Global Stocks Sink on China, U.S. Growth Concerns

How China Stocks Reflect Economic Idiosyncrasy
  • S&P 500 ends down 1.5%, trimming earlier slide of almost 3%
  • Treasuries advance with gold, yen as haven assets sought

Stocks were pummeled on the first trading day of the year, sending the Dow Jones Industrial Average down as much as 467 points before recouping some of those losses as a selloff in Chinese equities spread amid anxiety over the outlook for global growth.

While the U.S. blue-chip index had almost halved its decline by the end of Monday trading, the Dow still capped its worst start to a year since 2008. Banks and health care shares led the Standard & Poor’s 500 Index to a 1.5 percent slump, and a gauge of global equities posted its worst inaugural session in at least three decades. Emerging-market shares slid the most since August as evidence of slowing manufacturing in China triggered a selloff that halted trading in Shanghai. As riskier assets were shunned, bonds found favor and the yen rallied. Oil ended lower after rising earlier in the session.

While U.S. stocks slid with global equities, traders took back some losses in the last few hours of Monday.
While U.S. stocks slid with global equities, traders took back some losses in the last few hours of Monday.

“I think the selloff did bring in some bargain hunters at the end of the day,” said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Corp., which oversees $946 billion. “That is somewhat a reflection that the worries in the market were predominately based overseas. If you look at the way the market traded, it didn’t scream fear.”

Investors returning to financial markets after the New Year holiday were greeted with a worldwide selloff sparked by the weak factory data in China, while a report showing the fastest contraction in U.S. manufacturing in six years added to anxiety that slowing growth in Asia’s largest economy may be spreading. A flareup in tensions between Saudi Arabia and Iran increased geopolitical unease, initially igniting gains in crude oil.

Stocks

The MSCI All-Country World Index fell 2.1 percent by 5 p.m. in New York, topping its slide of 1.5 percent at the start of 2001. The S&P 500 dropped to 2,012.66, after the gauge ended 2015 down 0.7 percent.

The S&P 500’s decline, its worst since Dec. 18, constituted its sixth-worst start to a year in data compiled by Bloomberg going back to 1927. The biggest first-day rout was in 1932 when the index sank 6.9 percent, followed by a 2.8 percent slide during the dot-com demise in 2001. In those two instances, the index averaged a full-year loss of 14 percent.

S&P Dow Jones Indices data indicate that the first day of trading has little predictive power for the rest of the year. The index ends the year in the same direction it takes on the opening day 50.6 percent of the time, the data show. The first month of the year has proved more telling -- the gauge’s return in January determines its direction for the year 72.4 percent of the time.

Focus will turn toward economic reports this week, including data on factory activity, the monthly U.S. jobs report and minutes from the Federal Reserve’s meeting that ended with the first rate increase since 2006. Data Tuesday showed manufacturing in the U.S. contracted in December at the fastest pace since 2009 as factories, hobbled by sluggish global growth, cut staff at the end of 2015.

Gauges of volatility in the U.S. and Europe spiked, with the Chicago Board Options Volatility Index climbing 14 percent. Its counterpart for the Europe Stoxx 50 jumped 22 percent.

The Stoxx Europe 600 Index fell 2.5 percent, capping the worst start of the year ever as almost 580 of its companies fell. Germany’s DAX Index, among the best performers in 2015, dropped 4.3 percent, the biggest slide for the export-driven gauge since the China-led rout in August.

In Asia, Japan’s Topix index slid 2.4 percent to drive a 2.4 percent slump in the MSCI Asia Pacific Index as China’s CSI 300 Index slid 7 percent, spurring a trading halt.

New Zealand’s S&P/NZX 50 Index, the first major stock gauge to get going each day, slid 1.4 percent at its open in Wellington Tuesday, its first day of trading for the year. Futures on stock gauges in Tokyo, Sydney, Seoul and Hong Kong declined at least 0.4 percent in most recent trade.

Emerging Markets

The MSCI Emerging Markets Index slid 3.3 percent, the most since Aug. 24, which marked the nadir of a selloff sparked by China’s shock devaluation of the yuan. 

China’s CSI 300 Index of large-capitalization companies listed in Shanghai and Shenzhen fell 7 percent, triggering a circuit-breaker that suspended trading for the rest of the day. Hong Kong’s Hang Seng China Enterprises Index, which tracks mainland shares traded in the city, slid 3.6 percent as benchmark gauges in South Korea, Taiwan, Malaysia, South Africa and Poland lost more than 2 percent.

The Caixin factory index for China came in at 48.2 in December, missing the median analyst estimate for a reading of 48.9. The private PMI reading came after the nation’s first official economic report of 2016, released Jan. 1, signaled manufacturing weakened for a fifth month, the longest such streak since 2009.

Currencies

High-yielding currencies were sold off, with the Australian and New Zealand dollars leading losses amid their close trading connections with China.

The yen and dollar climbed as traders sought out refuge investments. The yen touched 118.70 per dollar, the strongest level since Oct. 15 and the Swiss franc was also among the biggest gainers. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, climbed 0.3 percent. 

The Argentine peso and Brazilian real drove emerging-market currency declines.

Bonds

Government bonds across developed economies rallied after the plunge in Chinese shares drove demand for the relative safety of sovereign debt, pushing Treasury 10-year yields down by the most since Dec. 17. The increased tensions between Iran and Saudi Arabia also fueled the haven demand.

Benchmark German 10-year bonds opened higher, rising with European peers from Austria to France. The move echoed the reaction to August’s rout in Chinese shares that helped persuade the Fed to refrain from raising rates in September.

Yields on benchmark U.S. 10-year notes declined three basis points, or 0.03 percentage point, to 2.24 percent. Germany’s bund yields fell six basis points from the Dec. 30 close to 0.57 percent.

Commodities

West Texas Intermediate crude dropped 0.8 percent to $36.76 a barrel, erasing earlier gains of almost 2 percent as more evidence of a global glut in the commodity outweighed the increase in tensions between Saudi Arabia and Iran. Prices last week capped the biggest two-year loss on record amid speculation a global glut will be prolonged as U.S. crude stockpiles expanded and the Organization of Petroleum Exporting Countries abandoned output limits.

Copper wiped out two weeks of gains as metals and mining shares slumped after data showed manufacturing contracted in China and the U.S., the world’s biggest users of the metal.

Gold had the biggest gain in two weeks on haven demand. Futures for February delivery rose 1.4 percent to settle at $1,075.20 an ounce in New York, the biggest advance since Dec. 21. The precious metal sank 10 percent last year, capping the longest slump since 1998.

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