Markets rebound melts away as Dow closes down 200 points

Volatility continued to jolt financial markets after a rebound that took the Standard and Poor’s 500 Index up 2.9 per cent melted away in the final hour of trading. The Dow Jones industrial average closed down 200 points in a late sell-off.

The Standard and Poor’s 500 Index fell 1.3 per cent as traders said trepidation over what will happen in China’s market made holding on to stocks too risky for most investors.

Stocks had rallied earlier in the day, with the Dow Jones Industrial Average climbing more than 440 points, as China’s central bank cut its benchmark lending rate for the fifth time since November and lowered the amount of cash banks must set aside.

The Nasdaq composite index led the way with a 3.2 per cent rise, boosted by Apple’s 5.7 per cent gain to $108.96. The stock slumped as much as 13 per cent on Monday. It is still barely above sea level, up by 0.07 per cent.

“We just saw a crazy evaporation of gains after being up the majority of the day,” said Stephen Carl, principal and head equity trader at Williams Capital Group LP.

“People are nervous about the potential volatility that could erupt or resurface in the market. They’re not sure what’s going to happen overseas, and that uncertainty is winning out.”

China’s unexpected devaluation of the yuan on August 11th sparked the biggest rout in US stocks in nearly four years on concern that the slowdown in the world’s second-largest economy is worse than anticipated. The slump in Chinese equities torpedoed emerging-market assets and sank commodities from oil to metals.

Leading the charge downward in the Dow is major pharmaceuticals company Merck, off by more than 4.3 per cent, with Verizon (down about 1.6 per cent), another pharma company, Pfizer (down 1.8 per cent), and Microsoft (down nearly 2 per cent).

Earlier the People's Bank of China (PBoC) reduced the one-year lending rate to 4.6 per cent in a signal that it was prepared to head off a repeat of the stock market crash that hit the country in June.

The benchmark Shanghai Composite fell by 7.6 per cent on Tuesday, bringing its loss in the last two days to more than 15 per cent.

The central bank also cut the one-year deposit rate to 1.75 per cent in an effort to persuade Chinese savers to spend cash hoarded in the country’s banks.

Investors had despaired at the lack of policy action from Beijing in response to recent data suggesting the downturn in the world’s second-largest economy was deepening.

China, one of the main engines of the world economy, has overtaken Greece at the top of the worry list of global investors, who fret its economy is growing at a much slower pace than the official 7 per cent target for 2015.

“Currently, there is still downward pressure on China’s economic growth,” the central bank said in a separate statement. “There is also relatively big volatility in global financial markets, which require more flexible usage of monetary policy tools.”

Stocks, oil prices and safe-haven bond yields rose on Tuesday as a tentative market rebound picked up pace after China cut rates.

Global markets were pummelled on Monday, with Chinese shares falling 8 per cent, prompting investor calls for remedial action from authorities that grew louder overnight after the Shanghai Composite Index slumped a further 8 per cent.

Reuters