Black Monday: China Leads Selloff in Global Stock Markets

A selloff in the Chinese stock market has sent shockwaves across the globe in what some are calling “Black Monday.” 
According to The Guardian, the fall was triggered by Friday manufacturing data out of Beijing that points to “fresh evidence of problems at the heart of the Chinese economy.” The news pushed the preliminary Caixin China Manufacturing Purchasing Managers’ index for August to a 77-month low on Monday, and had sent the Shanghai Composite index down 8.5 percent by the end of the day.
Speaking to the news outlet, David Madden, a market analyst at IG, commented, “China has been on a mission to keep up the illusion of a gradual slowdown, but dealers aren’t buying it anymore.”

Summertime sadness

And indeed, China has been working hard, particularly since its stock market free-fall in July and its yuan devaluation earlier this month, to maintain composure in its markets.
That first event sent the Shanghai Composite index down as much as 8 percent, wreaking havoc for stocks and for investor confidence. The second event, which saw the yuan weaken about 3 percent against the US dollar from August 11 to 13, stoked further concerns about the Asian nation’s economy.
China has responded with “extraordinary government intervention … aimed at propping up share prices,” but as The New York Times states, its work hasn’t had the desired effect. “As the slide on Monday highlighted, those efforts have not been a success and the damage has been felt far beyond the Chinese stock market,” the news outlet notes.

World markets take a hit

It’s not hard to see exactly how far the effects of China’s meltdown have already spread.
US markets were already seeing the effects of China’s manufacturing data release on Friday, with all of the main US indices closing down over 3 percent that day, as per another Guardian article. They had already sunk for the previous four days as well.
Monday brought even more carnage. Reuters reported that the Dow Jones Industrial Average (INDEXDJX:.DJI) lost over 1,000 points in early trading, though it perked back up after that initial drop and was sitting at 16,251 points, down 208.75 points, as of 12:53 p.m. EST. Prior to Monday it had never lost more than 800 points in a day.
Meanwhile, the S&P 500 (INDEXSP:.INX) was down 21.53 points at that time, at 1.946.25 points. According to Reuters, all 10 major sectors on the index fell, and more than 90 percent of its stocks were in correction territory at their session lows.
On the lower end of the scale, the S&P/TSX Composite index (INDEXTSI:OSPTX) dropped over 700 points at the open, and was at 13,375.44 points, down 99.39 points, as of 1:27 p.m. EST. The S&P TSX Venture Composite index (INDEXTSI:JX) was down 15.15 points, at 522.37 points, at that time.
Stock markets outside North America were hit as well. CNN Money states that Japan’s Nikkei 225 (INDEXNIKKEI:NI225) closed down 4.6 percent, while stocks in India took their biggest fall in over seven years. In Germany, the DAX (INDEXDB:DAX) fell almost 6 percent, while French stocks lost 7 percent. In London, the FTSE 100 (INDEXFTSE:UKX) traded down 6 percent.

What’s next?

Monday’s global meltdown of course has investors of all types wondering what’s next. Unfortunately, the future doesn’t necessarily look bright — at least not in the short term.
Speaking to The Guardian, Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo, suggested that “China could be forced to devalue the yuan even more should its economy falter.” Nader Naeimi, head of dynamic asset allocation at AMP Capital Investors, offered a similar perspective, commenting, “[y]ou really need rate cuts and more policy easing in China. In the meantime, things can get worse.”
Rajiv Biswas, Asia-Pacific chief economist for IHS gave a more specific suggestion in conversation with CBC. “The most important step is to see China take further action to try to bring their economy to a 7 per cent growth path,” he said.
Aside from China, Monday’s rout in the markets has raised questions about the US Federal Reserve’s anticipated interest rate hike. The Financial Times states that it reduces the chances that the central bank will raise rates next month, “and could even spur it to keep them on hold until 2016.”
Interestingly, Deutsche Bank (NYSE:DB) analyst Jim Reid told the news outlet, “[w]e always thought something would get in the way of the Fed raising rates in September and we’re perhaps seeing this now.”

That said, there’s been some positivity even amid the widespread crash. The Economist points out that while the incident is “good reason for concern,” the Shanghai Composite index is still up 43 percent year-on-year and states that “a replay of the Asian financial crisis of 1997 looks unlikely.” It adds, “[n]either does a 2008-style meltdown appear to be on the cards.”
And for his part, Ernie Cecilia, chief investment officer at Bryn Mawr Trust, did leave Reuters with a little optimism. “The market tends to over react in either direction and needs to find a stable level before this rout can be stemmed. There is a lot of liquidity left and at some point investors will look at lowered valuations and step in,” he said. In other words, there’s still value in the market for those open to looking for it.
 
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.