China Selloff Shakes Markets Around World

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Includes: AGG, DIA, SPY
by: Judith Levy

U.S. and global markets dropped sharply yesterday following a massive selloff in China. After the Shanghai market closed down 8.8%, its biggest one-day drop in a decade, the DJIA skidded 3.3%, the S&P 500 3.5%, and the Nasdaq 3.9% in their most precipitous collective drop since the September 2001 terrorist attacks. The Nikkei 225 index fell 3.6% and Hong Kong's Hang Seng Index was off 3.8%. U.S. markets were already jittery about the implications of a deteriorating subprime mortgage market and concerns over the economy. Those concerns were fed by a disappointing January durable goods report and comments by former Fed Chairman Alan Greenspan, who said on Monday he considers a recession likely in the U.S. Tuesday's selloff in China was equivalent to an 1,100-point decline on the DJIA. Some analysts believe it reflected the inexperience of the large numbers of retail investors who pushed the Shanghai composite above 3,000 on Monday -- "blind optimism" turning into SP 500 28 02 2007 Chart China 28 02 2007 Chartits opposite, blind panic. Others believe investors were rattled by fears the government will raise interest rates or cut back on money available for lending. In the U.S., the drop affected every sector, from small-cap and tech stocks to large manufacturing companies. The Fed might ease interest rates on the durable goods drop, but rising energy prices could sustain concerns about inflation.

Sources: USA Today, TheStreet.com, New York Times (I, II, III)
Commentary: Reacting to the Selloff • Opportunities In China Following Today's Selloff • Greenspan: Recession Possible by End of 2007
ETFs to watch: S&P 500 Index (NYSEARCA:SPY), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Lehman Aggregate Bond (NYSEARCA:AGG)

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