Futures in the United States are trading higher today after the bears went on a rampage in yesterday’s session. Evergrande, a Chinese real estate behemoth with massive debt on its balance sheet and the inability to meet its obligations, was the driving force behind the market downturn. The situation sparked a global financial market meltdown, with the Dow dropping nearly 600 points as a result.
In yesterday’s session, the Dow Jones Industrial Average dipped 1.78%, and the S & P 500 index dropped 1.70%. The Nasdaq, the tech-savvy index, fell 2.19%, and the Russell 2000, the small-cap index, slumped 2.44%.
Investors should note that the biggest issue with Evergrande is its huge liability, which has the potential to cause a credit crunch, reduce investor confidence in Chinese assets, and have a global spill over effect. The company currently has more debt, amounting to $300 billion, than any other real estate developer in the world. It must make payments worth $83.5 million on Thursday as interest on its five-year bond. Failure to meet this obligation within 30 days means the company has defaulted. In addition to this, on the same Thursday, the company is due to pay $36 million in coupon payments.
As a result, financial markets took a significant hit, with Hong Kong’s Hang Seng falling more than 3% and hovering near a critical support level established by the 2008 global financial crisis. Equity indices in Italy and Germany fell nearly 2%, while the S&P 500 fell the most in four months. Furthermore, iron ore futures fell nearly 12% in intraday trading. Evergrande fell as much as 19% in yesterday’s session before closing down 10%.
Despite taking a beating, Chinese officials have yet to remark on the crisis and outline a plan to contain the crisis. Although investors do not think Evergrande would collapse out of the blue, a lack of communication by the Chinese authorities would only add fuel to the fire.
Moving forward, Chinese regulators will be under pressure to change their policies because the consequences of Evergrande may be greater than the government is willing to accept. As a result, authorities are likely to ease up on their crackdowns in the future to avoid a repeat of this sort of situation. Having said that, investors should keep in mind that the Chinese government has already demonstrated that it is willing to bear large losses, as evidenced by previous cases involving tech companies, edtech companies, or Macau casinos, in order to achieve “Common Prosperity.” In either case, stock traders should closely monitor market signals and price action in real estate and financial sector stocks to determine whether the situation has the muscle to become a systematic issue.
Moving forward, along with the Evergrande issue, investors should keep an eye on coronavirus cases, as it remains one of the most important factors influencing markets, as the pace of economic recovery is dependent on it. Similarly, the crucial FOMC meeting is scheduled to take place this week, providing investors with insight into how the monetary landscape will likely look in the coming months. Furthermore, Treasury Secretary Janet Yellen has emphasised the importance of raising the United States’ debt limit. She claims that the failure to act now will result in an economic disaster because it will limit the government’s ability to make payments and borrow to meet its obligations.
The turbulence in equity markets spilled over into the cryptocurrency industry, as traders lowered their exposure to the volatile digital asset in order to take cover and wait for markets to stabilise. This behaviour is consistent with historical patterns in which traders liquidate their holdings to meet margin calls and then wait for the winds to die down before reinvesting in riskier assets.
Consequently, the price of Bitcoin, the de facto standard for cryptocurrencies, dropped by up to 10% on Monday. Similarly, Microstrategy and Coinbase fell 4% and 3%, respectively, while Square fell 2%. Investors should keep in mind that Bitcoin’s price action has paralleled that of equities markets this year, and that crypto markets, like equity markets, are subject to corrections in the traditionally slow month of September.
Oil prices fell by about 2% on Monday as the US dollar strengthened against other currencies. The US dollar went up in value because it is regarded as a safe-haven in risk-averse environments, which has a negative impact on oil prices. This is since, when the value of the US dollar rises, oil becomes more expensive to foreign buyers, causing its price to fall. However, the news that some US Gulf supply will most likely be unavailable for months kept the black gold from falling any further.
The Evergrande saga has increased market worries, and the volatility index is currently at 25.71. As a result, investors have rushed to boost their holdings of the safe-haven commodity. Furthermore, investors have flocked to purchase bonds over the last few days as well, causing yields to fall and gold prices to rise. Gains have been limited, however, in anticipation of the Fed’s meeting this week. This is because a hawkish stance could potentially harm the yellow metal’s appeal.