U.S. equity markets closed a volatile session Thursday in sharply negative territory as fears were re-ignited about slower growth in China, and global currencies. Stocks tracked by the S&P Global Broad Market Index shed $2.3 trillion over the last four days, in what has amounted to the worst ever start to a year for the broader averages.
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The Dow Jones Industrial Average tumbled 392 points, or 2.32% to 16513. The S&P 500 dropped 47 points, or 2.37% to 1943, while the Nasdaq Composite lost 145 points, or 3.03% to 4689.
All 10 S&P 500 sectors were in negative territory as technology and materials plunged more than 2%.
Fears over China’s growth and currency devaluation ricocheted through global markets on Thursday before regulators stepped in to try and calm frayed nerves. Their efforts, though, were short lived.
In China, the trading day was over just as it began thanks to a swift selloff. For the second time this week, Chinese equity markets tripped their newly-installed “circuit breaker,” a mechanism used to prevent panic selling, just 30 minutes into the start of trade. But regulators there had second thoughts hours after trading was halted, ultimately deciding to suspend the circuit breaker, which has added to volatility so far this year.
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Andy Kapyrin, Regent Atlantic’s director of research, said it was a move should help calm things down a bit in global markets.
“It will remove the incentive to rush for the door on a down day,” he said. “China created these circuit breakers last year, but the problem is they made them too tight. In the U.S. we only halt trading when stocks fall 20%. In China, they set it at 7%. Having a circuit breaker that’s too tight might make a crash more likely because it could make everyone run to an exit, but the door is only so big.”
Regulators also took another step to help ease investor anxiety when they extended a ban on large-scale asset sales, originally put in place after last summer’s market volatility. The six-month ban was slated to expire Friday.
Despite efforts from China, the damage was done, and had already bled to equity markets worldwide.
The drastic move was triggered in part by further depreciation in China’s currency, the renminbi, which hit a five-month low on Thursday. The move lower echoes fears that surfaced last year after the nation twice devalued its currency, and if it continues, its Asian neighbors could make the same move, which could destabilize emerging markets.
“Despite gradually gaining access to the IMF’s SDR basket, it is clear that Chinese markets are in no state to be called developed, with inexperienced regulatory bodies overseeing unsophisticated investors who seem to be in panic mode,” Joshua Mahony, IG market analyst, said in a note.
He continued by saying the problem now is no one really knows when the pressure will let up.
“No one knows where this rout will stop and as of yet, Chinese regulators have yet to show they can instill confidence in any other way than to install draconian measures that limit the function of free markets,” he said.
China’s Shanghai Composite index closed down 7.04%, while Hong Kong’s Hang Seng tumbled 3.09%, and Japan’s Nikkei shed 2.09%.
European markets extended the selling as commodity stocks came under the most pressure thanks to worries about the effect China’s slower economic growth could have on the industry. In recent action, the Euro Stoxx 50, which tracks large-cap companies in the eurozone, fell 2.30%. Germany’s Dax shed 2.29%, while the French CAC 40 shed 1.72%, and the UK’s FTSE 100 erased 1.96%.
The gloomy outlook for China has been months in the making as investor fears have been on heightened alert since last August when the world took notice of the nation’s slower pace of economic growth. Earlier this week, China data showed its manufacturing sector recorded its tenth-straight month of contraction, while services slipped nearer to contraction territory. Markets have grappled with what that means for global growth in 2016, and how it will impact investors in the U.S.
Peter Kenny, independent market strategist, said while the moves in the markets have been extreme, they don’t yet suggest running for the exits. He said in a note Thursday that he remains “constructive” on the markets – more than he has been “in months.”
“My optimism rests on two pillars: Domestic economic data and the prospects for better-than-expected corporate earnings,” he said. “I expect a roughly 6% gain by the S&P 500 this year. I also expected an 8% increase in corporate revenues.”
He said while the longer-term outlook is mired in global market turmoil now, the eventual climb to positive performance for the year will take time and patience.
Oil’s Crumble Continues
Oil prices were hammered early in the session as U.S. crude dipped $32.10 a barrel, to its lowest level in more than 12 years. Prices recovered by mid-morning before falling back into negative territory.
West Texas Intermediate crude slid 2.06% to $33.27 a barrel, while Brent, the international benchmark, dropped 1.40% to $33.75 a barrel.
Hitting the commodity especially hard was not only China consumption worries, but persisting supply concerns. Weekly inventory from the U.S. Energy Information Agency on Wednesday showed an unexpected drawdown in stockpiles. On the surface, the data appeared to be a good sign, however, along with the 5.09 million-barrel drawdown in crude supplies, the market saw 6.31 million barrels of distillate stocks and 10.58 million barrels of gasoline stockpiles come onto the market.
“Yesterday’s substantial drawdown of U.S. crude inventories proved insufficient to gain any traction for oil prices and as long as China continues to fall, commodities are likely to do exactly the same,” Mahony said.
As it appeared no place was safe from the widening selloff, traders flocked to safe-haven assets. Gold prices rose 1.48% to $1,108, trading at that level for the first time in two months, and up for the fifth-straight session
Elsewhere in the commodities complex, metals were mixed as silver gained 2.57% to $14.08 an ounce, while copper, generally sensitive to changes in the Chinese economy, stumbled 3.16% to $2.02 a pound.