NATHANIEL POPPER and NEIL GOUGH
Stocks around the world tumbled in volatile trading on Monday, leaving investors to wonder how much government officials can and will do to insulate the global economy from the turmoil.
The upheaval in the markets began with another rout in China that drew comparisons to the 1987 crash in the United States known as “Black Monday.”
Concerns about China’s ability to be a powerful engine of global economic growth have added to worries about the potential impact of higher interest rates in the United States, driving stocks sharply lower in Asia and Europe.
But early Tuesday, after a three-day rout that erased nearly $3 trillion in value from stocks globally, markets showed signs that selling pressures were easing.
Volatility continued to dominate early trading in Asia, but many regional markets swung from losses to gains on Tuesday for the first time in days. Stocks in Japan opened sharply lower but had recovered by late morning, while shares in Australia, Hong Kong, Singapore and South Korea were staging a modest rally.
Across Asia, the free-fall of the past few days appeared to have ended — except in China, where Shanghai stocks opened 6.4 percent lower after Monday’s 8.5 percent plunge.
The tumult has had many analysts grasping for explanations, given the lack of any significant new data that would explain the big market moves.
On Monday, the steepest losses in the New York markets ended within minutes after opening, with share prices spending the rest of the day sharply rising and reversing course multiple times. When the day’s roller-coaster ride ended, the benchmark for stocks, the Standard & Poor’s 500-stock index, was down 3.9 percent. That left the index off 11 percent from its May high, in what in market parlance is called a “correction,” its first since 2011.
Beyond the questions about what exactly caused Monday’s moves, the recent market turmoil has now led many investors to turn their focus to the government officials who have become the most important players in the market since the financial crisis.
In particular, there is a growing debate among market participants about whether the Federal Reserve will still follow through with plans to push interest rates higher, an action that was expected to begin in September. The market turmoil has led some, including Lawrence H. Summers, a former chief economic adviser to President Obama, to call for the central bank to reconsider those plans.
“Everything is going to be dictated by government policy,” said Kevin Kelly, the chief investment officer of Recon Capital Partners. “Whatever noise is coming from policy makers is going to determine the next couple weeks.”
Fed officials could give some indication of their thinking later this week when they gather for an annual conference in Jackson Hole, Wyo.
At an event on Monday, the president of the Atlanta Fed, Dennis Lockhart, said that recent developments “are complicating factors in predicting the pace of growth,” though he said he still expected rates to rise this year.
Investors have also been looking to Beijing. Over the weekend, there were expectations that the Chinese government would take more aggressive steps to stem the recent declines in the Chinese stock market and the renminbi, the country’s currency.
Previous moves, though, did little to beat back concern about a weakening Chinese economy, and Chinese officials declined to do anything significant on Monday.
The debates in both China and the United States have often turned to more worrying questions about whether the levers that central bankers use to influence the markets are losing their power after years of extensive intervention.
With all the hand-wringing, however, many investment advisers have been urging clients to ignore the recent swings.
And although a number of American companies stand to be hurt by any weakness in China, recent data has suggested that the economy in the United States is continuing to gain strength.
Even apart from the problems in China, many analysts have said that high-flying American stocks were due for a pause after the steady upward climb that has characterized the American stock market over the last four years.
Still, the violent swings in stocks have left many investors unnerved.
“We take the sell-off very seriously as this unfamiliar mix of emerging market uncertainty, deflationary pressure, central bank interference and extreme volatility is hard for global markets to digest,” Mark Haefele, the chief investment officer for the UBS wealth management arm, wrote in a note to clients.
Wall Street’s so-called fear gauge, theVix, rose Monday morning to its highest level since 2009.On Monday, the Shanghai composite index closed down 8.5 percent. In Europe, benchmark indexes in Germany, Britain and France fell nearly 5 percent or more. A number of emerging markets were also lower, with leading indexes in Brazil and Indonesia both down around 4 percent.
In the United States, the Dow Jones industrial average plummeted 1,000 points before regaining ground. It ended the day down 3.6 percent, or 588.40 points, to 15,871.35. The Standard & Poor’s 500 index fell 3.9 percent, or 77.68 points, to 1,893.21. The Nasdaq composite index closed down 3.8 percent, 179.79 points, to 4,526.25.
The Treasury market was a beneficiary of the fear in stocks. The demand for bonds pushed the yield on the benchmark 10-year Treasury note to as low as 1.90 percent before it settled at 2.01 percent.
The recent market tumult began two weeks ago when the Chinese government unexpectedly allowed the value of its currency to drop, partly in response to indications that the country’s economy is weakening.
The Chinese moves played into the continuing drop in the price of oil, which has taken the price of a barrel of crude oil down 65 percent over the last year. On Monday, the price of oil, as measured by a benchmark New York contract, dropped below $40.
Get news and analysis from Asia and around the world delivered to your inbox every day in the Asian morning.The selling in China has accelerated despite extraordinary government intervention in the last two months aimed at propping up share prices. On Sunday, the Chinese government said that the country’s pension funds would be allowed to invest in stocks for the first time. But the slide on Monday highlighted that the new policy, and several similar recent moves, have not been successful.
Many investors are now hoping that the central bank, the People’s Bank of China, will cut the ratio of deposits that banks are required to keep on reserve in a bid to encourage lending and spur economic growth.
In the meantime, there are big questions about whether China’s stock market plunge will make the Chinese economy, the world’s second-largest after that of the United States, even weaker.
Xu Sitao, the chief China economist in the Beijing office of Deloitte, said in a speech in Hong Kong that the effect on the economy could be muted because equities represent only 7 percent of the overall wealth of urban Chinese households, which continue to rely heavily on real estate in their holdings.
In the United States, too, economists were hopeful that the activity in the markets would not spread to the broader economy.
“For now we believe the positive factors will win out,” Mr. Haefele of UBS wrote in his note to clients. “But market shocks of this magnitude have the potential to overpower fundamentals so we need to remain vigilant.”
© 2015 The New York Times Company