Stock Sell-Off in China Hits Wall Street
Wednesday, February 28, 2007
A plunge in Chinese stocks rippled across global markets yesterday, triggering a massive wave of selling in the United States that sent the Dow Jones industrial average down 3.3 percent, or 416 points, its biggest decline since March 2003.
The news from Asia sparked the initial sell-off, but a confluence of other events, including news of rising real estate loan delinquencies, a surprisingly weak manufacturing report and a bombing near Vice President Cheney in Afghanistan, made an already difficult day worse.
For most of the morning the Dow declined steadily until it had fallen 300 points. Then, just before 3 p.m., it plummeted another 200 points before recovering slightly because of a trading glitch that led to a backlog of sell orders clearing at once. The Dow closed at 12,216.24. The Standard and Poor's 500-stock index, a broader measure of stock prices, also lost more than 3 percent by the close of the trading day, its biggest drop in 3 1/2 years.
Chinese markets did not participate in the continued sell-off Wednesday. Japan's Nikkei 225-stock index closed down 2.85 percent, at 17,604.12. In midday trading, the Hang Seng index had fallen 2.9 percent, to 19,568.54, but the Shanghai Composite index had climbed 1.6 percent, to 2817.12.
From currency markets to blue-chip companies to international stock exchanges, no sector was left unscathed yesterday. The day was reminiscent of when the Internet bubble burst several years ago -- traders and investors around the world stared at electronic boards and televisions showing markets falling deeper into the red.
Todd Leone, head of trading at Cowen & Co., saw "nothing but sellers," he said. "My whole screen is red. Every group is down."
Adding to the market's woes, former Federal Reserve chairman Alan Greenspan warned in a speech Monday that the U.S. economy might slip into recession by year's end. "It didn't help that Greenspan used the 'R-word,' " said Al Goldman, chief market strategist at A.G. Edwards. "People overreacted to that. He's still an icon."
Some analysts said, however, that it was about time for the market to cool after a breathless run-up in share prices.
"I don't think a one-day [sell-off] is going to do justice for what's been going on," said John O'Donoghue, co-head of equity trading at Cowen. "It wouldn't surprise me to see a total 5 percent correction and even more from here."
A major long-term concern among analysts is whether the heady days of "cheap debt" are coming to an end. The ability to borrow money at low rates and with favorable terms has fueled much of the world economy in the past few years, including the record-topping leveraged buyouts on Wall Street, the global run-up in real estate prices and the surge of investments in emerging markets overseas.
Signs surfaced yesterday that the easy availability of debt may be ending.
The mortgage company Freddie Mac announced tougher standards for its subprime mortgages, saying it would not buy such risky loans that are linked to a high number of delinquencies and defaults.