By Polya Lesova and Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- U.S. stocks pared losses after a
China-sparked tumble Monday as Federal Reserve officials commented
on the market reaction to last week's central-bank meeting.
Earlier in the session, the Dow industrials dropped more than
200 points after Shanghai stocks plunged 5.3% on increasing fears
over a liquidity crunch in China.
Monday's decline comes after last week's bruising selloff on
Wall Street, prompted by concern that the Federal Reserve will
start pulling back monetary stimulus later this year if the economy
improves further.
The Dow Jones Industrial Average (DJI) fell 152 points, or 1%,
to 14,647 after touching an intraday low of 14,551.27. Only five of
the index's 30 components traded in positive territory.
Hewlett-Packard Co. (HPQ) was the biggest decliner on the Dow,
with shares down 3.7%, followed up by shares of Bank of America
Corp. (BAC), with a 3.4% decline.
Boeing Co. (BA) dropped 2.3% after one of its 787 Dreamliner
planes flown by United Airlines (UAL) had to make an emergency
landing Sunday due to a brake problem.
The S&P 500 index (SPX) declined 21 points, or 1.4%, to
1,571 with all of its 10 major sectors in negative terrain,
following an intraday low of 1,560.31. Materials and financials
posted the biggest losses.
The Nasdaq Composite index (RIXF) fell 42 points, or 1.8%, to
3,316, following an intraday low of 3,294.95.
Decliners outnumbered advancers 14 to 1 on the New York Stock
Exchange and 5 to 1 on the Nasdaq. Composite NYSE volume topped 2.7
billion shares, while composite Nasdaq volume topped 1.1 billion
shares as of 1:35 p.m. Eastern.
Stocks started to pare losses after Minneapolis Fed President
Narayana Kocherlakota said the market's reaction to Fed comments is
not yet a concern as long as higher bond yields do not harden over
a long period of time. Also, Dallas Fed President Richard Fisher
said in a Financial Times interview on Monday that central-bank
members fully understood there would be a significant market
reaction to last week's Fed meeting and that big money is
organizing itself like "feral hogs" to test the Fed.
The Fed has fallen short of its inflation and employment
objectives, New York Fed President William Dudley said Monday.
Dudley said that Fed policy, while aggressive by historical
standards, is not sufficiently accommodative. Read Dudley's full
speech.
But, it's not all about the Fed. Monday's selloff is a
continuation of renewed concerns over global uncertainty out of
China, Japan, and Brazil, said Dan Greenhaus, chief global
strategist at BTIG LLC. "Right now, one has to think this has to be
a buying opportunity," Greenhaus said.
Shares of Apple Inc. (AAPL) fell 2.9% to $401.53 after Jefferies
cut its price target to $405 from $420, saying the technology
company may slow iPhone production.
In the U.S. government-debt markets, the 10-year Treasury yield
(10_YEAR), which moves inversely to price, rose 3 basis points to
2.57%, after being as high as 2.67% earlier in the session.
European stocks tumbled and Shanghai stocks melted down.
U.S. stocks are declining "due to the concern over the state of
the Chinese economy and the implications for the rest of the
world," said Stephen Pope, managing partner at Spotlight Ideas, in
an email. "I am convinced we have overdone the downside with regard
to that [Federal Reserve] story, but now with China we have another
excuse to trade with timidity."
U.S. stocks fell sharply last week, with investors spooked after
the Federal Reserve signaled it may scale back bond purchases later
this year if the economy continues to improve as the central bank
expects. Last week, the S&P 500 declined 2.1% and the Dow
industrials fell 1.8%. Read about seven ways to spot a market
top.
Chinese market tumbles
On Monday, the Shanghai Composite Index plunged 5.3% to
1,963.24, its first close below 2,000 since December. The
percentage drop was the worst since a 6.7% fall in August 2009.
In fact, Chinese stocks have already ventured into bear country,
noted Andrew Wilkinson, chief economic strategist at Miller Tabak
& Co., with levels about 20% off from highs hit in
February.
A cash crunch in China took a toll on bank stocks. Short-term
interbank interest rates in Shanghai were off last week's highs,
but still above 6% on Monday. China's central bank warned Monday
that banks need to control liquidity better.
The moves in China are not out of character with what policy
makers there have been indicating lately, said Mark Luschini, chief
investment strategist at Janney Montgomery Scott.
"They're steps to moving toward a more market-based economy, and
squashing out shadow banking activity, which is a potential source
of bad loans," Luschini said.
With China and Fed overhangs on U.S. stocks, Luschini sees a
little more to go in the correction but doesn't expect the pullback
to be in the 10% to 20% range.
Goldman Sachs downgraded its GDP growth forecasts for China to
7.4% and 7.7% for 2013 and 2014, respectively, from 7.8% and 8.4%,
previously. Read commentary: China's alarming credit crunch
"The recent tightening of the interbank market has sent a strong
policy signal that the strong credit growth earlier in the year
will likely not continue," wrote Goldman economist Li Cui in a
note.
"The overriding fear is that what is in the long-term interest
of China, as they act to constrain the domestic bubble, is going to
prove problematic for the economies of the developed world in the
short term," said Pope.
In corporate news, shares of Vanguard Health Systems Inc.
(VHS.XX) soared 69% after Tenet Healthcare Corp. (THC) agreed to
acquire the company for $1.63 billion, or $21 in cash per Vanguard
share, marking a 70% premium to Vanguard's Friday close. Shares of
Tenet Healthcare rose more than 3%.
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