China’s “Black Monday” Wipes Out Global Markets

In an effort to limit capital flight, the People’s Bank of China announced it would pump an additional 150 billion yuan ($US 23.4 billion) into the financial markets and cut interest rates for the fifth time since November.
At Woodbridge Research, we are dedicated to keeping investors informed, and this week has been monumental in terms of stocks as up to a trillion dollars was wiped from the global stock markets, a result of a massive selloff in China.

The rout in equities, commodities and currencies began early Monday morning in Asia and extended throughout the globe. The day, quite fittingly dubbed “Black Monday,” saw China’s benchmark Shanghai Composite Index plunge 8.5% – its biggest drop since 2007 – on renewed fears that China’s economic slowdown was intensifying.

The panic quickly spread to Europe, where shares slumped more than 5%, resulting in the worst daily closing performance since 2008. And, the US markets were equally volatile, with the Dow Jones posting its biggest midday swing on record before closing on losses of nearly 600 points. The large-cap S&P 500 declined nearly 80 points or 3.9%. Moreover, the CBOE VIX Volatility Index – a.k.a. the “investor fear gauge” – surged 93% to 53 after the opening bell – its highest level since 2009.

Next, “Black Monday” saw oil prices plumb more than six-year lows. US benchmark West Texas Intermediate (WTI) fell below $39 a barrel on the New York Mercantile Exchange – its lowest level since February 2009. International benchmark Brent crude settled at a six-year low on the ICE Futures exchange in London.

How did the events affect currencies? Well, the US dollar suffered heavy losses against global peers and posted its biggest single-day drop against the yen since 1998. The dollar index, a weighted average of the greenback against six global currencies, closed down 1.7%.

On Tuesday, Chinese stocks plunged even further, rounding out the worst four-day performance for the Shanghai Composite since 1996.  In an effort to limit capital flight, the People’s Bank of China announced it would pump an additional 150 billion yuan ($US23.4 billion) into the financial markets and cut interest rates for the fifth time since November. The announcement helped lift European shares, but did little to boost the American averages, which sunk deeper into correction territory.

The dramatic fall in global markets over the past two days are an extension of the financial turmoil that has been brewing since China unexpectedly devalued its currency, the yuan, on August 11. Since that day, more than $5 trillion has been wiped from global equities. China’s abrupt decision to devalue its currency for the first time in more than two decades came just three days after official data showed the country’s exports plunged 8.3% in July.

Concerns about a protracted slowdown in the world’s second-largest economy have been brewing for a while. China’s gross domestic product – the value of all goods and services produced in the economy – expanded 7.4% in 2014, the slowest pace in 24 years and barely missing Beijing’s official target of 7.5%. China’s economy weakened again in the first quarter of 2015, rising at the slowest rate since the 2009 financial crisis.

Many analysts contend that this lower Chinese economic growth could further depress oil prices, which will continue to impact export-oriented nations like Canada, Australia and OPEC member-states. As a major source of global economic growth, a weaker China is likely to continue to weigh on investor confidence, resulting in a longer period of instability.

However, China’s central bank has repeatedly intervened in the financial markets to curb intensifying capital flight and lift investor confidence. But, after spending more than $200 billion buying Chinese stock in less than two months, the PBOC has had limited success in boosting investor morale. With China’s GDP growth unlikely to hit 7% this year, the latest bout of volatility won’t likely be the last.

So, what does all of this mean for commercial real estate investors?  That still remains unclear.  Some analysts believe that Chinese investors may hasten their buying of United States assets, as it is a much more stable market.  However, others wonder if the fallen value of the yuan may cause investors, particularly those interested in luxury real estate, to pump the breaks. 


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