HONG KONG, Jan 26: A more than six per cent collapse in Shanghai led Asian markets lower Tuesday as a two-day global rally fuelled by stimulus talk came to an abrupt end following sharp losses in US and European markets while oil prices tanked again.
There had been a glimmer of hope that the worst start to a trading year on record may be easing, with a surge across all assets spurred by a European Central Bank pledge Thursday to further ease monetary policy.
A report suggesting the Bank of Japan (BoJ) was considering similar moves fanned the optimism, with crude surging about 15 per cent over the two days and equities seeing blistering gains. But analysts said the euphoria subsided as the realisation set in that the oil market is far too oversupplied for its weak demand, and with China's economy continuing to struggle.
"Obviously investors are working through some potentially difficult issues in their minds about the state of the world economy," John Carey, a Boston-based fund manager at Pioneer Investment Management, told Bloomberg News. Shanghai, which has already this year lost about 17 per cent, slumped 6.4 per cent by close Tuesday.
The slump came despite the People's Bank of China pumping $67 billion into the money market in a bid to ease tight liquidity ahead of the Lunar New Year holiday. The injection was the largest since 2013, Bloomberg News reported.
But analysts said dealers took their cue from losses in New York, where all three main indexes lost more than one per cent. Also taking a painful hit was Tokyo's Nikkei, which lost 2.4 per cent, while Hong Kong was 2.5 per cent lower. Seoul closed 1.2 per cent lower while there were also hefty losses in Manila and Taipei. Sydney was closed for a public holiday. In Europe London and Frankfurt opened 1.4 per cent lower, while Paris shed 1.7 per cent.
After ECB boss Mario Draghi's comments on stimulus last week, dealers will be closely following the rhetoric coming out of the US Federal Reserve when it ends its policy meeting Wednesday, which will be followed by the BoJ's on Friday.
The Fed's last session saw it lift interest rates for the first time in almost a decade, citing confidence that the US and global economies were picking up.
With markets from Asia to the Americas seeing trillions of dollars wiped off their valuations since then, experts are keen to find out policymakers' current views.