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Markets dive as China manufacturing weakens in bleak start to 2019

China’s huge manufacturing sector has shrunk for the first time in 19 months, sending stock markets into a tailspin in an ominous start to 2019.

The weak data released on Wednesday follows a slew of other disappointing figures from the world’s second largest economy and underline concerns that is heading for a tough 12 months.

Stock markets in the region suffered. Hong Kong was down 2.7%, Shanghai off 1.2% and the ASX 200 benchmark closed down 1.6% in Sydney. In South Korea, figures showed that its crucial export industries finished the year on a poor note, sending the Kospi stock index down 1.7% at the end of trading.

Asia biggest market, Japan, was closed for a holiday. But the selling looks set to spread to Europe and the US with FTSE futures pointing to a 0.25% fall at the open and the E-Mini futures for Wall Street’s S&P 500 down 0.8%.

The Australian dollar, which is seen as a proxy for the Chinese economy, lost 0.6% as it plunged as low as US70.05 cents. It was the currency’s lowest level since January 2016 and perilously close to dipping below the key trading benchmark of US70c that, once breached, could spur further falls.

The Australian outlook was not helped by figures showing that house prices are now falling at their fastest rate for 10 years.

In China, the Caixin/Markit manufacturing purchasing managers’ index (PMI) for December fell to 49.7, from 50.2 in November. A number below 50 represents a contraction. It was the first time it has shrunk for 19 months.

Taiwan also saw a contraction in manufacturing in December while official data in Singapore showed that gross domestic product grew more slowly than forecast in the fourth quarter as the city-state’s manufacturing sector contracted on a quarterly basis.

The Asia data made it more difficult for traders and investors to ignore what looks like “a genuine global economic slowdown”, said Australian market strategist Greg McKenna.

“It’s still difficult to be strongly positive given all the uncertainties,” said Sim Moh Siong, currency strategist at Bank of Singapore.

With business conditions expected to get worse before they get better, China is expected to roll out more support measures in coming months on top of a raft of initiatives in 2018.

“This data confirms our view that the economy is weak and that stimulus needs to arrive quickly,” said analysts at ING in a note.

The position of the US Federal Reserve remains the key to market sentiment over the next 12 months, along with talks between the US and China to end their trade standoff.

The chairman of the Federal Reserve, Jerome Powell, signalled that there could be two more rate hikes this year, adding to the four he oversaw in 2018.

But many market observers, not to mention Donald Trump, think that the US central bank risks sucking the life out of the booming US economy and emerging markets that are heavily geared to the US dollar.

Federal Reserve fund futures have all but priced out any hike for this year and now imply a quarter-point cut by mid 2020. The treasury market also assumes the Fed is done and dusted with bond yields – a key indicator of real interest rates – now beginning to fall after rising during 2018.

Powell will have the chance to comment on the economic outlook when he participates in a joint discussion with his predecessors Janet Yellen and Ben Bernanke on Friday.

Also looming is a closely-watched survey on US manufacturing due on Thursday, followed by the December payrolls report on Friday.

“What is clear is that the global synchronised growth story that propelled risk assets higher has come to the end of its current run,” analysts at OCBC Bank wrote in a note.

The pullback in the dollar and the chance of and end to US rate hikes have been boons for gold, which fetched $1,280.40 an ounce to be close to a six-month peak.

Oil prices flagged again after a punishing 2018. On Wednesday, US crude futures eased 2 cents to $45.39 a barrel, while Brent fell 18 cents to $53.64.

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