US markets rally fizzles as China worries persist

Traders working on the floor of the New York Stock Exchange on Aug 25, 2015, in New York City.
Traders working on the floor of the New York Stock Exchange on Aug 25, 2015, in New York City.PHOTO: AFP

NEW YORK (AFP) - The global markets rebound fizzled out on Wall Street on Tuesday (Aug 25) as investors locked in gains and took cover from more possible turmoil.

What appeared one hour before the close of New York trading as a solid comeback, after the global “Black Monday” onslaught of selling, turned into a sixth straight day of losses on US markets.

Investors across most of Asia, Europe and Latin America took encouragement from the Chinese central bank’s move to slash interest rates for the fifth time in nine months to shore up the world’s second-largest economy.

With the exception of Shanghai (-7.63 per cent) and Tokyo (-3.96 per cent), the gains were strong in major bourses.

Frankfurt and Paris closed up more than 4 per cent, while London gained 3.09 per cent.

Wall Street appeared on track for the same, trading up nearly 3 per cent early in the session.

But selling took hold late, raising questions about the firmness of the wider rebound in equities, oil and some other commodities.

The S&P 500 ended down 1.35 per cent, after Monday’s nearly 4 per cent plunge. The Dow gave up 1.29 per cent.

“Nerves are frayed after what happened yesterday,” said Mr Bill Lynch of Hinsdale Associates. Monday’s rout wiped about US$2.7 trillion (S$3.8 trillion) off global equity values in bourses from Sydney to London to Buenos Aires.

Tuesday opened with more worries, with Chinese and Japanese markets sinking. But the rate cut from the People’s Bank of China raised hopes that Beijing will do what is needed to stabilise the economy.

Even Hong Kong’s market, closely tied to China, managed a 0.72 per cent gain.

French President Francois Hollande said he trusted that “Chinese authorities will overcome this stock market crisis”.

But British Finance Minister George Osborne warned that the global economy could not be immune.

“These dramatic movements in recent days are telling us there are still lots of risks out there in the global economy and there are particular concerns about what’s going on in China. It means we’re not immune to what goes on in the world,” he said.

For those closer to the markets, the question was also about the economic linkages.

“Monday’s sell-off may have been overdone but the underlying fears remain,” said Mr Craig Erlam at trading firm Oanda.

“The Chinese economy is slowing and the more we see its markets collapse, the more concerned investors are going to become.”

“We have seen before that these large crashes can either spark or act as a warning of a global recession, and given how fragile many economies still are, it would be naive to think the same couldn’t happen again.”

Most vulnerable are emerging-market economies, which have seen a huge outflow of capital especially since Beijing took a surprise step to devalue the yuan against the US dollar two weeks ago.

After slipping for a few days, the currency has been stable since then, but the worries the devaluations gave birth to – that leaders in Beijing are not fully on top of their problems – remain.

“What we are facing now is the increasing uncertainty over the ability of the Chinese authorities to manage the transition in China,” said Mr Angel Ubide, an economist at the Peterson Institute for International Economics.

Chinese Premier Li Keqiang insisted on Tuesday there was no basis for the yuan currency to weaken further and said the exchange rate would be maintained at a “basically stable” level, state media reported.

Analysts were still hopeful that the US economy and markets can hold up amid the turmoil.

“I think it will take a while for the market to heal because of the technical damage that was done,” said Mr Lynch.

“It’s going to be volatile for sure, but I would hope that two or three months out, the market will have solidified and stabilised, and hopefully be higher than where it is today.”