Only one day after Henry wrote “… some market spruikers are saying ‘This time it’s different!’… though there are plenty of Cassandras saying a big correction is overdue”, it appears the Cassandras were right.

Following from the lead in Shanghai, Wall Street suffered the worst single day since the fall of the Twin Towers. When the markets had closed, the Dow Jones industrial average had lost 415.86 points, or 3.29%, to settle at 12,216.40, including 200 points in a minute at around 3pm.

This New York slump came after China’s benchmark Shanghai composite index plunged 8.8% to 2,771.79 – the worst single day in over a decade. According to reports, China’s highest ruling body, the “State Council”, has set about creating a taskforce to combat illegal share offerings and other banned activities in the market. Cheng Siwei, the vice chairman of the “Nation’s People Congress”, also wrote that Beijing would be focusing attention on potential stock market bubbles before they get out of hand. There are also rumours that the Chinese Government may be ready to hike interest rates to cool the economy. These, when taken together, sent a collective “Arrrrggghhh, Chinese Slowdown!” through global markets.

However, international markets were not only concerned about China. The ongoing concern surrounding Iran’s refusal to halt uranium enrichment has added upward pressure to oil stocks (although the purported China slowdown led to a significant fall in after-hours electronic trading) which adds to inflationary pressure.

Former Fed Chairman Alan Greenspan also added to the malaise by mentioning the R-word – recession – “When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign…While yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown,” he said.

Compounding Greenspan’s pessimism was a US Government report showing new orders for U.S.-made durable goods fell by a much sharper-than-expected 7.8% in January. Indeed, non-defence goods orders saw their biggest monthly decline ever.

While Henry has to admit that he gets some sort of sick pleasure watching scenes of frazzled share traders tearing their hair out, it is obvious that one day’s fall does not make a correction. Of course, the real optimists will be singing “buy buy, baby, buy buy”.

We will soon see if the one day plunge will turn into a full-blown correction, with important data including US new home sales, fourth preliminary fourth quarter US GDP, personal consumption spending and US construction spending all being released in coming days.

Read more at Henry Thornton.

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW