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Global stocks on pace for historically bad day

January 4, 2016

U.S. stocks dropped sharply Monday after a plunge in Chinese markets triggered by weak Chinese manufacturing data and escalating tensions in the Middle East. Major U.S. stock indexes sank more than 2.5 percent in morning trading following a rout that stretched across Asia into Europe.

The Shanghai Composite Index sank 6.9 percent to its lowest level in nearly three months. The drop led the Shanghai and Shenzhen stock markets to halt trading for the remainder of Monday to avert steeper falls, the official Xinhua News Agency said.

It was the first time China used the "circuit breaker" mechanism it announced late last year.

Chinese authorities have been trying for months to restore confidence in the country's stocks after a plunge in prices in June rattled global markets and prompted a panicked, multibillion-dollar government intervention. Beijing is gradually unwinding emergency controls that included a freeze on new stock offerings.

Concerns about China's economic slowdown were revived by weak manufacturing data released Monday, along with Middle East tensions, which pushed up oil prices.

The Dow Jones industrial average index dropped 442 points, or 2.5 percent, to 16,982 as of 11:05 a.m. The Standard & Poor's 500 index lost 51 points, or 2.5 percent, to 1,993. The Nasdaq composite gave up 153 points, or 3 percent, to 4,853.

The Dow Jones index was on pace for its largest percent decline on the first trading day of the year since 1932.

"The market is trying to anticipate the global growth story," said Kevin Kelly, CIO of Recon Capital Partners. He added, "It's going to be a turbulent year. This isn't a blip."

The S&P 500’s decline has it on track for the third-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. Expand the data to include the five worst inaugural days, and the average full-year result is a gain of 5.1 percent.

S&P Dow Jones Indices data indicate the first day of trading has no 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, as the gauge’s return in January determines its direction for the year 72.4 percent of the time.

Data Monday indicated manufacturing in the U.S. contracted in December at the fastest pace in more than six years 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 surging 25 percent. Its counterpart for the Europe Stoxx 50 jumped 22 percent.

“It’s never good to come in on the first day of proper trading to see this happening,” said Patrick Spencer, equities vice chairman at Robert W. Baird & Co. in London. “Volatility will continue to dominate the market this year. There’s short- term escalating concern in the Middle East and the Chinese manufacturing data is also is worrying markets.”

The jitters extended to Europe. The DAX index in Germany, whose export-led economy is sensitive to the fortunes of China, tumbled 4.3 percent. Britain's FTSE 100 fell 2.3 percent while France's CAC 40 dropped 2.8 percent.

Huang Cengdong, an analyst for Sinolink Securities in Shanghai, said selling accelerated as investors tried to lock in trades before trading was halted. He expects further turmoil ahead of corporate earnings reports.

"The market will not improve because there will be heavy selling in the near future," said Huang.

Elsewhere in Asia, Japan's Nikkei 225 tumbled 3.1 percent and Hong Kong's Hang Seng retreated 2.7 percent. South Korea's Kospi closed 2.2 percent lower. Stocks in Australia, Taiwan and Southeast Asia were also lower. Stocks in Australia, Taiwan and Southeast Asia were also lower.

The Caixin/Markit index of Chinese manufacturing, which is based on a survey of factory purchasing managers, fell to 48.2 points in December from 48.6 the previous month, marking contraction for the 10th straight month.

It was the latest sign of the headwinds facing China's economy that add to a downbeat outlook for Asian exporters. On Friday, an official manufacturing index also showed a persistent contraction in factory activity despite Beijing's stimulus measures.

China's factory data is "still a long way off stirring up cheer about global demand recovery," said Mizuho Bank Ltd. in a daily commentary. "Asian exporters are expected to continue struggling with exports contraction and growth prospects dampened by related manufacturing gloom."

Escalating tensions in the Middle East worried investors and briefly sent the price of oil higher. Saudi Arabia said Sunday it is severing diplomatic relations with Iran, a development that could potentially threaten oil supply. The world's largest oil supplier executed a prominent Shiite cleric that prompted protesters to set fire to the Saudi Embassy in Tehran and Iran's top leader to criticize Saudi Arabia.

"Oil markets will be concerned that this could be an incremental step in a deteriorating political situation that might ultimately threaten world oil supply," Ric Spooner, chief analyst at CMC Markets, said in a commentary.

Benchmark U.S. crude gave up an early gain and was down slightly in late morning trading in New York. Oil was down 30 cents to $36.70 a barrel in New York Mercantile Exchange. It traded over $38 a barrel earlier in the day. Brent crude, which is used to price international oils, was little changed at $37.27 a barrel in London.

Oil and gas producers, which were battered last year, were among the few stocks in the S&P 500 to rise. Southwestern Energy climbed 21 cents, also 3 percent, to $7.31 and Consol Energy rose 6 cents, or 1 percent, to $7.96.

In other trading, some of the biggest decliners in the U.S. were companies that sharply outpaced the market last year. Netflix and Amazon, both of which more than doubled in price in 2015, were down sharply. Netflix sank $6.98, or 6 percent, to $107.43 and Amazon gave up $34.63, or 5 percent, to $640.14.

On the whole, technology was the weakest among the 10 sectors in the S&P 500 index. It was one of the better-performing industries in the market last year.

In currencies, the dollar weakened to 119.19 yen from 120.23 yen. The euro fell to $1.0809 from $1.0858.

In government bond trading, U.S. bond prices rose. The yield on the 10-year Treasury note fell to 2.21 percent from 2.27 percent.

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