Financial Markets Hit By Global Unease

Stock markets have fallen after a sharp decline in Chinese shares, while oil and gold prices have increased as tensions rise in the Middle East.

Trading in China’s main stock markets ended early on Monday after the indexes tumbled 7%.

Europe’s main stock markets followed Asia lower, with the FTSE 100 sinking 2.4% and Germany’s Dax index down 4.3%.

Meanwhile, news that Saudi Arabia had broken off diplomatic ties with Iran sent oil and gold prices higher. China weakness

Earlier on Monday, trading on China’s Shanghai and Shenzhen stock exchanges was halted for the first time under new “circuit breaker” rules, which are designed to curb market volatility.

The share price falls came after more signs of trouble in the world’s second-largest economy.

The Caixin/Markit purchasing managers’ index slipped to 48.2 in December, marking the 10th consecutive month of shrinking factory activity in the sector. A reading below 50 indicated contraction.

Some analysts also attributed the decline in share prices to the imminent end of a six-month lockup period on share sales by major institutional investors, a policy implemented to shore up indexes. Big shareholders may start dumping shares once the ban is lifted on Friday.

Huang Cengdong, an analyst for Sinolink Securities in Shanghai, said: “The market will not improve because there will be heavy selling in the near future.”

Monday’s sell-off in China had a knock-on across the region. Japan’s Nikkei 225 tumbled 3.1% and Hong Kong’s Hang Seng retreated 2.6%.

“Welcome to 2016, though you’d be forgiven for thinking the markets were back in August 2015 with China causing some early New Year issues,” said Spreadex analyst Connor Campbell.

And Alastair McCaig, market analyst at IG, said: “Anyone hitting the trading floor expecting a calm and quiet start to 2016 was given a rude surprise as Asian chaos affected European markets.”

Markets were also rattled by growing tensions between Middle East powerhouses Saudi Arabia and Iran over the execution of Shia cleric Nimr al-Nimr.

The execution in Saudi Arabia led to protests in Tehran. Saudi has cut diplomatic ties with Iran and given diplomats 48 hours to leave.

Iran’s supreme leader has warned Saudi Arabia it would face “quick consequences” for the execution. ‘Supply glut’

Fearing further upheaval in the already volatile Middle East, the US has urged regional leaders to try to ease tensions.

The price of Brent crude initially rose more than 3% on Monday, before easing to $35.50 a barrel, still up almost 1%.

The price of US crude was up more than 2% to $37.81 a barrel.

Despite the oil price rise, Bernard Aw, market strategist at IG Markets in Singapore, said global crude oversupply would continue to weigh on prices over the longer term.

“Unless we see a convincing drop in oil output from these two nations, and the broader oil-producing community, the supply glut issue will persist, which means oil prices would remain under pressure for a longer period,” he told the AFP news agency.

Oil prices are down by two-thirds since mid-2014, with analysts estimating that producers are pumping between 0.5 million and two million barrels of oil every day in excess of demand.

Worries about the impact of Middle East tensions were underlined in the gold price, which rose more than 1% on Monday to $1,070.20 an ounce.

Gold is frequently seen as an alternative investment during times of geopolitical and financial uncertainties. The gold price lost 10% last year.

Another traditional haven is the Swiss franc, which gained about 0.8% against both the dollar and the euro in early trading on Monday.

-bbc