Tuesday, February 27, 2007

China Slump Fuels Wall St. Meltdown

News Article
February 27, 2007

BusinessWeek Logo

China Slump Fuels Wall St. Meltdown

The Dow slumped over 500 points at one point before staging a partial recovery. All eyes are on the Asian trading session Wednesday

Is this the long-awaited U.S. stock market correction, or is there more pain to come? Stocks were sharply, broadly lower in heavy trading Tuesday, with major U.S. stock indexes each down over 3%. Bonds soared as investors fled stocks for the less risky confines of the Treasury market.

What sparked the sell-off? A plunge in China's stock exchange rippled across global markets, spurring big declines in bourses worldwide. A disappointing report on U.S. durable goods orders fanned concerns about a slowing economy.

When the dust settled after a session marked by extremely heavy trading volume, the Dow Jones industrial average tumbled 416.02 points, or 3.3%, to 12,216.24, after being down by more than 500 points at one juncture. Each of the 30 member stocks posted losses, with heavy hitters Disney (DIS) and General Motors (GM) each losing over 5%.

The broader Standard & Poor's 500 index dropped 50.33 points, or 3.47%, to 1,399.04. The tech-heavy Nasdaq composite was the biggest percentage loser on the day, slumping 96.65 points, or 3.86%, to 2,407.87.

Losses were accompanied by an enormous jump in volume on the NYSE and Nasdaq Composite indexes, notes S&P MarketScope, signaling institutions were likely liquidating long positions.

Trading was exceptionally volatile in the session's last hour, with the Dow falling over 500 points -- its worst intraday loss since September, 2001 -- before snapping back somewhat.

The Dow's dizzying 200-point drop around 3:00 pm ET was triggered by a tabulation delay by Dow Jones data systems, according to wsj.com.

Market internals were extremely bearish. NYSE breadth was 29-5 negative, with up/down volume was nearly 90-1 negative. On the Nasdaq, breadth was 28-3 negative, and up/down volume was nearly 11-1 negative.

The unpleasantness started overnight in Shanghai, where the benchmark index tumbled 8.8% Tuesday amid worries about possible government action to cool the market. The benchmark closed at a record high a day earlier. According to a Bloomberg report, the State Council, China's highest ruling body, has approved a special task force to clamp down on illegal share offerings and other banned activities in the market.

Regulators clearly responded to the frothy gains in Chinese exchanges. Beijing must pay attention to "bubbles" in its stock market before they get out of hand, Cheng Siwei, vice chairman of the Nation's People Congress, wrote in a commentary published in the Chinese-language Financial News.

The market's worries were't limited to China. "The perfect storm of geopolitical stress via Iran, Chinese asset reversal, and lingering concerns about the subprime mortgage market" raise concerns about a global growth downturn, according to Action Economics.

The acid test for global markets may well be how the Asian markets fare in Wednesday trading.

In U.S. economic news, durable goods orders tumbled 7.8% in January, much more than expected, erasing a cumulative 5% gain in November and December.

Investors ignored some good economic news. U.S. existing home sales rose 3% to 6.460 million in January, after an upwardly revised 6.27 million rate in December.

And the Conference Board's consumer confidence index rose to 112.5 in February, a new five-year high, from a downwardly revised 110.2 in January.

Among Tuesday's stocks in the news, Xerox (XRX) was lower after the copy machine maker cut its first-quarter profit forecast, citing restructuring costs.

General Electric (GE) was slightly lower even though UBS raised its rating on the stock from neutral to buy.

Shares of Apple (AAPL) fell after the iPod maker announced its highly anticipated Apple TV device will be delayed.

In earnings news, retailer Target (TGT) was lower despite reporting higher fourth-quarter profits.
Brocade Communications (BRCD) was higher, helped by upgrades at Goldman Sachs and Bear Stearns, after the network equipment maker said fiscal first-quarter profit rose sharply.

Sirius Satellite Radio (SIRI) was lower despite logging a narrower fourth-quarter loss.

Federated (FD) fell after the department-store operator posted a 5% uptick in fourth-quarter earnings and announced plans to change its name to Macy's Group.

Fellow clothing retailer Nordstrom (JWN) was lower on a disappointing fourth-quarter earnings report.
Elsewhere, Freddie Mac (FRE) said it will no longer buy some subprime mortgages as the mortage lender tightens its lending standards.

In the energy markets, April West Texas Intermediate crude oil futures rose 7 cents to $61.46 a barrel to reach a fresh closing high for 2007. S&P MarketScope notes that economists said the overnight 9% Chinese stock market slide didn't mean that country's economy would slowdown and cut demand for oil.

European markets also caught the Chinese flu, finishing sharply lower Tuesday. Investor sentiment was also dinged after the Bank of France warned of excessive liquidity. The FTSE-100 index in London fell 148.6 points, or 2.31%, to 6,286.1. Germany's DAX index dropped 207.94 points, or 2.96%, to 6,819.65. In Paris, the CAC 40 index was down 174.15 points, or 3.02%, to 5,588.39.

Asian markets ended lower amid China's biggest tumble in 10 years on a government trading crackdown. In Japan, the Nikkei 225 index shed 95.43 points, or 0.52%, to 18,119.92. In Hong Kong, the Hang Seng index tumbled 360.8 points, or 1.76%, to 20,147.87. Korea's Kospi index slid 15.43 points, or 1.05%, to 1,454.6.

Treasury Market
Treasuries soared Tuesday as investors sought the relative safety of government debt amid the China sell-off and the U.S. and european market routs. The benchmark 10-year note fell 32/32 to 100-01/32 for a yield of 4.49%. The 30-year bond skyrocketed 58/32 to 102-06/32 for a yield of 4.61%.

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