Before the weekend, disappointing data about the confidence of American consumers deflated stocks and renewed concerns about the brittle nature of the recovery. By the end of Friday trading, New York markets had closed down for the week after a month of consecutive weekly gains.
The pessimism soon rubbed off on Asian investors who feared that a sustained weakness in American spending would threaten recovery in export-dependent countries like Japan and China.
Shares fell by roughly 2 percent shortly after the opening bell in New York, hours after markets in Shanghai and Tokyo posted their worst one-day drops in months. The Shanghai composite index plummeted 5.8 percent, taking its total decline since Aug. 4 to 17 percent and further eroding a rally that had sent it up more than 80 percent in the first seven months of this year.
In morning trading, the Dow Jones industrial average fell 1.94 percent to 9,140.48. The broad-based Standard and Poor’s 500-stock index dropped 2.17 percent to 982.31. The Nasdaq composite index shed 2.34 percent to 1,939.02.
“It’s almost an Asian flu that the markets caught today,” said Art Hogan, the chief markets analyst at Jeffries & Co. “Creeping into the conversation now is, when do we see top-line revenue growth? When is the consumer going to take over from government stimulus? But the answer is consumer data has been less than spectacular.”
Industry may be rebounding more quickly. According to data released Monday, New York state’s manufacturing showed growth in August. Economists at the Federal Reserve Bank in New York ratcheted up the state’s general economic index to 12.1, the highest it has been since April 2008.
“The manufacturing survey shows us returning to growth,” said Nigel Gault of IHS Global Insight. “That’ll dampen some of the initial negative sentiment from overseas.”
As stock prices sank, investors headed for the relative safety of government debt, driving up bond prices and suppressing interest rates. The benchmark 10-year note was up 17/32 to yield 3.49 percent after briefly touching a low of 3.46 percent.
The price of oil fell below $65 a barrel, a two-week low, as the sagging consumer outlook undermined future energy demand. The drop came in spite of the looming threat of hurricanes and tropical storms that could curtail supply.
“Oil prices were exaggerated because growth demand was exaggerated,” said Fadel Gheit, the managing director of oil and gas at Oppenheimer Funds. “Prices are still inflated.”
Asian markets were broadly lower. The Nikkei 225, Japan’s main index, dropped 3.1 percent — its worst performance in nearly five months. The benchmark market gauges in Singapore, South Korea and Thailand all staged similar performances.
The Bombay Stock Exchange’s Sensex index and the India Nifty index both dropped about 4 percent. And the Hang Seng in Hong Kong shed 3.6 percent in its largest decline since late March.
The sharpest declines were in mainland China, where home-grown uncertainties about the direction of bank lending have helped deflate a rally that many analysts had long warned would be unsustainable.
“The market in China was clearly seeing a bubble that was partially driven by massive lending by state-controlled banks,” said Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong.
The Shanghai stock market has been a star performer for much of this year, mainly thanks to China’s relatively upbeat economic prospects — China’s gross domestic product is widely expected to grow 8 percent or more this year — and the ample liquidity generated by this lending.
But the market reversed course in early August as it became clear that the government was reining in bank lending in a bid to prevent asset prices from rising too sharply.
“The question now is whether we are now at valuations that are justified by the economic and company fundamentals,” Mr. Kowalczyk said.
“I believe that we are close to that level and that the index will end the year higher than where we are now,” he added. “But volatility will continue as investors keep a very close eye on what the Chinese authorities signal about bank lending.”
“We need more clarity, we need another month’s worth of data to get a clearer picture of where this is going.”
European markets, too, started the day in a gloomy mood — key indexes in Britain, Germany and France were nearly 2 percent lower by early afternoon.
By early afternoon Monday, the FTSE-100 in London was down 1.6 percent, the DAX in Frankfurt was off 1.8 percent and France’s CAC-40 shed 2.1 percent.
In Europe, the main losers were banks and commodity-related stocks as some analysts expressed caution about hopes for a swift economic global recovery and as commodity prices dipped.
Source: New York Times