Global stock markets are getting a gut check this week.
The Dow plunged 300 points on Friday morning, its fourth straight day of losses. Around the world, major indexes are down for the week and most are negative for the month. The Dow has fallen more than 4% so far this week.
Three big factors are driving this week’s worries:
1. Concerns are growing that China’s economy is slowing down faster than its government has said.
2. Investors had been preparing for the U.S. Federal Reserve to raise its benchmark interest rate in September. However, the central bank has been sending mixed signals. That’s dredging out the market’s worst enemy: uncertainty.
3. Oil prices dropped 4% to their lowest point in over 6 years.
The S&P 500, Dow and Nasdaq are each down between 4% and 6% this week.
The losses are far greater abroad with some indexes in China and the U.K. stock market all now in correction — down more than 10% from their since its peak in April.
How bad is China’s economic slowdown?
The latest red flag came Friday morning from China. The government reported that its manufacturing activity — a key sign of economic performance — hit a 6-year low in July.
After the government devalued its currency last week, Wall Street has become extra worried about the China slowdown.
Although Chinese officials say the economy grew 7% earlier this year, many experts wonder if it’s worse.
“There’s nobody that really believes that China is growing at 7%,” said Tim Anderson, managing director at MND Partners in New York. “They’re afraid to say to what degree their economy has really slowed down.”
Will the Fed raise rates in September
As if China wasn’t worrying investors enough, the odds of a Fed rate hike in September seems to have lowered.
Earlier this week, the central bank released the minutes from its July meeting, which showed some members are ready to go forward with a rate hike while others are concerned about the global economy and non-existent inflation in the U.S.
The uncertainty from the minutes — along with China — was a one-two punch that drove the markets down further.
“I am still saying yes [for September], but I have much less conviction,” says David Joy, chief economist at Ameriprise Financial in Boston. “It’s still an open question on whether they would move in September or not.”
Oil prices are at 6 1/2 year lows
And then there’s oil. Crude oil prices fell to again this week, and are flirting with the $40 a barrel level. A year ago a barrel of oil was about $100.
Oil a lifeline of economic growth for many developing countries, which are also seeing their currencies lose value because of their economic exposure to China.
Brazil’s currency, the real, has fallen 9% against the dollar in just the past 4 weeks. Colombia, Chile, Vietnam and Indonesia have also seen significant currency drops against the dollar.
Less demand for oil hurts these country’s economies, which rely on China as a trade partner.
The fall in oil prices is hurting U.S. energy stocks too. Exxon and Chevron are down 25% and 38% respectively over the past year.