A sharp drop in stocks in China sent financial markets reeling around the world Monday, with Wall Street just avoiding posting its biggest loss on the first trading day of a year since the Great Depression.
While the Dow Jones index of blue-chip stocks was able to trim some of its losses late in the day, the volatility exposed the problems China’s leaders are having as the world’s second-biggest economy downshifts from the double-digit growth rates to which the world had become accustomed in recent decades.
Traders said the global sell-off began Monday when Chinese officials announced that a key measure of manufacturing activity had fallen for the 10th straight month. Panicky sellers in Shanghai triggered “circuit breakers” designed to limit daily losses and forced an early end to the trading day in Shanghai and Shenzhen. Some traders said the moves by Beijing to curb speculation on China’s tumultuous markets last year may have ironically fueled the rout, as investors rushed to sell before the market windows closed.
Economists and analysts say the fallout underscores some deeper challenges that likely will be felt far beyond Monday’s losses.
“The global spillovers from China’s reduced rate of growth, through its diminished imports and lower demand for commodities, have been much larger than we would have anticipated,” Maury Obstfeld, director of research at the International Monetary Fund, said in a survey of the 2016 global economy released Monday.
Also feeding the markets’ fears was the escalating feud between oil-producing giants Saudi Arabia and Iran, raising the prospect of continuing tension and even military clashes in the Middle East.
“This will be the theme for the year — there will be more volatility,” Devendra Joshi, an equity strategist for HSBC Asia, told The Wall Street Journal.
The pessimism quickly spread to other Asian markets, to major European exchanges and to New York, where the Dow Jones index of blue-chip stocks was down at one point Monday morning more than 460 points, nearly 3 percent, before closing the losses with a modest afternoon rally.
The 460-point loss would have been the largest year-opening decline since 1932, in the depths of the Great Depression. Even with the afternoon rally, Wall Street marked its worst January start since 2008 and the onset of the global Great Recession.
“It’s going to be a turbulent year,” said Kevin Kelly, chief investment officer of Recon Capital Partners. “This isn’t a blip.”
But analysts were heartened that the U.S. markets were able to trim some of their losses later in the day. The Dow finished the session down 276.09 points, or 1.6 percent, to 17,148.94. The broader S&P 500 was down 31.28 points, or 1.5 percent to 2,102.66, and the tech-heavy Nasdaq market fell 104.32 points, 2.08 percent, to close at 4,903.09.
“The most important thing to me is where we closed,” Peter Costa, president of the Wall Street boutique trading firm Empire Executions, told the financial network CNBC. “When you see a really big swing and rally to come back only 275 points, to me that’s a good sign.”
Losses were heavier on most of the world’s trading exchanges. Germany’s DAX index was off 4.3 percent, Tokyo’s Nikkei Index was off 3.1 percent, and London’s FTSE 100 fell back 2.4 percent. Stocks that have profited in recent years from China’s boom times were among the hardest hit: stock in Anglo American, the London-based global mining giant, fell 7 percent Monday.
Summer rerun
One worrisome sign is that this is not the first time that turbulence in China’s relatively small equity markets has been able to rock the global financial system.
The panic was a rerun of a plunge last summer, when efforts by China’s communist leaders to cool sharply rising stock values and speculative trading helped touch off a selling spree in which the Shanghai Composite Index lost 43.5 percent of its value from June to the end of August. The wild swings — and the rising suspicion among investors that China’s economic officials were not being totally honest about their policies — spread to other markets and led to a major correction for the S&P 500.
China’s slowdown is even more worrisome for emerging markets and countries in the developing world that have benefited from China’s voracious appetite for commodities and raw materials. China is the largest trading partner with rising economies across East Asia and has been a prime source of demand and investment for countries across Latin America and sub-Saharan Africa.
Beijing has been trying to transition from an export-led economic strategy to one that grows more through domestic spending and investment and consumer demand, but the transition has proved tricky to pull off.
Another worry has been the falling value of China’s yuan, which could further curb China’s appetite for imports and put more pressure on leading Chinese companies that hold their debt in foreign currencies. For foreign automakers, consumer goods giants and other companies looking to sell to China’s massive domestic markets, the falling yuan also makes their offerings instantly less competitive.
In the U.S., slow overseas growth already appears to be hurting American manufacturers. A report issued Monday by the Institute for Supply Management showed manufacturing shrank in December at the fastest pace in more than six years as factories cut jobs and orders declined.
Although superstitious traders tend to see a big decline on the first trading day of the year as a bad omen, investment analysts said that isn’t always the case.
“A weak first day of the year doesn’t portend that 2016 will be a down year,” Ernie Cecilia, chief investment officer of Bryn Mawr Trust, told The Associated Press. “There are a lot of trading days left.”
⦁ This article is based in part on wire service reports.
• David R. Sands can be reached at dsands@washingtontimes.com.
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