August 21, 2015


[Since the devaluation, China has moved to keep the renminbi from depreciating further by selling dollars. This effectively takes money out of the financial system, so the central bank has been busy this week trying to add liquidity. On Wednesday, it announced 110 billion renminbi, or about $17 billion, in new six-month loans to 14 unnamed financial institutions.]


Stock Prices around the world continued to plunge on Friday, threatening to end one of the longest bull runs in the history of the United States stock market.
A searing six-year rally in United States stocks had advanced into the summer months, shrugging off challenges like the dispute over Greece’s debt. But in the last two weeks, world markets tumbled as investors grew increasingly concerned about developments in China, which unexpectedly devalued its currency last week, and the outlook for the economies of other large developing countries.
As the selling gathered steam Friday afternoon, some benchmark indexes were at or near 10 percent below their recent peaks — a “correction” in Wall Street parlance. “This is likely going to go down as the first meaningful correction in four years,” said David Rosenberg, an economist and strategist at Gluskin Sheff.
The Dow Jones industrial average, for instance, is more than 10 percent below the high it reached in trading in May. At the end of trading, the index was down more than 500 points, a loss of about 3 percent on the day.
The Standard & Poor’s 500-stock index, a broader benchmark, fell below the psychologically important 2,000 mark. It was down 3 percent on the day and more than 7 percent below its recent peak. The Nasdaq, which contains a lot of technology stocks, fell 3.5 percent on Friday, a slide that takes the index nearly 10 percent below its latest high.
The price of oil, as measured by the benchmark United States crude contract in New York, briefly fell below $40 per barrel, and later on Friday it was trading at $40.11, nearly 25 percent below its price at the start of the year. The decline in the price of oil and other commodities may indicate that there is less demand for such commodities because economies are slowing.
The Vix, known as Wall Street’s fear gauge, spiked to its highest level since last fall, when global markets sold off on concerns about global growth.
Investors rushed into the relatively safety of government bonds. The yield of the 10-year Treasury note fell to 2.054 percent on Friday, from 2.08 percent on Thursday.
In the coming days, investors will have to decide whether the selling is part of summer squall that will soon pass – or the start of tougher times for the global economy that could weigh on stock markets for months.
“There is a relatively more ominous slowdown going on in emerging markets — and that’s what the trade is all about right now,” said Gina C. Martin Adams, an equity strategist at Wells Fargo Securities.
Officials at the Federal Reserve will also have to weigh the seriousness of the turbulence in the markets as they decide whether to raise interest rates for the first time in nine years. Raising rates as early as next month, as some investors have expected will happen, could further unnerve investors, damp economic activity and speed the flow of dollars out of developing countries. As a result, the Fed may decide to wait until later in the year, or longer.
Much, of course, depends on the strength of the Chinese economy – and an economic release on Friday could stoke further fears. Output in China’s manufacturing industry contracted in the first three weeks of August at the fastest pace since the depths of the financial crisis, according to a preliminary reading of the Caixin purchasing managers’ index. It came in at 47.1 points for August, compared with 47.8 points in July. The August figure was its lowest reading since March 2009 on a scale in which any figure below 50 indicates contraction.
“Economic recovery seems to have lost steam further in August,” analysts at HSBC in Hong Kong wrote on Friday in a research note. “Both monetary and fiscal policy makers need to move more swiftly to demonstrate easing intention and anchor market expectations.”
Markets have grown volatile since China made a surprise move last week to devalue its currency, the renminbi, by the biggest amount since 1994. On Thursday, Vietnam devalued its currency, the dong, while Kazakhstan allowed its currency, the tenge, to float freely, prompting a decline of about 25 percent.
Since the devaluation, China has moved to keep the renminbi from depreciating further by selling dollars. This effectively takes money out of the financial system, so the central bank has been busy this week trying to add liquidity. On Wednesday, it announced 110 billion renminbi, or about $17 billion, in new six-month loans to 14 unnamed financial institutions.
These measures have not been enough, however, as China’s overnight money market rates have continued to inch upward. Many analysts now think the central bank must respond more aggressively.
Shuang Ding, the head of China economic research at Standard Chartered in Hong Kong, calculates that capital outflows reached a record of $70 billion in July and have probably increased this month because of the devaluation of the renminbi.
In a Friday research report, Chen Xingdong, chief China economist at BNP Paribas, wrote, “Short term, we remain cautious.”
The main Shanghai index fell 4.3 percent, while the Shenzhen index closed 5.4 percent lower. Hong Kong’s Hang Seng index declined 1.5 percent after having given up all its gains for the year this week. The Nikkei 225 in Tokyo closed down 3 percent.

European shares were also trading markedly lower on Friday. Benchmark indexes in London, Frankfurt, Paris and Milan were all down more than 1 percent, capping a week of declines.
Positive survey data published on Friday was not enough to overcome investor doubts about whether the Continent could break out of its pattern of perennially sluggish growth, analysts said.
A monthly survey of business sentiment by Markit, a research firm, signaled a modest pickup in eurozone growth. But the survey also pointed to nearly stagnant growth in France, the eurozone’s second-largest economy after Germany.
Investors are wondering why the eurozone economy is not doing better, considering that it is benefiting from low energy prices, favorable currency rates and huge central bank stimulus, said Marie Diron, an economist at Moody’s Investors Service in London.
 “In terms of the external environment, this is a pretty positive situation,” Ms. Diron said.
At the same time, she said, the outlook for global growth has been muddied by problems in China and slower growth or recession in emerging countries like Russia and Brazil. In addition, investors are bracing for an interest-rate increase in the United States.
 “That’s not news, but I guess investors are wondering what this different environment will mean,” Ms. Diron said.
Another headwind for United States stocks is that their valuations – or the yardsticks that investors use to determine whether a company is cheap or expensive — recently climbed to demandingly high levels. This can make stocks all the more vulnerable to declines when bad news occurs or fearfulness grows among investors.
Companies are struggling to bolster their revenue, for instance. In the second quarter of this year, companies in the S.&P. 500 managed to post revenue growth of only under 1 percent — even after excluding energy companies, which have been hit hard by the decline in the price of oil. “It’s very, very slow,” Ms. Martin Adams said.

Neil Gough and Jack Ewing contributed reporting.