Why the Dow Is Tanking Yet Again

If you thought one central bank's reaction to economic conditions could tank the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , you should see what two can do! This morning has seen the index fall another 200 points on fears that the global economy could be headed south following a big player's nonaction. With loads of uncertainty leaving investors with little direction, there is scant hope of the index recovering its morning losses.

Pay attention!
Though the U.S. markets were fixed on the Fed's new timeline and the upcoming end to its stimulus plan, elsewhere a true economic disaster was brewing. The Chinese banking system had a liquidity freeze, with interbank lending rates going as high as 28%. It's only this morning that we get an explanation as to why the People's Bank of China didn't step in -- in a letter to the participating banks, the PBOC basically scolded them to pay attention and work it out on their own. Since the impact of a Chinese economic slowdown reaches far beyond the country's borders, U.S. investors are concerned that the inaction from the Chinese central bank may signal new trouble brewing.

Biggest losers -- China edition
Some of the Dow's biggest losers this morning are its financial component stocks. Both Bank of America (NYSE: BAC  ) and JPMorgan (NYSE: JPM  ) are down more than 2.4% as of this writing. Since both companies have expanded their operations in the Asian markets, it's clear that investors are concerned about the security of the banks' revenue streams. But with only 4% and 6%, respectively, coming from Asian markets, the two are faring better than some other more heavily concentrated firms.

Citigroup (NYSE: C  ) gets 18% to 20% of its revenue from the Asian markets, and has fallen almost 2.9% in the first two hours of trading. Citi has already demonstrated in its first-quarter earnings report that its Asian markets had softened, so further deterioration of revenue streams from the region could hurt the bank's chances of offsetting those declines in other markets.

American International Group (NYSE: AIG  ) has recently spent close to $600 million expanding its presence in China in a joint venture with the PICC Group, initiated in the fourth quarter of 2012. The company reported a 10% return in the first quarter from its investment and re-upped its involvement. But due to the rapid expansion plan, investors might be a bit concerned this morning, sending the insurer down 4.2% so far in trading. AIG's plan in China hinges on the continued growth of the emerging middle class and discretionary income for both insurance and retirement products and services. If the Chinese economy slows to a crawl, the returns seen by the insurer in the first quarter may not be matched for quite a while.

It's hard to know how the issues in China will play out, but for now the liquidity levels are adequate and investors are trading on "what-if" scenarios. If you're confident in your investments outside of the Chinese markets, hold on during this bumpy ride.

Many global regions are still stuck in neutral, and their eventual resurgence could result in windfall profits for select companies. A recent Motley Fool report, “3 Strong Buys for a Global Economic Recovery,” outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


Read/Post Comments (2) | Recommend This Article (13)

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  • Report this Comment On June 25, 2013, at 9:07 AM, HypoKrat wrote:

    Here you report that AIG is at risk with their investment in China. However AIG is on of your top recommendations. Will you change if China slowdown is confirmed?

  • Report this Comment On June 26, 2013, at 10:53 AM, XMFHarleyQuinn wrote:

    HypoKrat --

    AIG is exposed to the Chinese economy in part through its investment with the PICC Group, but that is just a small piece of the insurer's overall operations. I do note that the recently reported returns from the JV will likely not be repeated soon if the Chinese economy slows further, but I don't believe that it will be anything more than a small hiccup for the insurer overall.

    I would still recommend AIG, even if the Chinese economy does slow further.

    Thanks for reading!

    Jessica

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12/18/2014 3:14 PM
^DJI $17683.20 Up +326.33 +1.88%
DOW JONES INDUSTRI… CAPS Rating: No stars
AIG $54.79 Up +0.77 +1.43%
American Internati… CAPS Rating: ****
BAC $17.43 Up +0.17 +0.96%
Bank of America CAPS Rating: ****
C $53.76 Up +1.31 +2.50%
Citigroup Inc CAPS Rating: ***
JPM $61.14 Up +1.37 +2.29%
JPMorgan Chase & C… CAPS Rating: ****

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