Markets tumble as China enters bear market
U.S. markets slid on Monday after Chinese stock made a nose dive and investors took caution on fears of a Federal Reserve pullback on stimulus.
By 2:20 p.m. the three major indexes had recovered some losses, with Standard & Poor’s 500 Index down 1 percent, the Dow Jones Industrial Average down 0.37 percent and the Nasdaq tech index dropping 0.64 percent.
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The morning numbers were bleaker: The S&P tumbled 2 percent before noon, extending its biggest monthly drop in more than a year. At the same time, the Dow dropped more than 220 points and the Nasdaq fell by 1.8 percent.
The trading slump followed the biggest drop in Chinese shares since August 2009 earlier in the day. An index of China’s largest 300 companies tumbled 6.3 percent in Shanghai, taking its decline to 22 percent from this year’s peak. A fall of more than 20 percent signifies a bear market.
U.S. stocks plunged and interest rates jumped last week after the Fed said it may start pulling back on its bond-buying policy as soon as September. The benchmark S&P sank 2.1 percent in the sell-off and is down 3.1 percent in June, on course for the biggest monthly drop since May 2012. It has declined 5.4 percent since its May 21 high.
The Fed’s announcement boosted 10-year Treasury yields last week to 2.4 percent, as investors began pulling out of government bonds. On Monday prices slumped more, pushing the 10-year rate as high 2.66 percent, a level not seen since August 2011.
Some market analysts are predicting a steeper fall in domestic stocks — as much as 10 percent — until the end of the month, as investors adjust their portfolios to the Fed’s potential stimulus tapering. But Sam Stovall, the chief equity strategist at S&P Capital IQ, predicted that the downward movement won’t push the United States into a bear market. Jason Benowitz, of Roosevelt Investment Group in New York, said the “sell-off is a reaction to less liquidity” expected since the Fed news last week, and he predicted it will be only a near-term upset.
Jamie Cox, the managing partner of Harris Financial Group, sees a bright spot for American households in the market activity. “One should not look at this short-term drop in the stock market as a foreshadowing of an impending systemic event but as an overreaction to a statement about policy that has not even been altered,” Cox said. He argued that this correction is “in favor of the U.S. consumer,” as the flight to the U.S. dollar “is making it stronger.” Therefore, he said, “gasoline, groceries and other commodities priced in dollars are dropping. This is a much-needed reprieve from a five-year siege in higher prices caused by a weak dollar.”
China’s central bank urged banks to control credit risks Sunday, raising fears that the second-largest economy in the world may be facing a cash crunch. Borrowing costs in the country have been rising on slow growth, a crackdown on illegal capital inflows and efforts to rein in shadow banking.
“The liquidity tightening is another indication that the new government has put priorities on tackling the structural problems,” Goldman Sachs said in a report released Monday.
PMI data from China showed an arrest in economic activity last week. “The uncertainty is not about the slowdown (or even about the magnitude of the slowdown) but about how China navigates this shift and develops new sources of growth,” noted a McKinsey white paper on the growth scenarios for the global economy in the next decade.
Roosevelt Investment predicts that if the Fed stops its bond-buying program, 10-year yields could rise from their recent low of 1.4 percent between 2.7 and 3 percent by the end of year, and even 4 percent in 2014.
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