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Stocks decline after China slump, bond yields drop

Singapore - A lurch lower in Chinese stocks is sending fresh signs of distress through global financial markets.

Stocks dropped around the world after the Shanghai Composite Index plunged 6.4% on concern capital outflows will accelerate as China’s economy slows. Haven investments gained, with German note yields sliding to record lows and gold reaching the highest level in more than two months.

Oil traded near $30 a barrel on speculation a supply glut is worsening and Russia’s ruble fell with emerging-market currencies.

After last week’s brief respite, the Chinese contagion that has spread through global financial markets this year is back. Capital outflows from the mainland reached a record $1trn in 2015, more than seven times higher than the whole of 2014, based on Bloomberg Intelligence data dating back to 2006.

Huang Weimin, a hedge fund manager whose Chinese stock-index futures wagers returned more than 6 200% last year, has warned investors should sell their shares now, before it’s too late.

“The overriding concern is still the health of the global economy,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “Oil and stocks are reacting on the same fears and the same hopes. As long as global and US macro is not stabilizing investors will continue to sell the rally.”

The MSCI All-Country World Index declined 0.5% as of 12:31, clawing away at the gauge’s 1% recovery last week. West Texas Intermediate crude slipped 0.4% to $30.23 a barrel.

Stocks

The Stoxx Europe 600 Price Index fell 0.7%, deepening its biggest monthly slide since August 2011. All but one of the gauge’s 19 industry groups declined. Richemont dropped 0.8% as data showed Swiss watch exports fell in December to end the first annual drop in six years.

Siemens AG rallied the most since 2010 after increasing its earnings forecast. Royal Philips NV jumped 5.5% after fourth-quarter profit rose more than projected.

Futures on the Standard & Poor’s 500 Index fell, with the US benchmark gauge heading for its worst month since May 2010. Alcoa Inc. and Chevron were among commodity-related shares declining in premarket trading. Apple, Procter & Gamble, Johnson & Johnson, are among 23 companies from the index posting results on Tuesday.

While stocks are having a chaotic start to the year, investors have pulled out of securities that profit from higher volatility at the same time as short sellers piled into bets that tranquility will return. That’s even as a measure of investor anxiousness known as the VIX heads for a 33% surge this month.

Emerging markets

The MSCI Emerging Markets Index fell for the first time in three days, sliding 1.4%. Benchmark gauges in the Middle East, South Korea and the Philippines lost more than 1%.

 The Shanghai Composite Index tumbled to the lowest since December 2014 and the Hang Seng China Enterprise Index of mainland equities listed in Hong Kong fell 3.4%. The offshore yuan rebounded in Hong Kong, stoking speculation that China’s central bank propped up the currency after the slide in equities.

Outflows from China increased to $158.7bn in December, the second-highest monthly outflow of the year after September’s $194.3bn, according to estimates compiled by Bloomberg Intelligence. The total for the the year soared more than seven times from $134.3bn in the whole of 2014.

Investors were also concerned about a possible liquidity squeeze even as the central bank flooded the financial system with cash before the Lunar New Year Holidays that start in the second week of February. The People’s Bank of China injected $67bn into the financial system using reverse-repurchase agreements, the most in three years.

Huang Weimin says the Shanghai gauge could drop another 15% in the first half as slowing economic growth and a weaker yuan fuel an exit of capital.

“The pressure for capital outflow and the yuan’s devaluation is still quite big,” said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai, adding that he’s cutting equity holdings. “We haven’t seen signs of a pickup in the economy and the first and second quarters could be challenging.”

Bonds

The yield on German two-, three- and five-year government debt fell to all-time lows as bonds advanced across Europe. Yields on Austrian and Dutch two-year securities also dropped to the lowest on record.

Yields on 10-year Treasuries fell one basis point to 1.99% as plunging energy costs raise doubts about whether consumer-price growth is strong enough to sustain four interest- rate increases in 2016, the median projection from Federal Reserve officials at their December meeting.

The US two-year note yield also declined, falling two basis points to 0.84% as the nation prepares to auction $26bn of January 2018 securities.

The cost of insuring corporate debt rose for a second day. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies climbed two basis points to 95 basis points. The junk-rated Markit iTraxx Europe Crossover Index rose seven basis points to 382 basis points.

Currencies

The yen rallied versus South Korea’s won and South Africa’s rand as investors sought the currency as a haven. The euro was little changed at $1.0840. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, increased 0.1%.

A Bloomberg index of emerging-market currencies declined 0.1%. The won fell for the first time in four days after South Korea reported economic growth of 3% for the fourth quarter on a year-on-year basis, retreating from a five-year high. Foreign funds have pulled $2.5m from Korean shares so far this year.

Russia’s ruble sank 0.5%, extending a 2.5% drop on Monday.

Commodities

West Texas Intermediate crude extended Monday’s 5.8% retreat. Government data due out Wednesday is expected to show US inventories rose by 4 million barrels last week, according to energy analysts. That would be a third week of gains.

Oil is down almost 20% this year amid concern over brimming U.S. stockpiles, steady output from Saudi Arabia and Russia and the prospect of increasing Iranian shipments after the end of sanctions. Bets that WTI will retreat below $25 a barrel have reached a record high.

Gold for immediate delivery gained 0.6% to $1 114.64 an ounce. It climbed 0.8 percent last week as the turmoil in global stock markets renewed interest in the metal as a store of value.

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