A large chunk of Wall Street stocks and indices fell to their lowest level in months on Monday after Chinese real estate giant Evergrande warned it was struggling to raise the cash needed to pay interest this week, prompting a Widespread global liquidation and fueled concerns about potentially systemic risks that could arise if the world’s most indebted real estate developer begins to default on massive debt obligations exceeding $ 300 billion.
Led by losses at JPMorgan Chase, Goldman Sachs and equipment maker Caterpillar, the Dow Jones industrial average plunged 615 points, or 1.8%, to 33,970 on Monday, posting its lowest closing level since July 19.
Meanwhile, the tech-savvy S&P 500 and Nasdaq fell 1.7% and 2.2%, respectively, with energy and industrial stocks leading the losses; the indices are now up 18% and 16% for the year, while the Dow is up 12.5%.
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“The bad news just keeps coming,” LPL Financial analyst Ryan Detrick said in a note Monday about Evergrande’s mounting woes, noting that the company suspended trading of its onshore corporate bonds on Sunday after analysts credit unions warned about investing in them.
The development takes Evergrande “one step closer to restructuring or default,” adds Detrick, noting that some analysts are concerned that a default could be “the first domino to fall, creating a systemic risk similar to what happened when the investment bank Lehman Brothers collapsed 13 years ago ”. At the beginning of the Great Recession of 2008.
Although many Asian markets were closed for the holidays, Hong Kong’s Hang Seng Index suffered heavy losses, falling 3.3% to its lowest point for the year.
Evergrande, the second-largest real estate developer in China, told banks last week that it would not be able to make payments on the debt that are due this month, causing its shares to fall and a sharp decline in the Chinese real estate sector that it quickly spread to other industries.
With some 1,300 real estate projects in China, Evergrande employs about 200,000 people and says it creates approximately 2 million jobs each year through its projects. Although it posted more than $ 100 billion in revenue last year, Evergrande has also amassed more than $ 300 billion in debt to help fund its high-rise developments since its founding 15 years ago. Although U.S. stocks were unfazed by last week’s turmoil, they plunged quickly on Monday after Bloomberg reported that Evergrande could miss an interest payment of $ 84 million that is due this Thursday.
Despite acknowledging that Evergrande’s liquidity crisis could be “huge,” Detrick does not believe Evergrande could cause a Lehman-style collapse. Unlike the investment bank, most of Evergrande’s debt is held in equity funds and stocks, unlike banks or other major institutions, he notes. Furthermore, Detrick believes that the Chinese communist government would likely intervene to prevent a default if necessary, and the company also has assets that it can sell to settle financial obligations.
“Market prices have been perfectly priced for a long time, and in this September hiatus that seems to be quite seasonal throughout history, markets are dealing with what they hate the most: uncertainty,” said the advisor. David Bahnsen, of The Bahnsen Group of California, in an email Monday.
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Bahnsen added that he does not see any systemic risk to the global economy from the Evergrande situation, but cautions: “This market has experienced almost no downside volatility for a long time, and it is long overdue.”