U.S. stock market follows Asian stocks downward

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, November 13, 2010; 12:01 AM

The U.S. stock market followed Asian stocks downward Friday amid investor concern that China may be poised to rein in its superheated economy.

The Dow Jones industrial average fell 0.8 percent to 11,192.58, while the Standard & Poor's 500-stock index - a broad gauge of the U.S. stock market - fell 1.2 percent to 1199.21. The S&P 500 ended the week with a 2.2 percent loss.

China has been the global economy's strong spot, "and so if China begins to feel some chills, it would appear that we could catch pneumonia," said Peter Cardillo, chief market economist at Avalon Partners, a brokerage firm.

"China would be slowing down from 10 percent growth while we could be slowing down from less than 2 percent growth, so that's where the fear factor is," Cardillo said.

China appeared to drive the markets after a major Shanghai stock index plunged by 5.2 percent earlier Friday.

China has been a huge buyer of energy and raw materials, and anticipation of slower demand from its industrial juggernaut helped drive commodity prices down sharply Friday, too.

Copper futures were down 3.3 percent, crude oil futures were down 3.3 percent by one measure and some agricultural futures were down even more. Sugar was down by 11.6 percent.

Gold, which has undergone a spectacular runup against the backdrop of economic anxiety and a weak dollar, sank 2.7 percent.

Among U.S. stocks, the day's biggest losers included mining company Freeport-McMoRan Copper & Gold, which was down 3.8 percent.

Investors seemed to believe "that China is going to cool off and might crash," said M. Cary Leahey, senior managing director at the consulting firm Decision Economics.

An accumulation of economic indicators suggests that China's growth might be so hot that Beijing might be forced to apply the brakes by raising interest rates, Leahey said.

Analysts have been warning that China's growth has been driving up asset prices there to dangerous levels, potentially leaving it vulnerable to the kind of bubbles that spawned the financial crisis of recent years.

A Chinese investment bank, China International Capital, said Friday that the Chinese government has shown resolve to curb inflation and asset bubbles, and as a result it could raise interest rates by the end of the year, China's Xinhua news agency reported.

James Paulsen, chief investment strategist at Wells Capital Management, discounted Friday's stock market dip, saying the U.S. economy has shown encouraging signs.

"I really think this is just a pause that refreshes," Paulsen said.

Theoretically, higher interest rates in China could strengthen China's currency, increasing the buying power of the renminbi and boosting exports from the United States. But the United States has long criticized China for artificially controlling its currency to support Chinese exports.

© 2010 The Washington Post Company