Global Markets Swoon as Worries Mount Over Superpowers’ Plans

Investors on three continents dropped their stocks on Monday as they worried that the governments of the world’s two largest economies – China and the United States – would act in ways that could undermine the nascent global economic recovery.

The reluctance of the Chinese government to step in and bail out a heavily indebted property developer just days before a high interest payment is due has signaled to investors that Beijing may break with its longstanding policy of bailing out its domestic stars.

And in the United States, the world’s No. 1 economy, investors feared the Federal Reserve would soon begin curbing its huge purchases of government bonds, which had helped keep stocks down for a number of times since the coronavirus pandemic broke out Driving record highs.

The sell-off began in Asia and spread to Europe – where exporters to China were slammed – before ending up in the United States, where stocks appeared to be heading for their worst performance of the year ahead of a late-day rally. The S&P 500 closed with a minus of 1.7 percent, the worst daily performance since mid-May, after even falling 2.9 percent in the afternoon.

The cause for the swoon was the ongoing turmoil at the China Evergrande Group, one of the three largest residential property developers in the country. The company is estimated to have $ 300 billion in debt and more than $ 80 million in interest payment is due this week.

Analysts said Evergrande’s plight was so severe that it was unlikely to survive without the support of the Chinese government. “The question is to what extent there is spill-over risk within Chinese stocks and then spill over to global markets,” said John Canavan, senior analyst at Oxford Economics.

Few companies move markets through their actions and inaction like the American and Chinese governments, and Monday’s global slump made that clear. Until recently, investors seemed content to ignore a variety of issues that are making recovery difficult – including the advent of the delta variant and supply chain confusion that has angered consumers and manufacturers alike.

But from that month on, as Evergrande began to fluctuate and the likelihood of the Fed scaling back – or expiring – its bond-buying programs grew, the market’s protective bubble began to deflate. Some U.S. investors are also concerned that tax hikes – including on share buybacks and corporate profits – are imminent to pay for a spurt of federal spending signed by President Biden’s proposed $ 3.5 trillion budget. Regardless, Congress also needs to act to raise the government’s credit limit, a politically charged process that has sometimes put the markets in a loop.

On Monday, these currents converged, reflecting the interdependence of global markets as investors sold their holdings everywhere.

The decline was ugliest in Asia, where Evergrande’s troubles – its shares fell 10.2 percent – dragged the stocks of other Chinese real estate companies down 10 percent or more. Mainland China markets were closed for the day, but Hong Kong’s Hang Seng index fell 3.3 percent.

For decades, Chinese growth has been driven by investments in infrastructure, including the residential real estate market, which has been funded with huge amounts of debt. Banks, on the orders of the government, often lent property developers who viewed real estate as a source of jobs and economic growth.

“Beijing says borrow, so borrow; When or even whether you get your money back is of secondary importance, ”write analysts at the economic research firm China Beige Book.

As a result, many lenders viewed companies like Evergrande as an implicit guarantee from the government, which meant the government would ensure that creditors would be repaid if the company failed to pay its debts.

Business & Economy

Updated

9/20/2021, 6:05 p.m. ET

This understanding is now being tested. The company does not appear to have the cash for the interest payment due this week and credit markets are largely closed to the company. Few expect it to be able to make the payments on its own, but the Chinese government has not yet finally moved towards a bailout.

The uncertainty surrounding Evergrande is just the latest issue investors have to face this year as the Chinese government has shown signs of a sharp turn away from the policies that have guided its economy for much of the past decade.

Chinese tech giants like Alibaba were hit hard this year as Beijing flexed its regulatory muscles on issues like privacy. But the impact on China’s changing policies extends beyond its borders.

The curtailment of steel production due to environmental concerns has depressed iron ore prices, which have fallen more than 40 percent in the past three months. And global crude oil prices – China is the world’s largest importer of crude oil – fell 1.9 percent on Monday.

The price of copper, which is used in wiring and is a hot commodity for Chinese property developers, fell more than 3 percent, putting a burden on producers worldwide. Industrial stocks closely linked to China also fell on the US stock exchanges. Freeport-McMoRan, a copper and gold mining giant based in Phoenix, was one of the worst-performing stocks on the S&P 500, falling 5.7 percent.

The elevator manufacturer Otis, an important supplier for Chinese high-rise buildings, lost more than 2 percent. And construction machinery manufacturer Caterpillar, whose second largest market is China, lost 4.5 percent.

Impending decisions by Federal Reserve and Congress policymakers are also hurting stock market sentiment, analysts say.

On Wednesday, the Fed is expected to signal that it plans to reduce its purchases of government bonds, which have pumped trillions of dollars into financial markets since the Covid crisis began in March 2020.

Substantial deficit spending by the federal government helped accelerate growth and prop up corporate profits during the pandemic. But with much of that money being spent, investors are now closely watching the $ 3.5 trillion spending plan that the Democrats are trying to get through Congress.

There are signs that they are becoming less and less certain that the bill will be passed. This month, stock prices have plummeted for companies whose businesses would benefit from another boost in federal spending, such as large engineering and construction companies.

Dycom, which specializes in building and engineering telecommunications network systems, has fallen nearly 11 percent since late August. Fluor, another engineering and construction company that has a large government contractor, is declining at about the same rate. Alternative energy stocks like Enphase Energy and Bloom Energy have also fallen.

Investors are also increasingly focusing on when Congress will raise the debt ceiling, a once shallow budget task that has become increasingly politicized. In 2011, the vicious debate over raising the debt ceiling was accompanied by a sharp market collapse as officials in Washington seemed to be flirting with the idea of ​​not increasing credit restrictions, which would in effect mean defaulting on government bonds.

“It is be a drama for politics’s sake, ”said Lisa Shalett, chief investment officer, Morgan Stanley Wealth Management. “People don’t like that.”