Dow heads for worst day in 10 months as debt woes for China’s Evergrande rattles stock market

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

“There’s plenty of headlines to hit stocks, and we’ve seen that happen,” said Sahak Manuelian, head of equity trading at Wedbush Securities in Los Angeles, pointing to Evergrande’s woes, geopolitical tensions, the coming FOMC meeting and jitters about the U.S. debt ceiling.

“I’m not sure what the scope of this will end up being,” Manuelian told MarketWatch, but he also said he’ll be watching to see if investors come out in force over the next few days to snap up downtrodden shares, as largely has been the case on any weakness year-to-date. “We’ll see how we come out of this.”

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 debt-laden Evergrande would neither lead to a tidal wave of defaults nor mere ripples from a pebble in a pond but something between the two.

“Stories like Evergrande’s can be tough to digest, and it may take time to understand the true risk related to this type of event,” Lindsey Bell, chief investment strategist at Ally Invest, wrote in emailed comments. “Fear has been building in the market for a while, and selling pressure has intensified today with the VIX
VIX,
+37.05%
“fear index” jumping to its highest level since May.”

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 unclear.

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.

“We are probably out of the Goldilocks stages, where stocks were putting in a straight line higher,” said Michael Reynolds, investment strategy officer at Glenmede, in a phone interview. “This is almost a return to normal.”

Reynolds said discord in Washington, including over President Biden’s planned $3.5 trillion spending plan could mean “volatility is here for now.” But he also thinks the fundamentals of the economic recovery remain “in relatively good shape,” meaning that a sustained pullback might make for a good time to add risk.

Read: It is the ‘golden age’ of U.S. consumer credit, says this Voya portfolio manager

Investors also were weighing an upbeat report from Pfizer Inc.
PFE,
+0.03%
 and German partner BioNTech SE
BNTX,
-6.08%
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 fell 3.7%. 

• 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 7.1% toward a four-month low.

• GameStop Corp. GME said Monday it plans to hire 500 employees at its new customer service center in Pembroke Pines, Fla. Shares were down 9.4%

• 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. Exchange traded U.S. Global Jets ETF JETS slipped 0.9%.

• 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,
  -3.13%
  is off by 3.5%, outpacing the drop by the S&P 500.

How are other assets faring?

• The yield on the 10-year Treasury note TMUBMUSD10Y fell 7 basis points to around 1.30%. 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 less than 0.1% higher.

• Oil future settled lower on Monday, with the U.S. benchmark CL00 closing 2.3% lower at $70.29 a barrel. Gold futures GC00 climbed 0.7% to settle at $1,763.80 an ounce.

• In European equities, the Stoxx Europe 600 index SXXP closed 1.7% lower, it’s largest daily plunge since mid-July. The FTSE 100 UKX slumped 0.9%.

• 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.

Barbara Kollmeyer contributed reporting