Markets across the globe were stuck deep in the red on economic data out of Asia combined with disappointing news about the European economy.
As a result, all the major European indices closed the day down sharply. London’s FTSE 100 shed 3 percent to close at 6,058 while Spain’s IBEX 35 lost 2.6 percent to finish at 9,992. Frankfurt’s DAX 30 lost 2.4 percent to close at 10,015, which is on top of a 7 percent decline for August. The French CAC 400 fell 2.4 percent, and the Stoxx Europe 600 fell 2.7 percent to 352.
In the midday session in the U.S., the Dow Jones Industrial Average was off 374 points, or 2.3 percent, to 16,153 while the S&P 500 was down 2.3 percent to 1,926, and the S&P 500 Retailing Industry Group Index dropped 2.2 percent to 1,167.
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The data coming out of Asia demonstrates an even sharper slowdown than most expected. The Purchasing Managers’ Index in China fell to 49.7 in August, the weakest amount in 3 years and the Caixin China Manufacturing PMI dropped to 47.3 the lowest since March 2009.
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Caixin called the decline “the most marked contraction of output since November 2011” and noted that companies had reduced their purchasing activity “at the fastest rate since March 2009.” Dr. He Fan, chief economist at Caixin Insight Group, commented: “Recent volatilities in global financial markets could weigh down on the real economy, and a pessimistic outlook may become self-fulfilling.”
Michael Montgomery, U.S. economist at IHS Global Insight, said the August reading of the manufacturing index reflects global moderation of the economy. “Breaking out of the malaise will take time for inventory and foreign trade drag to lessen,” Montgomery said. “Prospects that U.S. manufacturing will revive before 2016 dawns are slim. The service side of the U.S. economy is faring far better than manufacturing and is keeping final demand for goods growing, but that growth is offset by the twin drags of foreign trade and inventory restraint.”
For the balance of the current year, Montgomery expects a “bumpy ride in manufacturing, but prospects for advances much better than tepid are about as remote as prospects for anything worse than transitory declines – U.S. manufacturing is just stalled.”
In South Korea, exports declined the most in 6 years with exports dropping 14.7 percent in August from last year. The drop was due to the slowdown in China, plus fewer exports to Europe and Japan. South Korea is the first country to report its monthly trade data and is seen as a barometer of global trade. A quarter of all Korean exports goes to China, so it’s a good indicator of how the Chinese economy is truly faring.
Not surprisingly, the euro zone manufacturing growth data was lower in August as well, but still not to be considered in contraction. The same cannot be said for the U.S.’ northern neighbors, the Canadians. Low oil prices have dragged the Canadian GDP to negative 0.5 percent; putting that country back into recession.
In the energy sector, oil speculators broke the three-day rally pushing both the Brent and U.S. crude prices down $2 a barrel. Treasuries rallied as the market runs to the traditional safe havens pushing the 10-year treasury yield to 2.19 percent. Gold is also up 1 percent to $1,143 an ounce, giving the precious metal an increase of 3.5 percent for the month of August.
In other economic news, weekly retail sales — or the JohnsonRedbook Index — for the week ending August 29 showed a drop to 1.3 percent from the previous week of 1.7 percent. And the August U.S. manufacturing PMI posted at 53, down from 53.8 in July and the slowest rate of improvement since October 2013. The slowdown was blamed on softer new business growth and efforts to reduce finished goods inventories.
Earlier in the day, the Asian markets had also lost ground, with the Shanghai Composite Index falling 1.2 percent to 3,166, Hong Kong’s Hang Seng Index dropping 2.2 percent to 21,185 and the Nikkei 225 in Tokyo down 3.8 percent to 18,165.
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