China and cheap oil are seriously spooking the markets. Again.
The latest freakout on Wall Street comes as China’s stock market crashed 7% overnight, losses so severe that trading had to be halted after just 30 minutes. And crude oil plummeted to a new 10-year low, falling through the lows during the 2008 financial crisis.
Dow futures are down more than 320 points, while the S&P 500 is on track to drop 2% and the Nasdaq futures are down 2.4%.
It’s been a brutal opening act to 2016, with the Dow logging its worst three-day start to a year since 2008.
Most of the blame goes to China, which is believed to be the biggest threat to U.S. stocks this year.
China’s stock market is in complete disarray. For the second time in four days, trading was suspended under new circuit breaker rules unveiled this week. Many observers believe the circuit breakers, which are aimed to ease volatility, are actually creating more chaos by causing investors to sell out of fear they won’t be able to get their money out before trading is stopped.
Investors are also alarmed by the steep decline in China’s currency. The country’s central bank set the yuan’s value at the weakest level since March 2011. The currency devaluation may help boost growth, but it can hurt asset values and cause money to exit the country.
To that point, China’s central bank said it burned through a record $108 billion in foreign-exchange reserves in December in an effort to slow the sharp devaluation of its currency. It still has $3.3 trillion in cash, but that’s the lowest level since late 2012.
While investors should focus on China’s economy, not its turbulent equity market, the economy isn’t looking that great either. New reports released this week reinforce concerns that China is slowing down more than investors realized.
As if China’s crash wasn’t enough, crude oil continues to nosedive. Crude plunged 4% to $32.10 a barrel, the lowest level since late 2003.
That’s a great thing for consumers because it’s going to send gasoline prices even lower. But it worries investors because it crushes profits for energy companies. Even though oil’s plunge has been mostly driven by oversupply, cheap oil also raises concerns it’s signaling something alarming about poor demand due to slower global growth.
