“While some blame the correction on the ongoing Chinese slowdown given the poor Chinese flash PMI read, we think it also reflects contagion and position adjustment given the significant declines seen in emerging markets”, Mizuho Bank said in a daily market commentary.
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The Dow Jones industrial average capped a four-day losing streak by dropping more than 500 points to close at 16,459.75, sinking 10 percent from its May peak and following even steeper market declines in Asia and Europe. With that drop, the Dow entered official correction territory, which refers to a drop of 10 per cent from its record close in May. Market analysts consider a swing of that size a market correction.
The Vix, known as Wall Street’s fear gauge, spiked higher than the level it reached last fall, when global markets sold off on concerns about global growth.
“I think there’s no shortage of things people can cite, from the movement in currencies, to the weakness in commodities and fears about China“, said Thomas Lee, managing partner at Fundstrat Global Advisors in New York.
One of the biggest reasons is China’s economy, which appears to be slowing down quickly.
Experts say China’s ruling Communist Party needs to deliver improved living standards, lifting more people out of poverty and satisfying the growing middle class, in exchange for acceptance of its rule. The Dow Jones industrial average could be headed for a decline of 800 points or more. Analysts, investors, consultants, and an entire zoo full of “China bears” have been churning out reports on what a potential Chinese economic slowdown will look like for months, even years.
The Fed was expected, perhaps at its September meeting, to raise the short-term rate it controls from near zero.
The market still speculates that the central bank would lower the reserve requirement ratio (RRR) to provide more liquidity. Oil prices are still at abysmally low levels, and still keep on slumping; crude futures in the U.S. are now at below $40 per barrel for the first time in six years. The S&P 500 slid 64.84 points, or 3.19 per cent, to 1,970.89 and the Nasdaq Composite lost 171.45 points, or 3.52 per cent, to 4,706.04.
“To add more evidence to that, Rana Gupta’s(Manulife’s Equity Specialist) comment can sum it all up”, India, whose exports to China were worth just $11 billion, or 0.5 percent of gross domestic product, in fiscal 2014, is more protected from China’s woes than most other Asian markets “.
Towards next week, attention will be shifted to the Rocky Mountains, as policy makers will be gathering there from August. 27-29 for the Fed’s conference of central bankers, finance ministers, academics and financial market participants in Jackson Hole.
The flash PMI, the earliest economic measure to be released about China each month, is closely followed by global investors for clues on the health of the economy.
Stock prices around the world continued to plunge Friday, threatening to end one of the longest bull runs in the history of the U.S. stock market. But a market source said, “Currently, there are no positive factors for buying, as companies’ April-June quarterly financial results have already been announced”.
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Natural gas and gold are also down. Meanwhile, concern that China’s economy will slow increases expectation that demand will wane.
