European shares took their lead from Asia this morning, after China’s benchmark stock index officially entered bear market territory following another mass sell-off in the region.
The Shanghai Composite Index sank 3.5pc to 2,902 - its lowest level since December 14, driven by oil price volatility.
In London, the FTSE 100 was down 1.37pc by mid-morning.
Since hitting its December high just three weeks ago, the Shanghai index has now fallen by almost 21pc after a nightmare start to the new year.
Bear-market territory is a market condition in which prices of securities fall by 20pc or more from a recent high. This is not to be confused with official correction territory, which is a reverse movement (usually negative) of at least 10pc to adjust for an overvaluation.
During the overnight trading session, the Shanghai Composite Index breached its August 26 nadir, which wiped $5 trillion off financial markets, before recovering some ground later on. The benchmark index is already nursing hefty losses of 15pc so far this year and is off by 43.9pc since its June peak of 5,166.
The Shanghai Composite index has fallen by almost 21pc in just three weeks.
This is the second time in seven months the index has fallen into bear market territory. Sentiment towards the region remains fragile as concerns mount about Beijing’s ability to stem the latest sell-off.
Earlier this week, the Shanghai Composite index enjoyed some respite - and a 2pc jump - following its rollercoaster start to 2016, after better-than-expected trade data tempered some of the fears that the world’s second largest economy is contracting.
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However, data today showed China’s bank lending slowed last month, reinforcing concerns about the state of the country’s health.
The fall into bear market territory is another setback for the state authorities in China after its interventions to support both the yuan and stock markets resulted in the worst new year start in 20 years.
Indeed its torrid start to 2016 was triggered by a controversial circuit-breaker mechanism, which was subsequently scrapped in its first week of operation, and its move to accelerate the depreciation of the yuan.
Events in China have contaminated this morning’s trading session in Europe once again, with the majority of indices opening in the red as panic-stricken investors offloaded assets. The German DAX fell 1.2pc, while the CAC in Paris was down 1.4pc before 11am.
Alastair McCaig, an IG analyst, said: “Last night’s Chinese sell-off has once again seen the Asian powerhouse move back into bear market territory for the second time in just over six months.
“The last couple of days might have seen the FTSE flirting with the idea of breaking back above 6,000, but this morning’s actions look to have cooled any hopes of that.”
Back in London, the FTSE 100 tumbled 83.37points, or 1.4pc, to 5,835.46 in mid-morning trade as Brent crude slipped below $30 once again and miner BHP Billiton announced a $7.2bn writedown on its US shale operations.
Last night on Wall Street, US stocks rebounded after a brief (and short-lived) rebound in oil prices. The Dow Jones industrial average ended up 1.4pc, while the S&P 500 made gains of 1.7pc.
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