Scary as Tuesday’s plummeting markets were, at one point it looked worse. In mid-afternoon in New York, the Dow plunged more than 200 points in a matter of minutes. There was no single trigger for the fall — just as there was no clear trigger for the Chinese sell-off earlier in the day.
The Wall Street Journal reports that a glitch in the mechanism that calculates the average was behind the sudden drop. “The system fell behind,” said Mike Petronella, president of Dow Jones Indexes. The team that compiles the DJIA had noticed at about 2pm New York time that heavy trading volume was overwhelming the system, creating a data backlog that was affecting all of the Dow Jones indexes. The Dow’s component stocks were falling, but — improbably — the Dow average wasn’t falling as much. Just before 3 pm, the team switched over to a backup computer system. Almost immediately, the Dow caught up, tumbling 200 points, for an eye-popping plunge on the day of more than 500 points.
Bargain hunters then started pushing US stocks back up, says John Authers in Short View, but the mood of optimism that had permeated the stock market since last summer was over.
The wider question on Wednesday remained — to what extent was the sell-off in markets around the globe sparked by plunging Chinese shares? For China, a rapidly expanding but still relatively immature market, to create such a global domino effect would be unprecedented. The global markets reaction to China on Tuesday was certainly correlated – but was it causal? Was the China story an after-the-event rationalisation of what was in any case a long-awaited correction, which had Alan Greespan’s comments warning of a possible US recession, weaker-than-expected US durable good orders, the subprime lending fiasco, concerns about Iran, an attack in Afghanistan and murmers of a windfall tax on minding stocks to aid it along?
The frothy state of the Chinese market is in little doubt. The New York Times calls the sell-off just the latest indication that share prices in China had often become unhinged from the broader economy. In the last year, when a company announced bad news, its stock price shot through the roof.
Early this year, for instance, when a group of 17 Chinese companies was cited by regulators for misappropriating corporate funds, their stock prices all skyrocketed. When the Tianjin Global Magnetic Card Company failed to report quarterly earnings last April, its stock doubled.
But some played down the role of the 9 per cent drop in the Shanghai Composite as a trigger for global falls in favour of broader concerns about global valuations. “The China explanation seems a little bit too convenient,” said Paul Hickey, analyst at Birinyi Associates, on Tuesday. “Every day there is some new concern. These things don’t matter until they matter, then you get a sell-off like today.”
China, says Authers, is a leveraged play on the habits of the US consumer. If US consumption stays robust, China gains disproportionately. But at some point, the scary developments in the US subprime lending industry could dent demand for Chinese products. They are linked.
With world markets more inter-connected thanks to the growth of financial instruments, it is easier for a trader who has grown more risk-averse to act. On Tuesday, traders’ models told them to sell risky assets — and that meant sudden sell-offs of Chinese and then US stocks.
Shanghai is a long way from being east Asia’s most important stock market, let alone the world’s. It is relatively shallow, for all the fact that it is fast growing in stature, says Robert Cole in the Times. But at a time when the West is more aware than ever before of China’s importance to the world economy and the prices of metals and minerals, however, Shanghai now has the power to trigger fears that are lying only just below the surface of Western financial and commodity markets, he adds. Perhaps it was time that investors in Shanghai, and across the globe, reacquainted themselves with the sizeable economic and political risks that go with high growth.
The Telegraph’s headline writers, at least on the website, seem to be party to information that the rest of the world’s financial press are not – “White House on alert as stocks tumble.” No mention of the White House in the story itself though, so hard to tell what this ‘alert’ might involve.
But city editor, Damien Reece, thinks that any alarm in the Oval Office should be directed close to home. “As long as they keep buying our steel, commodities, airport designs, what have you, who cares if Chinese share prices fall?” he writes. “Rather more worrying is the recession building in the world’s leading, fully formed capitalist system. We have already seen the dollar collapse – a vote of no confidence in an economy if not in, then on the brink of recession…Investors should be concerned less with a regular bout of financial Asian Flu and more worried about a nasty case of Rocky Mountain Spotted Fever crossing the Atlantic.”
Authers, in the FT’s Short View, agrees, though in less hysterical fashion. “The correction could turn into something worse and emerging markets could suffer more than others. Whether this happens though depends primarily on the US and its credit market.”
The polarity of views on the topic – or rampant uncertainty – was on display on Asian breakfast TV. The analyst unearthed by Bloomberg would have you believe that Tuesday’s events marked the beginning of the end. Over on BBC World, their talking head was of the opinion that in a couple of months it’ll be back to plain sailing and no one will remember events of February 27.