The behaviour of investors has often been likened to the “herd mentality” with leaders being followed to take the market higher or (more commonly) lower. When bigger investors close out a position and sell stock, others may follow leading to a rout. In the age of digital, high speed trading and in the light of massive single day falls, most stock exchanges have instituted firebreaks which suspend trading if the market falls by a specific amount in any single trading session. The intention is to give investors time to consider their positions more fully and prevent a cascade of market value as other investors make sell orders to minimise potential losses in their portfolios.
Monday marked the first full day of trading in 2016 and it was greeted by significant falls on the China stock exchange in Shanghai. The CSI 300 index shed 7% of its value whilst the Shenzen Composite index, which is tech stock heavy, fell by 8% and the Shanghai Composite index slipped by 6.9%. The falls were sufficiently marked to trigger an automatic suspension to trading for the day since a 15 minute pause after losses passed the 5% level didn’t cause any rally.
The Chinese indexes brought in automatic trading suspension last year following volatility in the summer caused by fears that the Chinese economy was slowing more than anticipated – these measures only came online last month.
A likely culprit for the Chinese gloom is the latest Caixin/Markit purchasing managers’ index for last month which shows a decline to 48.2, marking the tenth consecutive month of weakening factory output (this data relates to small and medium-sized enterprises).
Markets around the world seem to have taken their lead from China and all are trading lower, currently. The mood has been darkened by developments in the Middle East following Saudi Arabia’s decision to execute a leading Shia cleric, despite pleas for clemency.