Global markets: Oil rout deepens; Asia stocks drop

Asian stocks fell on Monday and China's yuan hit fresh four-and-a-half-year lows as plunging oil prices added to investors' nervousness about riskier assets ahead of an expected US rate rise later in the week.

Spreadbetters saw the sombre mood extending into Europe, forecasting Britain's FTSE, Germany's DAX and France's CAC to open flat to a touch lower.

The People's Bank of China (PBOC) on Monday continued guiding its currency lower, setting the yuan/dollar official midpoint at its weakest since July 2011.

Beijing's introduction of a yuan rate index against a basket of peers – seen as a move that traders said would de-peg the renminbi from the greenback over time – further weighed on the yuan.

China's decision to loosen its grip on the yuan and allow slow but steady depreciation in recent weeks had added to concerns that the economy may be more fragile than expected.

MSCI's broadest index of Asia-Pacific shares outside Japan hit a two-and-a-half-month low and was last down 1.3 per cent. Japan's Nikkei slumped 2.1 per cent as falling commodities hit energy and trading companies' shares.

South Korea's Kospi retreated 1.1 per cent and Australian shares dropped 1.8 per cent.

Data on Saturday showed factory output growth in China accelerated to a 5-month high in November, while retail sales rose at an annual 11.2 per cent pace – the strongest this year.

While most of the region's investors mostly looked past better-than-expected indicators, China proved the exception with volatile Shanghai stocks paring earlier losses and gaining 0.5 per cent.

On Friday, the Dow sank 1.8 per cent and the S&P 500 lost 1.9 per cent as plunging crude oil prices added to fears of a possible spike in volatility if the Federal Reserve raises interest rates on Wednesday for the first time in nearly a decade, as widely expected.

"It's fair to say that equities are going to be truly tested over the coming four days, and the Fed will be a catalyst for volatility in the lead up to Thursday," wrote Evan Lucas, market strategist at IG in Melbourne.

A US rate hike would be a first step towards normalising monetary conditions after an extended period of loose policy, which had helped shore up riskier assets.

Oil prices continued their freefall after the International Energy Agency (IEA) warned that global oversupply could worsen next year. Brent crude fell below $38 a barrel for the first time in seven years on Friday and was last down 0.6 per cent at $37.70.

In currencies, the dollar was little changed at 121.13 yen after shedding 0.5 per cent on Friday, when it stooped to a near six-week low of 120.585. The euro was steady at $1.0965 after gaining about 0.4 per cent on Friday.

The greenback stalled as long-dated US Treasury yields slumped to multi-week lows on Friday as government debt attracted bids for safe havens.

The forex market also kept an eye on the Chinese currency after Beijing, in a move seen by some as a green-light for more devaluation, late on Friday launched a new trade-weighted yuan exchange rate index. Beijing said it was intended to discourage investors from exclusively tracking the yuan's fluctuations against the greenback.

"While some will see this as cover for currency devaluation, we suspect the goal is to keep the renminbi's value broadly stable rather than be compelled to have it follow the dollar higher, as it has over the past couple of years," Capital Economics said in a note.

"But the haphazard way in which information is dribbling out is doing nothing to generate confidence."

Spot yuan fell to as low as 6.4665 to the dollar, its lowest since mid-2011, taking its losses far this year to about 4 per cent.