A Butterfly Flaps Its Wings In China and the Dow Drops Over 400 Points

MediaChannel presents a media roundup of the coverage of yesterday’s mini-crash, which started in the chinese markets of Shanghai and Shenzhen and reverberated all around the world:

CNBC was optimistic even in the face of disaster. CNBC talking head Larry Kudlow was unflappable: “I think people should stay in for the long run and be optimistic because free-market capitalism is the best way to create wealth and prosperity.” Counters another guest, “I think that’s a philosophy, not a trading recommendation.”

Expect More Declines, But Long-Term Outlook Remains Strong

After the biggest selloff in over five years, market strategists and traders said stocks could continue to decline in the coming days. But many remained optimistic about the market’s longer-term prospects.

“It’s not that big of a deal,” Mike Driscoll, head of listed trading at Bear Stearns, said on CNBC after the market closed. “Three percent? We’ve done much worse than this.”

Driscoll said interest rates remain low and the economy has become used to high oil prices. “When you put it all into the pot, things still look OK,” he said.

Still, some market pros urged caution for now.

Stocks Dive in Worst Selloff in Four Years on Fears of Global Slowdown

“Asia sneezed and we all picked up a global chill,” Frederic Dickson, Chief Market Strategist at D.A. Davidson, told CNBC.com. “We’re not going to go off of the ledge but tighten up the seatbelts a notch or two because it could be a little bumpy in the next few days. There’s still a tremendous cushion of cash out there with most investors waiting for a pullback to put some money to work. We’ll see if they come in.”

Bloomberg News was more sober, and more specific about analyzing the causes of the market drop, noting (in a separate article than the one excerpted below) that although the bond markets rallied, gold (traditionally a safe bet in down markets) also slipped yesterday. Bloomberg’s Darren Boey and Stuart Kelly reported (emphasis mine):

Asian stocks fell the most in eight months, extending a rout in global equities that started in China and triggered a slump in the U.S. compounded by signs the world’s largest economy is slowing.

Japan’s Nikkei 225 Stock Average posted the biggest loss since June, led by Sony Corp. China Mobile Ltd. helped Hong Kong stocks to the largest decline since November. Today’s drop wiped at least $250 billion off the region’s equities.

“There’s no way we’ll be decoupled from what happens to the major markets,” said Wong Shou Ning, who helps manage $136 million at Kenanga Investment Management Sdn. in Kuala Lumpur. “It will be question of how bad one will get hit.”
…
Toyota Motor Corp. added to the drop in Japan after the yen strengthened against the dollar in New York, eroding the value of exporters’ sales.

China’s stocks ended last week at an all-time high, having jumped 13 percent in the previous six days. The Shanghai Composite Index yesterday plunged 8.8 percent, the steepest drop since Feb. 18, 1997. The rout wiped $107.8 billion from the market value of China’s companies, which had doubled in the past year.

Stocks fell after the State Council, China’s highest ruling body, approved a special task force to clamp down on illegal share offerings and other banned activities in the market. Investors were concerned the government will introduce further measures at a meeting of China’s legislature next week.

The government said it won’t impose a capital gains tax on stock investment, the Shanghai Securities News reported today, citing officials at the finance ministry and tax bureau.

CNN focused a bit more on the debt side of this issue. From the article entitled, “Bonds spike as stocks sink“:

U.S. stocks plunged Tuesday, sparked by worries of a slowdown in China and the U.S. economy. The Dow, broader S&P 500 and Nasdaq each fell more than 3 percent during the session.

Adding to concerns about weakness in the economy was a government report that said new orders for U.S.-made durable goods fell sharply in January.

Orders for items meant to last three years or more sank 7.8 percent, and orders for nondefense goods posted their biggest monthly decline ever, according to Reuters.

Economists surveyed by Briefing.com expected the report to show a decline of 3 percent after posting a 2.8 percent gain in December.

The volatile report is the latest in a string of readings to raise concerns about the health of the economy.

Last week a report showed the default risk for mortgages given to borrowers with weak credit histories is rising, and on Monday former Federal Reserve Chairman Alan Greenspan said the U.S. economy may fall into a recession by the end of the year.

In currency trading, the euro bought $1.3245, up from $1.3187 late Monday. The dollar bought ¥117.92, down from ¥120.55 the previous session.

Other news sources from around the world:

Reuters Canada:

U.S. stocks tumbled on Tuesday, driving the Dow Jones industrial average down in its worst slide since the aftermath of the September 11 attacks, as a sell-off in China’s stock market raised concerns that equity valuations may be too high.

A U.S. government report showing a bigger-than-expected drop in January’s new orders for U.S.-made durable goods

added to investors’ concerns about the outlook for economic growth and corporate profits. Those worries added more fuel to the sell-off and helped contribute to a loss of about $600 billion in market value for the day.

The New York Stock Exchange’s closing bell was greeted with a chorus of “boos” from the trading floor. A surge in trading volume triggered a technical glitch in late afternoon, contributing to an abrupt swing in the Dow average, which briefly fell 500 points. A Dow Jones Indexes spokeswoman said the glitch did not affect stock prices.

Investors dumped stocks with the biggest exposure to Chinese demand, including Caterpillar Inc., whose shares slid 3.6 percent, while Tuesday’s sell-off wiped out the year’s gains for all three major U.S. stock indexes.

“There seems to be just an air of nothing is safe anymore, there’s nowhere to go and people are rotating into bonds as a safe haven,” said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey.

The AP article by Madlen Read which is probably in your local newspaper today, this one via CBS News:

Stocks had their worst day of trading since the Sept. 11, 2001, terrorist attacks Tuesday, hurtling the Dow Jones industrials down more than 400 points on a worldwide tide of concern that the U.S. and Chinese economies are stumbling and that share prices have become overinflated.

The steepness of the market’s drop, as well as its global breadth, signaled a possible correction after a long period of stable and steadily rising stock markets that had not been shaken by such a volatile day of trading in several years.

A 9 percent slide in Chinese stocks, which came a day after investors sent Shanghai’s benchmark index to a record high close, set the tone for U.S. trading. The Dow began the day falling sharply, and the decline accelerated throughout the course of the session before stocks took a huge plunge in late afternoon as computer-driven sell programs kicked in, and also as a computer glitch caused a delay in the recording of a large number of trades.

Ireland Online noted that computer-driven sell programs played an important role in the crash:

A 9% slide in Chinese stocks, which came a day after investors sent Shanghai’s benchmark index to a record high close, set the tone for US trading.

The Dow began the day falling sharply, and the decline accelerated throughout the course of the session before stocks took a huge plunge in late afternoon as computer-driven sell programs kicked in.

The Dow fell 546.02, or 4.3%, to 12,086.06 before recovering some ground in the last hour of trading to close down 415.86, or 3.29%, at 12,216.40. Because the worst of the plunge took place after 2.30pm, the New York Stock Exchange’s trading limits, designed to halt such precipitous moves, were not activated.

The decline was the Dow’s worst since September 17, 2001, the first trading day after the terror attacks, when the blue chips closed down 684.81, or 7.13%.

The drop hit every sector of stocks across the market. Riskier issues such as small-cap and technology stocks suffered the biggest declines.

Investors’ dwindling confidence was knocked down further by data showing that the economy may be decelerating more than anticipated. A Commerce Department report that orders for durable goods in January dropped by the largest amount in three months exacerbated jitters about the direction of the US economy, just a day after former Federal Reserve Chairman Alan Greenspan said the US may be headed for a recession.

“It looks more and more like the economy is a slow growth economy,” said Michael Strauss, chief economist at Commonfund. “Moderate economic growth is good – an abrupt stop in economic growth scares people.”

The market had been expecting the government on Wednesday to revise its estimate of fourth-quarter GDP growth down to an annual rate of about 2.3% from an initial forecast of 3.5%, and grew increasingly nervous on Tuesday that the figure could come in even lower.

The housing market, which the Street had been hoping had bottomed out, also looked far from recovery after a Standard & Poor’s index indicated that single-family home prices across the nation were flat in December. A later report from the National Association of Realtors said existing home sales climbed in January by the largest amount in two years, but the data didn’t erase housing-related concerns, as median home prices fell for a sixth straight month.

But a growing feeling that Wall Street, which has had a big run-up since October, was due for a correction also played into today’s decline.

“I think that the market was prepared to pull back. The constellation of issues that were worrying the market came to a head,” said Quincy Krosby, chief investment strategist at The Hartford.

Just a week ago, the Dow had reached new closing and trading highs, rising as high as 12,795.92.

BusinessWeek:

Is this the long-awaited U.S. stock market correction, or is there more pain to come? Stocks were sharply, broadly lower in heavy trading Tuesday, with major U.S. stock indexes each down over 3%. Bonds soared as investors fled stocks for the less risky confines of the Treasury market.

What sparked the sell-off? A plunge in China’s stock exchange rippled across global markets, spurring big declines in bourses worldwide. A disappointing report on U.S. durable goods orders fanned concerns about a slowing economy.

Canada’s Global TV:

North American stock markets tumbled on Tuesday, with the TSX falling more than 400 points while the Dow and the Nasdaq losing 3% each, after the Shanghai stock index in China posted its biggest drop in a decade.

At around 3:10 p.m. ET, the main S&P/TSX stock index was down 408.57 points, or 3.1%, at 12,995.89. But the market correction is expected to wash over the Canadian market without any long-term pain, experts said.

The Australian declared, “Wall St. In Freefall”:

“The sell-off in China continues to have a profound effect on stocks across the board, since the largest unwinding in the Shanghai Composite Index since 1997 leaves investors questioning the sustainability of stock gains everywhere,'’ the analysts said in a note to clients.

Asia was dragged down by a plummeting Shanghai stock market, Wall Street slumped, and the main European indices showed falls of between 2.0-3.0 per cent on average at the close.

Metal and mining stocks were particularly hard hit because of concerns about demand from China, which has been the driving force behind record prices for raw materials in recent years.

In London, the FTSE 100 lost 2.31 per cent to close at 6286.10 points, in Paris the CAC 40 shed 3.02 per cent to 5588.39 points while in Frankfurt the Dax fell 2.96 per cent to 6819.65 points.

Comments from former Federal Reserve chairman Alan Greenspan and rising tension about Iran’s nuclear program also served to undermine investor confidence.

Mr Greenspan warned on Monday that the US economy had been expanding since 2001 and that there were signs that the current economic cycle was coming to an end.

The White House said it was monitoring the situation.

White House spokesman Tony Fratto declined to comment on whether any discussions were planned with the President’s financial working group.

“We’re always keeping an eye on movements in the market,'’ Mr Fratto said.

“The President’s economic advisers do that on a daily basis.'’

Britain’s The Herald noted:

Growing concern over Iran’s nuclear programme, and a 9% drop in Chinese stocks combined with jitters over prospects for the US economic outlook to hammer share prices in London and other financial centres yesterday.

UK shares saw £36.2bn wiped off their value.

The global rout raised fears in trading rooms on both sides of the Atlantic that US investors will dump equities after a four-year bull market on Wall Street.

“This is what I call the Shanghaishake-up, that’s what’s happening,” said Phil Flynn, a US stocks analyst.

City traders said Iran’s stand-off with the major powers, which yesterday saw Tehran again face down international demands to suspend uranium enrichment,has soured the recently buoyant mood on world markets. This has increased the risk on highly-leveraged investments.

An economic report showing that new orders for US-made durable goods fell by a much sharper-than-expected 7.8% in January and a warning from former Federal Reserve chairman Alan Greenspan that the American economy may be headed for a recession also took a toll on trading.

“The durable goods release likely brought the bears on the US economy out of hibernation,” said analyst Patrick Franke at Commerzbank. “Although durable orders are a very volatile series, the data point to an ongoing weakness in investment demand.”

The US market is important for many Scottish and other UK exporters.

Asian investors were rattled by fears that the Chinese government may raise interest rates to rein in the booming economy and by comments made by Chinese Premier Wen Jiabao who said the country’s communist leaders have no plans to allow democracy in the near future.

Democracy will emerge once a “mature socialist system” develops but that might not happen for up to 100 years, Wen wrote in an article in the People’s Daily, the main Communist Party newspaper.

Leave it to All Headline News to reassure us with an article entitled, ‘Wall Street Sees Red, But Experts Say There’s No Fear Of Another “Great Depression”.’

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