Wall Street suffers worst drop since May as global markets collapse

Stocks faded on Monday as investors feared the governments of the world’s two largest economies – China and the United States – could act in ways that undermine the nascent global economic recovery.

The sell-off started in Asia and spread to Europe before landing in the United States, where the S&P 500 fell 1.7%, the worst one-day decline since mid-May. It would have been worse if it hadn’t been for a late rally; the index was down 2.8 percent in the afternoon.

The Chinese government’s reluctance to step in and rescue a heavily indebted real estate developer just days before a big interest payment is due has signaled to investors that Beijing could break with its long-standing policy of bailing out local stars . And in the United States, investors feared the Federal Reserve might start cutting its government bond purchases soon, which has caused stocks to rebound sharply and helped support corporate earnings since the start of the pandemic. coronavirus.

Prior to this month, Wall Street was capitalizing on a seven-month run that had pushed stocks up more than 20% as investors seemed to ignore any bad news. But there has been a clear change in the tone of the market since the September 2 peak, and it worsened on Monday due to the debt spiral of Evergrande, a large Chinese real estate company that struggled to meet its obligations, which worries investors. and around the world.

Evergrande’s woes are an important consideration for Chinese financial markets: the company owes more than $ 300 billion to various lenders, and a default on its debts would have ripple effects on the Chinese economy. Investors must have wondered what other real estate companies were likely to toughen their creditors, and whether banks and insurers lending to them could also be crippled.

“We have been asked several times in recent weeks whether ‘this’ – a likely default by Evergrande – was China’s Lehman moment,” Barclays analysts wrote in a client note on Monday, referring to the collapse of Lehman Brothers, the investment banks whose 2008 collapse was a watershed moment in the last financial crisis.

Evergrande’s fortune might have been less important to investors had it not been for the lingering unease over the state of global recovery in the event of a pandemic. The Delta variant of the coronavirus continues to be a threat to stability in many parts of the world, and investors are also nervous about a range of political issues, infrastructure spending and tax plans in the United States. exactly what China would do. do if Evergrande failed.

Senate Democrats are uniting to impose a new tax on companies that repurchase their shares, which could potentially weaken a key source of demand for shares. Democrats are also expected to focus this week on raising the federal borrowing limit. Analysts say until the cap is raised investor exuberance could be hard to come by.

But above all in the minds of investors, the Federal Reserve is expected to discuss Wednesday a timetable for slowing bond purchases aimed at supporting the US economy. Some economists expect the Fed to signal that it will start cutting bond purchases later this year. The central bank could then start raising interest rates in 2022.

On the other side of the globe, questions surrounding Evergrande also concern government policy: Investors are closely watching how Beijing is handling the company’s struggles. For decades, much of China’s growth has been driven by investment in infrastructure, including the residential real estate market, which has been funded by huge sums of borrowed money.

In the Chinese system, loans to developers are often given under the strong influence of the government, which sees building construction as a source of jobs and economic growth. As such, many lenders viewed companies like Evergrande as having an implied government guarantee, meaning that if the company couldn’t pay its debts, the government would ensure that creditors were paid off.

“The market was looking to some extent for a catalyst for a sell off,” said John Canavan, chief analyst at Oxford Economics. “The Evergrande situation is unlikely to resolve itself without China’s support and, if China does not offer that support, the question is to what extent are there spillover risks within Chinese stocks, then cascade into world markets. “

Evergrande shares plunged 10.2% in Hong Kong, as the Hang Seng index fell 3.3% to its lowest level in nearly a year.

Distrustful investors have pushed the Hong Kong-listed shares of some of China’s largest real estate developers into the red, fearing that Evergrande’s problems could affect the funding capacities of other developers in an era of heightened regulatory control. Chinese developer Sinic Holding’s shares fell 87% after regulators in one Chinese province said they would sanction some of the developers’ selling practices.

Mike Bell, a strategist at JPMorgan Asset Management in London, said the situation with Evergrande could lead to more volatility over the next month, but he was not too concerned that the company’s problems would have global consequences.

“When we look at China at the moment, we still think the earnings outlook – outside of companies like Evergrande – for the market as a whole remains very positive, ”he said.

In addition to investor worries about Evergrande’s problems and political maneuvering in Beijing and Washington, other factors have spilled over into global markets. High natural gas prices in Europe are pushing up energy bills and shutting down factories, such as those that make fertilizer, in Britain, where small energy companies are asking for government bailouts. The Stoxx Europe 600 fell 1.7%, while Britain’s FTSE 100 was down 0.9%.

Alexandra Stevenson contributed reports.

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