U.S. stocks tumbled the most in three weeks Friday, as a crackdown on margin lending in China ignited a global sell-off that found further momentum with the release of a batch of disappointing corporate earnings and signals of rising inflation in the world's top economy.
The Dow Jones industrial average fell 279.47 points, or 1.54 per cent, to 17,826.30. The S&P 500 slid 23.81 points, or 1.13 per cent, to 2,081.18 and the Nasdaq composite lost 75.98 points, or 1.52 per cent, to 4,931.81.
Oil retreated for the first time in seven days. But the resource-heavy S&P/TSX composite index managed to escape with only modest losses, declining 26.22 points, or 0.17 per cent, to 15,360.55. The Toronto market slumped 0.6 per cent in two days after reaching a seven-month high on Wednesday.
China's securities regulator warned investors to be cautious as Chinese shares hit seven-year highs after seven weeks of gains. Retail investors are borrowing record amounts of money to buy stocks, pushing trading volumes to new highs.
China on Friday also allowed fund managers to lend stocks for short-selling and expanded the number of stocks investors can short to increase the supply of securities in the market.
"China in general has been tightening up on some of the excesses in lending," said Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, N.J. "It's just another area that makes people think globally there's a bit of a top to this recent rally."
The China news "shows how vulnerable the market can be," said Matt Maley, an equity strategist at Miller Tabak & Co. in Newton, Mass. "More than anything else, it gives us an excuse to sell off, pull back in a market that is a little bit extended and close to all-time highs. Asian and European markets have had huge rallies over a short period of time and we'll go down in sympathy with them."
The cost of living in the United States excluding food and fuel in March signalled inflation is starting to firm as U.S. Federal Reserve officials debate the timing of raising borrowing costs. U.S. consumer prices rose 0.2 per cent during the month, propelled by higher costs for gasoline and housing. Closely watched core consumer prices rose 1.8 per cent year-on-year, inching closer to the Fed's 2-per-cent target.
"What spooked the market is that we had core CPI move up, which pulls forward the worry of the Fed may raise rates sooner," said Mark Luschini, chief investment strategist in Philadelphia at Janney Capital Management, which oversees about $68-billion (U.S.).
European markets had other concerns, as Greek government bonds sank as officials worked to reach an agreement before the country faces payments of almost €1-billion ($1.3-billion Canadian) next month. MSCI's all-country world index of equity performance in 46 countries fell 0.92 per cent, while the FTSEurofirst 300 index of top European shares closed down 1.8 per cent at 1,607.03. Germany's DAX fell 2.6 per cent.
American Express fell 4.4 per cent to its lowest level since 2013 after quarterly revenue missed estimates. Advanced Micro Devices slumped 10 per cent after saying it is hard to see whether the second half will be "substantially better" than the first half of the year.
"We're very early in the earnings season and with multiples much higher now, there's some nervousness," said Steve Bombardiere, an equity trader at Conifer Securities in New York. "We need to get further into the season until we get some direction, so right now these little things in the background are good fodder for some short-term gut wrenching."
Oil dropped 1.7 per cent, ending the longest stretch of gains since 2013. Futures climbed 7.9 per cent this week amid expectations that the idling of U.S. rigs is spurring a slowdown that will trim the global surplus.