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January 04, 2016 at 10:06 AM
Blame it on China or revived tensions between Saudi Arabia and Iran, or both. Events in those countries triggered a massive selloff in global stock markets Monday, leading at one point to a 450-point drop in the Dow Jones Industrial Average.
By midday, the Dow was down 350 points and the S&P 500 was off 40 points — both down about 2% from the previous close on Dec. 31 — then sank again before recovering to end the session off a little more than 1.5%.
The rout began in China when the government there reported a larger than expected drop in manufacturing activity in data (known as the PMI report), marking the 10th consecutive decline in that index. Chinese stocks plummeted, triggering circuit breakers that were used for the very first time. Trading was initially stalled for 15 minutes, then halted altogether after the Shanghai Shenzhen CSI 300 Index dropped 7%.
European stocks followed, with the Pan-European STOXX 600, London FTSE and Paris CAC 40 ending their sessions down about 2.5% each, while Germany’s DAX sank 4.3%.
Adding to the downturn were growing tensions between Saudi Arabia and Iran, and their allies.
After Saudi Arabia executed a prominent Shiite cleric as part of a mass execution, crowds of Shiite Muslims protested in cities throughout the Mideast condemning the killing. Then Saudi Arabia cut off diplomatic relations with Iran, and Bahrain and Sudan followed suit while the UAE downgraded its diplomatic relations with Iran. Oil prices spiked higher, then retreated on the news.
“The markets have overreacted,” says Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors. “China is a problem, but is that big a problem? No.”
Indeed, David Dollar, a senior fellow at Brookings’ John L. Thornton China Center, says, “The actual economic news from China is not bad” and “there is no evidence of a hard landing so far.”
He says that even though China’s manufacturing PMI “continues to disappoint,” the country’s “service sector PMI rose in December and is at a healthy level,” and today’s selloff was also due to “the looming end to a ban on large investors selling their shares.”
