NEW YORK Global equity markets fell sharply on Monday, while gold and bonds rose, after a 7 percent slide in Chinese shares sparked by weak economic data rekindled worries over global growth on the first day of trading in 2016.
Rising tensions in the Middle East also increased demand for safe-haven assets. Crude prices rose above $38 a barrel at one point as some speculated a breakdown in diplomatic ties between Saudi Arabia and Iran could result in reduced oil supplies.
But crude later retreated on worries that the weak Chinese data could portend slower worldwide growth, which also hurt Wall Street and sent key stock indexes down more than 2 percent.
Emerging markets were especially hard-hit by the China news, with MSCI's index .MSCIEF tumbling 3.37 percent, while its all-country world stock index .MIWD00000PUS fell 2.38 percent.
The selloff in China triggered a circuit-breaker that suspended equities trading nationwide for the first time and put at risk months of regulatory work to restore market stability.
In the United States, the iShares China large-cap ETF (FXI) fell 3.57 percent, its biggest single-day slide since a 4.5-percent drop in September.
Investors are warranted to worry about global growth as the factory numbers may not fully indicate how quickly China has been slowing down, said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"The China 7-percent drop last night and the close of the market, along with Saudi Arabia, are causing investors to rethink to their growth estimates and the geopolitical risk that's really out there," Mendelsohn said.
On Wall Street, the Dow Jones industrial average .DJI fell 388.06 points, or 2.23 percent, to 17,036.97. The S&P 500 .SPX slid 43.98 points, or 2.15 percent, to 1,999.96 and the Nasdaq Composite .IXIC lost 129.58 points, or 2.59 percent, to 4,877.83.
China's yuan currency CNH=D3CNY= hit its lowest in more than four years after the central bank lowered its guidance rate and factory activity contracted for a 10th straight month in December, at a sharper pace than in November.
The selloff has more to do with geopolitical concerns than China's economy, which as been slowing but does not show signs of a hard landing as some fear, said Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab in Boston.
"Today's move is probably more about drama than data, since the data has actually been holding up OK," he said. "Over the last year, we've seen a number of these sharp daily moves in the markets tied to geopolitics that only lasted a day," he said.
The release late Tuesday in China of data on the country's services sector, the Caixin/Markit Purchasing Managers' Index, should be relatively good, Kleintop said. China is transitioning from manufacturing to a service economy, he said.
Oil prices slid in volatile trading, following the stock market lower on fears of China's slowing economy. Earlier, crude jumped 4 percent in early trade on Middle East tensions.
The Saudi-Iranian standoff raised fears over the security of oil supplies from the Middle East, estimated to hold about half of the world's proven oil reserves.
Saudi Arabia, the world's biggest oil exporter, cut diplomatic ties with Iran on Sunday in response to the storming of its embassy in Tehran, following Riyadh's execution of a prominent Shi'ite cleric on Saturday.
Data showing an inventory build at the Cushing, Oklahoma delivery hub for U.S. crude futures helped reverse crude prices.
Brent LCOc1 settled down 6 cents at $37.22 a barrel and U.S. West Texas Intermediate futures CLc1 settled down 28 cents at $36.76 a barrel.
The dollar pared earlier gains against a basket of key currencies as a private gauge on U.S. manufacturing activity unexpectedly fell in December to its weakest since June 2009, stoking worries about slowing domestic economic growth.
The Institute for Supply Management said its index of national factory activity fell to 48.2 from 48.6 in November, which was below the median forecast of 49 of economists polled by Reuters. A reading below 50 signals contraction in domestic manufacturing activity.
The dollar index, which measures the greenback against a group of six currencies .DXY, was last up 0.26 percent at 98.892.
U.S. Treasury yields fell, with benchmark yields hitting nearly two-week lows. Ten-year Treasury notes US10YT=RR yielded 2.200 percent at one point, their lowest since Dec. 22.
Ten-year Treasury notes were last up 10/32 in price to yield 2.2374 percent.
Gold rallied 2 percent to a four-week high.
U.S. gold futures GCv1 for February delivery settled up 1.4 percent at $1,075.20 an ounce.
(Additional reporting by Dhara Ranasinghe in London and Hideyuki Sano in Tokyo; Editing by Larry King and Nick Zieminski)
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