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Stock woes continue as China turmoil sparks global selloff

January 7, 2016

U.S. stocks extended their three-month lows on Thursday, with the Dow Jones industrial average dropping more than 390 points to post its biggest two-day drop since August, amid a China-led rout that continued to engulf markets around the globe.

The Standard & Poor’s 500 index slid 2.4 percent, to close at 1,943.09, falling to its lowest point since Oct. 1 in the worst start to a year in data going back to 1928.

“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.

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.”

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 Thursday 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 tomorrow, with economists surveyed by Bloomberg forecasting a 200,000 gain and an unemployment rate holding at 5 percent.

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