Australian shares are set to open lower on Wednesday, with the Chinese sharemarket, crude oil and US sharemarket futures all dipping lower on the Australia Day holiday.
The Shanghai Composite Index reached 13-month lows on Tuesday, slumping 6.4 per cent at the close of trade. S&P 500 futures were down 0.3 per cent – indicating a likely dip on Wall Street on Tuesday night – while Brent crude oil was back under $US30 a barrel, dropping 2.5 per cent to $US29.73.
"I think the Australian sharemarket will correct lower on Wednesday," said Betashares economist David Bassanese. "The reads from offshore markets are going to be weak."
Mr Bassanese said sharemarkets overreacted to the news last Friday that central banks in Europe and Japan would introduce more monetary stimulus.
US earnings 'under pressure'
The US earnings season was also likely to disappoint, he said. More than 130 companies in the S&P 500 are scheduled to report their fourth-quarter results this week.
"We get a slate of earnings results coming out of the US, and people are going to start focussing on the fact that valuations are stretched and earnings are under pressure, which is why markets are having a bit of a correction at the moment."
China's stocks fell to the lowest levels in 13 months amid concern capital outflows may accelerate as the economy slows, and after some of the nation's most-accurate forecasters predicted further declines for equities.
The Shanghai Composite Index finished up at its lowest point since December 9, 2014. Energy producers and technology companies led declines. PetroChina and coal producers slumped after oil prices slid below $30 a barrel.
Analysts fear the Shanghai gauge could drop another 15 per cent in the first half of 2016 as slowing economic growth and a weaker yuan fuel capital outflows. Outflows jumped in December, the estimated 2015 total reaching a record $US1 trillion ($1.4 trillion), more than seven times higher than the whole of 2014, based on Bloomberg Intelligence data dating back to 2006.
"The pressure for capital outflow and yuan's devaluation is still quite big," said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai, adding that he is cutting equity holdings. "We haven't seen signs of a pick-up in the economy, and the first and second quarters could be challenging."
The Shanghai Index's 43 per cent rout since June has been accompanied by an economy losing momentum, similar to the global financial crisis, when the gauge lost more than two-thirds of its value from peak to trough over the course of a year. The index will bottom once it falls to 2500 this year, said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. That represents a further 15 per cent decline from Monday's close.
Thomas Schroeder, the managing director of Chart Partners Group, who predicted in October that a rebound in Chinese stocks wouldn't last, said the Shanghai Composite will drop to 2400.
Investors are being urged sell shares as the sharemarket could come under pressure this year from both the economic slowdown and a potential surge in the supply of new shares. With 660 Chinese companies waiting to sell shares via initial public offerings, the additional supply could well divert funds from existing shares.
China's gross domestic product growth is seen slowing to 6.5 per cent this year, from last year's 6.9 per cent. The nation's top leadership has signalled in recent months it may tolerate further moderation, as officials tackle delicate tasks such as reducing excess capacity, but nothing that could threaten President Xi Jinping's goal of at least 6.5 per cent growth through 2020.