China collapse saps market confidence

The collapse in Asian markets has triggered a sea of red on European equity markets as bears dominate the day’s trading.

China
Source: Bloomberg
  • Shanghai wipes out 2015 gains
  • Asian panic scares off the bulls
  • Traders’ screens drenched in a sea of red

Regardless of what the Chinese government and PBoC might be saying and doing, they are currently learning a lesson that many have learned before them. Namely that you can only fight against market forces for so long before you end up losing. Pre-market expectations had the majority of equity indices being called over 3% lower, as Asian markets spooked European investors who saw today’s moves on the Shanghai Composite wipe out all of its 2015 gains.

August is always renowned for thin volumes and these current frothy markets will do little to entice the bulls to dip their toes into the markets.

Oil prices have continued falling and even though they’ve been sitting in oversold territory for more than a week, the increasing doubts over China’s abilities to meet its 7% growth target is looking more and more unachievable, and has helped drive prices lower. Expectations that Iran will swiftly return to its position as one of the world’s biggest oil suppliers have been boosted by the fact that the UK foreign secretary has reopened Britain’s embassy in Tehran.

The volatility index has now doubled in less than three trading days and this is a clear example that panic rather than prudence is driving traders’ thinking. The overnight session gave little encouragement to those hoping for a bounce in the markets, although the dominance of equities in oversold territory does bear out the adage that it’s always darkest before the dawn.

How long equity markets remain this negative should help clear up how much of the downward move is due to sellers dumping shares or whether it’s down to a short-term absence of buyers. 

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