Stock futures sink amid China’s Evergrande default risk, debt ceiling debates
U.S. stock futures sold off Monday morning, tracking declines in overseas equities as investors nervously eyed the potential ripple effects of the default of a major Chinese real estate company and ongoing debates over the debt limit in Washington.
Dow futures sank by more than 500 points, or 1.6%, in early trading. S&P 500 futures also dropped by more than 1%, adding to losses from last week. The CBOE Volatility Index, or Vix (^VIX), jumped by more than 30% as a confluence of concerns roiled markets.
Shares of China Evergrande Group (3333.HK) plunged by more than 10% on the Hong Kong Stock Exchange as fears mounted that the Chinese real estate juggernaut would collapse under a major debt burden, impacting shareholders, bondholders and potentially triggering turmoil elsewhere across global markets. The specter of a broader crackdown by the Chinese government on Hong Kong’s real estate sector further added to concerns.
Meanwhile, heated debates in Washington over increasing the government’s borrowing limit built on the risk-off tone in markets. U.S. Treasury Secretary Janet Yellen called for Congress to raise the U.S. debt ceiling again in a Wall Street Journal op-ed, and suggested that to do otherwise would risk leaving the government to default on payments and generate “widespread economic catastrophe.” The U.S. House is set to vote this week on the debt ceiling and a stopgap spending measure to keep the government operating past the end of the fiscal year at the end of September.
Even heading into Monday’s session, the three major U.S. stock indexes had dipped so far in September amid escalating concerns over the Delta variant, pace of the economic recovery, inflation and path forward for monetary and fiscal policy. Retail sales data last week suggested the consumer was turning back towards goods rather than services spending amid the latest wave of the coronavirus, and still-weak consumer sentiment data suggested many individuals were becoming increasingly concerned about inflationary pressures.
And on the monetary policy front, the prospects of a near-term shift to present ultra-accommodative policy posturing from the Fed has also injected additional uncertainty into markets. The Federal Open Market Committee is slated to hold its two-day policy-setting meeting Tuesday and Wednesday, with the event culminating in a new monetary policy statement, update economic projections, and press conference from Federal Reserve Chair Jerome Powell.
One of the major focuses at this week’s meeting will be about whether the Federal Reserve ramps up its signaling around when it will begin to taper its crisis-era asset purchase program. The central bank has suggested this quantitative easing — which currently comprises purchases of $120 billion monthly in Treasurys and mortgage-backed securities — would begin once the economy made “substantial further progress” toward the Fed’s goals on inflation and employment.
“While we readily admit that the Committee could make changes to the September statement to signal that tapering is drawing closer, we believe the soft August hiring print and recent surge in COVID cases added enough uncertainty to the economic outlook that would refrain officials from making substantive changes to the wording,” Sam Bullard, senior economist for Wells Fargo, wrote in a note on Sunday.
“If the economic data improves sufficiently over the coming weeks, then Fed officials could use public comments throughout October to signal that tapering will commence in November,” he added.
For investors, the Fed’s move on tapering will be closely watched given that the asset purchases were one major tool the central bank used to bolster liquidity and support the economic recovery during the pandemic, and had by extension helped underpin stocks’ rise to record highs.
Though stocks have lost some of their momentum in September so far, some strategists believe the move may be temporary.
“You have to look at where the crowding is, and right now, there’s so much negative sentiment with regard to the market. It’s why we have been buying this dip this week and telling our clients that we think the market setup is perfect for a pretty big rally for the rest of September and possibly the beginning of October,” Eddie Ghabour, Key Advisors managing partner, told Yahoo Finance on Friday. “The next big hurdle we have to get through is the Fed meeting on Wednesday. If the Fed doesn’t disappoint, I think it’s a risk-on rally … right now everyone is so pessimistic about the market, and in our opinion markets don’t crash when everyone is positioned for it.”
6:57 a.m. ET Monday: Stock futures plunge, Dow drops 500+ points
Here were the main moves in markets as of Monday morning:
S&P 500 futures (ES=F): -56.75 points (-1.28%) at 4,365.00
Dow futures (YM=F): -541 points (-1.57%) to 34,921.00
Nasdaq futures (NQ=F): -152.25 points (-0.99%) to 15,173.75
Crude (CL=F): -$1.43 (-1.99%) to $70.54 per barrel
Gold (GC=F): +$8.20 (+0.47%) to $1,759.60 per ounce
10-year Treasury (^TNX): -3.9 bp to yield 1.331%
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck