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Dow skids 500 points as fear of market contagion from China’s Evergrande intensifies

U.S. stocks were down sharply on Monday, but off their worst levels of the session, as investors parsed the potential impact of the collapse of a property developer in China. Investors also were positioning ahead of a two-day of Federal Reserve policy makers that begins Tuesday.

How are stock futures trading?
  • The Dow Jones Industrial Average
    DJIA,
    -1.99%

    fell 513 points, or 1.5%, to 34,057.

  • The S&P 500
    SPX,
    -2.05%

    declined 71 points, or 1.6%, to 4,362.

  • The Nasdaq Composite Index
    COMP,
    -2.60%

    tumbled 2%, or 307 points, to 14,735.

On Friday, the Dow logged its third straight weekly decline, losing 0.1% and booking its longest weekly losing streak since the four weeks ending Sept. 25, 2020, according to Dow Jones Market Data. The S&P 500 fell 0.6% in a second straight week of losses, while the Nasdaq Composite lost 0.5%, also booking two straight weekly falls, according to FactSet.

What’s driving the market?

Is this the correction that some strategists have anticipated?

A downturn in China’s property market, which suffered heavy losses Monday, with shares of China Evergrande
3333,
-10.24%

falling 13% in Hong Kong, were blamed for dragging down U.S. and global equities.

Markets were closed in mainland China for a holiday, but the Hang Seng
HSI,
-3.30%

dropped over 3%.

Read: Evergrande fears send stock market tumbling: Here’s what investors need to know about the China property giant

The 8.25% Evergrande bond that has interest payments due this week was trading at around 29 cents to the dollar on Monday, according to Reuters.

A report from S&P Global Ratings on Monday said a default by Evergrande would neither lead to a tidal wave of defaults nor mere ripples from a pebble in a pond but something between the two.

Events could broadly rattle investors’ confidence in China’s property sector and for speculative-grade markets broadly, possibly diminishing funding access for unrelated names,” said S&P Global Ratings credit analyst Matthew Chow. 

Separately, investors will be closely watching for any talk of tapering at the Fed’s two-day policy meeting. The Fed has signaled it will begin tapering bond purchases before the end of the year, but the exact timing of the move remains open to speculation.

Check out: Evergrande isn’t the only reason the stock market is headed for its worst day in 2 months. Here are 5 other reasons

The economy has been giving off mixed signals, though, amid rising cases of coronavirus due to the delta variant. Friday’s losses for Wall Street came as a reading on consumer sentiment held close to a roughly 10-year low.

Analysts also were discussing the inability, so far, of Congress to increase the debt ceiling.

“While today’s selloff may be alarming to some, it really was a question of when a pullback would happen and not if — especially given September is a notoriously volatile month for stocks,” wrote Chris Larkin, managing director trading at E-Trade Financial, in emailed remarks.

Pierre Veyret, technical analyst at ActivTrades, noted that “investors already had a lot to digest recently, [and] the debt crisis in both of the world’s two biggest economies (Evergrande and U.S. debt ceiling) combined with uncertainties about the Fed’s decision this week about the timeline for any tapering are denting market sentiment.”

Investors were also weighing an upbeat report from Pfizer Inc.
PFE,
+0.57%

 and German partner BioNTech SE
BNTX,
-4.91%

on Monday, announcing positive results in a Phase 2/3 trial of their COVID-19 vaccine in children aged 5 to 11, and said the vaccine was safe, well tolerated and produced “robust” neutralizing antibody response. 

In economic news, the National Association of Home Builders’ monthly confidence index increased one point to a reading of 76 in September, the trade group said Monday. The slight uptick comes following a three-month decline in optimism among home builders.

Which companies are in focus
  • Twitter Inc. TWTR, -2.61% announced Monday that it had entered an agreement to settle a class-action lawsuit that began in 2016. 

  • Shares of China-based electric vehicle makers, and of Tesla Inc. TSLA, -2.97%, were trading lower Monday, amid Li Auto Inc.‘s warning of a deliveries miss and Shares of NIO Inc. NIO sank 4% toward a four-month low, Xpeng Inc. XPEV slid 4.4% and Li Auto shed 5.7%. 

  • GameStop Corp. GME said Monday it plans to hire 500 employees at its new customer service center in Pembroke Pines, Fla.

  • The airline sector fell, but outperformed amid a broader-market selloff, after reports that President Joe Biden will soon lift the travel ban on Europeans, which was put in place early in the COVID-19 pandemic by former President Donald Trump. Exchange traded U.S. Global Jets ETF JETS slipped 0.4%.

  • Financial stocks skidded lower on the back of market jitters highlighted by Evergrande, with Berkshire Hathaway BRK. A, JPMorgan Chase JPM, Bank of America BAC, Wells Fargo WFC, Morgan Stanley MS, Citigroup C, Goldman Sachs GS, and BlackRock BLK all down sharply. The Financial Select SPDR Fund
    XLF,
    -2.99%

    is off by 2.2%, outpacing the drop by the S&P 500.

How are other assets faring?
  • The yield on the 10-year Treasury note TMUBMUSD10Y fell 4.8 basis points to around 1.33%. Yields and debt prices move in opposite directions.

  • The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was trading 0.1% higher at 93.247, following a weekly gain on Friday of 0.7%.

  • Oil futures declined on Monday, with the U.S. benchmark CL00 trading 1.4% lower at $70.79 a barrel. Gold futures GC00 climbed 0.8% to trade at $1,766.30 an ounce.

  • In European equities, the Stoxx Europe 600 index SXXP fell 1.6%. The FTSE 100 UKX slumped 0.8%.

  • A number of Asian markets were closed for holidays, including in China where the Shanghai Composite SHCOMP. However, Hong Kong’s Hang Seng Index HSI declined 3.3%, following a 4.9% decline last week. Japan’s market also was closed.

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