Stock markets from Hong Kong to New York were hit by a major sell-off on Monday, as a massive Chinese real estate conglomerate called China Evergrande Group faces a potentially devastating debt default.
The Dow Jones Industrial Average slumped more than 800 points as of mid-afternoon, while the S&P 500 and Nasdaq also fell sharply.
The Evergrande Group owes roughly $300 billion, and investors fear a default could destabilize the financial system in China, one of the world’s top economies.
The worries about Evergrande come at a delicate time for Wall Street, which has gone from a record-setting run earlier this year to hefty falls this month.
Investors are facing a growing list of worries, from the Delta variant to a potential debt default by the U.S. government here at home.
Here are three things to know about the stock market.
So what’s going on with Evergrande?
Evergrande is one of China’s biggest property developers, and it’s in big trouble.
In a stock filing earlier this month, Evergrande said flat out “there is no guarantee that the Group will be able to meet its financial obligations.”
So far, Evergrande’s efforts to offload office buildings and attract new investors haven’t helped, and the company has hired a team of outside advisers.
But a big question is how the Chinese government will intervene, if at all. China has been growing increasingly concerned about debt levels in the country, especially in its overheated property sector.
A default would raise concerns about the stability of China’s financial system, and some investors worry about contagion — when fear tied to a major event spreads.
Weren’t things already rough on Wall Street?
Yes, they were. The Dow Jones has declined in each of the three previous weeks, a rarity in a year marked by a string of record highs.
September is traditionally a tough month for markets. This year, there are several factors weighing down on stocks.
The Delta variant is a top concern as it continues to spread across the country, threatening the economic recovery. Already airlines are saying they are seeing more cancellations and fewer bookings.
The uncertainty raises the stakes for the Federal Reserve, which meets on Tuesday and Wednesday.
Fed Chairman Jerome Powell has said the central bank plans to start removing this year some of the massive market support it’s currently providing to markets, a process known as the bond taper. That support has come in the form of purchases of $120 billions in government bonds and mortgage-backed securities each month.
And there are also worries about a debt default by the U.S. government.
Treasury Secretary Janet Yellen has said the U.S. could run out of money to pay its bills in October if Congress does not raise the debt ceiling, something that is far from certain at a time when Democrats have only a razor-thin majority.
In an op-ed in The Wall Street Journal on Monday, Yellen warned a debt default would lead to a “widespread economic catastrophe.”
So what happens next?
Halfway through September, all three major indexes have declined.
Trading on Wall Street is likely to remain volatile, as investors proceed with caution. They’ll pay close attention to the Fed’s plans, and they’ll watch what is happening in China. And economic data will continue to be important.
Perhaps the most important factor will be what happens with the Delta variant, which has led many companies to push back return-to-work dates.
Wall Street forecasters are already paring back their expectations for gains this year, and many are predicting a short-term pullback.
That said, markets have suffered bouts of uncertainty since the pandemic began, and they’ve eventually regained their footing to continue a march toward new record highs.