Plunge in Chinese shares helps send global markets lower

By Ken Sweet
AP Business Writer

NEW YORK (AP) — The worst drop in China’s stock market in eight years helped drag down other markets around the world Monday.

The tough day follows declines in U.S. markets last week, when the three major indexes fell more than 2 percent as a number of big companies reported disappointing earnings.

Faced with a drop in stock prices in Asia, Europe and the U.S., investors moved into traditional safe havens. The yield on the 10-year U.S. Treasury note fell to 2.22 percent from 2.26 percent on Friday. The price of gold rose 1 percent.

Dividend-heavy stocks, like utilities, also gained. Investors favor high-dividend companies during times of volatility because they provide a reliable income stream.

“There remain very few buyers out there and there are some growing concerns that we’re looking at a slowdown in global economic growth,” said Sean Lynch, co-head of global equity strategy with the Wells Fargo Investment Institute.

The Dow Jones industrial average lost 127.94 points, or 0.7 percent, to 17,440.59. The Standard & Poor’s 500 index lost 12.01 points, or 0.6 percent, to 2,067.64 and the Nasdaq composite lost 48.85
points, or 1 percent, to 5,039.78.

It was the fifth straight loss for the U.S. market. The S&P 500 is still up about half a percent for the year. The Dow is down 2 percent and the tech-heavy Nasdaq is up 6 percent.

Asia
The worries for investors this week started with an 8.5 percentage point plunge on the Shanghai market, the biggest one-day decline since February 2007. It was the latest big drop in the Chinese stock market, which has slumped since early June.

Some analysts said Monday’s dive was set off by brokerages restricting credit used to finance stock purchases, also known as margin trading. Chinese authorities took aggressive steps to stabilize the market after it tumbled last month.

“The continuous check on margin trading by security companies has triggered today’s sell-off,” said Xu Xiaoyu, a market strategist at China Investment Securities. “In addition, the recent economic data shows it still takes time for the economy to recover from its sluggishness.”

The precipitous rise and fall of the Chinese stock market has been one of the bigger topics of conversation for investors this summer.

By the time China’s Shanghai benchmark index peaked in early June, it was up 150 percent in the last year. The gains were originally driven by commentary in state media that called the stock market undervalued. That led investors to believe the government would ensure that stock prices gained.

When the Chinese stock market started falling, many investors felt the decline would bring a much-needed correction to that country’s stock market bubble. But many small Chinese investors jumped into the market near its peak and are now sitting on significant losses.

There are now concerns the 30 percent decline in the stock market is starting to do damage to China’s economy. A closely watched Chinese purchasing manager’s index fell to a 15-month low over the weekend, with analysts blaming the drop partly on the market.

“Rightly or wrongly, people are concerned about a global economic slowdown,” said James Liu, a global market strategist with JPMorgan Funds.

The Chinese sell-off ruffled other markets in Asia, though the scant amount of foreign investment in Chinese shares limits the ripple effects outside of Hong Kong, a semiautonomous Chinese territory
that is also a financial center.

Hong Kong’s Hang Seng shed 3.1 percent and Japan’s Nikkei 225 dropped 1 percent. South Korea’s Kospi fell 0.4 percent.

Europe and the U.S.
In Europe, which has already had a volatile summer because of worries about Greece’s precarious finances, also fell broadly on Monday.

The Euro STOXX 50 index, the European equivalent of the Dow 30, fell 2.4 percent. Germany’s DAX lost 2.6 percent, France’s CAC-40 lost 2.6 percent and the U.K.’s FTSE 100 lost 1.1 percent.

Elsewhere, traders were turning their attention to the U.S. Federal Reserve as they try to assess when the central bank will start raising interest rates. The market appears split between those who think it will happen in September or December. The central bank will also meet this week, but few expect it to begin raising rates.

Traders also have the busiest week for second-quarter earnings reports this week, with 174 members of the S&P 500 as well as six members of the Dow average reporting their results.

Big pharma gets bigger
Generic drug giant Teva Pharmaceuticals jumped $8.76, or 14 percent, to $70.61 after it announced it would buy Allergan’s generic drug division for $40.5 billion in cash and stock. Allergan’s shares also rose, up $19.01, or 6 percent, to $327.19.

Currencies and commodities
The price of oil fell to the lowest point since March as another steep drop in Chinese stocks caused concerns that demand from the world’s second biggest oil consumer would slip. Benchmark U.S. crude fell 75 cents to close at $47.39 a barrel in New York. Brent crude, a benchmark for international oils used by many U.S. refineries, fell $1.15 to close at $53.47 a barrel in London.

In other futures trading on the New York Mercantile Exchange:
— Wholesale gasoline fell 0.8 cent to close at $1.820 a gallon.
— Heating oil fell 3.4 cents to close at $1.596 a gallon.
— Natural gas rose 1.3 cents to close at $2.789 per 1,000 cubic feet.

In currency trading, the euro strengthened 0.9 percent to $1.1092 while the dollar fell 0.4 percent to 123.28 yen.
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AP Business Writer Youkyung Lee contributed from Seoul, South Korea and researcher Yu Bing contributed from Beijing.