By Corrie Driebusch 

Concerns about China's economy intensified, accelerating the selloff across global markets as investors tried to assess whether the rout was just a short-term pullback or a signal of deeper trouble.

The Dow Jones Industrial Average began Monday with a drop of 1,089 points, a bigger decline than the "flash crash" five years ago, and closed down 588.40 points, extending a slide that has left the index off 11% this year.

Few markets were spared. European and Asian stocks suffered even deeper declines, with the Shanghai Composite Index tumbling 8.5%, entering negative territory for 2015, having risen as much as 60% at its peak in June.

Oil slid below $39 a barrel in New York, and emerging-market currencies like Turkey's lira and Russia's ruble fell against the dollar.

The euro and U.S. Treasurys were notable exceptions, gaining in value as investors sought out safer havens for their money.

The severity of the selloff in stocks--shares of J.P. Morgan Chase & Co. were down more than 20% at one point early Monday--confounded some observers, because the U.S. economy is showing few of the red flags that preceded major market downturns in the past. The economy continues to expand, corporate earnings outside the energy sector are staying aloft, and credit remains widely available at historically low interest rates even for some junk-rated companies.

Still, the risk is that the market turmoil could spill over into the U.S. economy if the selloff persists. The wide-ranging declines are already raising concerns for officials around the world, notably the Federal Reserve, where officials are debating whether to raise interest rates this year. Beyond that, the rise in the euro and turbulence in emerging markets are threatening the already shaky growth in Europe's export-driven economies.

Meanwhile, China is pursuing new measures to boost lending and economic growth. The sharp drop in the Shanghai Composite, its worst single-day percentage decline in more than eight years, rippled across Asia, with Japan's Nikkei Stock Average dropping 4.6% and Australia's S&P/ASX 200 index falling 4.1%.

"The latest developments are driven by sentiment and positioning in financial markets without much relation to underlying economic fundamentals at this stage," said Liam Spillane, head of emerging-market debt at Aviva Investors, which oversees more than $385 billion in assets. "But those are not mutually exclusive. They can feed on one another."

The drop in the S&P 500 alone over the past week has wiped out $1.85 trillion in market value.

The fault line underlying the troubles is that while the Fed and other central banks around the world have implemented easy-money policies that have led to higher stock and bond prices, they have failed to spur robust economic growth. That leaves investors in an uncertain position as new threats arise at a time of low interest rates.

Those jitters were in full display Monday. The Dow's early drop was the worst intraday point decline in the history of the blue-chip index. About 6.6 billion shares traded on the New York Stock Exchange, nearly twice the daily average and the highest total in nearly four years.

Richard Madigan, chief investment officer of J.P. Morgan's private bank, called an emergency investment committee meeting following the morning drop in U.S. stocks. The executives spent more than an hour discussing what they were seeing and what had changed.

"Some of this is knowing what you don't know," Mr. Madigan said. "And not trying to overthink what we're seeing but just try to understand what is real, fundamental and deserved...what may create opportunities."

A cascade of automatic selling by individual investors contributed to the initial selloff, some traders said. The sharp declines triggered stop-loss orders, which are designed to protect investors by triggering a sale once a stock falls to a certain level.

The selloff overwhelmed some online brokerage firms as investors tried to access trading accounts amid a plunge in the markets. Clients at TD Ameritrade Holding Corp. and Scottrade Inc. reported problems logging on to their accounts and executing trades. Scottrade experienced a 230% spike in trading volume on Monday morning, a spokeswoman said.

Jan Rothbauer and her husband, Bill, of Poland, Ohio, decided Friday--when the market was down about 300 points--to tell their financial adviser to sell most of their stock. The couple cut their stockholdings from about 50% to less than 5%, fearing they would suffer steeper losses as they prepared to retire.

"I felt this was on a roll now and not going to stop for a while, so it's just time to move," Ms. Rothbauer said.

Traders said some of the initial sell orders were from big investors looking for ways to protect themselves against losses outside the U.S. Markets in the U.S. are more liquid, and traders said investors took out bearish bets on U.S. stocks to offset possible losses in other countries where trading is often more difficult.

"It's not necessarily a reflection of U.S. investors wanting to take money out of U.S. positions," said Jeffrey Yu, head of single-stock derivatives trading at UBS Group AG.

The speed and depth of the drop harked back to the flash crash of May 2010, when program-driven trading produced a self-reinforcing wave of selling. This time around, high-frequency trading firms like Virtu Financial Inc. and Global Trading Systems LLC were buyers that helped U.S. stocks rebound midday from their early slump.

"We were catching those falling knives," said Ari Rubenstein, co-founder of Global Trading Systems.

It wasn't enough to reverse the slide. The Dow closed down 3.6%, at 15871.35. The S&P 500 dropped 77.68 points, or 3.9%, to 1893.21, leaving it in correction territory, a drop of 10% or more from a recent high, which it hit in May. The Nasdaq Composite Index declined 179.79 points, or 3.8%, to 4526.25. The S&P 500 and Nasdaq Composite have fallen 8% and 4.4%, respectively, in 2015. J.P. Morgan's shares ended the day down 5.3%, at $60.25.

The pain was worse in Europe. The Stoxx Europe 600 sank 5.3%, the biggest one-day percentage decline since December 2008.

Germany's DAX index fell 4.7% and has now lost 22% since closing at a record in April. The country's stock market, home to many auto makers and industrial firms with a big chunk of their sales in China, has been among the worst hit by the selloff.

The U.K.'s FTSE 100 dropped 4.7% to its lowest level since December 2012. The Stoxx Europe 600 index has now ceded all its gains since the European Central Bank on Jan. 22 announced it would launch a bond-buying program to stoke growth, highlighting the limitations of central-bank stimulus.

U.K. banks that rode a wave of growth in emerging markets in recent years now find themselves facing a sharp downturn in those markets. Shares in Standard Chartered PLC and HSBC Holdings PLC are down 39% and 24%, respectively, over the past year. A slowdown in Asian markets would crystallize loan losses at banks with big operations in the region, said Nick Anderson, a banking analyst at Berenberg. "In terms of provisioning, the pain is still to come." Standard Chartered and HSBC declined to comment.

Investors are also coming to grips with the idea that there isn't much more central banks can--or are willing--to do to bolster growth. The Federal Reserve is still widely expected to raise interest rates in coming months, even if such a move is delayed to next year.

"Markets are on their own now; the Fed has already deployed its arsenal, " said Ashwin Alankar, who helps manage about $1 billion as global head of asset allocation at asset manager Janus Capital Group Inc. "All the central banks can do today is not withdraw liquidity."

Mr. Alankar said his firm snapped up short-term U.S. Treasurys on Monday, based on his belief that prices will rise if the Fed holds off on raising interest rates next month. The yield on the two-year Treasury note fell to 0.568% Monday, the lowest closing level since July 8. Yields on the 10-year Treasury, a benchmark for many loans including mortgages, fell below 2%, to 1.997%, for the first time since April. Bond yields move inversely to prices.

The market for U.S. corporate bonds has been drifting lower in recent weeks, foreshadowing the trouble in stocks. Still, analysts said debt markets aren't suggesting an economic downturn is imminent.

"The U.S. feels pretty good," said Arlen Shenkman, chief financial officer of business software company SAP America Inc. "This is more of a message on what's happening in China."

AnnaMaria Andriotis, Vipal Monga, Emily Glazer, Bradley Hope and Dan Strumpf contributed to this article.

 

(END) Dow Jones Newswires

August 24, 2015 20:10 ET (00:10 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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