China torpedoes FTSE 100 again

Global stockmarkets had looked vulnerable all summer, and with trading volume slim and positive catalysts hard to spot, a major sell-off was always possible. It was with great disappointment, however, that the moment came in the middle of my annual two-week break!

In conversation early July about the likely direction of the FTSE 100, I suggested to a colleague that "this has got 6,000 written all over it". Then, the index was trading at 6,500. Six weeks later, global indices had plunged and the UK index had sunk to 5,768, its lowest level since late 2012.

On the same day, Interactive Investor's head of derivatives Mike McCudden warned in his morning market report: "With China and Greece under the cosh there appears to be no real reason to buy in to this market and any bounce should present some selling opportunities. Furthermore, with the VIX moving towards the panic zone, investors may be well advised to head for the sidelines."

It also seems that the subsequent rally back up to 6,247 has all the hallmarks of a "dead cat bounce", or "sucker's rally". By mid-morning, the FTSE 100 had slumped 2.8% to 6,069 following weak data out of China and further US rate rise concerns.

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A temporary resolution to the Greece problem meant China was the most likely to cause a wave of panic. It had already begun devaluing the yuan early August, and now monthly manufacturing data has come in soft.

China's manufacturing purchasing managers' index (PMI) fell 0.3 points in August to 49.7. That's a three-year low and the first sub-50 print since February - a read below 50 indicates contraction. Declines both in production and new orders are blamed.

"The summer weakness could be linked to the recent Tianjin port explosion and large-scale factory closures in Beijing ahead of the WW II victory day parade on 3 September," speculates Barclays. "Even so, we believe the multi-year low PMI confirms that the economy is still not on a solid footing, and we look for a flat growth profile during the rest of 2015, with continued downside risks."

Predictably, the miners are deep in the red. Glencore is off 5%, with BHP Billiton, Anglo American and Rio Tinto not far behind. Burberry has taken another pasting too and threatening its recent two-year low. Only defence contractor Meggitt, distributor Bunzl and high street chain Sports Direct are in the blue.

But comments over the weekend from US Federal Reserve vice chairman Stanley Fischer are also unsettling markets. At the Fed's getaway in Jackson Hole, Wyoming, Fischer tipped inflation to rise and rates to increase at this month's Fed meeting. Experts put the probability at 42% compared with 38% on Friday.

Whatever the outcome, either in the US or China, further share price volatility is inevitable.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.