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The Cable

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Black Monday: Global Panic Sets In as the Dow Drops 1,000 Points at the Opening Bell

The Dow experienced its biggest one-day drop as concerns about China's economic slowdown grow.

By David Francis

August 24, 2015, 12:05 PM

The Dow Jones Industrial Average dropped more than 1,000 points in the first minutes of trading Monday, the latest sign that the United States is experiencing aftershocks from the roiled economy in China, the world’s second-largest economy.

An hour into trading, the Dow rallied to pare back some of its losses; by 12:10 p.m. in New York, it was down 219 points, or about 1.3 percent. But the dramatic drop at opening, which follows the Dow and S&P 500’s worst week since 2011, is historic in its size. The Dow had never dropped more than 800 points in a day. In three months, the equities index has gone down from 18,041 to 16,240.

China is the clear reason for Monday’s sell-off. The Shanghai Composite Index dropped another 8.5 percent Monday, the biggest one-day loss since 2007. Officials in Beijing have been unable to stop the rout; Chinese stocks are down nearly 40 percent since June, despite Beijing’s recent decision to devalue its currency, allowing it to float to the lowest level in 20 years.

Now, there are increasing concerns that China, which saw an 8-percent drop in exports year-to-year in July and whose manufacturing sectors have shrunk to their lowest levels since 2009, would not be able to meet a 7-percent growth forecast for 2015.

“The target is now looking overly ambitious, and the most sensible way forward would seemingly involve further currency devaluation … and fiscal stimulus,” IG’s market analyst Angus Nicholson wrote in a research note.

Monday’s sell-off could have an impact on U.S. monetary policy. Fed chief Janet Yellen has hinted that she could raise interest rates from zero percent in the coming months, the first time the cost of borrowing from the U.S. Central Bank would go up since before the Great Recession. Monday’s meltdown could stop the Fed from raising rates in September. It’s widely thought that a rate increase will come in December, if not September.

“A reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives: price stability, full employment and financial stability,” former U.S. Treasury Secretary Lawrence Summers wrote in a Sunday op-ed in the Washington Post.

But the broader question is whether China’s slowdown could be contained. If Monday’s letting is any indication, the answer is no.

In Germany, the DAX was down 4 percent Monday. In the United Kingdom, the FTSE 100 dropped 4.5 percent. Commodity prices are now at their lowest levels since the end of the 20th century, according to the Bloomberg Commodity Index. Global stocks have now lost $5 trillion since China devalued its currency on Aug. 11.

British Finance Minister George Osborne on Monday said China’s economic slump was a “real concern,” but added that although he didn’t think Europe would “be unaffected by what happens in China, I don’t think it’s going to cause immediate sharp problems in Europe.”

Photo credit: Philippe Lopez/Getty Images