Stock markets in Europe and Asia plunged again Monday led by a nine percent drop in China. In the U.S., the Dow fell as much as 1,000 points after opening Monday but it recovered somewhat in the second hour of roller coaster trading. The Dow is now in correction territory, down nearly ten percent last week. More than $5 trillion has been erased from the value of global equities since China unexpectedly devalued the yuan on Aug. 11.
“There is no doubt that the panic begets panic in this market,” Michael Holland, chairman at Holland & Co., said in a Bloomberg Television interview. “We certainly have a Black Monday morning starting for us, so it’s a psychological thing. It’s pervasive. It’s everywhere.”
Global commodity prices continued to fall Monday, hitting a 16-year low. Oil prices fell another 4 percent. Bent Crude Brent dropped to $43.74 a barrel falling below January’s lows for the first time. U.S. crude fell below $39 a barrel. Copper hit a six-year low dropping 2.5 percent. All of this is attributed to a slowing of industrial demand around the world.
The Great Fall of China, as some call the recent 40 percent drop in the Chinese stock market, is largely responsible for the global stock market drop over the last two weeks, particularly last Friday and today. Over $800 billion in equity has already left Chinese markets, some of that went to Wall Street, but that was not enough to avoid the current drop. The nine percent slump in Chinese stocks on Monday was their worst performance since the depths of the global financial crisis in 2007 and wiped out what was left of the 2015 gains, which in June had been more than 50 percent.
The latest slide in China is rooted in a key index released on Friday that showed Chinese factory output at its weakest level for 77 months. Also, there was disappointment that the government did not announce expected policy support over the weekend. All Chinese futures contracts slumped by their 10 percent daily limit, meaning more bad days ahead in China, and the rest of the world by extension
Most of the money in the Chinese markets is domestic money. Much of the foreign investment has already left. The reason the situation in China causes this global reaction is that it fuels fears that the economy in China is much worse than the government is admitting. The Chinese government claims the economy is growing at seven percent, half its recent growth rate. Economists, however, believe it may actually be three percent or less.
Many big U.S. companies earn much of their revenue and profits in China. Companies like GM, McDonald’s, Boeing, and Apple are dependent on customers in China. If China falls into recession, it will send ripples through our economy. Donald Trump’s comments notwithstanding, China is a growing market for U.S. exports.
There are several reasons why Chinese stocks are falling. The slowing economy is a big reason that has ripple effects. During the good times, many average Chinese investors were making a small fortune in the rapidly rising stock market. But, as many financial analysts say, gravity is taking effect. “China’s stock market had become detached from the reality of China’s own economy, and appallingly overvalued,” Patrick Chovanec, managing director at Silvercrest Asset Management, told CNN.
It is too soon to panic in the United States. Our economy is generally strong, and a correction in the stock market and dropping oil prices may not have lasting consequences unless it gets worse. Eventually, falling oil prices will reach the pump and consumers will spend the savings in our service-based economy. But, we need to keep an eye on the situation.