Wall Street kicked off September on a sharply negative note as China growth worries slammed global markets yet again.
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The Dow Jones Industrial Average dropped 467 points, or 2.83%. The S&P 500 shed 58 points, or 2.94%, while the Nasdaq Composite declined 138 points, or 2.92%.
All ten S&P 500 sectors were in negative territory, with energy the most, dropping 3.14% in recent action, followed by financials, which declined about 3.53%.
It was déjà vu all over again for global financial markets as manufacturing data ruled the day.
In the U.S., a gauge on factory activity from the Institute for Supply Management saw a bigger-than-expected drop in August to 51.1 from 52.7 in July. Wall Street anticipated a shallower drop to 52.6. The reading, though still in expansion territory, was the lowest since May 2013.
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The global picture wasn’t much better, and is what helped drive the selloff in world markets.
Overnight, data from China showed the nation’s manufacturing sector slipped to a three-year low and back into contraction territory for the first time in six months, though mostly in-line with expectations, while the services sector also showed weakness.
The data suggest a major theme of either moderate gains or declines across the board, according toIHS U.S. Economist Michael Montogmery’s Tuesday research note.
“Almost all of the world manufacturing powerhouses are nestled between 47 and 53 with the eurozone the best example of strength and China the poster child for manufacturing struggling,” he wrote. “U.S. manufacturing is somewhere in the upper third or that range, but no longer the locomotive as it digests bad foreign trade prospects and holding too much inventory in the system.
He added that the rest of this year is likely to be filled with rough waters and the likelihood that U.S. factory activity will revive itself before 2016 are “slim.”
The importance of this latest round of data, Joshua Mahony, IG market analyst said in a note, is that it revealed the nation’s slowdown is hitting larger, state-backed companies.
“Chinese markets have started the week just as the past three weeks have begun, with widespread selling and the expectation that the worst may not be over. There are precious few signs that China is beginning to recover, and while PBoC action can provide a temporary reprieve, we are yet to see any evidence that is doing any good to the economy,” he said.
The data rattled Asia markets, where stocks finished the session deeply in negative territory.
China’s Shanghai Composite Index dropped 1.23%, Hong Kong’s Hang Seng declined 2.24%, while Japan’s Nikkei plunged 3.84%.
The weakness continued in Europe where equity markets there opened sharply lower after data showed manufacturing expansion in the UK eased in August. The Euro Stoxx 50, which tracks large-cap companies in the eurozone, slid 2.47%. The German Dax declined 2.38%, the French CAC 40 dropped 2.40%, while the UK’s FTSE 100, reopened after a holiday weekend, slid 3.03%.
Meanwhile, as the nation officially enters a month in which many on Wall Street had anticipated the first interest-rate hike from the Federal Reserve, attention will be focused on any and all central bank speakers who might give insight into when the Fed is likely to move – whether it’s by the end of the year, or well into 2016.
Boston Fed President Eric Rosengren was the latest member to step up to the podium. At the Forecasters Club of NY, he offered his outlook for the economy ahead of the FOMC’s September 16-17 meeting, saying that the economic recovery in the U.S. will require a “much more gradual” normalization.” Rosengren didn’t offer any specifics about his view on when the central bank should begin to raise short-term interest rates from historic lows.
Michael Block, chief strategist at Rhino Trading Partners, said the movement in global markets was a little to do with weak manufacturing data across the world, but it’s more to do with fear and pain from a rough August for the markets.
“Fear that the tumult is not over. Fear that we have no idea what the FOMC is going to do on September 17 and how the markets will take that,” he said. “This market continues to feel thin, whippy, and manipulated, so we’re giving it a lot of room. Welcome to September.”
After a blockbuster rally of nearly 8% on Monday, oil prices were socked by global growth worries on Tuesday, putting an end to a three-session win streak, and giving back all the prior session’s gains. U.S. crude dropped 7.68% to $45.45 a barrel. Brent, the international benchmark, declined 8.51% to $49.54 a barrel.
Energy majors Exxon (XOM) and Chevron (CVX) were the two biggest decliners on the Dow, dragging all 30 components lower. Both names traded down about 3% in recent action, while the energy sector as a whole dropped 3.69%.
Gold, largely seen as a safe-haven asset, was one of the only glimmers of green on a sharply down day. It traded up 0.77% to $1,141 a troy ounce. Silver traded up 0.23% to $14.62 an ounce, while copper edged 1.63% lower to $2.30 a pound.
The dollar was mixed against a handful of world currencies, while the euro gained 0.72% against the greenback. Meanwhile, the yield on the benchmark 10-year Treasury bond was down 0.030 percentage point to 2.170%.