Dow dips 600 points to two-month low as experts fear recession-like meltdown with Evergrande

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Shares fell to their lowest level in months on Monday after Chinese real estate giant Evergrande warned it was struggling to raise the cash to pay interest this week, triggering a widespread global sell-off and fueling concerns about the potentially systemic risks that could arise if the world’s most indebted real estate developer begins to default on its massive $ 300 billion debt obligations.

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Highlights

Led by losses from JPMorgan Chase, Goldman Sachs and OEM 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 highly technical S&P 500 and Nasdaq fell 1.7% and 2.2%, respectively, with energy and industrials stocks posting losses; the indices are now up 18% and 16% for the year, while the Dow Jones is up 12.5%.

“The bad news keeps coming,” LPL Financial Ryan Detrick said on Monday in a note on Evergrande’s growing problems, noting that the company suspended trading in its onshore corporate bonds on Sunday after credit analysts have warned against their investment.

The development brings Evergrande “one step closer to restructuring or defaulting,” adds Detrick, noting that some analysts fear a default is “the first domino to fall, triggering systemic risk similar to when [investment bank] Lehman Brothers went bankrupt 13 years ago, ”at the start of the Great Recession.

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 of the year.

Key context

Evergrande, China’s second-largest real estate developer, told banks last week that it would not be able to repay its debt this month, pushing its shares down and causing China’s real estate sector to fall sharply. quickly spread to other industries. With some 1,300 real estate projects in China, Evergrande employs around 200,000 people and claims to create around 2 million jobs each year through its projects. Although it recorded over $ 100 billion in revenue last year, Evergrande has also amassed over $ 300 billion in debt to help finance its major developments since its founding 15 years ago. Although U.S. stocks were largely indifferent to last week’s turmoil, it quickly sank on Monday after Bloomberg said Evergrande could miss an $ 84 million interest payment due on Thursday.

Contra

While he acknowledges that Evergrande’s liquidity squeeze could be “huge,” Detrick doesn’t think Evergrande can trigger a Lehman-style meltdown. Unlike investment banking, most of Evergrande’s debt is held in equity and equity funds, as opposed to banks or other major institutions, he notes. Additionally, Detrick believes the Chinese Communist government would likely step in to avoid a default if needed, and the company also has assets it can sell to settle its financial obligations.

Crucial quote

“The markets have been priced perfectly for a long time, and in this September lull that seems to be quite seasonal throughout history, markets are faced with what they hate most: uncertainty,” said the wealth advisor David Bahnsen, of the California group The Bahnsen, wrote in an email Monday, saying he saw no systemic risk to the global economy in the Evergrande situation, but adding: “This market does has seen almost no downside volatility in a long time, and a pullback was long overdue. “

Further reading

Hong Kong index closes 3.3% as Evergrande plunges, contagion spreads (TBEN)

Evergrande’s fateful week and China vacation spotlight the yuan (Bloomberg)

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