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A Plunge in China Rattles Markets Across the Globe
(about 3 hours later)
■ Stock markets in the United States traded in a volatile session, with the Standard & Poor’s 500-stock index closing down nearly 4 percent.
Stocks around the world tumbled in volatile trading on Monday, leaving investors to wonder how much government officials can and will do to insulate the global economy from the turmoil.
■ Many investors sought refuge from the upheaval by turning to American and European government bonds.
The upheaval in the markets began with another rout in China that drew comparisons to the 1987 crash in the United States known as “Black Monday.”
■ The American and international oil benchmarks have fallen to their lowest point in more than six years.
Concerns about China’s ability to be a powerful engine of global economic growth have added to worries about the potential impact of higher interest rates in the United States, driving stocks sharply lower in Asia and Europe on Monday.
■ An index that measures market volatility reached levels last seen in 2011 when Americans were worrying about a double-dip recession.
When trading opened in New York, the major market measures went into what was essentially a free fall. While the steepest losses ended within minutes, share prices spent the rest of the day sharply rising and reversing course multiple times. When the day’s roller-coaster ride ended, the benchmark for stocks, the Standard & Poor’s 500-stock index, was down 3.9 percent. That left the index off 11 percent from its May high, in what in market parlance is called a “correction,” its first since 2011.
■ In China, the benchmark Shanghai composite index erased all of the gains it had made this year.
The tumult had many analysts grasping for explanations, given the lack of any significant new data that would explain the big market moves.
■ In Europe, stocks fell sharply, with the main indexes closing down 5 percent or more.
But beyond the questions about what exactly caused Monday’s moves, the recent market turmoil has now led many investors to turn their focus to the government officials who have become the most important players in the market since the financial crisis
Stock prices around the world bounced around wildly on Monday as investors debated if and when governments are likely to step in to calm the turmoil that has recently spiraled out from China.
In particular, there is a growing debate among market participants about whether the Federal Reserve will still follow through with plans to push interest rates higher, an action that was expected to begin in September. The market turmoil has led some, including Lawrence H. Summers, a former chief economic adviser to President Obama, to call for the central bank to reconsider those plans.
The Dow Jones industrial average plunged over 1,000 points immediately after the opening bell on Monday morning before recovering much of those losses and then dropping again nearly 600 points to close at 15,871.28.
That followed a stock market rout in China — immediately named “Black Monday” by local commentators — in which the main Shanghai stock index fell 8.5 percent.
The day’s trading began with questions about whether the Chinese government would make further efforts to support local investors. When Chinese authorities didn’t get involved, the talk on trading floors turned to the Federal Reserve’s current plans to ease up on its stimulus program, and whether that might change in light of the recent tumult.
“Everything is going to be dictated by government policy,” said Kevin Kelly, the chief investment officer of Recon Capital Partners. “Whatever noise is coming from policy makers is going to determine the next couple weeks.”
“Everything is going to be dictated by government policy,” said Kevin Kelly, the chief investment officer of Recon Capital Partners. “Whatever noise is coming from policy makers is going to determine the next couple weeks.”
The conversation about government policy is playing into a broader debate about the global economy’s ability to continue growing without the sort of extraordinary stimulus that has become the norm in recent years.
Fed officials could give some indication of their thinking later this week when they gather for an annual conference in Jackson Hole, Wyo.
In the United States, the major indexes had pared back much of their early losses in midday but again resumed their fall.
At an event on Monday, the president of the Atlanta Fed, Dennis Lockhart, said that recent developments “are complicating factors in predicting the pace of growth,” though he said he still expected rates to rise this year.
The S.&P. 500 closed down 3.9 percent, at 1,893.21. The index is off more than 11 percent from its high in May, indicating a so-called correction. The Nasdaq ended Monday down 3.8 percent to 4,526.25.
Investors have also been looking to Beijing. Over the weekend, there were expectations that the Chinese government would take more aggressive steps to stem the recent declines in the Chinese stock market and the renminbi, the country’s currency.
Investors’ worries over China’s economic slowdown and a souring view of emerging economies have rattled financial markets around the world in recent days, and showed no signs of letting up.
Previous moves, though, did little to beat back concern about a weakening Chinese economy, and Chinese officials declined to do anything significant on Monday.
“There was a huge amount of negative sentiment built in this morning,” said Dan Greenhaus, the chief global strategist at BTIG.
The debates in both China and the United States have often turned to more worrying questions about whether the levers that central bankers use to influence the markets are losing their power after years of extensive intervention.
Mr. Greenhaus said many investors ended last week hoping that the Chinese government would step in over the weekend to announce some steps to support the markets, but nothing significant was announced, contributing to the pessimism on Monday morning.
With all the hand-wringing, however, many investment advisers have been urging clients to ignore the recent swings.
The negative sentiment led to the big market drops in early trading Monday morning, with the S.&P. 500 initially down more than 5 percent and the Nasdaq down more than 8 percent. The bounce back from those early lows by midday suggested that at least some investors were convinced that the panic has gone too far.
In China — the source of the recent instability — the Shanghai stock index is still up over 40 percent from where it was a year ago, even after falling 38 percent from its recent peak.
Ryan Larson, the head stock trader at RBC Global Asset Management, said that after the initial market declines clients were canceling their sell orders and putting in requests to buy stocks. Although some American companies may be hit by the weakness in the emerging markets, recent data has suggested that the American economy is continuing to strengthen.
And although a number of American companies stand to be hurt by any weakness in China, recent data has suggested that the economy in the United States is continuing to gain strength.
The shares of Apple were in positive territory for a bit after its chief, Timothy D. Cook, sought to reassure investors that the company’s sales were still strong in China.
Even apart from the problems in China, many analysts have said that high-flying American stocks were due for a pause after the steady upward climb that has characterized the American stock market over the last four years.
Still, few investors were calling an end to the volatility that has shaken markets in recent weeks.
Still, the violent swings in stocks have left many investors unnerved.
Among the biggest losers in the main indexes were oil stocks like ExxonMobil as crude oil prices traded below $40 a barrel.
“We take the sell-off very seriously as this unfamiliar mix of emerging market uncertainty, deflationary pressure, central bank interference and extreme volatility is hard for global markets to digest,” Mark Haefele, the chief investment officer for the UBS wealth management arm, wrote in a note to clients.
The so-called fear index, the Vix, was up on Monday morning to levels last reached in 2011 when Americans were worrying about a double-dip recession.
Wall Street’s so-called fear gauge, the Vix, rose Monday morning to its highest level since 2009.
Investors flocked to the safe haven of Treasury bonds. The demand for bonds pushed the yield on the benchmark 10-year Treasury note briefly to 1.90 percent before it recovered back over the psychologically significant 2 percent mark.
On Monday, the Shanghai composite index closed down 8.7 percent. In Europe, benchmark indexes in Germany, Britain and France fell nearly 5 percent or more. A number of emerging markets were also lower, with leading indexes in Brazil and Indonesia both down around 4 percent.
In China, the benchmark Shanghai composite index closed 8.5 percent lower on Monday, erasing all of the gains it had made in an extraordinary run-up this year.
In the United States, the Dow Jones industrial average plummeted 1,000 points before regaining ground. It ended the day down 3.6 percent, or 588.40 points, to 15,871.35. The Standard & Poor’s 500 index fell 3.9 percent, or 77.68 points, to 1,893.21. The Nasdaq composite index closed down 3.8 percent, 179.79 points, to 4,526.25.
The broad-based sell-off in stocks poses a challenge to the Federal Reserve in the United States. The central bank’s chairwoman, Janet L. Yellen, and her colleagues on the Fed’s policy board have been warning investors for months that the central bank was moving toward the first increase in its main interest rate since it was cut to zero in December 2008.
The Treasury market was a beneficiary of the fear in stocks. The demand for bonds pushed the yield on the benchmark 10-year Treasury note to as low as 1.90 percent before it settled at 2.01 percent.
Many analysts have said that a correction to stock market valuations was overdue after a long bull market. And it is too early to say how the financial market slump will affect the underlying global economy where goods and services are actually produced and consumed.
The recent market tumult began two weeks ago when the Chinese government unexpectedly allowed the value of its currency to drop, partly in response to indications that the country’s economy is weakening.
Many of the world’s central bankers will have a chance later this week to compare notes and discuss whether new policy steps are needed when they gather, along with finance ministers and academics, in Jackson Hole, Wyo., for the Federal Reserve Bank of Kansas City’s annual conference.
The Chinese moves played into the continuing drop in the price of oil, which has taken the price of a barrel of crude oil down 65 percent over the last year. On Monday, the price of oil, as measured by a benchmark New York contract, dropped below $40.
The selling in China has accelerated despite extraordinary government intervention in the last two months aimed at propping up share prices. As the slide on Monday highlighted, those efforts have not been a success and the damage has been felt far beyond the Chinese market. The gloom was shared across Asia. In Japan, the Nikkei 225 stock average closed 4.6 percent lower, while Australia’s main index fell 4.1 percent.
The selling in China has accelerated despite extraordinary government intervention in the last two months aimed at propping up share prices. On Sunday, the Chinese government said that the country’s pension funds would be allowed to invest in stocks for the first time. But the slide on Monday highlighted that the new policy, and several similar recent moves, have not been successful.
In Hong Kong, where the Hang Seng Index closed 5.2 percent lower, the mood at brokerage firms was grim.
Many investors are now hoping that the central bank, the People’s Bank of China, will cut the ratio of deposits that banks are required to keep on reserve in a bid to encourage lending and spur economic growth.
“People who had wanted to bottom-feed by buying earlier this morning are all losing money,” said Andy Wong, a Hong Kong stockbroker. “The market trend does not look good, it is all bad news, globally. All the markets are going down, globally; the Chinese stock markets are in free fall today.”
In the meantime, there are big questions about whether China’s stock market plunge will make the Chinese economy, the world’s second-largest after that of the United States, even weaker.
Leung Chung, a 62-year-old retiree and day trader in a T-shirt and with a toothpick in his mouth, looked sourly at the monitors at his local brokerage firm in late morning. “I just purchased some stocks earlier this morning, but have already lost money,” Mr. Leung said. “I am not too concerned as I only bought stocks with solid financial strength.”
Xu Sitao, the chief China economist in the Beijing office of Deloitte, said in a speech in Hong Kong that the effect on the economy could be muted because equities represent only 7 percent of the overall wealth of urban Chinese households, which continue to rely heavily on real estate in their holdings.
The dollar rose against most Asian currencies, with the exception of the yen, which is considered a regional haven.
The euro gained 1.8 percent against the dollar, trading at $1.1585 late afternoon on Monday.
Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in London, said in a research note that the rising euro and yen were “creating a policy headache for the European Central Bank and Bank of Japan,” as well as for the Fed.
Stronger currencies, he said, would make it harder for central banks to fight deflationary pressures. He noted that long-term forecasts for the eurozone showed inflation beginning to return to the levels that existed before the European Central Bank began its bond-buying program this year.
One big question is whether China’s stock market plunge will make the Chinese economy, the world’s second-largest after that of the United States, even weaker. China’s exports were down 8 percent in July compared with a year earlier, while auto sales were down 7 percent.
But Xu Sitao, the chief China economist in the Beijing office of Deloitte, said in a speech in Hong Kong that the effect on the economy could be muted because equities represent only 7 percent of the overall wealth of urban Chinese households, which continue to rely very heavily on real estate in their holdings.
“The stock market really has a very, very insignificant impact on the Chinese economy,” he said.
“The stock market really has a very, very insignificant impact on the Chinese economy,” he said.
Despite this, the market continued to slump. On Monday, the Shanghai index fell to its lowest level this year; it traded as low as 3,191.88 points, a drop of 9 percent from the close on Friday and nearly 40 percent below its peak in June. Mainland shares are only allowed to rise or fall by 10 percent per day before they are suspended from trading. Shares in more than 800 of the nearly 1,100 companies in the Shanghai index fell by the limit.
In the United States, too, economists were hopeful that the activity in the markets would not spread to the broader economy.
The plunge in Shanghai came despite an announcement by China’s government on Sunday that the country’s pension funds had been approved for the first time to invest in stocks.
“For now we believe the positive factors will win out,” Mr. Haefele of UBS wrote in his note to clients. “But market shocks of this magnitude have the potential to overpower fundamentals so we need to remain vigilant.”
Pension funds can invest as much as 30 percent of their holdings in the stock market, according to the statement by the State Council, China’s cabinet. The main state-run pension fund manages about 3.5 trillion renminbi, or about $550 billion, in retirement savings of ordinary citizens.
Many economists expect the central bank, the People’s Bank of China, to cut the ratio of deposits that banks are required to keep on reserve in a bid to help stem outflows of capital, which rose to a record of $70 billion in July and probably accelerated in the weeks since the renminbi was devalued.
