It has been barely a week into 2016 and the world’s economy has already experienced its initial dose of drama. The first trading day of the year saw the Chinese stock market halt trading, escalation of political conflict in the Middle East threatening to affect oil supply, and a noticeable drop in the global stock markets.
On the 4th of January, the world saw witness to a plunge and the eventual halt in trading in the Chinese stock market with the Shanghai Composite Index falling by 6.9%. The day started off normally with the SSE Index opening at 3539 points and showing a slight downward trend. However, as the day progressed, the continued downward trend only exacerbated the already shaken investors’ confidence and triggered a mass sell behavior which further pulled the index down.
After reaching the 5% threshold, all trading was halted for 15 minutes as the first of two safety circuit breakers were applied. Unfortunately, it only worsened the fear of losing more fueling a greater panic among investors and before long the second one was applied when the index fell 7%.
At 1:35PM local time, after both indices dropped more than 7%, trading was halted for the Shanghai and Shenzhen stock exchanges. A drop of such size in a single day was last seen in August 2015, during the summer stock market rout.
Why Did China Halt Trading?
There were many reasons responsible for bringing about such an event, but if the main ones were to be identified, there would be three.
First, the government put into place a lockup period during which major institutional investors, corporate executives, directors, and anyone with more than a 5% stake were unable to sell their shares for six months. That was six months ago and with its imminent end, the public anticipates a heavy selling period ahead.
Secondly, today marks the release of the Chinese manufacturing data for December and the news acted as a blow to investors’ confidence as well. Based on a survey of purchasing managers of factories, the Caixin Index of Chinese manufacturing dropped from November’s 48.6 points to 48.2. This marks the 10th consecutive month of contraction further fueling anxiety. The official manufacturing index also reveals the same downward trend despite the government’s multiple attempts to revive it with stimulus.
Last and most importantly, the installation and usage of the “circuit breakers” played a great part in today’s mishaps. Announced late last year and implemented for the very first time today, it was put to test immediately.
Even though it was intended to halt all trading to keep the prices from falling too much, many experts feel that it only worsened the situation for the Chinese stock market.
“The trigger of the circuit breaker seems to have heightened panic,” commented Gu Yongtao, a strategist at Cinda Securities. Many believed that without the circuit breakers, the market would not have dropped to such extent.
World Markets Affected
This calamity proved to be the epicenter of a great shock to the global stock market. Asia-Pacific shares outside of Japan posted some of the most dismaying results since August last year. Europe was also greatly affected with its pan-European FTSEurofirst 300 index dropping 2.5% and the EU’s STOXX 50 index by 2.9%. The US was no different with the NYSE sliding 1.7%.
The situation could have been worse. However, the rise in crude oil prices due to rising political tension in the Middle East acted as an offsetting agent.
2016 looks to be another shaky year for the stock market with the very first day of trading resulting in the materialization of many investors’ nightmares.
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