The Collapse of the Chinese Stock Market Affects all World Stock Markets

Wall Street closes its fifth consecutive trading day with losses. The major indexes of the New York Stock Exchange opened the week lower, led by a drop of 0.7 % in the Dow Jones, its lowest level since late February.

Wall Street slumped from the start of the session by sharp losses in Chinese stocks, which experienced its worst day in eight years. Further, the main European stock markets closed with losses on Monday, following the sharp decline in the Shanghai Stock Exchange.

Chinese Manufacturing Unexpectedly Fell. Asian markets ended with losses in today's session, the China's Shanghai Composite fell 8.5% in its largest daily fall in eight years.

Meanwhile, Japan's Nikkei 225 lost 0.95%, in a "partially" active trading session, where about 1.88 billion shares were traded.

Among the reasons behind this phenomenon, the announcement from the National Bureau of Statistics showed that China's industrial profits fell 0.3% in June from a year earlier. Further, the manufacturing activity shrank and reached its lowest level in 15 months, according to a study published on Friday, which confirms the current difficulties faced by the second largest economy in the world. However, the data had not significantly affected the markets during the morning session, but after midmorning investors began selling massively their securities and the trend grew until unknown levels in the last ten minutes of trading. More than 1,500 shares of the nearly 2,200 companies listed were automatically suspended when falling below the threshold of 10%, maximum daily variation that allows the Chinese stock market regulations.

China-based Companies. Chinese companies which trade in the U.S. were also hurt. Inc. (SOHU), Baidu (BIDU) and Alibaba (BABA) fell 4.34%, 4.16% and 1.95%, respectively.

The World's Largest Maker of Generic Drugs. Teva Pharmaceuticals Industries Ltd. (TEVA) agreed to buy the generic-drug business of Allergan PLC (AGN) for about $40.5 billion.  As a consequence, Allergan rose 6%, Teva 16.4% while Mylan (MYL) shares slid 14.5% after avoiding the merger with Teva.

Japanese Economy Contracted. Japan's economy contracted in the second quarter driven by weak consumption and a drop in exports, which hit a low not seen since late 2012, as reported by the BOJ. The world's third largest economy shrank at an annualized rate of 2.5 %.

Tuesday Movers. Companies such as E I du Pont de Nemours and Co (DD), Ford Motor Co (F), Gilead Sciences Inc (GILD), Merck & Co (MRK) and Pfizer Inc (PFE), among others, will report quarterly results tomorrow. Investors should keep an eye on these companies in Tuesday's trading session.

Published on Jul 27, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2020. Content published with author's permission.

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