Wall Street rout: Dow Jones and Nasdaq dragged down by faltering Chinese economy

US equities began 2016 on the back foot as Wall Street reeled after a slump in China saw trading halted and dragged Asian markets sharply lower. Shortly after the opening bell on 4 January, the Dow Jones Industrial Average, S&P 500, and the Nasdaq were all firmly in the red, continuing a trend that saw the main US benchmarks close 2015 largely in negative territory.

Meanwhile, US investors were waiting on a number of macroeconomic reports. The Markit purchasing managers index for the manufacturing sector for December due out at 9.45am EST, while the ISM manufacturing index is released at 10am EST.

In China, the Shanghai Composite Index closed down almost 7% after a fresh reading showed manufacturing production in the world's second largest economy remained in the doldrums in December. The sharp decline saw trading momentarily halted on the main Chinese index, as it triggered the index's so-called "circuit breaker".

Under the new mechanism, which was introduced on the first day of trading in 2016, swings of up to 5% trigger a 15-minute suspension in trading, while a rise or fall of 7% halts trading for the remainder of the day.

Figures released earlier on 4 January showed the Caixin/Markit manufacturing purchasing managers' index (PMI) fell to 48.2 in December 2015, marking the 10th consecutive month the index has remained below the 50 threshold that indicates expansion.

"The Chinese markets have fallen after data showed manufacturing weakened for the fifth month in a row," said Sanjiv Shah, chief investment officer at Sun Global Investments.

"The Caixin China Manufacturing Index for December fell to 48.2 which, being below 50, indicates contraction and underlines the continuing evidence of weakness in the manufacturing sector.

"Chinese stocks are also weak as markets anticipate the likely lifting of the ban on short selling which is due next week. China's weakness has affected other indices in Asia with most markets down about 2% this morning."

The rout in Asian markets was felt in Europe as well, where Germany's Dax and France's CAC 40 were down over 3.5% and over 2.6% respectively by mid-morning, while the Pan-European Stoxx600 index was almost 2.8% in the red.

Meanwhile, oil prices advanced over 1% as on 3 January Saudi Arabia announced it had severed diplomatic ties with Iran after its embassy in Tehran came under attack from people protesting against the execution of Shiite Muslim cleric Nemer al-Nemer.

Among individual stocks, US-listed shares of pharmaceutical group Shire were in the red after reports suggested the Ireland-based firm was close to complete a takeover of sector peer Baxalta.

Shares in Tesla Motors slid sharply after the electric car maker said on Sunday it delivered 17,400 cars in the final quarter of 2015, a figure that was at the lower end of the company's forecast for 17,000 to 19,000 deliveries.