Coverage: Markets tank while China’s economic uncertainty rises

Doubts surrounding the Chinese economy and the impact it will have on surrounding emerging nations continued to wreak havoc on the markets Monday, extending last week’s massive equity selloffs.

Reuters’ Pete Sweeney detailed what’s been leading up to today’s big drop:

China stock markets slumped again on Monday, giving up all their gains for the year on a massive selloff that dragged down regional markets, with even some state media saying the government rescue attempt had now failed.

Chinese markets were down more than 9 percent during the day and had only slightly recovered by the close of trade, the worst daily performance since 2007 and a hair’s breadth from the worst day since 1996, with traders blaming regulators’ failure to act over the weekend after markets lost 11 percent last week.

The downside was limited mostly by rules preventing any given stock from losing more than 10 percent a day, and by the fact that many company shares are still under trading halts.

As much as 80 percent of China’s tradable stocks hit the downside limit during the day, and ominously all index futures contracts, for the CSI300, CSI500 and SSE50 indexes were down the maximum 10 percent.

After a year of heady gains, Chinese markets have been buffeted by increasing signs that economic growth is faltering, and central government’s efforts to reassure and backstop stock investors have been sunk by a succession of weakening indicators.

Exchanges not only gave up all the gains made from Beijing’s unprecedented stock market rescue in July, in which hundreds of billions of state dollars were ordered into the market, but have also now for the first time entered negative territory for the year.

Tommy Stubbington, of The Wall Street Journal, summed up how the markets are fairing so far:

The rout in financial markets showed no sign of easing Monday, as global stocks and commodities extended last week’s steep declines.

European stocks and U.S. stock futures fell sharply as a rout in Chinese shares accelerated, wiping out gains for the year. Oil prices continued to drop, while Treasurys gained as investors sought the relative safety of government bonds.

Fears that China’s economy is slowing dramatically have sparked heavy selling around the globe in recent days. Beijing’s unexpected move to devalue its currency two weeks ago raised the alarm that the world’s second-largest economy may be in worse shape than many investors had thought. Since then, weak economic data have fueled worries that a drop-off in Chinese growth could cause a global slowdown.

The Shanghai Composite sank 8.5%, entering negative territory for 2015, having risen as much as 60% to its June peak. Japan’s Nikkei benchmark tumbled 4.6%.

Investors were further rattled Monday by the lack of fresh steps to stem the selloff over the weekend from Chinese authorities. The Wall Street Journal reported that the central bank was preparing to flood the banking system with liquidity to increase lending, the latest in a series of measures designed to give the flagging economy a boost.

Futures indicated opening declines of around 2% for the Dow Jones Industrial Average and the S&P 500. The Dow entered a correction on Friday, falling 10% from its recent peak, following its worst week since 2011. Changes in futures aren’t necessarily reflected in market moves after the opening bell.

The Dow, the S&P 500 and the Nasdaq Composite Index all posted their worst one-day percentage declines since 2011 on Friday.

In Europe, the Stoxx Europe 600 was 3.3% lower late morning. The index is now up by less than 3% this year, as a massive rally sparked by the European Central Bank’s stimulus program melts away. Germany’s DAX index fell 3.0%, earlier touching its lowest level since January. The U.K.’s FTSE was down 2.9% at its weakest level since January 2013.

Mining stocks, which are highly sensitive to fears of waning Chinese demand, bore the brunt of the selloff. Basic resources companies on the Stoxx Europe 600 fell nearly 6%.

The momentum of the selloff has left investors nervous.

Bloomberg reporters Nick Gentle and Stephen Kirkland looked at the changes in the commodities market resulting from the massive selloff:

The Bloomberg Commodity Index fell 2.1 percent, heading for the lowest closing level since August 1999.

Brent and West Texas Intermediate crudes both traded at six-year lows of $44.36 and $39.36 a barrel, respectively. Gold, a haven for investors during volatile trading, slipped 0.2 percent to $1,58.34, the smallest decline among 10 precious and industrial metals in London.

Currencies of basic resource-producing countries led declines, with the ruble tumbling 2.9 percent to 71.15 per dollar and Malaysia’s ringgit sliding 1.8 percent to a fresh 17- year low. South Africa’s rand dropped 1.7 percent and New Zealand’s currency weakened 1.4 percent.

Turkey’s lira retreated 0.7 percent. A deadline for a coalition government passed, putting the country on course for its second parliamentary election this year.

The yen advanced with the euro as Treasuries rallied amid speculation the global selloff will forestall the Federal Reserve’s first interest-rate increase since 2006.

Japan’s currency jumped 1.2 percent to 120.66 per dollar, the strongest since July 9 and the euro climbed for a fourth day against the dollar, strengthening to $1.15 for the first time since February.

Fed funds futures now show a probability of a December rate increase at 55 percent versus 61.1 percent on Friday. Bets on the first increase in rates in almost a decade in September fell to 28 percent, down from 34 percent.

The New York Times’ writers David Jolly and Neil Gough described how the Chinese economic slowdown comes despite intense government efforts to prevent it:

One big question is whether China’s stock market plunge will make the Chinese economy, the world’s second largest, after that of the United States, even weaker. China’s exports were down 8 percent in July from a year earlier while auto sales were down 7 percent.

But Xu Sitao, the chief China economist in the Beijing office of Deloitte, said in a speech in Hong Kong that the effect on the economy could be muted because equities represent only 7 percent of the overall wealth of urban Chinese households, who continue to rely very heavily on real estate in their holdings.

“The stock market really has a very, very insignificant impact on the Chinese economy,” he said.

Instead, China’s slowdown is being driven by more traditional industry. On Friday, new data showed China’s manufacturing sector contracted in the first three weeks of August at the fastest pace since the depths of the financial crisis.

It was the latest sign of continued deterioration in industrial activity across China, suggesting that the government’s efforts to support growth — which include several interest rate cuts and directing billions of dollars in new loans to infrastructure projects — have fallen short.

At the same time, state intervention in the stock markets appears to have backfired. China’s stock markets had enjoyed a tremendous rally, more than doubling in the year to mid-June. But they have plunged since then, despite the government ordering state agencies to buy shares and barring large shareholders from selling down their stakes.

Despite this, the market continued to slump. On Monday, the Shanghai index fell to its lowest level so far this year; it traded as low as 3,191.88 points, a drop of 9 percent from the close on Friday and nearly 40 percent below its peak in June. Mainland shares are only allowed to rise or fall by 10 percent per day before they are halted from trading. Shares in more than 800 of the nearly 1,100 companies in the Shanghai index fell by the limit.

The plunge in Shanghai came despite an announcement by China’s government on Sunday that the country’s pension funds had been approved for the first time to invest in stocks.

Pension funds can now invest as much as 30 percent of their holdings in the stock market, according to the statement by the State Council, China’s cabinet. The main state-run pension fund manages about 3.5 trillion renminbi, or about $550 billion, in retirement savings of ordinary citizens.

Many economists now expect the central bank, the People’s Bank of China, to cut the ratio of deposits that banks are required to keep on reserve in a bid to help stem outflows of capital, which rose to a record of $70 billion in July and probably accelerated in the weeks since the renminbi was devalued.

Reducing this so-called reserve requirement ratio, or R.R.R., would help bring down rates in China’s money markets, which have been climbing in recent months, despite the central banks recent attempts to add more liquidity.