European stock markets opened negative in response to the Chinese stock market closing again after having fallen by 7% within half an hour.
German stock market index DAX went down by -3.43%, the CAC40 by -2.81% and the FTSE100 by -2.73% as of 11am CET, according to Bloomberg data.
The Chinese stock market collapsed for the second time this year, partly in response to the ongoing depreciation of the yuan. Investors were spooked by the Chinese central bank setting its reference rate at an unexpectedly low level this week, reinforcing further currency depreciation, argues Mo JI, chief economist, Asia ex-Japan at Amundi Hong Kong.
“Among all reasons – sluggish PMI, 1.1trn RMB unlocking pressure, domestic institutional investor re positioning, we think RMB is the key trigger of the market correction. Market gets more and more nervous with accelerated CNY depreciation recently” he says.
“Stock markets are generally considered to be a nervous, but insightful early indicator of real economic activity” argues Tobias Basse, analyst at Nord LB.
“Looking at China, it is wise to use this method with caution, because the local stock market is so unusual and the behavior of some market participants seems to be less influenced by fundamentals and rather a substitute to gambling” Bosse argues.
“We do not anticipate that the Chinese economy will collapse. As the current negative mood will improve, a falling risk premium could in this case lead to a rising DAX.”
“In retrospect, today might be a good opportunity to buy into European equities” Bosse concludes.