• Dec. 7, 2016, 6:10 pm

Stock market turmoil: China shares fall another 5% but Europe holds firm – business live

Powered by Guardian.co.ukThis article titled “Stock market turmoil: China shares fall another 5% but Europe holds firm – business live” was written by Graeme Wearden (unitl 2.45) and Nick Fletcher, for theguardian.com on Monday 11th January 2016 15.04 UTC

Back with UK stocks and Mike Ashley’s Sports Direct International is the biggest faller in the FTSE 100 at the moment, down nearly 6% at 407.4p.

The controversial company’s shares plunged 15% on Friday – wiping more nearly half a billion off its market value – after it warned annual profits would be £40m lower than expected.

It blamed a fall in the number of shoppers visiting the high streets, and unseasonably warm weather in the run-up to Christmas.

The profits warning came just a month after a Guardian investigation revealed that Sports Direct effectively pays thousands of temporary workers below the national minimum wage of £6.70 an hour and subjects warehouse staff to a regime of searches and surveillance.

Sports Direct falls

Sports Direct falls Photograph: Luke Macgregor/Reuters

Today’s fall follows a number of analyst downgrades in the wake of the profit warning. Cantor Fitzgerald slashed its target price from 700p to 480p with a hold recommendation, with analyst Freddie George saying:

At the interim results, we gave the company the benefit of the doubt even though retail sales were disappointing. In view of the lack of transparency on strategy and in view that the company is likely to be eliminated from the FTSE100 over the next quarter, we are now taking a more cautious view on valuation. We are thus reducing our target price to 480p from 700p, which on our revised pre-tax profit forecasts, downgraded by around 14%, broadly values the company at 14 times full year 2016 earnings. We are, however retaining our hold recommendation on the stock, which has declined by almost 40% since the interim results announcement.

Liberum cut from buy to hold and said:

At the interims in December we downgraded 2016-18 pretax profit by between 6% and 8%. Following the trading update on 8 January we downgrade again, by 8% in 2016 and 6% in 2018. While the latest update only related to weakness over the past month we see a lack of earnings momentum in the short to medium term, and a lack of European M&A. Sports Direct has levers that it can pull, notably automating the distribution centre, but will not do so until the future shape of the business is clear.

China market volatility pulls down the Dow<br>07 Jan 2016, New York State, USA --- The New York Stock Exchange behind a Wall Street street sign on Thursday, January 7, 2016. Weakness in the Chinese stock market has rippled to the U.S. pulling down the Dow giving stocks a potential for the worst start of a new year in over 100 years. (© Richard B. Levine) --- Image by © Richard Levine/Corbis

The US stock market is making a valiant attempt to put the problems in China behind it.

The Wall Street opening bell has just been rung, and the Dow Jones industrial average has jumped by 102 points in the first few minutes. That’s a gain of 0.63%.

The broader S&P 500 index is up a similar amount, while the technology-focused Nasdaq index has gained 0.8%.

Lunchtime summary: China rocked again but Europe positive

A trader in Nanjing, China, today.

A trader in Nanjing, China, today. Photograph: REX/Shutterstock

A quick recap:

1) China’s stock market has suffered another day’s heavy losses, losing 5%m to close at its lowest level since September.

Investors remained anxious, despite Beijing’s attempts to reassure them:

XTM Research Analyst Lukman Otunug says:

Fears have heightened over China’s ailing economy and with confusion towards the unexpected devaluations leaving market participants questioning Beijing’s overall policy intentions; global sentiment may remain heavily depressed.

2) European stock markets have shrugged off the latest selloff. The FTSE 100 is pretty flat today, while the German and French markets are leading other markets slightly higher:

European stock markets

European stock markets at 2pm GMT Photograph: Thomson Reuters

Jasper Lawler of CMC Markets says markets are in a state of flux, fixated on China’s problems.

The conditions are not that of a calm rising bull market or a raging bear market but a volatile sideways price range, still undecided which way to break.

3) Concerns over China’s slowing economy pulled copper down to a seven-year low. Figures released over the weekend showed that manufacturers continued to slash prices, suggesting weak demand.

4) Oil has dropped towards 11-year lows today, with Brent crude shedding 2% to $32.91 per barrel – sparking fresh woe for the Russian ruble.

Analysts at Morgan Stanley have predicted that oil could slump to $20/barrel, if the US dollar were to spike (which could happen if the global economy falters).

5) Analysts fear that if Beijing mishandles the crisis, it could trigger a wave of corporate defaults.

6) Luxury carmaker Rolls-Royce has already been hit by China’s woes, reporting that sales in the country shrank by 54% last year.

Rolls-Royce sales halve in China

Luxury carmaker Rolls-Royce has just reported a sharp decline in sales in China

Sales to Chinese customers shrank by 54% in 2015, the company says; the latest indication that China’s economy has weakened in the last year.

Rolls-Royce, which is part of Germany’s BMW, warns that:

In China, significant headwinds impacted negatively on the entire luxury sector and Rolls‑Royce was not immune to these developments.

The slump took the shine off some otherwise decent results from Rolls-Royce. It delivered a total of 3,785 new cars globally during 2015, down from a record high of 4,063 in 2014.

A team of employees polish the exterior bodywork of a Ghost automobile at the Rolls Royce Motor Cars Ltd. plant in Goodwood, UK.

A team of employees polish the exterior bodywork of a Ghost automobile at the Rolls Royce Motor Cars Ltd. plant in Goodwood, UK. Photograph: Bloomberg/Bloomberg via Getty Images

Rolls-Royce sales can give a good insight into which parts of the global economy are hot, or not.

In 2015, it says it managed a “strong performances in all global regions”, apart from China. That includes record sales were reported in Asia Pacific (up 13%), the Middle East (up 4%) and North America (up 6%).

It also grew sales in these countries:

  • Korea: up 73%
  • Japan (up 7%),
  • Qatar (up 21%),
  • Russia (up 1%),
  • UK (up 2%)
  • South Africa (up 7%).

And apparently it sold more “super-luxury” cars (costing €200,000 or more) than anyone else.

But China’s problems ended a five-year run of rising sales.

Torsten Müller-Ötvös, chief executive, says it was a tough 12 months:

“2015 was a year of tremendous challenge for the entire luxury industry. I am very proud of our success which was achieved against a backdrop of considerable global uncertainty.”

Here’s the full statement released a few minutes ago.

Three months ago, Müller-Ötvös admitted being surprised by the rapid developments in China, and cited Beijing’s anti-corruption drive as one factor. He told the BBC that:

The whole anti-corruption campaign… is very much around investigating where your money is from, to whom you are related and so on and so forth.

That of course scares people who are quite affluent, and no one wants to be visible currently in that kind of environment and people are shying away from… obvious luxury goods, and that is not only true of cars but for jewellery and for precious watches and so on.”

Updated

Britain’s top tax official, Lin Homer of HMRC, has surprised us by resigning today.

As my colleague Sean Farrell points out, her tenure has been marked by criticism over the way HMRC tackled tax avoidance by large companies, among other issues:

Homer, who was made a dame in the New Year honours list, has been the subject of political controversy during her tenure.

She revealed in February that most UK clients of HSBC’s Swiss business who settled with the tax authorities did so under an extraordinarily lenient agreement. Homer also apologised in November that HMRC’s giant call centre had failed to answer a quarter of the 50m calls it received each year.

More here:

There are signs that China’s deteriorating economy is bottoming out.

That’s according to new monthly economic indicators published by the Organisation for Economic Co-Operation and Development (OECD) today, based on the latest economic data.

But the Paris-based think-tank also sees signs that the UK recovery is faltering, while the eurozone continues to grow slowly and steadily.

OECD forecasts
OECD forecasts

The financial markets could be on track for a rough year, having posted the worst start to a new year ever.

Tim Edwards, senior director of Index Investment Strategy at S&P Dow Jones Indices, has pulled together some charts showing how week 1 of the year often sets the tone.

Stock market performacne

Major markets lost around 5% last week, so this chart really doesn’t bode well.

But at least the opening week isn’t as important as early September — a time dominated by European elections, and investors returning to their desks after their holidays.

Edwards explains:

Historically speaking, years that have started badly have more frequently ended badly – and to a greater extent than might be supposed, given the expected impact of a single week’s performance. However, those who wish to divine the market’s yearly performance from that of a single week might be better off waiting until September.

One bad week doesn’t make a recession, but this research from JP Morgan suggests the global economy has come off the boil in the last month or so:

Copper hits new seven-year low

It’s situation-as-normal in the commodities market this morning, with copper dropping to its lowest price since spring 2009.

Copper had managed a brief rally at the turn of the year, but has been (predictably) hit by the latest turmoil in China’s markets.

Any recovery could be a few weeks away, at least, according to analyst Daniel Hynes of ANZ in Sydney:

“Expectations coming into 2016 were for a better macro environment, but the likelihood is that we’re not going to see any real rebound until well after the Chinese New Year.”

Wall Street is expected to rise when trading begins in four hours time.

Perhaps investors are becoming less skittish about China, and turning their attention to other issues. The next US earnings season begins this week, with major companies reporting how they fared in the last three months.

That will show how the American economy is faring, as David Kelly, chief global strategist at JP Morgan Asset Management explains:

These numbers will still be impacted by lower oil prices and a higher dollar. However, the year-over-year comparisons on these issues are easier than in the third quarter and should result in a return to positive year-over-year growth in operating earnings.

Overall, the US economy isn’t booming, profits aren’t soaring and China isn’t out of the woods.

Interesting developments in Greece overnight – the country has a new opposition leader.

And the new man, Kyriakos Mitsotakis, is a serious reformer with the ability to shake up the Greek economy should he take power one day.

New Democracy’s newly elected president Kyriakos Mitsotakis with wife Mareva and their 3 children after his victory at his campaign headquarters in central Athens.

New Democracy’s newly elected president Kyriakos Mitsotakis with wife Mareva and their 3 children after his victory at his campaign headquarters in central Athens. Photograph: Panayiotis Tzamaros/Demotix/Corbis

Our Athens correspondent, Helena Smith, explains why it matters:

For Greece’s shattered business and finance worlds, the election of the reform minded Harvard-educated Kyriakos Mitsotakis to the helm of the main opposition New Democracy is generating thinly disguised excitement this morning.

Aides are talking of the centre-right party “undergoing” a Tony Blair moment – albeit 15 years late. At 47, Mitsotakis not only speaks the language of realpolitik, his innate cosmopolitanism and experience in banking are of natural appeal to the international creditors keeping the debt-stricken country afloat.

The secret of Mitsotakis is that he will appeal to social democrats, pro-European liberals who now want Greece to change through reform.

To date, the leftist prime minister Alexis Tsipras has been given a free reign because of the power vacuum that the weak opposition has presented. Mitsotakis sees himself in the tradition of European progressives: although fiercely pro-market his stance on issues from gay rights to greens is decidedly moderate and forward looking.

Kyriakos Mitsotakis<br>Newly-elected President of the New Democracy party Kyriakos Mitsotakis, center, is cheered by supporters outside his office in Athens, Monday, Jan. 11, 2016. Greece’s conservative opposition New Democracy party has elected the reformist as its new leader. Former administrative reform minister Mitsotakis has defeated party stalwart Evangelos Meimarakis in a leadership contest open to all party members. (AP Photo/Yorgos Karahalis)

Mitsotakis was cheered by supporters outside his office in Athens last night. Photograph: Yorgos Karahalis/AP

By moving New Democracy to the centre, the newly installed leader will not only give Tsipras a run for his money but force him to implement the pro-market €86bn bailout program if he wants to stay in power. That automatically increases the chances of early elections.

In that sense Sunday’s vote may well be a ground-breaking event of potentially seismic repercussions – a major challenge not only for Tsipras but New Democracy itself. With 75 % of the vote counted Mitsotakis had won 51.6 % against 48.4% for his challenger Vangelis Meimarakis widely identified with the old political establishment.

Even if New Democracy collapses in disarray – and as it is bitterly divided this is not ruled out – Mitsotakis may well attract support from the centre left who see in him a viable alternative for reform. His surprise win over Meimarakis (despite his name conjuring old-school nepotism as the scion of a political dynasty) is a first step in that direction.

Updated

In a week’s time, high-flying members of the global elite (plus a bunch of journalists) will gather in Davos for the annual World Economic Forum (WEF).

It’s a chance to discuss the global situation, cut deals, and plot the way ahead – at a crucial time for the world economy. But this year, Angela Merkel won’t be there.

Instead, the German chancellor will stay at home to deal with an escalating domestic crisis over migration, following scores of assaults and robberies at Cologne on New Year’s eve.

The FT got the story last night, saying:

With a lot on her plate, she [Merkel] had already decided well before the Cologne attacks not to make her regular trip to the Davos World Economic Forum, the global leaders’ gathering this month.

Merkel’s camp insist there’s nothing unusual here:

Merkel doesn’t go to Davos every year – she skipped 2014 after suffering a skiing injury. But generally, she’s appeared to enjoy WEF – and I suspect she’ll be missed.

But given the growing criticism at home over her refugee strategy, this probably isn’t the time to be rubbing shoulders with Davos Man (and Woman).

Updated

Morgan Stanley: Oil could hit $20 per barrel

File picture of an employee walking down the stairs of an oil storage tank after a regular check at a PetroChina refinery in Lanzhou, Gansu province

The recent gyrations in the markets are is forcing City economists to rip up their oil price forecasts.

Morgan Stanley has predicted that Brent crude could slide to as low at $20 per barrel this year, if the US dollar continues to strengthen [any commodity priced in dollars would fall if the US currency goes up in value]

They told clients today that:

“Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency.

“The U.S. dollar and non-fundamental factors continue to drive oil prices.”

The fundamentals of oil aren’t great either, given the risks from China. That’s why French bank SocGen has taken a knife to its predictions too. It now reckons Brent will average $42.50 per barrel this year, not almost $54….

Updated

Relief as yuan strengthens

There’s drama in the international currency markets, where the Chinese currency has strengthened against the US dollar.

The yuan has gained 1% in so-called ‘offshore trading’, reaching a one-week high of 6.6170 yuan to the US dollar.

That comes after Beijing fixed the on-shore yuan at a stronger level than last week, at 6.5807 yuan to $1. That’s a gain of around 0.2%, which could be taken as a signal that China isn’t planning a major yuan devaluation.

And that is helping to push shares higher in Europe – where the German DAX and French CAC are now around 0.8% higher.

Here’s our news story about today’s ructions in the Asian markets:

Experienced City economist and China-watcher George Magnus has written about the China crisis in the Financial Times.

He points out that the big worry isn’t China’s stock market, but the possibility of credit defaults.

And there’s a lot of potential for problems here. China’s corporate and local government debt burden has swelled to around 250% of GDP, by some measures, up from ‘only’ 100% in 2008.

With the economy slowing, some defaults could be inevitable. But as Magnus explains, authorities are more likely to keep weak borrowers afloat:

Even though government officials speak occasionally about the need to allow corporate defaults and restructuring, and recognise bad debts in the banking system, the political and institutional blockages to such outcomes are formidable. If they could be overcome, adjustment might be softened, for example, by significant tax cuts for households and spending transfers from the state to the private sector. But the political will is not there.

Instead, all we are likely to see is more credit easing, in the wake of the six initiatives since late 2014 to cut interest rates and banks’ reserve requirements, albeit to no economic effect. The credit binge, then, will continue until it can’t.

Weak oil drags ruble to record low

Man walks by board showing currency exchange rates of U.S. dollar and euro against rouble in central Moscow<br>A man walks by a board showing currency exchange rates of the U.S. dollar and euro against the rouble, in central Moscow, Russia, January 11, 2016. REUTERS/Maxim Zmeyev

A board showing currency exchange rates of U.S. dollar and euro against rouble in central Moscow today. Photograph: Maxim Zmeyev/Reuters

The oil price is heading towards new 11-year lows this morning, giving the Russian ruble another knock.

Brent crude has shed 3%, or around one dollar per barrel to just $32.58, close to last week’s lows.

That heralds more pain for oil producers in the Middle East, and also Russia. Its currency has hit a fresh low this morning, at 76 rubles to the dollar.

There’s not much panic in Europe about today’s selloff in China, yet anyway.

The French and Italian markets have crept higher at the opening, while Germany’s DAX is only down 0.2%.

European stock markets

London stock market drops in early trading

City workers walk in the rain in the financial district of the City of London, Britain January 7, 2016. Global shares tumbled for a sixth day on Thursday and oil prices slid to levels not seen since the early 2000s, after China guided the yuan lower and Shanghai shares tumbled 7 percent in less than half an hour. REUTERS/Toby Melville

It’s another wet and gloomy morning in the City.

And that matches the mood in the markets, where the FTSE 100 has dropped 21 points 0r 0.4% in early trading.

Our old friends, the mining stocks, are leading the selloff. Anglo American, Antofagasta, BHP Billiton and Rio Tinto are all down between 1.6% and 2%.

They continue to be hit by fears that China could knock the global economy off course, meaning weaker demand for materials such as iron ore, copper, coal, nickel, zinc.

City experts have spent the weekend fretting about China, reports Société Générale’s top currency analyst Kit Juckes:

If my inbox is anything to go by, the big market issue this weekend is whether the Chinese authorities can restore confidence in their ability to manage an orderly adjustment of the Yuan.

So what happens next?

Kit’s best guess is that the Chinese economy’s ‘bumpy landing’ continues, as Beijing struggles to rebalance its economy and embrace more free-market principles.

Even if China’s some way from the inconsistent quartet of free trade, free capital mobility, independent monetary policy and a fixed exchange rate, they have moved closer and will struggle to find consistent policies.

Nervousness across Asian markets and fear of bigger capital outflows and a bigger FX move are going to go on haunting markets.

Today’s selloff means that the Chinese stock market has now lost 15% of its value this year – over just 6 trading days.

An investor rests in front of a screens showing stock market movements at a securities firm in Hangzhou, in eastern China’s Zhejiang province on January 11, 2016. China’s benchmark Shanghai stock index closed down 5.33 percent on January 11, as investors continued to worry over the state of the world’s second largest economy, dealers said. AFP PHOTO CHINA OUTSTR/AFP/Getty Images

A securities firm in Hangzhou, in eastern China’s Zhejiang province, today. Photograph: STR/AFP/Getty Images

The latest Chinese inflation figures are also fuelling worries over its economy this morning.

Figures released over the weekend showed that factory-gate prices have now fallen for 46 months in a row.

That suggests domestic demand is still weakening, forcing Chinese firms to charge less for their wares – which could ripple out across the global economy, driving prices lower worldwide.

China’s consumer inflation rate inched up to 1.6%, from 1.5% in November.

Updated

European stocks are expected to dip this morning:

China’s stock market tumbles 5%

An investor takes a nap in front of an electronic board showing the stock prices at a securities brokerage house in Beijing, China, today.

An investor takes a nap in front of an electronic board showing the stock prices at a securities brokerage house in Beijing, China, today. Photograph: Wu Hong/EPA

A late rush of selling in Shanghai has sent the Chinese stock market sliding to its lowest level in over three months.

The CSI 300 index slumped by 5% to close at just 3,192 points, a drop of 169 points.

Beijing’s claim that its financial system is “largely stable and healthy” (see opening post) clearly wasn’t enough to stop the index hitting its lowest levels since the aftermath of the summer crisis:

The Shanghai Composite Index this year

The Shanghai Composite Index this year Photograph: Thomson Reuters

Overnight, Chinese authorities fixed the yuan at a level similar to Friday – resisting any temptation to weaken its currency again.

But economists predict more scuffles in the currency wars, as Angus Nicholson of IG explains:

Global markets are still in the grips of China fears, and it is uncertain whether the Chinese government can do enough to reassure global investors.

The People’s Bank of China (PBoC) fixed the CNY largely unchanged from its position on Friday. But this halt in the weakening of the currency appears to have done very little to investors’ expectations that there will be further depreciation of the currency in the near future.

Updated

Introduction: Can Beijing reassure markets?

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Brace yourselves for another week dominated by fears over China, with a dash of stock market volatility and a weak oil price thrown in too.

Equities have already posted their worst start to a New Year ever, and there’s no respite as investors worry about exactly how bad the Chinese situation is.

Over the weekend, Beijing’s foreign exchange regulator declared that China’s financial system is robust. It said:

“China’s economic fundamentals are strong.

“Foreign exchange reserves are relatively abundant and the financial system is largely stable and healthy.”

But will that reassure global investors following recent heavy stock market losses, mounting pressure on the yuan, and concerns that more corporations could default on their debts?

I’ll be tracking all the main events through the day….

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