China sinks world markets, not world economy

Ongoing China concerns were the proximate cause of this week's market decimation, but what do they really mean for the U.S.?

Robert Johnson, CFA 24 August, 2015 | 5:00PM

It was a bad week for markets no matter how you cut it. All major equity markets were down as were most commodities. China and emerging markets bore the brunt of it, but developing markets weren't spared, either. The major emerging indexes were down, close to 8% for the week. That's not over the past year, but in the past seven days. Europe and the U.S. markets were down in the 6% range. Commodities that were already decimated in prior weeks were down about 3%.

U.S. government bonds, a safe haven for scared investors around the world, were up nicely as the 10-year U.S. Treasury bond yield, which moves inversely with prices, fell from 2.2% to 2.05% after reaching over 2.4% earlier this year.

Though complacent investors, stretched valuations and vacationing portfolio managers might be factors, ongoing China issues were the proximate cause of this week's decimation, in our opinion. The worst of the shellacking happened on Friday when the purchasing managers' report for China confirmed investors worst fears, namely, the Chinese economy was worse off than officials were willing to admit. Headlines trumpeted that China's PMI ratio dropped to a 77-month low and was getting dangerously close to a recession-like level at 47. I am not so sure it was really news. The index has been acting badly for months, but it certainly put the fear of God into investors on Friday. Later in this report, we detail why China may or may not be important to various countries and sectors.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.

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