• Wall Street starts new year with sharp dive
• Troubles in China's manufacturing industry sparks fears
• Tensions in Middle East also making investors nervous
• FTSE suffers worst stock market start in 16 years
• New Zealand shares falling amid global stock rout
Trading floors began the new year in a state of chaos as weak economic data from China and heightened tension in the Middle East wreaked havoc on financial markets worldwide.
On Wall Street both the S&P 500 and the Nasdaq had their worst starts to a year since 2001.
Indexes were heading for their worst start to the year since the Great Depression recovered late in the session, following a turnaround in oil prices that caused energy shares to cut losses.
The Dow Jones industrial average ended the session with the worst start to a year since 2008.
Both New Zealand and Australian markets fell in early trading.
Falls came after weak Chinese economic data fanned fears of a global slowdown.
US data sparked further concern as factory activity weakened unexpectedly in December.
Britain's benchmark index suffered its worst new year start in 16 years. The last time the FTSE 100 made such a bad start to the year was on January 4, 2000, when it sank 3.81per cent, the worst new year start in the FTSE 100's 31-year history.
After suffering its worst year since 2011, the FTSE 100 closed down 158.89 points, or 2.39 per cent, to 6093.43.
More than £38 billion ($83 billion) had been wiped off Britain's leading companies when markets closed on Monday, compared with a total of £80 billion in the past 12 months.
"Those are violent New Year fireworks. That's quite a way to start the day," said Andre Bakhos, managing director at Janlyn Capital in New Jersey.
Banks and technology shares also dragged the Standard & Poor's 500 Index lower.
A measure of global equities headed for its worst inaugural session in at least three decades.
Emerging markets slid the most since August as slowing manufacturing triggered a sell-off that halted Shanghai trading. Bonds jumped and the yen rallied on demand for haven assets.
"We've had a number of negatives out there in the US throughout most of last year as investors battled to have a flat year and China is a reminder that there aren't many things to be bullish about going into this year," Michael O'Rourke, chief market strategist at JonesTrading Institutional Services LLC in Greenwich, Connecticut, said by phone.
Investors returning to the market after the New Year holiday faced a worldwide sell-off sparked by weak factory data in China, and a reading that showed the fastest contraction in US manufacturing in six years added to anxiety that slowing growth in the world's second-largest economy is spreading.
A flare-up in tension between Saudi Arabia and Iran increased geopolitical unease.
Global equities slump in 2016:
The MSCI All-Country World Index fell 2.3 per cent by 1 pm in New York, topping its 1.5 per cent slide to start 2001. The Standard & Poor's 500 Index lost 2.1 per cent, the most since September on a closing basis, after the gauge ended the year down 0.7 per cent.
At the Wall Street's close the Dow Jones industrial average was down 276.09 points, or 1.58 per cent, to 17,148.94, the S&P 500 lost 31.28 points, or 1.53 per cent, to 2,012.66 and the Nasdaq Composite dropped 104.32 points, or 2.08 per cent, to 4,903.09..
Volatility will continue to dominate the market this year. There's short-term escalating concern in the Middle East and the Chinese manufacturing data is also is worrying markets.
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S&P Dow Jones Indices data indicate the first day of trading has no predictive power for the rest of the year. The index ends the year in the same direction it takes on the opening day 50.6 per cent of the time, data show. The first month of the year has proved more telling: the gauge's return in January determines its direction for the year 72.4 per cent of the time.
Focus will turn towards economic reports this week, including data on factory activity, the monthly jobs report and minutes from the Federal Reserve's meeting that ended with the first rate increase since 2006. A reading today showed manufacturing in the US contracted in December at the fastest pace since 2009 as factories, hobbled by sluggish global growth, cut staff at the end of last year.
Gauges of volatility in the US and Europe spiked. The Chicago Board Options Volatility Index surged 21 per cent. Its counterpart for the Europe Stoxx 50 jumped 22 per cent.
"It's never good to come in on the first day of proper trading to see this happening," said Patrick Spencer, equities vice chairman at Robert W. Baird & Co. in London. "Volatility will continue to dominate the market this year. There's short-term escalating concern in the Middle East and the Chinese manufacturing data is also worrying markets."
The Stoxx Europe 600 Index fell 2.5 per cent, capping its worst start of the year as almost 580 of its companies fell. Germany's DAX Index, among the best performers last year, dropped 4.3 per cent, the biggest slide for the export-driven gauge since the China-led rout in August.
The MSCI Emerging Markets Index slid 3.4 per cent, the most since August 24, the nadir of a sell-off after China's surprise devaluation of the yuan. China's CSI 300 Index of large-capitalisation companies listed in Shanghai and Shenzhen fell 7 per cent, setting off a circuit-breaker that suspended trading for the rest of the day. Benchmark gauges in South Korea, Taiwan, Malaysia, South Africa and Poland lost more than 2 per cent on Monday.
The Caixin factory index for China came in at 48.2 in December, missing the median analyst estimate of 48.9 in a Bloomberg survey, after the nation's first official economic report of the year on January 1 signalled manufacturing weakened for a fifth month, the longest such streak since 2009.
Brent crude fell 0.3 per cent, erasing gains of more than 2 per cent after Saudi Arabia and some of its Gulf allies severed or downgraded ties with Iran in the biggest meltdown in relations between the Middle Eastern powers in almost three decades, raising the spectre of deepening conflicts across the volatile region.
Oil last week capped the biggest two-year loss on record amid speculation a global glut will be prolonged as US crude stockpiles expanded at a record rate and the Organisation of Petroleum Exporting Countries abandoned output limits.
Base metals also fell. Nickel and zinc slid more than 2 per cent on the Chinese manufacturing data, and copper fell 1.4 per cent.
Spot gold jumped 1.5 per cent to $1076.57 an ounce on demand for a haven. The precious metal posted a third straight annual decline last year, the longest retreat in 15 years.
The yen touched 118.70 per dollar, the strongest level since October 15 and the Swiss franc was also among the biggest gainers among haven currencies.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, climbed 0.6 per cent. The gauge climbed 9 per cent last year, a third straight gain. The yen had a record fourth annual decline, and the euro slumped a second year, as stimulus in Japan and the euro area widened the gap between monetary policy in those regions and the US.
Government bonds across developed economies rallied after a plunge in Chinese shares drove demand for the relative safety of sovereign debt, pushing Treasury 10-year yields down by the most in more than two weeks.
Benchmark German 10-year bonds opened higher, rising with European peers from Austria to France. The move echoes the reaction to August's rout in Chinese shares that helped persuade the Federal Reserve not to raise interest rates in September.
The yield on the benchmark US 10-year note yield declined seven basis points to 2.20 per cent, the biggest drop since December 17. Germany's bund yield fell six basis points from the December 30 close to 0.57 per cent.
- Bloomberg and Daily Telegraph