Potential China slowdown frays markets, Dow sheds 530 points

Growing concerns about a slowdown in China shook markets around the world on Friday, driving the US stock market to its biggest drop in nearly four years.

The rout started in Asia and quickly spread to Europe, battering major markets in Germany and France. In the US, the selling started early and never let up. Investors ditched beaten-down oil companies, as well as Netflix, Apple and other technology darlings.

Oil plunged below US$40 for the first time since the financial crisis, and government bonds rallied as investors raced into hiding spots.

"Investors are wondering if growth isn't coming from the US or China, where is it going to come from?" said Tim Courtney, CIO of Exencial Wealth Advisors. "This is about growth."

By the time it was over, the Standard and Poor's 500 index had lost 5.8 per cent for the week, its worst weekly slump since 2011. That leaves the main benchmark for US investments 7.7 per cent below its all-time high -- within shooting range of what traders call a "correction," a 10 per cent drop from a peak.

Markets began falling last week after China announced a surprise devaluation of its currency, the yuan. Investors have interpreted China's move as a sign that flagging growth in world's second-largest economy could be worse than government reports suggest. On Friday, they got more bad news: A private survey showed another drop in manufacturing on the mainland.

The Standard & Poor's 500 index dropped 64.84 points, or 3.2 per cent, to close at 1,970.89.
The Dow Jones industrial average fell 530.94 points, or 3.1 per cent, to 16,459.75. That's 10 per cent off its high - a correction.
The Nasdaq slid 171.45 points, or 3.5 per cent, to 4,706.04.

"Concerns about slowing growth in China are certainly valid," said Jeremy Zirin, head of investment strategy at UBS Wealth Management. "But there doesn't seem to be any signal that the weakness abroad is slipping into the US economy."

Investors pointed to other reasons behind the recent sell-off, such as falling prices for oil and other commodities as well as the relatively high prices investors pay for US stocks compared with corporate earnings.

"All of this is coming at a time when we haven't had a correction" in many years, Zirin said. The last time the market slipped into a correction was in October 2011.

Until recently, investors seemed willing to shrug off any worrying news, confident that low interest rates from the US Federal Reserve and rising corporate profits would help push stocks higher. As a result, big drops were soon followed by big gains and the market would continue on its six-year run. The S&P 500 has more than tripled in value since the financial crisis.

Roberto Perli, head of global monetary policy research at Cornerstone Macro, said the market's recent slump likely means the Federal Reserve won't raise its benchmark interest rate at its September meeting. Fed officials gathering next month will have to weigh the global pressures against evidence of a solid US job market and improving US economic growth.

"They have the luxury of being able to wait and see what happens," Perli said. "But if the meeting was tomorrow, it's probably fair to say that they wouldn't tighten given all the turmoil in the global markets."

For all the markets' jitters, many economists say they remain confident that the US economy is resilient enough to withstand a slowdown in the developing world. And Europe's economy appears to be emerging from its long slump.

Major markets in Europe finished with deep losses on Friday. France's CAC-40 fell 3.2 per cent while Germany's DAX lost 2.9 per cent. In Britain, the FTSE 100 index dropped 2.8 per cent.

In Asia, the Shanghai Composite index suffered another steep drop of 4.3 per cent. Japan's Nikkei 225 lost three per cent, South Korea's Kospi shed two per cent and Hong Kong's Hang Seng fell 1.5 per cent.

Back in the US, government bond prices rose, pushing the yield on the 10-year Treasury note down to 2.04 per cent.

In the commodity markets, gold gained US$6.40 to settle at US$1,159.60 an ounce. Crude oil briefly dipped below US$40 a barrel for the first time since March of 2009. US crude fell 87 cents to close at US$40.45 in New York.