01/07/2016 05:39 EST | Updated 01/07/2017 00:12 EST

Global markets tumble as China turmoil sends oil, stocks sliding

North American stocks tumbled again today in the wake of market volatility in Asia and 12-year lows in crude oil prices, while the Chinese regulator moved to stabilize markets by suspending the "circuit breaker" rule that halts trading after declines of seven per cent. 

The benchmark index in Toronto, the S&P/TSX composite index, was down 1.8 per cent to 12,493.5, about an hour and a half after Thursday's opening, while the Dow Jones industrial average fell about one per cent.

Amid the turmoil the Canadian dollar hovered around 71.07 cents US, up marginally from its closing Wednesday.  

The losses came after China halted trading for a second straight day only a half-hour after opening, as Shanghai shares plummeted seven per cent and the yuan fell to its lowest level in five months.

In an apparent effort to stall losses, Chinese regulators announced late Thursday that as of Friday they would scrap the "circuit breaker" rule, a move that some market analysts expect will help North American and European markets recover some ground. 

The breaker, in place since the start of this year, was designed to temper the market but instead caused a wave of selling.

"The circuit breaker mechanism was not the main reason for the market slump," Deng Ge, a spokesman for the China Securities Regulatory Commission said in a statement. "It just didn't work as anticipated based on actual situations. The negative effect of the mechanism outweighed its positive effect."

Investors have also been rattled by falling crude oil prices, which slid to their lowest levels since the early 2000s. Brent crude prices skidded over five per cent to an almost-12-year low of $32.16, with worries over weaker demand from China adding to a persistent drag on prices caused by oversupply and near-record output levels.

- ANALYSIS | 7 things that could go wrong in 2016: Don Pittis

Before news of China halting the "circuit breaker" rule, European markets followed Asia lower, with the pan-European FTSEurofirst 300 index down 2.3 per cent and the eurozone's blue-chip Euro STOXX index falling 2.5 per cent. MCCI's 46-country All World index fell one per cent to hit a three-month low, the sixth straight day of losses.

The benchmark emerging stock index slid 2.5 per cent to a 6.5-year low as investors dumped risky assets.

"It's looking pretty ugly," said hedge fund manager and chief investment officer Andreas Clenow at ACIES Asset Management in Zurich. "We've been scaling down equity positions. It's time to take a step back to re-evaluate the situation."

The People's Bank of China (PBOC) set the yuan midpoint rate at 6.5646 per dollar, 0.5 per cent weaker than the previous day's fix. That was the biggest decline between daily fixings since August and the eighth day in row the PBOC had set a lower guidance rate. Spot yuan fell to 6.5956 to the US dollar, its weakest since February 2011.

Offshore yuan rates hit a record low of 6.7600 to the US dollar, before erasing its losses after suspected intervention by authorities.

Currencies hit

Other regional currencies followed the yuan down as markets began to worry about competitive currency devaluations from trading partners.

Singapore's dollar hit a six-year low, the South Korean won touched a four-month low, and the Malaysian ringgit slumped to a three-month trough.

Investors fear China's economy is even weaker than had been imagined, with Beijing, in a bid to help exporters, allowing the yuan's depreciation to accelerate.

"The lower yuan fixing probably signifies greater risks to the Chinese economy than we know of, leading to risk-off trades," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

Flight to safety

North Korea's announcement on Wednesday that it had successfully conducted a test of a hydrogen nuclear device also added to a growing list of geopolitical worries for investors.

"Geopolitical tensions stemming from Saudi-Iran tensions and North Korea's nuclear test had already heightened the 'risk off' mood," said Takashi Hiroki, chief strategist at Monex Securities in Tokyo. "Resurfacing China risk was the extra psychological blow to the markets that led to the sell-off in equities."

As investors fled to safety, the yen rose about one per cent to 117.615 per dollar, its strongest in 4.5 years. Top-rated German bonds, which are also considered a safe haven, benefited, too. Ten-year yields dropped below 0.5 per cent for the first time in over a month.