Inside Financial Markets

Dow kicks off 2016 with 400-point plunge on China fears

Dow kicks off 2016 with 400-point plunge on China fears

The Dow Jones Industrial Average plunged about 400 points in early trade Monday as a 7% drop in Chinese shares stoked a global selloff in stocks.

The Dow DJIA, -2.03% plunged nearly 411 points to 17,015, led by a drop in DuPont Co. DD, -4.41% and American Express Co. AXP, -2.99%
The S&P 500 SPX, -2.03% fell about 45 points to 1,998, led by a decline in technology stocks, financials and industrials. Only the S&P 500’s energy sector showed a modest gain as Middle Eastern tensions helped lift crude-oil prices.

“It is not surprising to see such a selloff considering negative headlines from China and tensions between Iran and Saudi Arabia. What is surprising is that it is happening on the first day of the year,” said Ryan Larson, head of equity trading at RBC Global Asset Management.

“While trading desk are busier than they normally would be on Mondays, this is not a panic selling, it’s orderly. We are likely to see this kind of volatility a lot in 2016,” Larson said.

The S&P 500-tracking “SPY” ETF opened down nearly 2%. According to Bespoke Investment Group analysts, since the SPY SPY, -1.95% began trading in 1994, the ETF has opened lower on the first trading day of the year only twice in 22 years, and never by more than 1%.

Meanwhile, the Nasdaq Composite COMP, -2.46% tumbled by 138 points to 4,869 as tech stocks took the brunt of Monday’s drop.

China slump: The sharp losses followed an almost 7% slide in China’s Shanghai Composite Index SHCOMP, -6.86% on the back of a weak manufacturing reading. The slide activated a new circuit-breaker system for Chinese stocks, halting trading on the mainland for the rest of the day. European stocks also slumped.

“It is unclear if the rout in China is more of a function of overvalued markets there or deteriorating economy,” said Maris Ogg, president at Tower Bridge Advisors.

“We believe China’s economy is growing at a much more modest 2%-4% range, not 7% officials in China say. But that is not news to most investors. However, trading halts and market plunges did spook global investors,” Ogg said.

Last summer, a severe selloff in China’s stock market sparked a global market rout, which was seen as one of the reasons the U.S. Federal Reserve kept rates on hold at its September meeting.

Chinese officials announced plans for the circuit breaker system in December, as a measure to prevent the wild swings that accelerated this summer’s stock-market crash. But analysts and investors say the circuit breaker could trigger more selling, as the freeze spooks investors and losses snowball, setting off the halt all over again.

U.S. stocks ended 2015 mostly lower after a losing session on Thursday. Markets were closed Friday for New Year’s Day.

Saudi-Iran tensions: Investors also monitored developments in the Middle East, where a rift between Saudi Arabia and Iran raised concerns about further disruption to oil prices. Saudi Arabia over the weekend cut ties with Iran after attacks on its embassy in Tehran by people protesting the execution of prominent Shiite Muslim cleric Nemer al-Nemer.

Saudi Arabia executes prominent Shiite cleric(1:45)
Shiite cleric Nemer al-Nemer was among 47 people executed in Saudi Arabia on Saturday. The execution sparked protests around the globe.

Oil prices CLG6, -1.08% spiked on the tensions between Saudi Arabia and Iran, but have since pared gains somewhat. Gold prices GCG6, +1.39% were also higher, as the uncertainty spurred a flight to havens.

Data: In economic news, the Institute for Supply Management said its manufacturing index slipped to 48.2% last month from 48.6% in November. That’s the lowest reading since the last month of the Great Recession.

U.S. construction spending sank 0.4% in November to a seasonally adjusted annual rate of $1.12 trillion, the Commerce Department reported Monday. That was well below the 0.9% gain expected by economists surveyed by MarketWatch.

Movers: Pharmaceutical company Baxalta Inc. BXLT, +4.46% jumped after speculation Shire PLC SHP, -5.21% is close to completing a takeover of its U.S. rival. U.S.-listed Shire shares SHPG, -3.76% were down.

Shares of Tesla Motors Inc. TSLA, -6.16% dropped sharply after the electric car maker released delivery numbers for the fourth quarter on Sunday.

Netflix Inc. NFLX, -5.21% slid after Baird Equity Research downgraded the stock to neutral and said risk-reward is balanced following its recent strength. Inc. AMZN, -5.78% fell after Monness Crespi Hardt downgraded the stock to neutral from buy and suspended its price target.

Other markets: European stock markets SXXP, -2.50% skidded, with Germany’s DAX 30 index DAX, -4.28% off more than 4% and on track for its worst day since August.

The dollar traded mixed against other major currencies, although the ICE Dollar Index DXY, +0.21% was up 0.2% at 98.827.

Ahsan Baig

The Canadian Securities Institute


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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)