Global sell-off sparks fears of sharper economic slowdown

 investors monitoring screens showing stock market movements at a brokerage house in Shanghai.
investors monitoring screens showing stock market movements at a brokerage house in Shanghai.PHOTO: AFP

Concerns about emerging markets and China follow US market's shock 1,000-point plunge

The sudden and brutal global selloff in markets last week has raised concerns over whether emerging markets and China could be in for a far sharper economic slowdown than expected.

World stock markets around the world plummeted on growth fears, recording their worst week of the year. What shocked many was how the US market capitulated, having held up until now even as China's slowdown, Greece's debt crisis and a plunge in emerging-market currencies roiled other markets.

That changed last Thursday and Friday. The Dow suffered a more than 1,000-point plunge last week, the largest weekly drop since October 2008, putting it in correction territory, for a fall over 10 per cent from a recent peak. It was joined by major European stock indexes. Oil prices extended their slump, with the US benchmark briefly falling below US$40 a barrel on Friday, a level not seen since 2009.

In Singapore, the Straits Times Index sank 4.6 per cent for the week to 2,971.01, below the key psychological 3,000 level.

The catalyst for the panicked sell-off was another round of disappointing economic data from China, 10 days after Beijing stunned markets by weakening the yuan. The US Federal Reserve had already added to the sense of uncertainty as the minutes of its July policy meeting highlighted concerns about developments in China.

Said OCBC economist Selena Ling: "Markets were prime for a correction over the US Fed hiking interest rates but with China throwing the latest curve ball over the yuan, there is now the added factor of policy uncertainty."

China's de facto yuan devaluation has fanned fears that its economy is in far worse shape than thought. Countries like South Korea and Vietnam now have to contend not just with flagging sales to China but tougher competition for exports. The US$1 trillion (S$1.4 trillion) of capital that has flowed out of emerging markets in the past year is also evidence of a sharp drop in investor confidence.

"The scale of the current emerging market crisis is wider than the scares in 2013 and 2014," The Telegraph quoted analysts at Danske Bank as saying. "Weak Chinese data add to depreciation pressure on the yuan and it is too early to call the bottom for emerging market currencies..."

To add to the jitters, trouble flared anew between North and South Korea and Greek Prime Minister Alexis Tsipras resigned to call for a snap election, bringing into question whether a new government can implement agreed-upon reforms for a crucial bailout.

UOB economist Francis Tan said: "Recent indicators on the global real economy front haven't been promising while the disinflationary trend across all economies appears to be continuing."

Still, strong employment numbers and other indicators suggest the US economy remains resilient.

As for China, International Monetary Fund executive director Carlo Cottarelli said yesterday that its economic slowdown and the sharp fall in its stock market herald not a crisis but a "necessary" adjustment for the world's second-largest economy. "It's totally premature to speak of a crisis in China."

A version of this article appeared in the print edition of The Sunday Times on August 23, 2015, with the headline 'Global sell-off sparks fears of sharper economic slowdown'. Print Edition | Subscribe