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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