China: Worst Yet to Come

After the steep drop in China, a wave of selling surged through world markets. In the U.S., the Dow Jones Industrial Average slumped 416 points.

China and emerging-markets-based ETFs fell sharply Tuesday. The iShares FTSE/Xinhua China 25 Index (FXI Quote) ended the day down 9.87% at $95, the iShares MSCI Emerging Market Index (EEM Quote) lost 8.13% to 107.90, and the iShares Singapore Index (EWS Quote) fell to 11.54, down 7.83%.

A research note titled "When China Sneezes Does The World Catch Cold?" issued by Nomura at the end of trading Tuesday concurred with the gloomy outlook, while blaming in part the recent global appetite for risk.

"We do not see a simple causality between the performance [Feb. 27] of Chinese equity markets and global markets. Global risk appetite has been intense, while technically global markets were overbought. We expect an ongoing reversal in risk appetite to undermine Asian equity prices in the short term. Based on a number of financial measures, investor risk appetite appears almost insatiable," said the note.

The note also said that Nomura expected growth fears about the U.S. economy to resurface. The question on the minds of traders in Asia was whether the selloff will remain confined to China or spark a long-term contagion elsewhere in the region and eventually the rest of the world.

Spencer says it was the early Japanese reaction to China's initial selloff that began the reverberations felt around the rest of the world.