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China's growth worries and credit tightening sent ripples across global stocks on Monday with major U.S. stock indices, in particular, dropping 1 percent on the back of a 2-percent decline last week.
Traders believe that although markets of the two economies are more interrelated, China will not be the sole factor to impact the U.S. market. U.S. stocks, which are oversold on a near-term basis, will retain its resilience and bounce back.
Global stocks slump on China worries
A cash crunch in China's banking sector as well as China's slowing growth fueled fears of a possible tapering of the U.S. Federal Reserve's quantitative easing later this year, which sent global stocks to plunge on Monday
The Dow Jones Industrial Average slipped 139.84 points, or 0.94 percent, to 14,659.56 points. The S&P 500 shed 19.34 points, or 1.21 percent, to 1,573.09 points. The Nasdaq Composite Index fell 36.49 points, or 1.09 percent, to 3,320.76 points.
"Today's initial sell-off (of the U.S. stock market) was just about people trying to guess when the Fed was actually going to stop the bond- buying program, it was also about what's going on in China," Keith Bliss, senior vice president and director of sales and marketing at Cuttone & Company, told Xinhua.
Joseph C. Greco, managing director-trading & sales at Meridian Equity Partners in New York, said, "Clearly, right now we are chasing each other's tail down lower."
China's benchmark Shanghai Composite Index tumbled 5.3 percent on Monday, the biggest drop since August 2009. The Chinese benchmark stock index lost over 20 percent from its previous peak to enter a bear market.
Other Asian markets and European shares also experienced a broad-based sell-off on Monday amid China's credit tightening, propelling the fear gauge of European investors to a four-month high.
The People's Bank of China (PBOC), China's central bank, said Monday in a statement that the country's liquidity remains at a "reasonable" level and commercial banks should strengthen liquidity management. The statement came in a day after the PBOC pledged to continue to implement a prudent monetary policy while fine-tuning it at a proper time.
The PBOC dampened market expectations that it would inject cash into the financial system to cool down spiking domestic inter-bank lending rates and address a slower economic growth.
Adding to the woes, investment bank Goldman Sachs downgraded its forecasts on China's economic growth to 7.4 percent from the previous 7.8 percent for 2013 and cut its 2014 GDP growth to 7.7 percent from 8.4 percent.
More interrelated U.S., Chinese markets
It is not hard to understand the growing impact of China and the Chinese market on the U.S. and other markets as the world's second largest economy is emerging as a major economic power.
"Traditionally, the U.S. markets have always driven behavior around the globe. I think that has changed somewhat over the last 10 years as the Chinese market and economy have become such a bigger part of what we do globally," Bliss said.
"There are too many interrelationships between the two countries' economies ... We may have political, cultural and ideological differences, but from an economic standpoint, the two countries are coming together very quickly," he added.
However, China is not a sole fundamental factor that will impact the U.S. market. Looking back on the U.S. market's massive run at the beginning of this year, it is fair to say the U.S. market is largely driven by the Fed's stimulus and improving fundamentals of the U.S. economy.
Volatility on the U.S. market spiked after Fed Chairman Ben Bernanke said in a testimony before Congress on May 22 that the Fed may start scaling back asset purchases in the next few meetings. The CBOE Volatility Index, a gauge widely used to measure investor anxiety, has soared over 50 percent since then.
"The U.S. market is trading based upon Fed's behavior and will react to noises coming out of the Fed," Bliss said.
The market's Fed-driven character was partially revealed when it recouped some of the losses on Monday morning following several Fed officials' dovish comments.
Dallas Fed President Richard Fisher said Monday that he was not "in favor of going from wild turkey to cold turkey overnight," when commenting on the Fed tapering policy. While Minneapolis Fed President Narayana Kocherlakota said it was a misperception to view the central bank as more hawkish in its views on scaling back quantitative easing.
In addition, New York Fed President William Dudley said Monday the U.S. monetary policy, though aggressive by historic standards, was not sufficiently accommodative relative to the state of the economy.
A more resilient U.S. market
The U.S. market has become far more resilient than it was before the financial crisis. Since the end of last year, it has overcome a string of challenges such as the so-called "fiscal cliff" and U.S. government's sequester cuts. It has also weathered external risks such as the Cyprus banking crisis, the Italian election gridlock and slowdown in emerging markets.
"There will be a point where money recognizes and smart money recognizes that everything is permanently and inextricably linked, therefore they will realize buoyancy and resilience of the U.S. equity market over perhaps the Chinese market," Greco said.
"Global investors are seeking safety and seeking secure markets to place their money. And when that happened, they go to the market which exhibits the most resilience and the greatest amount of strengthen. Security is here in the U.S. right now," Greco said.
Most traders think U.S. equities are oversold since the Fed's June meeting last week, when Bernanke said the central bank may moderate its pace of bond purchases later this year and may end the purchases in mid-2014 if economy continues to improve.
The U.S. market gets oversold on a short-term basis on Bernanke's "exit" timetable, Bliss said, the U.S. stock market is going to lift back up and the dip right now provides a good opportunity to buy.
Traders and analysts generally believe the U.S. equity market has a limited upside at current levels, and volatility will be a keyword for trading in the near term.
"I think by the end of the year we will be back near the highs, but I don't think we'll eclipse the highs that we've already set so far," Greco said.
Year to date, the major stock indices was still up over 10 percent despite a roughly 5 percent retreat from their all-time highs set on May 21.
