China Drags Asian Equities to Three Week Low

Asian stocks fell to three-week lows on Tuesday as a deepening rout in Chinese stocks erased risk appetite – sending investors flocking to safe-haven instruments such as government bonds and the Japanese yen.  MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.8 percent in early deals, its lowest level since July 9 as mainland Chinese indexes opened 2- 5 percent lower.

“Volatility is the enemy of investor appetite,” said the head of index trading at a U.S. fund. “Any sign of government support to prop up the market will be used by investors to exit the market completely rather than add fresh positions.”  Since hitting a peak in early June, Chinese shares have gone through a roller-coaster ride with main China indexes falling by a third in less than a month before rebounding by a quarter, only to stage its biggest one-day fall since 2007.

While broader Asian markets have been initially resilient to the fireworks in Chinese stocks, they have started to move more closely in step with the mainland over recent days in the absence of fresh triggers elsewhere.  Correlations between the MSCI gauge for regional stocks and the Shanghai index .SSEC has risen to 0.5 – its strongest in nearly a year – indicating the market rout is starting to have a broader regional impact.