Tuesday, February 27, 2007

Shanghai slump & the midday report

A large drop in the high-flying Shanghai Composite index has prompted investors to sell shares on Wall Street and in international markets today, as investors bail out of US and emerging market stocks.

The drop in Chinese shares was also enough to bring worries of a possible US recession and international conflict over Iran to the fore. FT.com reports:

Wall Street stocks fell sharply in early trading as a slump in China’s main stock index encouraged investors to sell riskier assets.

The biggest drop for the Shanghai Composite in a decade prompted a broad sell-off in US stocks that hit most severely at the materials, financials and consumer discretionary sectors.

Disappointing US economic data and news of falling house prices added to the markets’ anxiety and dragged the Dow Jones Industrial Average briefly into negative territory for the year.

“There are multiple catalysts driving this market lower, not least China,” said Arthur Hogan, chief market analyst at Jefferies & Co.

“There is plenty to be concerned about in a market that hasn’t taken a breather in a while. It looks like a well-contained sell-off.”

Video from FT's "Daily View" provides added commentary on the day's action.

Bloomberg weighed in on the recent correction with their report, "Emerging-Market Stocks Slide Following Plunge in Chinese Shares".

As the title suggests, Bloomberg's report on the fallout from China's market turmoil was largely focused on the impact to international and emerging-market shares. The full spectrum of opinions are offered regarding the importance of this correction; some are firmly in the "healthy correction" camp, while others are undecided.

Marc Faber, who for months now has been wary of the action in all asset and financial markets, is now shunning the emerging market shares.

``I wouldn't buy'' in emerging markets, said Marc Faber, a Hong Kong-based investor who manages about $300 million and who predicted the U.S. stock market crash in 1987. ``Something has changed in the financial market: It's the time to sell rallies rather than buy dips.''

The rout has also led to a bit of a shake up in the emerging-market debt and currency markets.

Emerging-market bonds and currencies fell as a tumble in Chinese stocks curbed investor demand for riskier assets.

The average spread for emerging-market bonds over U.S. Treasuries rose to the highest since Jan. 9 after China's main stock market index sank 9.2 percent, the biggest drop in a decade. Brazil's real, Turkey's lira and the South African rand led a slump in developing-nation currencies.

``It started off with China and then with U.S. stocks, which is leading to risk-averse behavior,'' said Matias Silvani, who helps manage $4.7 billion of emerging-market debt at JPMorgan Asset Management in New York. ``In times like these, correlation across markets increases.''

Emerging-market bond yield spreads surged 8 basis points to 1.8 percentage points at 11:49 a.m. in New York, leaving them up 16 basis points from a record low of 1.64 points on Feb. 22, according to JPMorgan Chase & Co.'s EMBI Plus index. A basis point is 0.01 percentage point.

Risk appetites are being quickly reexamined. Stay tuned for more.