Alarm bells rang across world markets on Monday as a near 9 percent dive in China shares and a sharp drop in the dollar and major commodities panicked investors.At this writing, Dow futures briefly tumbling more than 700 points, as fears surrounding the health of China's economy multiplied. The Dow futures held about 650 points lower, with the S&P futures off about 70 points, and the Nasdaq 100 futures off about 5 percent, which marks the lower end of the price limit.
European stocks were almost 3 percent in the red and Wall Street was braced for similar losses after Asian shares slumped to 3-year lows as a three month-long rout in Chinese equities threatened to get out of hand.
Oil slumped another 4 percent, while safe-haven government U.S. an German bonds and the yen and the euro rallied as widespread fears of a China-led global economic slowdown and currency war kicked in.
"It is a China driven macro panic," said Didier Duret, chief investment officer at ABN Amro. "Volatility will persist until we see better data there or strong policy action through forceful monetary easing."
Many traders had hoped that such support measures, which could include an interest rate cut, would have come from Beijing over the weekend after its main stocks markets slumped 11 percent last week.
With serious doubts now emerging about the likelihood of a U.S. interest rate rise this year, the dollar slid against other major currencies.
The Australian dollar fell to six-year lows and many emerging market currencies also plunged, whilst the frantic dash to safety pushed the euro to a 6-1/2-month high.
"Things are starting look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable," said Takako Masai, head of research at Shinsei Bank in Tokyo.
As commodity markets took a fresh battering, Brent and U.S. crude oil futures hit 6-1/2-year lows as concerns about a global supply glut added to worries over potentially weaker demand from the normally resource-hungry China.
U.S. crude was last down 3.6 percent at just below $39 a barrel while Brent lost 3.7 percent to $43.74 a barrel to take it under January's lows for the first time.
Copper, seen as a barometer of global industrial demand, tumbled 2.5 percent, with three-month copper on the London Metal Exchange also hitting a six-year low of $4,920 a tonne. Nickel slid 6 percent to its lowest since 2009 at $9,570 a tonne.
GREAT FALL OF CHINA
The near 9 percent slump in Chinese stocks was their worst performance since the depths of the global financial crisis in 2009 and wiped out what was left of the 2015 gains, which in June has been more than 50 percent.
With the latest slide rooted in disappointment that Beijing did not announce expected policy support over the weekend, all index futures contracts slumped by their 10 percent daily limit, pointing to more bad days ahead.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 5.1 percent to a three-year low. Tokyo's Nikkei ended down 4.6 percent and Australian and Indonesian shares hit two-year troughs.
"China could be forced to devalue the yuan even more, should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy," said Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo.
There was further evidence that developed markets were becoming synchronized with the troubles. London's FTSE which has a large number of global miners and oil firms, was down for its 10th straight day, its worst run since 2003.
The pan-European FTSEurofirst 300 was last down 3.7 percent at 1,382.15 points, wiping around 300 billion euros ($344.61 billion) off the index and taking its losses for the month to more than 1 trillion euros.
U.S. stock futures also pointed to big losses for Wall Street's main markets, with the S&P 500, Dow Jones Industrial and Nasdaq expected to open down 2.8, 2.5 and 4 percent respectively.
It could tip the S&P 500 and Nasdaq formally into 'correction' territory - meaning stocks, at their lows, are 10 percent off their 52-week highs.
"We are in the midst of a full-blown growth scare," strategists at JP Morgan Cazenove said in a note.
Welcome to Black Monday 2015. Fear and panic are reigning now as everyone waits to see how bad things are in China and what authorities there are going to do to stabilize markets there. The People's Bank of China needs to cut rates soon but so far it has resisted calls to go ahead and cut rates (I still maintain it's around the corner, especially if this market rout continues).
Why are markets all around the world reacting so ferociously to what's going on in China? Several reasons. Sam Ro of Business Insider reports, For global markets, this chart is 'the danger':
Stock markets around the world are getting bludgeoned, and there is no shortage of reasons that may be behind it.I don't think the S&P will fall another 50% for the simple reason that we're not back in 2008 mode. I know, the crowd at Zero Hedge will have you believe this time is much worse but it isn't.
One big theme this year has been the longtime sell-off of commodities, which are more sensitive to the demands of the economy. For the most part, analysts had tied this sell-off to the slowdown in China's economy, the second largest in the world.
Interestingly, the S&P 500 has managed to decouple from commodities.
But with stocks tumbling, are we at risk of a recoupling? Because if commodity prices don't pick up, then stock prices will have to go down.
"Markets are afraid of further economic weakness in China, further pain in global commodity markets and uncertain about Fed and PBoC policy — what they will do and what the impact will be," Societe Generale's Kit Juckes wrote on Monday. "The divergence between global commodity prices and equities is not a new theme but the danger now is that they begin to re-correlate - as they did when the dotcom bubble burst in 2000 and what had previously been an emerging market crisis became a US recession."
Juckes offered this chart overlaying the S&P 500 with the CRB commodities index. He doesn't say it, but if we were to assume the lines were to meet up again, the S&P 500 would have to fall by around 50%. Again, no one's actually saying that; it's just that that's what it would take for the S&P to meet the CRB where it is now.
"The alternative view of course, is that US growth is sufficient that demand for raw materials and reductions in commodity supply will between them be sufficient to stabilize commodity prices, but in the near term, we have the Chinese slowdown leading to a commodity overshoot leading to broadening asset market weakness and deepening risk aversion," Juckes added.
To be sure, the bursting of the China bubble is extremely painful for Chinese (FXI), emerging markets (EEM), energy (XLE) and metals and mining shares (XME) and it's now spreading to pretty much every other sector including financials (XLF), technology (QQQ) and even utilities (XLU).
The panic is so widespread that the fear factor VIX index (VXX) had its second biggest jump of the year on Friday and is set to explode even higher on Monday morning (click on image):
Traders are having fun trading volatility as panic sets in but I would caution them to take their profits quickly, this isn't the big Kahuna the bears have all been waiting for.
What is going on right now is a painful shift between China and commodity-producing emerging markets, which both experienced an over-inflated bubble, and the United States which remains the most important economy in the world. I never really bought the global decoupling story which was blown way out of proportion.
We're seeing a repricing of risk, which is somewhat normal, but I still maintain fears of a crash are way overdone. Whenever you see a flight to safety which drives the 10-year Treasury yield below 2% as volatility spikes and the U.S. dollar tumbles, be on guard, things can shift very quickly.
Can it get worse? Sure it can. The unwinding of the Mother of all carry trades can be brutal and wreak more havoc on global markets but I wouldn't worry about that right now. In fact, now is the time to hone in your attention on which risk assets to buy as panic sets in.
On Friday, I recommended loading up on biotechs as I see a sharp reversal there once things stabilize but there are plenty of other great opportunities here including tech heavyweights Apple (AAPL), Microsoft (MSFT) and plenty more.
Of course, there's no rush to buy anything right now. The reality is when markets are dominated by computerized program selling based on "sophisticated" algorithms, there is no rush to jump into a waterfall.
What irks me is everyone is focused on China, oil, the Fed ("COF") but there is no reason to think markets can't overcome this as they've pretty much overcome everything else thrown at them these last few years.
As far as I'm concerned, the Fed's deflation problem remains a huge obstacle for raising rates this year. It should heed the warning of the bond king and not raise rates this year.
But maybe the problem here isn't the Fed but that markets are slowly but surely pricing in global deflation, which would explain why asset allocators are shifting out of risk assets into safe haven assets.
I don't know but it's way too early to conclude that global deflation has become fully entrenched and that the U.S. is heading the way of Japan. That is my biggest fear but right now things are overdone and there's a classic overshoot going on in markets, presenting great opportunities in risk assets.
Below, Wall Street plummeted early Monday -- with the Dow falling more than 1000 points -- as traders aggressively sold stocks and bid-up only the safest asset classes.
Relax, in these Risk On/ Risk Off markets, always remember Mr. Miyagi's advice: "Breathe in through your nose and out from your mouth. Always remember to breathe, very important!!"
Update: At mid-day, stocks staged a dramatic rebound but selling resumed in the final hour of trading. Still, indexes closed well above their lows as did many blue chip stocks like Apple, GE and JP Morgan which suffered early trading flash crashes.
Equally encouraging, the Dow Jones industrial average futures opened up more than 100 points Monday evening. Futures for both the S&P 500 and the Nasdaq 100 climbed, as well. Still, since the futures are trading below fair value, stocks still point to a slightly lower opening. We shall see if there are any good or bad surprises from China later tonight.
*** (Tuesday morning) China's central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months on Tuesday, ratcheting up support for a stuttering economy and a plunging stock market that has sent shockwaves around the globe. U.S. stock futures are up huge, indicating a very strong open.