Investors bounced on Wednesday from panicked in Shanghai to relieved in Paris and locked out in New York.
Even though the volatile day ended with a technical glitch that halted trading on the New York Stock Exchange for nearly four hours, the U.S. is seen as a relative source of stability in a world of troubles.
The equity bubble that has been building in China has popped and a string of efforts by the government there to prop up the market Wednesday failed to stave off steep stock declines. And while markets were on the rise in Europe, anticipating a fresh package of reform proposals from Greece, the highly indebted nation is still seen as a danger to stability on the continent.
The 100-issue WWD Global Stock Tracker of fashion companies fell 0.8 percent to 110.84, as the Dow Jones Industrial Average dropped 1.5 percent, or 261.49 points, to 17,515.42. In Shanghai, the SSE Composite Index lost 5.9 percent to 3,507.19 and Paris’ CAC 40 rose 0.8 percent to 4,639.02.
Among the top decliners in WWD’s tracker were key Chinese shares, including Li Ning Co., down 11.1 percent to 2.80 Hong Kong dollars, or 36 cents; Youngor Group Co., 10 percent to 14.29 yuan, or $2.30; Esprit Holdings Ltd., 7.4 percent to 6.36 Hong Kong dollars, or $82 cents, and Global Brands Group, 5.3 percent to 1.43 Hong Kong dollars, or 18 cents.
Among the U.S. retail and fashion stocks losing ground were Kate Spade & Co., off 5.4 percent to $19.99; Tiffany & Co., 4.5 percent to $90.25; Coach Inc., 3.7 percent to $32.90; Ralph Lauren Corp., 3.2 percent to $129.54; Macy’s Inc., 2.7 percent to $66.18, and PVH Corp., 2.5 percent to $112.88.
Luxury stocks gained ground after a tough run for shares in Europe, even though many of those companies have significant sales to Chinese consumers. The gainers included Kering, up 0.6 percent to 155.55 euros, or $171.30; LVMH Moët Hennessy Louis Vuitton, 1 percent to 149.35 euros, or $164.47; Hermès International, 1.4 percent to 325 euros, or $357.91, and Burberry Group, 2.1 percent to 15.38 pounds, or $23.78.
“The rest of the world is a mess and the U.S. is OK. That’s your bottom line,” said James Smith, chief economist for Parsec Financial Management, noting the U.S. economy is gaining momentum. “China has all kinds of problems, Japan has no hope ever [given its debt load and an aging population], the Europeans won’t ever grow again unless they fix Greece, and I mean fix it, not just kick the can down the road like they’ve been doing.”
Smith said there is very little risk of contagion in the U.S. from the troubles in Greece since the American market is relatively self-sufficient and backed up with resources from trading partners Mexico and Canada.
Greece, however, is very much on the radar of U.S. and European policymakers.
The Federal Reserve on Wednesday released the minutes of the Federal Open Market Committee’s meeting last month, where many participants “expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States.”
Greek officials on Wednesday were putting the final touches on a reform package to avoid bankruptcy. European Union leaders are expected to discuss those proposals on Sunday, deciding the future of Greece in the euro zone. The country’s antiausterity prime minister Alexis Tsipras told the European Parliament in Strasbourg that Europe must not be divided.
While Greece could potentially disrupt the delicate balance of the European Union, it is still a small economy with a gross domestic product equivalent to Milan’s.
The immediate money in play is much greater in China, where the once red-hot, but relatively isolated stock market has lost more than a quarter of its value over the past month.
Policymakers in China were working hard to mitigate a further deterioration of equities, but couldn’t hold back the tide.
On Wednesday, Chinese regulators said insurance companies could invest more of their money in blue-chip companies. They also made it harder to short stocks and said the government would invest more in small- and medium-sized companies and that the central bank was on the case.
Still, the market fell nearly 6 percent.
As the Chinese stock market implodes, fashion brands may start downplaying their exposure to the Asian giant.
“If you talk to a lot of the c-suite executives, they are starting to de-emphasize the mainland Chinese consumer,” said Brian Buchwald, chief executive officer of Bomoda Consumer Intelligence. However, the Chinese consumer remains critical to companies – especially luxury firms. Buchwald said about 70 percent of sales to Chinese consumers are conducted outside of China.
Whereas executives once flaunted their expansion into the Chinese market, now they would prefer to put a little distance between themselves and the market meltdown in that country. This comes as firms such as LVMH Moët Hennessy Louis Vuitton, Compagnie Financière Richemont SA, Prada and Kering have already felt the squeeze of declining luxury spending by Chinese consumers inside the country.
Equity analysts are wasting no time reviewing Chinese risk and applauding retailers that have limited their expansion in China. Bernstein analyst Anne-Charlotte Windal recently upgraded her rating for Tiffany from market perform to outperform and addressed the Chinese risk. While Tiffany is the number-two luxury competitor behind Cartier in China, Windal noted that its store footprint is smaller. “We view Tiffany’s still relatively small exposure to Greater China as an advantage compared to peers given the weakness in Hong Kong, Macau and the uncertainty surrounding mainland China’s economic outlook and luxury real estate landscape,” wrote Windal. Tiffany’s has 30 stores in China versus 38 for Cartier, so the number is smaller, but not by much.
Burberry is reacting quickly and is closing a net 10 stores in China during fiscal-year 2015 and has another five or so closures planned for fiscal-year 2016. Burberry stated in its recent quarterly update, “We saw a fall in spending from Chinese customers in the second half of the year, reflecting disruption in this high-margin market.” Burberry’s cautious comments in May caused its stock to tumble by 12 percent in the last three months.
But some consultants still believe in the Chinese consumer story. McKinsey & Co. concedes that the Chinese consumer situation is volatile and unpredictable, but believes that it is still a good story. The consultants have forecast that spending in China is expected to grow in excess of 7 percent in discretionary categories between 2010 and 2020 and grow 6 to 7 percent annually in seminecessities.
However, that was all before the Chinese stock market meltdown. If Chinese stockholders across the board can’t sell their shares, their wealth will be affected and limit the amount of luxury shopping the consumer can engage in. Additionally, many Chinese corporations used their stock as loan collateral so when the stocks are allowed to trade, they will more than likely plummet in value, triggering loan events at the banks. While the China Securities Regulatory Commission is trying to contain the fire, it is unlikely that the consumer will be immune to the fallout.
For now, there is a disconnect between the sales data being reported, which happened before the stock market crash, and what could be coming later this year. Hermès, the French luxury group reported that its Asia sales rose 9.6 percent in the first three months of this year and some of that increase was due to a new flagship in Shanghai. So reports like that make it sound as if the consumer is untouched. The real test will come as the stock market freeze lifts.
“Companies with exposure to China have definitely been more cautious about further expansion given the economic slowdown,” said Windal. With the latest market events, retailers are more than likely sharpening their blades for more cuts.
The stock market plunge in China and ongoing uncertainty in Greece meant investors were already watchful as the trading day got under way Wednesday on Wall Street, where the New York Stock Exchange started experiencing trading problems in the morning with roughly 200 stocks, including Nordstrom Inc., Macy’s Inc. and Kate Spade & Co. That problem was resolved and those stocks were able to trade again briefly, but at about 11:30, shares stopped trading on the Big Board altogether.
Technical problems happen occasionally with trading systems, but this is the first time it has happened since the Intercontinental Exchange purchased the New York Stock Exchange last year. Many employees from NYSE who would have handled such problems in the past are no longer with the firm, so this is the first test of the ICE employees to resolve the problem.
Traders didn’t appear to be overly concerned as most trading takes place at the opening and close of the trading day and about 90 percent of midday trading is diverted outside the exchange. Trading of NYSE stocks also continued on other exchanges.
The NYSE has said there was no hacking issue, although the coincidence of a United Airline computer glitch and the Wall Street Journal Web site going down on the same day has conspiracy theorists working overtime. Suggestions of Chinese hackers looking to divert attention away from their market woes have been tossed around.
Trading on the exchange resumed shortly after 3 p.m.