China crisis causes mid-month market hammering

16 September 2015

And people thought Greece was a bad influence on world sharemarkets! In August, China gave the world a full-blown market correction, as a three-month-long price slide on the Shanghai and Shenzhen sharemarkets accelerated sharply.

Beijing’s surprise devaluation of the yuan in mid-August pushed the selling in the twin Chinese markets into overdrive, and the slump spread across the globe, hammering everything from developed world stock markets to commodities and emerging market currencies. Adding to market worries, the forward-looking purchasing managers' indices (PMIs) slumped around the world, with China’s official PMI dropping to a reading of 49.7 in August – a three-year low - and beneath the 50-point threshold that signals industrial contraction.

Mid-month hammering for markets

The contagion from China quickly spread into the major markets. Between 17th and 25th August, for example, the US market fell by 11.2 per cent (S&P 500) and 10.7 per cent (Dow Jones Industrial Average). The Australian market (S&P/ASX 200) followed suit, with a fall of 12.3 per cent.

The major Shanghai Composite Index lost 12.5% in August, its third straight month of declines, and almost as bad an effort as July’s 14% loss, which was the index’s biggest monthly drop since August 2009. The index’s 8.5% drop on 24 August, dubbed ‘Black Monday’ by Chinese media, was its worst single day loss in more than eight years. A day later, Beijing cut interest rates for the fifth time since November. The smaller Shenzhen market plunged 15.2 per cent for the month – a correction in anyone’s language.

Markets generally recovered a little toward month end. As buying support returned, the Dow Jones Industrial Average cut its loss for August to 6.6 per cent, making its worst month since May 2010. The broad S&P 500 Index gave back 6.3 per cent for its biggest monthly loss since May 2012, while the Nasdaq Composite shed 6.9 per cent in August, its biggest fall since May 2010.

London’s FTSE-100 was down 6.7 per cent at month end, its worst monthly performance since May 2012. Hong Kong’s Hang Seng Index lost 12% in August, its worst monthly performance since September 2011. In Tokyo the Nikkei Stock Average fell 8.2%, its worst month since January 2014, while in Australia the S&P ASX 200 Index managed to bring its loss back to 8.6%, its worst monthly performance since October 2008.

Commodity prices hit – oil bucks the trend

Commodity prices also suffered. The Reserve Bank of Australia says commodity prices fell 3.1% in foreign currency terms in August, on the back of a 3.6% drop in July, bringing the annual rate of decline in Australia's export commodity prices to 20.9 per cent.

The iron ore price fell to US$56.52 a tonne in August from $66 in the June Quarter. Copper, seen as the barometer of global industrial demand, hit a six-year low. However, crude oil erased its August losses with a 27.5% spurt in three late-August days – the biggest three-day gain in 25 years.

Australian profit season underwhelms

In Australia the correction hit when the market was busy digesting profit results from the June 2015 full-year reporting season, which was slightly disappointing. About 59% of companies lifted profits from a year ago, but that was the lowest such proportion since August 2009, in the depths of the GFC.

As expected, commodity producers were hammered by falling commodity prices, with the likes of Fortescue Metals, Woodside and Santos all showing big profit falls, as did Rio Tinto (half-year) and BHP – the latter reporting its worst profit result in 11 years. But Qantas turned in a stellar return to profitability, as did gold miner Newcrest.

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