Markets Slump Over Fed Exit Plan and China Credit Squeeze
By DAVID JOLLY
The S.&P. 500 ended down 2.5 percent and the Dow fell 2.3 percent
over concern about a credit crunch in China and uncertainty about the
Federal Reserve’s plans for withdrawing its monetary stimulus efforts.
Markets Slump Over Fed Exit Plan and China Credit Squeeze
By DAVID JOLLY
Published: June 20, 2013
PARIS — Global markets tumbled on Thursday over concern about a credit
crunch in China and uncertainty about the United States central bank’s
plans for withdrawing the monetary stimulus upon which the American
economy has become dependent.
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China Facing Cash Squeeze as Rising Rates Crimp Lending (June 21, 2013)
Just a day after the Federal Reserve hinted that it could soon begin
winding down its bond-purchasing program, investors were unnerved by
reports that Chinese banks had become reluctant to lend to one another, causing interest rates in the interbank market to spike to punishingly high levels.
On Wall Street, the broad-based Standard & Poor's 500-stock index
ended down 2.5 percent Thursday, the Dow Jones industrial average
dropped 2.3 percent — more than 350 points — and the Nasdaq composite
index shed 2.3 percent. On Wednesday, the S.&P. 500 fell 1.4
percent.
The pain was also felt in the bond market, with yields on government
bonds, which move in the opposite direction of the price, surging
worldwide. The 10-year United States Treasury bond was yielding 2.380
percent, up 2.8 basis points. A basis point is one-hundredth of a
percent. Expectations that interest rates will rise tend to depress the
prices of existing securities.
A purchasing managers’ report
added to fears that China, which has been an engine of growth in the
world economy, might not be able to carry the load indefinitely. The
report suggested Chinese manufacturing was contracting.
“There’s been a lot of focus on the market rates in China,” said Laurent
Fransolet, a European rate strategist at Barclays in London. “Whether
it’s a full-fledged credit crunch remains to be seen.”
Analysts at Nomura International noted that one rate, known as the
seven-day repo rate, rose to as high as 25 percent on Thursday, compared
with just 4 percent a month ago, as the Chinese central bank declined
to smooth the market.
“But the main driver here has been the aftermath of the Fed,” Mr.
Fransolet said about the global stock activity. “We’re still seeing the
ripples of that.”
In Europe, the benchmark Euro Stoxx 50 index fell 3.1 percent, while the FTSE 100 in London ended down 3 percent.
In Asian trading, the Shanghai Stock Exchange composite index fell 2.8
percent. The Nikkei 225 stock average in Tokyo dropped 1.7 percent, the
Hong Kong benchmark Hang Seng Index declined 2.9 percent and the
S&P/ASX 200 index in Sydney fell 2.1 percent.
Gold futures dropped 6.2 percent, to $1,288.40 an ounce. The euro fell
0.6 percent, to $1.3220, while the dollar rose 1.6 percent, to 97.98
yen.
Markets had already been jittery after hearing about the Federal
Reserve’s plans to end the special operations it has been using to add
liquidity to shore up the financial system. On Wednesday, Ben S.
Bernanke, the Federal Reserve chairman, said the Fed hoped to begin reducing the size of its monthly bond purchases by the end of 2013 and end the program as soon as the American jobless rate fell to 7 percent.
Mr. Fransolet said investors had become accustomed to the so-called
quantitative easing policies used by central banks to provide liquidity
and support asset prices. In recent years, he said, markets faltered
when the authorities talked about ending those policies and the central
bankers had then backtracked.
But this time, he said, investors have grasped that the Fed is much more confident.
“That’s something the markets need to take on board,” Mr. Fransolet said. “That’s a big change from the last few years.”
The sell-off Thursday came in the face of economic news that showed an
improving trend, if not actual growth, in the European economy. Markit
Economics said its purchasing managers’ composite output index for
the euro zone rose to 48.9 in June from 47.7 in May, bringing the index
to its highest level in 15 months. While an index level below 50
suggests economic contraction, the fact that the index has been ticking
upward for three straight months indicated Europe may be on the way out
of recession.
Chris Williamson, Markit’s chief economist, said the data signaled
“stabilization in the third quarter and growth appearing in the fourth.”
London stocks fell as the Bank of England said British banks needed to raise their capital
by another 13.4 billion pounds, or $20.7 billion, this year to improve
their finances. The Bank of England made the announcement on the same
day that euro zone finance ministers convened in Luxembourg, where
banking issues were to be at the top of the agenda.
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