Collapse of US stocks due to ‘a confluence of negative attributes’.
US stock markets staged a stunning recovery on Monday after plunging to dramatic lows earlier in the day as markets across the world went into meltdown over ongoing fears of a collapse in the Chinese economy.
The Dow Jones Industrial average was down 200 points, or 1.2%, at 16,257 points at 1pm on Monday, a huge recovery from a more than 1,000-point (6%) drop as the markets opened. The S&P 500 and the Nasdaq also recovered to be down 1.1% and 0.55% after falling of 5% and 8% earlier.
However, while US markets recovered, those in most of the rest of the world suffered some of the biggest one-day falls so far this year, which greatly reduces the chance of the US Federal Reserve moving to increase interest rates in September, something that had been widely expected by economists.
Lawrence Summers, a former US Treasury secretary, said raising rates soon would be a “serious error”. “A reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives: price stability, full employment and financial stability,” he said in an opinion piece for the Wall Street Journal.
He also posted on Twitter to warn that “we could be in the early stage of a very serious situation”.
Barclays economists on Monday pushed back their forecast for a rate rise from the next month to March in the wake of the highly volatility markets.
“Given the uncertainty around the current global outlook, the timing of the rate hike seems more uncertain than usual,” they said in a note to clients. “Should this episode of financial market volatility prove transitory, the FOMC [Federal Open Market Committee] could raise rates in December. On the other hand, if the volatility proves durable or reveals greater than expected weakness in global activity, the FOMC may push the first rate hike beyond March. We see a delay past mid-2016 as a relatively low probability at this point given our views on US labor markets.”
The White House has played down fears that volatility in international stock markets, particularly in China, would have any significant knock-on impact on the US economy.
“There is no doubt the global economy is more interconnected that it ever has been,” Josh Earnest, the president’s chief spokesperson, told reporters on Monday. “What I would encourage people to evaluate is the ongoing strength and resilience of the US economy.”
Earnest said the US was experiencing the longest period of sustained private sector job increases in American history, with unemployment is at the lowest level in seven years.
“The US economy is far stronger now than it was in 2008,” he said. Earnest added that Wall Street reforms ushered in since the financial crisis mean that major US financial institutions have added more than $600bn in capital since 2009.
“That means banks are less reliant on unstable short-term funding, and that they are better able to withstand short-term volatility in the financial markets,” he said.
The global rout was sparked by a 9% fall in Chinese markets hit by “Black Monday” – the biggest one-day fall since 2007 – which intensified already-heightened fears about the health of the world’s second-biggest economy.
The pan-European FTSeurofirst300, which compromises Europe’s 300 biggest companies, closed down 5.4%, to its lowest level this year.
Germany’s DAX lost 5%, France’s CAC shed 5.6% and Spain’s IBEX lost 5.7%. The FTSE 100 in London closed down 4.67% to 5,899 points, wiping more than £73.9bn ($116.3bn) off the index of leading UK shares. It was the first time the index had dropped below the 6,000 mark since early 2013, with almost all companies in the red, and followed a week of declines last week.
“There is a lot of fear in the markets,” said Bernard Aw, market strategist at IG in Singapore, said. “The risk sentiment is really on the verge of panic, which is why we are seeing plenty of red screens. The Chinese stock market fell really spectacularly.”
Connor Campbell, an analyst at the spread betting firm Spreadex, said: “The fog of fear over the state of the Chinese economy is only thickening, and with little in the way of non-Chinese news to come this Monday, the markets are going to struggle to escape today without some fairly ugly scars. And the worrying thing is it could all worsen this afternoon with … the US markets.”
The oil price, which has already fallen dramatically, fell more than 5% to a 6-1/2-year low.
US tech stocks, including Apple, Facebook and Netflix, which had suffered bruising declines of as much as 14% in the morning, were in positive territory by 1pm.
Apple’s recovery – from a 11% drop to 2% gain by 1pm – came after chief executive Tim Cook sought to reassure investors. In a very unusual mid-quarter intervention, Cook said Apple’s performance has been “reassuring” and he was not overly worried about the Chinese concerns.
“I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August,” Cook said in an email to CNBC host Jim Cramer. “Obviously I can’t predict the future, but our performance so far this quarter is reassuring.”