Stock-market fall may be sign of more serious trouble ahead…

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Monday’s stock-market fall may be a sign of more serious trouble ahead

The Dow dropped 614 points yesterday, its worst day since October 2020 — and most analysts blamed worries about Chinese real estate.

That would seem an odd thing to be causing such fear and loathing in the US stock market, but don’t discount it — such seemingly unrelated spasms are often the spark of something far worse.

What appears trivial often forces market players to focus on all that’s wrong with the economy, corporate earnings, fiscal and monetary policy — the main drivers of stocks. History shows corrections often start with a random headline or event that’s a catalyst for something bigger.

 

 

Earnings Alarm Bells Ringing…

(Bloomberg) — An alarming number of companies have warned that profits won’t meet expectations when they report in a month.

The group, including PP Industries Inc. and Sherwin-Williams Co., are primarily materials producers that have struggled amid supply-chain disruptions. While just a small part of the S&P 500, their earnings have historically been the most correlated to the index’s of all sectors, a study by Bank of America Corp. found.

Gridlock, Debt Jitters…

  • Strategists said the renewed sell-off in U.S. markets on Monday is in part thanks to partisan gridlock in Congress over the debt ceiling and government shutdown.
  • House Speaker Nancy Pelosi, D-Calif., said Monday that the House will this week pass a government funding bill and a debt ceiling suspension.
  • The bigger hurdle is likely the Senate, where lawmakers will need to muster 60 votes to pass such a bill that isn’t tied to the separate reconciliation legislation.
  • “The framework of Washington policy is shifting to more risk after 18 months of unlimited fiscal and monetary policy,” wrote Dan Clifton, head of policy research at Strategas.
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DEJA VU ALL OVER AGAIN: To bail out or not to bail out: China’s Evergrande dilemma.

The Evergrande Group, one of China’s biggest real-estate developers, owes more than $300 billion to a number of lenders. Its interest liabilities are rising by an average of $28 million daily. On Thursday, Sep. 23, alone, the company needs to pay around $120 million as interest payments to bondholders.

If Evergrande begins to default, it will present the Chinese government with a dilemma. Should the company be bailed out, or should it be allowed to fail?

The markets are worried about the contagion effect that an Evergrande collapse will have on the economy; comparisons to the 2008 insolvency of Lehman Brothers, and the financial meltdown that ensued, have already been aired. There’s no good time for an economic crisis, but a particularly bad time for one is when the world is already in the grip of a pandemic.

If Evergrande does go into a bankruptcy court and has its debt restructured, its investors will all take significant haircuts on what they’re owed. But according to the so-called “seniority waterfall”—the pecking order in which creditors get paid—the Chinese government itself makes money first, since state-owned banks are among Evergrande’s biggest creditors.

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