China's stock shock affects U.S. markets

NEW YORK - The worst drop in China's stock market in eight years helped drag down other markets around the world Monday.

The tough day follows declines in U.S. markets last week, when the three major indexes fell more than 2 percent as a number of big companies reported disappointing earnings.

Faced with a drop in stock prices in Asia, Europe and the U.S., investors moved into traditional safe havens. The yield on the 10-year U.S. Treasury note fell to 2.22 percent from 2.26 percent on Friday. The price of gold rose 1 percent.

Dividend-heavy stocks, like utilities, also gained. Investors favor high-dividend companies during times of volatility for their reliable income stream.

"There remain very few buyers out there and there are some growing concerns that we're looking at a slowdown in global economic growth," said Sean Lynch, co-head of global equity strategy with Wells Fargo Investment Institute.

The Dow Jones industrial average lost 127.94 points, or 0.7 percent, to 17,440.59. The Standard & Poor's 500 index lost 12.01 points, or 0.6 percent, to 2,067.64 and the Nasdaq lost 48.85 points, or 1 percent, to 5,039.78.

It was the fifth straight loss for the U.S. market. The S&P 500 is still up half a percent for the year. The Dow is down 2 percent and the tech-heavy Nasdaq is up 6 percent.

The worries for investors this week started with an 8.5 percentage point plunge on the Shanghai market, the biggest one-day decline since February 2007. It was the latest big drop in the Chinese stock market, which has slumped since early June.

Some analysts said Monday's dive was set off by brokerages restricting credit used to finance stock purchases, also known as margin trading. Chinese authorities took aggressive steps to stabilize the market after it tumbled last month.

When China's Shanghai benchmark index peaked in early June, it was up 150 percent in the last year. 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 gained.

When the Chinese stock market started falling, many investors felt the decline would bring a much-needed correction. But many small Chinese investors jumped into the market near its peak and are now sitting on big losses.

There are now concerns the 30 percent decline in the stock market is starting to do damage to China's economy. A closely watched Chinese purchasing manager's index fell to a 15-month low over the weekend, with analysts blaming the drop partly on the market.

"Rightly or wrongly, people are concerned about a global economic slowdown," said James Liu, a global market strategist with JPMorgan Funds.