A weak open for US stocks; Chinese market drops sharply

Germany’s DAX and France’s CAC 40 were both about 2.5% lower, while the U.K.’s FTSE 100 was down 1.3%.

The S&P 500 Index fell by 12 points or 0.6% at 2,105.12 points with all 10 of its key sectors trading lower during the regular session.

“The previous support from the government funds is apparently unsustainable”, Jacky Zhang, an analyst at China’s BOC global, told the Wall Street Journal on Monday.

The benchmark Shanghai Composite Index plunged 8.48 percent to close at 3,725.56 points, in the sharpest daily drop since February 27, 2007.

In a statement Monday, a spokesman for China Securities Regulatory Commission said China Securities Finance Corp., a state-backed entity that offers margin financing and liquidity, has not taken away its backing for equities.

The recent slide in Chinese shares has shaken investors in recent weeks and raised questions about the underlying economic health and pace of growth of the once-booming economy. Companies were allowed to suspend their own shares – at one point 50% of all listed stocks were frozen.

Yating Xu, an economist at IHS Global Insight, said Beijing will likely feel renewed pressure to take more measures to put a floor under the stock market. The gains were originally driven by commentary in state media that called the stock market undervalued. That led investors to believe the government would ensure that stock prices would rise. That temporarily halted the stock market decline, which began again on Friday with a more than 2 percent decline. The rout dented investor confidence from Hong Kong to Taiwan and Indonesia, helping send the MSCI Emerging Markets Index to a two-year low.

The fallout off the SHCOMP decline could be felt in Hong Kong’s Hang Seng as well as Japan’s Nikkei and South Korea’s Kospi which all registered a dip.

The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.9 percent last month after an unrevized 0.4 percent drop in May. Stocks in Southeast Asia were lower. The Deutsche X-trackers Harvest CSI 300 Index ETF ASHR, -9.31% plunged 8.4%, while the ProShares Ultra FTSE/Xinhua China 25 XPP, -6.74% lost 5%.

Asian stocks had already started the week on a dour note, rattled by a last week’s report on Chinese manufacturing that showed a contraction in output.

China is the second largest economy in the world, but the country’s explosive growth has fallen to its lowest level since 2009. “Once those disappear, the market can not support itself”.

The dollar was weak ahead of the week’s main set piece – Wednesday’s Federal Reserve policy decision and statement – with a better than expected survey of German business sentiment pushing the euro above $1.11 for the first time in a fortnight.