NikkeiShizuo Kambayashi
World stocks sank Wednesday, with European indexes spooked by a 5 per cent drop in China that strengthened fears stocks have become overpriced after this year's powerful rally.
With a lack of new economic data across most of Europe, investors focused on the heavy losses in Asia, driven by fears that the Chinese government's easy credit policy to support the economy will not fuel a sustainable recovery there.
Germany's DAX fell 65.60 points, or 1.3 per cent, to 5,185.14 while Britain's FTSE 100 dropped 31.55 points, or 1.2 per cent, to 2,599.05. France's CAC-40 fell 31.02 points, or 0.9 per cent, to 3,419.67.
Wall Street appeared headed down as well. In futures trading, Dow industrials futures were down 86 points, or 1.0 per cent, at 9,121 and Standard & Poor's 500 futures lost 9.9 points, or 1 per cent, to 979.70.
In Shanghai, the main index plunged over 5 per cent at one point before closing down 125.30 points, or 4.3 per cent, to 2,785.58.
The drop came on the heels of a steep fall in world markets Monday, when investors were dismayed by weakness in American consumer spending. That seemed to many to augur an end to the five-month rally that has boosted some benchmarks over 50 per cent.
"We've had a very strong run and people are a little unnerved by what's going on in China, so it seems like a good opportunity to take some money off the table," said Adrian Mowat, chief Asian and emerging market equities strategist at JP Morgan in Hong Kong.
China's benchmark index has lost nearly 20 per cent since Aug. 4 on worries about corporate profits, the strength of China's recovery and possible changes in Beijing's easy credit policy that has helped to fuel the bull run in Chinese stocks this year.
"Investors are afraid there are no fundamentals to support the rally," said Cai Xiang, a Sinolink Securities analyst in the western city of Chengdu.
World stock markets have mostly been rising since March on relief that the economic crisis will be shorter than previously feared. But once many indexes reached new highs for 2009, analysts started wondering whether stocks are overvalued. Considering trading volumes are limited by the summer holiday season, the uncertainty has caused markets to hover in a range over the past few weeks.
Stuart Bennett, senior foreign-exchange strategist at Calyon in London, said European stocks may be overreacting to the Chinese market movements. He said losses may be short-lived, considering the speed with which Monday's sharp drop was quickly stabilized on Tuesday.
"The ups and downs over the past few days and the inconsistent reaction to data and news still leads to the conclusion that the market does not know which way to point," he said.
In Britain, minutes published from the Bank of England's latest policy meeting showed three rate-setters wanted a larger monetary stimulus than announced. Led by governor Mervyn King, the three policmakers wanted to increase the amount of quantitative easing, or increasing the supply of money in the economy, by £75-billion, not just £50-billion. That suggests the central bank may not be done with efforts to spur the economy.
"If the recovery is weaker than the Monetary Policy Committee (MPC) expects, there is a good chance that the MPC will extend the quantitative easing program again in November," said Vicky Redwood, economist at Capital Economics.
Elsewhere in Asia, Japan's benchmark Nikkei 225 stock average lost 80.96 points, or 0.8 per cent, to 10,204.00. Hong Kong's Hang Seng shed 1.7 per cent to 19,954.23.
South Korea's Kospi fell 0.3 per cent, India's Sensex was 1.3 per cent lower and Taiwan's index was flat. Australia's benchmark lost 0.2 per cent. Indonesia's market, another investor favorite this year, was down 2.7 per cent.
Oil prices fell in Europe, losing 22 cents to $68.97 a barrel. On Tuesday, the contract gained $2.44 to settle at $69.19.
The U.S. dollar fell to 94.29 yen from 94.70 yen, while the euro fell to $1.4102 from $1.4131.