LONDON Global stocks fell on Monday, dragged down by a six percent tumble in China which sent nervous investors into the yen, while an historic opposition victory in Japanese elections also gave the currency a boost.
Chinese share trading is largely cut off from global markets but the big drop in Shanghai still had a psychological knock-on. Investors nervous about whether the major economies can pull convincingly out of recession, helped by China, shied away from risk and opted for the perceived safety of the yen and government bonds.
MSCI's .MIWD00000PUS all-country world stock index was down 0.46 percent at 276.17 points at 5:06 a.m. EDT in a market subdued by a public holiday in Britain, while the FTSEurofirst 300 .FTEU3 index of top European shares was down 0.26 percent at 975.78 points after reaching a 10-month high on Friday.
"The drop in China does have an impact and there is further downside potential in those overvalued stocks," said Giuseppe-Guido Amato, strategist at Lang & Schwarz.
Shanghai stocks .SSEC fell 6.7 percent and the index dropped below the 125-day moving average, which many domestic investors believe is the dividing line between bear and bull markets.
Foreign investment on the Chinese stock market is limited, leaving trading largely to domestic players. Nevertheless, global investors decided to play safe after strong gains in recent months. For instance, the FTSEurofirst 300, which plunged 45 percent in 2008, is up 17 percent this year and about 50 percent from a lifetime low in early March.
In Tokyo, the Nikkei average fell as the stronger yen and tumbling Shanghai stocks helped to erase a jump to an 11-month high after the election results.
Sunday's landslide victory for Yukio Hatoyama's Democrats ends a half-century of almost unbroken rule by the Liberal Democratic Party and breaks parliamentary deadlock.
However, the market was struggling to interpret the results.
"Uncertainty remains on what kinds of policies the Democrats will take and what kind of impact they will have," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management. "The market will likely take a wait-and-see approach for about a month after the new government takes power as no one knows where it will take us."
The Nikkei lost 0.4 percent or 41.61 points to 10,492.53 after bouncing briefly to an 11-month high of 10,767.00.
YEN RISES BROADLY
The yen rose broadly, hitting a seven-week high against the dollar. Currency investors hoped that new policies in Japan will support consumer spending in an economy trapped in deflation and haunted by a weak growth outlook.
"Risk aversion due to the falls in the Shanghai stock index and relief at the lack of uncertainty in the Japanese election result have lifted the yen," Commerzbank currency strategist in Frankfurt Antje Praefcke said.
At 0807 GMT (4:07 a.m. EDT), the dollar was 0.9 percent lower at 92.80 yen, hovering just above an earlier low of 92.54 yen hit on trading platform EBS, its weakest level since mid-July.
The euro fell 1 percent against the yen to 132.46 yen, while it dipped 0.1 percent against the dollar to $1.4277.
Risk aversion also helped government bonds. Ten-year Bunds yielded 3.226 percent, about one basis point less than in late Friday trade.
Oil fell below $72 a barrel due to worries about the pace of economic recovery and a revival in energy demand. "I'm sure that weaker stock markets are feeding through into lower oil prices. It could indicate weaker demand from China," said Christopher Bellew, a broker at Bache Commodities in London.
U.S. crude for October fell $1.09 to $71.65 a barrel by 0843 GMT (4:43 a.m. EDT). London Brent crude fell $1.16 to $71.63.
"The sharp drop in Chinese markets is causing concerns and is inevitably making some investors rethink the risks to China's economy and question their assumptions on the country's growth rate and energy consumption," said Daniel Liu, a commodities strategist at MG Global Singapore.