Dow Average Falls 300 Points in China-Fueled Global Equity Rout

Why Would Investors Buy U.S. Stocks Right Now?
  • Dow average caps worst two-day selloff since summmer swoon
  • Soros says he sees crisis in global markets that echoes 2008

U.S. stocks tumbled to press three-month lows, with the Dow Jones Industrial Average dropping more than 390 points to post its biggest two-day retreat since August, amid a China-led rout that continued to engulf markets around the globe.

Banks and technology companies paced the retreat, marking their biggest declines in four months, with Citigroup Inc. and Apple Inc. down more than 4.2 percent. Yahoo! Inc. slid 6.2 percent, the most since May. Boeing Co. and General Electric Co. dropped more than 4.1 percent, two of Dow’s three worst today. Energy shares in the Standard & Poor’s 500 Index declined to a five-year low.

The S&P 500 slid 2.4 percent to 1,943.09 at 4 p.m. in New York, falling to its lowest since Oct. 1 in the worst four-day start to a year in data going back to 1928. The Dow lost 392.41 points, or 2.3 percent, to 16,514.10 and has fallen more than 900 points this week. The Nasdaq Composite Index dropped 3 percent. About 10 billion shares traded hands on U.S. exchanges, 42 percent above the three-month average.

“China devaluing its currency sparks concern that the global growth engine is starting to slow and that creates a dump of any high-flying stocks or anything people perceive as risk,” said Yousef Abbasi, a market strategist at JonesTrading Institutional Services in New York. “When you start to worry about growth, you have crude oil down and it all ties together. It’s the new year and people are scratching their heads, they’re not quite ready to buy the dip.”

Equity markets worldwide tumbled after Chinese stock exchanges closed less than a half hour after opening, as a more than 7 percent plunge triggered a market-wide halt for the second time this week. China’s securities regulator has since suspended a new stock circuit-breaker that caused the halts.

A flight from risky assets in the first week of the new year has wiped $2.5 trillion from global equities, made worse by China’s central bank cutting its yuan reference rate for an eighth straight day. China’s tolerance for a weaker yuan is being seen as evidence policy makers are struggling to revive an economy that’s the world’s biggest consumer of energy, metals and grains.

The move revived the angst that sent financial markets into turmoil last summer, driving U.S. stocks to three-month lows yesterday in a selloff led by commodity producers. Comments by billionaire George Soros exacerbated market jitters after he told an economic forum in Sri Lanka today that global markets are facing a crisis and investors need to be very cautious.

Commodity Weakness

Commodity shares remained weak, with copper producer Freeport-McMoRan Inc. tumbling 9.1 percent and Alcoa Inc. down 4 percent. West Texas Intermediate crude futures briefly wiped out a drop of more than 5 percent before the rebound withered, and its settled 2.1 percent lower. Anadarko Petroleum Corp. lost 8.4 percent, and Chevron Corp. fell 3.5 percent after its biggest slide since August yesterday.

A weaker yuan would support China’s flagging export sector, but it also boosts risks for the nation’s foreign-currency borrowers, and heightens speculation that the slowdown in Asia’s biggest economy is deeper than official data suggest.

While investors cope with the turbulence sparked by China, another source of consternation is looming as the corporate earnings season for 2015’s final quarter soon begins. Alcoa Inc., JPMorgan Chase & Co. and Intel Corp. are scheduled to report results next week. Analysts forecast profits for companies in the S&P 500 fell 6.1 percent last quarter.

“The market has been in denial,” said Michael Ingram, a market strategist at BGC Partners in London. “The broader issue is that growth dynamics are weak pretty much everywhere. Make no mistake, what happens in China this year will shape the market dynamic for the next five.”

Rising Volatility

The Chicago Board Options Exchange Volatility Index rose 21 percent to 24.99, its highest since Sept. 29. The measure of market turbulence known as the VIX is up 37 percent so far this month, which would be the most since a record-setting 135 percent jump in August.

The S&P 500 has fallen 6.3 percent since Federal Reserve raised interest rates last month for the first time in nearly a decade. The central bank balked at boosting borrowing costs in September in part due to turbulence sparked by China’s August currency devaluation. The poor start to 2016 has left the benchmark index 8.8 percent below its all-time high set in May after coming within 1 percent of the record as recently as November.

Fed Bank of Richmond President Jeffrey Lacker reiterated in a speech Thursday that the pace of interest-rate increases is expected to be gradual, but dependent on the economic outlook. He also expressed confidence inflation will move back to the Fed’s 2 percent goal “over the near term.” Chicago Fed President Charles Evans said he’s less optimistic on inflation than his colleagues, making a case for an especially cautious approach to raising rates in 2016.

A report today showed fewer Americans filed applications for unemployment benefits last week, a sign the labor market remained robust entering 2016. The government’s December jobs report is due Friday, with economists surveyed by Bloomberg forecasting a 200,000 gain and an unemployment rate holding at 5 percent.

Banks Tumble

All 10 of the S&P 500’s main industries fell Thursday, with financial, industrial and technology shares down more than 2.8 percent. Utilities slid less than 0.8 percent to end as the day’s best performers.

The KBW Bank Index dropped for a sixth day, down 3.3 percent amid its longest streak of losses since 2012. Capital One Financial Corp. and State Street Corp. lost more than 4.5 percent, falling to their lowest in more than two years. JPMorgan Chase & Co. slid 4 percent, its worst decline in four months.

A day after being one of the market’s bright spots, airlines were among the worst performers, with a Bloomberg index of U.S. carriers tumbling to its lowest since Oct. 8. SkyWest Inc. reversed a 4.9 percent rally Wednesday, losing 8.4 percent. JetBlue Airways Corp. fell 4.9 percent to a six-month low. The Dow Jones Transportation Average sank 3.1 percent to the lowest in more than two years.

Homebuilders were battered for a second day, led by an 15 percent decline in KB Home, the biggest in nearly a year. The company reported fiscal fourth-quarter earnings that missed analysts’ estimates, as bad weather and labor shortages delayed some deliveries. Toll Brothers Inc. sank 5.5 percent.

Among shares bucking today’s negative trend, Macy’s Inc. added 2.1 percent after announcing plans to cut costs and explore options for its real estate following a worse holiday period than the the largest U.S. department-store company expected.

Beaten-down Wal-Mart Stores Inc. continued to rally, up 2.3 percent to add to its longest winning streak in two months. The retailing giant fell 29 percent last year, its worst annual decline since 1974. Gap Inc. rose for the third time in four days, up 5.7 percent. The apparel seller plunged 41 percent in 2015, the most in 14 years.

Signet Jewelers Ltd. advanced 4.7 percent, its best gain in four months, after raising the bottom end of its fourth-quarter profit and sales forecasts. The retailer’s shares have rallied 16 percent during the past three weeks.

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