If you thought one central bank's reaction to economic conditions could tank the Dow Jones Industrial Average (^DJI 0.13%), 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 (C 0.04%) 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 (AIG 0.18%) 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.
