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Commercial Times: Reasons behind U.S. stock market fall

Commercial Times: Reasons behind U.S. stock market fall

A United States jobs report released last Friday indicated that the country's unemployment rate fell to 5.1 percent in August, which was within the range of full employment and marked the country's best performance since April 2008. Why then did the U.S. stock market drop 1.6 percent in response, with the Dow Jones Industrial Average Index falling 271.38 points?
There are at least two reasons.
First, the newly increased labor force in August numbered 173,000, lower than the average 211,000 recorded between July 2014 and July 2015 and the market expectations of 220,000. This led to the perception that the rising U.S. dollar and falling oil prices are still negatively affecting economic activities and that the U.S.' economic fundamentals have not completely stabilized.
Second, with an unemployment rate of 5.1 percent, within the range of full employment, there is an increased likelihood of a higher wages as labor supply and demand becomes tighter. Because wage levels and consumer prices tend to move in tandem, inflationary pressure will increase, which in turn will raise the chances of the U.S. Federal Reserve hiking interest rates. If U.S. interest rates go up, global capital will flow back to the United States, sending the U.S. dollar higher. This would be unfavorable to the U.S. efforts to improve its trade deficit and may have a negative impact on the country's export sector, which in turn would hurt employment.
If the Fed raises interest rates, foreign capital will withdraw from emerging markets, which could lead to a financial crisis in some of these markets. In such a scenario, the European and U.S. economies may also suffer. Those European and U.S. financial institutions that lend money to the emerging markets would be exposed to huge bad debt risk and a significant drop in profitability.
If the Fed raises interest rates in the near term, it will lead to a global wave of interest rate increases. Stock investors who invest in low-cost capital markets would have to sell their shares to reduce their loan burden. This explains why not only the U.S. stock market, but all major stock markets around the world, tumbled last Friday. (Editorial abstract -- Sept. 7, 2015) (By Y.F. Low)


Updated : 2021-09-20 17:24 GMT+08:00