Dow Pares Losses After 1,089-Point Plunge But Still Down Sharply in Global Rout
Growth fears spook investors around the world
By CORRIE DRIEBUSCH And SAUMYA VAISHAMPAYAN
Wall Street Journal
Aug. 24, 2015 11:00 a.m. ET
The Dow Jones Industrial Average briefly plummeted more than 1,000 points on Monday, marking the index’s largest one-day point decline ever on an intraday basis, as intensifying growth fears sparked steep stock-market losses world-wide
The blue-chip benchmark dropped as much as 1089 points before paring some of its losses. It was recently down 464 points, or 2.9%, to 15991.
The S&P 500 dropped 58 points, or 2.9%, to 1913, entering correction territory. The Nasdaq Composite fell 128 points, or 2.7%, to 4576.
Investors stampeded into relatively safe assets such as U.S. government bonds, the Swiss franc and the yen. The yield on the 10-year Treasury note dropped below 2% during Asian trading and recently was 1.976%, the lowest level since April.
Fears that China’s economy is slowing dramatically sparked the heavy selling in stocks 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 had thought. Since then, weak economic data have fueled worries that a drop-off in Chinese growth could cause a global slowdown.
China’s Shanghai Composite sank 8.5% on Monday, entering negative territory for 2015, having risen as much as 60% to its June peak. Japan’s Nikkei benchmark tumbled 4.6%.
In Europe, the Stoxx Europe 600 fell 4.6% and Germany’s DAX dropped 3.7%. Germany’s stock market, which contains many car makers and industrial firms with a big chunk of their sales in China, has been among the worst-hit by the recent selloff.
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 10%.
Before the U.S. market opened, Dow futures, S&P 500 futures and Nasdaq 100 futures triggered circuit breakers after falling at least 5%.
The New York Stock Exchange operator NYSE Group Inc. invoked the rarely used “Rule 48,” which relaxes some trading rules in a bid to ensure a smooth opening to trading. The rule is instituted when trading before the start of the regular session is especially volatile.
At the market open on Monday, a slew of single stocks and exchange-traded products triggered circuit breakers, which are initiated when there is a price drop of 10% or more in a five-minute period.
“When a big selloff comes, it tends to be herd mentality,” said Ryan Larson, head of U.S. equity trading for RBC Global Asset Management. “But once that herd gets out of the way, there can be some very good buying opportunities.”
With the Dow halving its earlier losses, Mr. Larson added that it appears investors are starting to realize the initial drop may have been an overreaction. Traders said early in the day as stocks swooned to their session lows they saw many investors stepping in to purchase stocks at very low levels.
Traders were watching whether a market-wide circuit breaker would be triggered as a result of Monday’s steep drop. The last market-wide halt was October 27, 1997, when the Dow Jones Industrial Average plunged 554 points, the worst single day in history up to that point.
The new rule for the market-wide circuit breaker uses the S&P 500 as a trigger instead of the Dow industrials. It will be initiated if the S&P 500 falls 7% before 3:25 p.m., at which point the New York Stock Exchange would halt for 15 minutes. If the index were to fall 13% before 3:25 p.m., then the market would halt for another 15 minutes. If either of those levels is breached after 3:25 p.m., trading will continue, however, unless the decline extends past 20%.
Fresh signs of a slowdown in China, the world’s second largest economy, have jolted stocks, bonds, currencies and commodities in recent days. 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 Chinese 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.
“A lot of markets abroad have seen a low amount of liquidity so investors are turning to the U.S. market to hedge,” said Jeffrey Yu, head of single-stock derivatives trading at UBS AG. Before the market opened, traders said futures volumes were extraordinarily heavy.
While the selloff began as an emerging markets story, with China’s stock market offering very little liquidity to investors due in part to technical stock-trading halts, investors have had to turn to the most liquid market to sell, which is the U.S., Mr. Yu said.
The Dow Jones Industrial Average, which has heavy international exposure, entered correction territory on Friday, defined as a decline of 10% from a recent peak.
Investors are increasingly skeptical that the U.S. Federal Reserve will raise interest rates at its meeting next month, amid growing turmoil in global markets and plunging inflation expectations.
A gauge of 10-year inflation expectations in the U.S. government bond market fell to the lowest level since 2009. Fed officials have said they intend to pursue policies that will enable inflation to rise to its 2% target in the medium term.
Fed-funds futures, used to place bets on central bank policy, showed Monday that investors and traders see a 28% likelihood of a rate increase at the September 2015 meeting, according to data from the CME Group. The probability was nearly halved from a week ago.
In a sign of growing anxiety, haven bonds have outperformed stocks and emerging market assets over the past few months. U.S. Treasurys maturing in at least a decade have handed investors a total return of 6.8% this quarter through Friday, according to data from Barclays PLC. The S&P 500 lost 4.2% in the same period and the MSCI Emerging Markets index lost 11.5%. Total return includes price gains and interest or dividend payments.
Many investors remain optimistic about the trajectory of U.S. stocks.
“Stock prices have dropped sharply and fears have increased sharply,” said Kate Warne, investment strategist at Edward Jones. “But it’s really important to keep in mind while stock prices have changed and obviously emotions have changed, fundamentals for the U.S. haven’t changed. Even with China selling sharply and emerging markets selling off, we’re still seeing solid U.S. economic growth.”
—Tommy Stubbington and Bradley Hope contributed to this article.
Write to Corrie Driebusch at corrie.driebusch@wsj.com and Saumya Vaishampayan at saumya.vaishampayan@wsj.com
By CORRIE DRIEBUSCH And SAUMYA VAISHAMPAYAN
Wall Street Journal
Aug. 24, 2015 11:00 a.m. ET
The Dow Jones Industrial Average briefly plummeted more than 1,000 points on Monday, marking the index’s largest one-day point decline ever on an intraday basis, as intensifying growth fears sparked steep stock-market losses world-wide
The blue-chip benchmark dropped as much as 1089 points before paring some of its losses. It was recently down 464 points, or 2.9%, to 15991.
The S&P 500 dropped 58 points, or 2.9%, to 1913, entering correction territory. The Nasdaq Composite fell 128 points, or 2.7%, to 4576.
Investors stampeded into relatively safe assets such as U.S. government bonds, the Swiss franc and the yen. The yield on the 10-year Treasury note dropped below 2% during Asian trading and recently was 1.976%, the lowest level since April.
Fears that China’s economy is slowing dramatically sparked the heavy selling in stocks 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 had thought. Since then, weak economic data have fueled worries that a drop-off in Chinese growth could cause a global slowdown.
China’s Shanghai Composite sank 8.5% on Monday, entering negative territory for 2015, having risen as much as 60% to its June peak. Japan’s Nikkei benchmark tumbled 4.6%.
In Europe, the Stoxx Europe 600 fell 4.6% and Germany’s DAX dropped 3.7%. Germany’s stock market, which contains many car makers and industrial firms with a big chunk of their sales in China, has been among the worst-hit by the recent selloff.
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 10%.
Before the U.S. market opened, Dow futures, S&P 500 futures and Nasdaq 100 futures triggered circuit breakers after falling at least 5%.
The New York Stock Exchange operator NYSE Group Inc. invoked the rarely used “Rule 48,” which relaxes some trading rules in a bid to ensure a smooth opening to trading. The rule is instituted when trading before the start of the regular session is especially volatile.
At the market open on Monday, a slew of single stocks and exchange-traded products triggered circuit breakers, which are initiated when there is a price drop of 10% or more in a five-minute period.
“When a big selloff comes, it tends to be herd mentality,” said Ryan Larson, head of U.S. equity trading for RBC Global Asset Management. “But once that herd gets out of the way, there can be some very good buying opportunities.”
With the Dow halving its earlier losses, Mr. Larson added that it appears investors are starting to realize the initial drop may have been an overreaction. Traders said early in the day as stocks swooned to their session lows they saw many investors stepping in to purchase stocks at very low levels.
Traders were watching whether a market-wide circuit breaker would be triggered as a result of Monday’s steep drop. The last market-wide halt was October 27, 1997, when the Dow Jones Industrial Average plunged 554 points, the worst single day in history up to that point.
The new rule for the market-wide circuit breaker uses the S&P 500 as a trigger instead of the Dow industrials. It will be initiated if the S&P 500 falls 7% before 3:25 p.m., at which point the New York Stock Exchange would halt for 15 minutes. If the index were to fall 13% before 3:25 p.m., then the market would halt for another 15 minutes. If either of those levels is breached after 3:25 p.m., trading will continue, however, unless the decline extends past 20%.
Fresh signs of a slowdown in China, the world’s second largest economy, have jolted stocks, bonds, currencies and commodities in recent days. 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 Chinese 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.
“A lot of markets abroad have seen a low amount of liquidity so investors are turning to the U.S. market to hedge,” said Jeffrey Yu, head of single-stock derivatives trading at UBS AG. Before the market opened, traders said futures volumes were extraordinarily heavy.
While the selloff began as an emerging markets story, with China’s stock market offering very little liquidity to investors due in part to technical stock-trading halts, investors have had to turn to the most liquid market to sell, which is the U.S., Mr. Yu said.
The Dow Jones Industrial Average, which has heavy international exposure, entered correction territory on Friday, defined as a decline of 10% from a recent peak.
Investors are increasingly skeptical that the U.S. Federal Reserve will raise interest rates at its meeting next month, amid growing turmoil in global markets and plunging inflation expectations.
A gauge of 10-year inflation expectations in the U.S. government bond market fell to the lowest level since 2009. Fed officials have said they intend to pursue policies that will enable inflation to rise to its 2% target in the medium term.
Fed-funds futures, used to place bets on central bank policy, showed Monday that investors and traders see a 28% likelihood of a rate increase at the September 2015 meeting, according to data from the CME Group. The probability was nearly halved from a week ago.
In a sign of growing anxiety, haven bonds have outperformed stocks and emerging market assets over the past few months. U.S. Treasurys maturing in at least a decade have handed investors a total return of 6.8% this quarter through Friday, according to data from Barclays PLC. The S&P 500 lost 4.2% in the same period and the MSCI Emerging Markets index lost 11.5%. Total return includes price gains and interest or dividend payments.
Many investors remain optimistic about the trajectory of U.S. stocks.
“Stock prices have dropped sharply and fears have increased sharply,” said Kate Warne, investment strategist at Edward Jones. “But it’s really important to keep in mind while stock prices have changed and obviously emotions have changed, fundamentals for the U.S. haven’t changed. Even with China selling sharply and emerging markets selling off, we’re still seeing solid U.S. economic growth.”
—Tommy Stubbington and Bradley Hope contributed to this article.
Write to Corrie Driebusch at corrie.driebusch@wsj.com and Saumya Vaishampayan at saumya.vaishampayan@wsj.com
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