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U.S. equity markets joined a Chinese-led global equities selloff which sent major market averages lower for the fifth-straight session.
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The Dow Jones Industrial Average fell 127 points, or 0.73% to 17429 on Monday. The S&P 500 lost 12 points, or 0.58% to 2067, while the Nasdaq Composite dropped 48 points, or 0.96% to 5039.
The only sector in positive territory was utilities, which is viewed as a safe haven. The current five-day losing streak is the longest run since Jan. 15.
Jitters over global worries returned to Wall Street on Monday after China shares plunged 8.5%, notching the biggest one-day drop since 2007. Equity markets there came under pressure as the government’s extraordinary measures to prop up the markets began to lose steam, and as traders there parsed disappointing industrial production data.
Before the massive selloff, which began in June, China’s main indexes had more than doubled over the year, before plunging more than 30% in just a few weeks.
On Monday, China’s Shanghai Composite index plunged 8.48% to 3725. Meanwhile, Hong Kong’s Hang Seng lost 3.9% to 24351, while Japan’s Nikkei shed 0.95% to 20350.
Peter Kenny, chief market strategist at ClearPool Group, said what Chinese equities experienced overnight was partially a result of weak data, but more than that, it was a realization that government controls have a limited shelf life with how long they impact market trends.
“That force has provided Chinese investors with a very startling and rude awakening. Central authorities have tried any number of very dramatic, logical steps to halt the slide in Chinese equities, none of which have had the impact intended. It was a comprehensive blow to Chinese investor confidence,” he explained.
Worries ricocheted across Europe, where the selloff continued. The Euro Stoxx 50, which tracks large-cap companies in the eurozone, dropped 2.28% to 3518. Meanwhile, the German Dax fell 2.56%, the French CAC 40 was 2.57% lower, while the UK’s FTSE 100 shed 1.13% to 6505.
Kenny said the impact of the selloff overseas will hit trading in the U.S., and warned not to expect the selling to let up any time soon.
“This will go on for weeks. We’ve seen heightened volatility over the past two months. We’re at the early stages of the birth of capitalistic forces in their markets. Do not expect to see this sort of run up in prices they’ve been accustomed to the last two or three years. That train has left the station,” he said. “It’s going to have an impact on global equity markets, no question.”
Meanwhile, pressure on the commodities market failed to let up on Monday. U.S. crude prices continued to fall after entering bear-market territory last Thursday as worries persist over a global supply glut. Prices fell 1.6% to $47.39 a barrel, the lowest mark since March 20. Brent crude, the international benchmark, also declined 2.4% to $53.31 a barrel.
It’s the commodities market, not China, that Michael Block, chief strategist at Rhino Trading Partners, said is the biggest concern to U.S. investors.
“We are watching crude make a run toward the March lows…And with the fall in commodity prices, the viability of some big, big metals companies is being questioned,” he wrote. “I do think we’ll see more casualties in the energy and commodities complexes given the overinvestment and the supply/demand dynamics in each area.”
Kenny weighed in, saying the lower prices could take on more velocity in the coming weeks, and continue to put more pressure on U.S. equities.
“Look what happened with energy is the first quarter, it became a startling revolution that energy is one of the largest sectors and with the drop from May to December, it had a decidedly negative impact on the S&P and the broader market,” he noted. “It’s a huge component of the equity landscape.”
Gold, which found itself under pressure last week, reversed course on Monday, trading up 0.74% to $1,094 a troy ounce, but still holding near 5-1/2 year lows.
The yield on the benchmark 10-year U.S. Treasury note fell 0.043 of a percentage point to 2.23%. Bond yields move in the opposite direction of prices.
In currencies, the euro traded up 1.01% against the U.S. dollar.
The economic data calendar in the U.S. was light on Monday with durable goods orders posting a bigger gain than expected. The Commerce Department said orders for long-lasting goods jumped 3.4% in June, a bigger gain than the 3% increase Wall Street forecast. Excluding the volatile transportation component, orders rose 0.8%, also topping views for a 0.5% rise.
Later in the week, the Federal Open Market Committee convenes for its two-day policy-setting meeting on Tuesday with its policy statement on Wednesday afternoon. Wall Street hopes this month’s meeting will give more clarity as to the central bank’s timing for the first interest-rate hike from historic lows.
Block said the optimism, though, is waning for a September rate hike, which has long been the consensus for the first increase.
“I see the move in commodities and I think about what that means for inflation. I don’t see wages going anywhere. How does the FOMC raise rates on that backdrop,” he noted.
In corporate news, Teva Pharmaceuticals (NYSE:TEVA) announced it plans to buy Allergan’s (NYSE:AGN) generics drugs business for $40.5 billion. The deal would make Teva a top-10 pharmaceutical company.
Fiat Chrysler Automobiles (NYSE:FCAU) agreed to a settlement with federal safety regulators over a record $105 million fine for recall lapses. As part of the agreement, the automaker will offer to buy back about 190,000 vehicles. Shares dropped 4.7%.