Dow falls again after Evergrande Sparks’ worst day in months. What happens next?


Top line

Stocks struggled to cut losses on Tuesday after fears the world’s most indebted real estate developer would start to default on debt sparked the market’s biggest sell-off in months, but many experts remain confident that equities will rebound in the United States, given strong economic momentum as the pandemic eases.


After plunging 615 points in its worst daily drop since July, the Dow Jones Industrial Average fell 50 points, or 0.2%, on Tuesday, keeping it nearly 5% below last month’s all-time high.

Meanwhile, the S&P 500 fell about 0.1% and the tech-rich Nasdaq added just 0.2%; the two indices posted their biggest declines since May on Monday, falling 1.7% and 2.2% respectively.

In a Tuesday note, JPMorgan’s chief global strategist Marko Kolanovic called Monday’s sell-off a “overreaction,” fueled largely by shaken traders, and doubled his bullish market forecast, saying the S&P could rise another 9% by the end of the year.

He says the Russell 2000, an index for small-cap companies, was relatively resilient on Monday and remains in a long-term uptrend, a good sign for the overall market, given that small-cap stocks are usually at the top of the more important clues, he adds. .

Although several Asian markets remain closed this week until Wednesday, the benchmark Hong Kong stock index rose 0.5% on Tuesday, although it remains down around 12% this year.

Crucial quote

“As long as Covid continues to ease, strong momentum is expected to continue through 2022, as companies begin to replenish depleted stocks and ramp up. [spending]Kolanovic said. “Central bank policies should remain growth-oriented, and even China’s slowdown should soon be countered by a political pivot.”

Key context

Evergrande, China’s second-largest real estate developer, has racked up a whopping $ 300 billion in debt to help fund its large portfolio of ambitious projects since its founding 15 years ago. However, battered by the country’s slowing economic growth, the company told banks last week it would not be able to repay debt this month, causing its shares to fall and triggering a sharp drop in the industry. Chinese real estate that quickly spread to Asian markets. 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. The company’s shares have plunged more than 80% this year.


In a letter to employees on Monday, the president of Evergrande said the company would “come out of its darkest moment” and fulfill its obligations to investors, partners and banks.

What to watch out for

While U.S. stocks were largely undisturbed by last week’s unrest, it quickly sank on Monday after reports were released warning Evergrande could miss an $ 84 million interest payment due this month. Thursday and trigger a default that would undeniably have damaging ripple effects, given the size of the developer. . “What happens on Thursday promises to be a major event for the markets one way or another,” National Australia Bank’s Ray Attrill told TBEN.


Many experts were initially concerned that the potential collapse of Evergrande could mark a seismic economic shock similar to those that fueled the Great Recession, but increasingly since Monday’s liquidation, analysts have changed their tone. Ryan Detrick of LPL Financial, for example, acknowledged that Evergrande’s liquidity crisis could be “huge” but said the Chinese government is likely to step in to avoid systemic damage. In a Monday night note, Wedbush analyst Dan Ives said the liquidation created a buying opportunity on tech stocks like Apple and Microsoft, which fell on Monday but are now on the mend. “While the bears will worry about the impact this issue will have on Chinese growth and global markets, our multi-year bullish thesis for tech stocks remains firmly unchanged,” Ives wrote.

Further reading

Hong Kong mixed stocks; Evergrande Falls, casino rebound, electric vehicle manufacturers slide (TBEN)

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