Australian shares follow global lead with 1% fall as dollar also dips

Australian shares have dipped almost 1% as uncertainty about the direction of theChinese economy and markets saw volatile trading across Asia Pacific.

At 12.45am AEDT on Tuesday, the benchmark S&P/ASX200 index was down 0.8% or 41 points at 5,229 points, and shares on the Shanghai Composite index dipped 3% on the opening before bouncing back sharply.

Chinese shares dropped 7% on Monday before trade was suspended, and the gloom spread around the world with New York, London, Paris and Frankfurt all finishing the day sharply down.

The Australian dollar suffered too, falling to a two-week low. On Tuesday, the local unit was buying US71.89c, down from US72.17c on Monday after earlier dropping to US71.56c.

“It does look like the Australian market will remain under pressure,” CMC Markets chief market strategist Michael McCarthy said.

“That weakening Aussie dollar is a positive, as is the continuing rise in iron ore, but I suspect in this global wave of weak sentiment those factors will be ignored and instead the key factor for today will be the performance of the markets in Shanghai and Shenzhen.”

The big four banks led the ASX/S&P200 lower in Australia while the miners BHP Billiton and Rio Tinto and energy companies were also down.

Electronics retailer Harvey Norman was up slightly, possibly benefiting from the continued travails of competitor Dick Smith, which went into voluntary administration on Tuesday.

However, there was some encouragement for traders when the Japanese and Korean markets opened only slightly down despite the heavy overnight falls in Europe and the US.

The Nikkei was down 0.23% at 1pm AEDT while the Kospi in South Korea had pushed back into the black with a rise of 0.33% on the day.

Poor manufacturing data released on 1 January was what sparked Monday’s jitters and the latest setting for the yuan on Tuesday provided further evidence that the authorities in Beijing want the currency to weaken in order to bolster exports. The People’s Bank of China set the midpoint rate at 6.5169 per US dollar prior to market open on Tuesday, weaker than the previous fix of 6.5032, its lowest level since 2011.

Chris Weston at IG Markets in Melbourne earlier identified an article in the People’s Daily as one reason for Monday’s selling. It said that “traditional Keynes theory has its limits” and had a strong focus “on overcapacity, lowering costs and removing ‘zombie’ companies”, suggesting to the markets that 2016 will see some rationalisation in China’s huge state-owned sector.

Tension in the Middle East may also play a part in how the markets react this week. Saudi Arabia cut ties with Iran on Sunday after Iranian protesters attacked its mission there, angered by the Sunni Muslim kingdom’s decision to execute a leading Shia cleric, while Islamic State militants promised renewed attacks on western countries.

Bank of New Zealand currency strategist Jason Wong said there were heavy falls on equity markets and most currencies as traders played it safe.

“There was enough bad news lurking around before the beginning of the European/US trading sessions, but manufacturing data added to the concerns,” he said.

“The combination of geopolitical concerns in the Middle East, weak economic data in China and the US, and thin holiday trading markets was a deadly one that saw some big moves.”