By Agency reporter

Monday, 15 Nov 2010

WASHINGTON: The United States stock market followed Asian stocks downward on Friday amid investor concern that China may be poised to rein in its superheated economy.

The Dow Jones industrial average fell by 0.8 per cent to 11,192.58, while the Standard & Poor‘s 500-stock index – a broad gauge of the US stock market – fell by 1.2 per cent to 1199.21. The S&P 500 ended the week with a 2.2 per cent loss, Washington Post reported on Saturday.

The Chief Market Economist, Avalon Partners, Mr. Peter Cardillo, said, “China has been the global economy‘s strong spot and so if China begins to feel some chills, it would appear that we could catch pneumonia.”

”China would be slowing down from 10 per cent growth while we could be slowing down from less than two per cent growth, so that‘s where the fear factor is,” he added.

China appeared to drive the markets after a major Shanghai stock index plunged by 5.2 per cent earlier on Friday.

China has been a huge buyer of energy and raw materials, and anticipation of slower demand from its industrial juggernaut helped drive commodity prices down sharply on Friday, too.

Copper futures were down by 3.3 per cent, crude oil futures were down by 3.3 per cent by one measure and some agricultural futures were down even more. Sugar was down by 11.6 per cent.

Gold, which has undergone a spectacular runup against the backdrop of economic anxiety and a weak dollar, sank by 2.7 per cent.

Among US stocks, the day‘s biggest losers included mining company Freeport-McMoRan Copper and Gold, which was down by 3.8 per cent.

A Senior Managing Director at the consulting firm, Decision Economics, Mr. Cary Leahey, said, “Investors seemed to believe that China is going to cool off and might crash.”

According to him, an accumulation of economic indicators suggests that China‘s growth might be so hot that Beijing might be forced to apply the brakes by raising interest rates.

Analysts have been warning that China‘s growth has been driving up asset prices there to dangerous levels, potentially leaving it vulnerable to the kind of bubbles that spawned the financial crisis of recent years.

A Chinese investment bank, China International Capital, said on Friday that the Chinese government has shown resolve to curb inflation and asset bubbles, and as a result it could raise interest rates by the end of the year, China‘s Xinhua news agency reported.

The Chief Investment Strategist at Wells Capital Management, Mr. James Paulsen discounted Friday‘s stock market dip, saying the US economy has shown encouraging signs.

”I really think this is just a pause that refreshes,” he said.

Theoretically, higher interest rates in China could strengthen China‘s currency, increasing the buying power of the renminbi and boosting exports from the US.

But the United States has long criticized China for artificially controlling its currency to support Chinese exports.

 

Source: Punch