Following market declines around the world, Wall Street opened lower on Thursday after investors were rattled by signs of a slowdown in Chinese manufacturing and a potential easing of central bank support for the economy.

The worst drop in share prices was seen in Tokyo, where the Nikkei index fell 7.3 percent, the most since the 2011 tsunami there. In New York, the benchmark Standard Poor’s 500-stock index was down 0.9 percent in early trading. Leading indexes were down 2.6 percent in Germany and 2.5 percent in France.

The pessimism that overtook investors on Thursday was a sharp reversal from months of steady advances in share prices around the world. Many investors had voiced concern that the rally was due for a break, but it had not been clear what would serve as a catalyst for a downturn.

The dip began on Wednesday afternoon, after Ben S. Bernanke, the Federal Reserve chairman, testified before Congress that the Fed could pull back on its monetary stimulus programs if the economy continues to show progress. Later on, an index of Chinese manufacturing showed that activity actually slowed down in May for the first time in months.

China’s slowing momentum has been long in the making and is, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more balanced pace of growth. Still, disappointments over the performance of China’s economy – the second-largest in the world after the United States – remain liable to unsettle markets not just in Asia but around the globe.

The response was particularly stark in Japan, which is in the early stages of an aggressive government effort to prop up the long-suffering economy. High hopes that the bold economic policies of Prime Minister Shinzo Abe will succeed have prompted a huge rally in stocks since November. The Japanese market is still up nearly 40 percent since the start of the year.

Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added.

“The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response.”

Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into the Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets.

One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the last few weeks have shown that the economy has begun to pick up speed.

Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about a rising interest rate burden for the government. The yield on the 10-year Japanese government bond briefly spiked above 1 percent Thursday before dropping back to 0.9 percent. The move spooked investors, helping produce the fall in the stock markets, said Stephen Davies, chief executive of Javelin Wealth Management in Singapore.

Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous. Given the indebtedness of the Japanese government, there are worries about the impact that this could have if sustained, Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.”

The sell-off Thursday came in spite of economic news from Europe that was, if not good, at least better than many expected. The Markit Economics euro zone purchasing managers’ index for the manufacturing sector rose to 47.8 points from 46.7, while the services index rose to 47.5 from 47. While a number below 50 indicates continued contraction, the improvement suggests the economy may be getting nearer to its nadir, setting up conditions for a rebound in the second half.

Article source: http://www.nytimes.com/2013/05/24/business/daily-stock-market-activity.html?partner=rss&emc=rss