Economy

Global markets rattled by China's Evergrande crisis, Fed meeting

Investors worried about spillover to other markets, similar to 2007 US mortgage crisis that caused global financial meltdown

Ovunc Kutlu   | 21.09.2021
Global markets rattled by China's Evergrande crisis, Fed meeting

ANKARA

Global financial markets have been rattled by risks surrounding China's second-largest property developer Evergrande Real Estate Group on Monday, and the upcoming US Federal Reserve meeting that will conclude on Wednesday.

Having $300 billion in liabilities, Evergrande was in danger of being unable to issue payments on loan interest due Monday, which could cause millions of its customers to lose their deposits.

Investors are worried whether Evergrande would default on its debt, which could then spill over to other Asian financial and real estate markets before turning to a global event, just like the US subprime mortgage crisis in 2007 led to a global financial meltdown a year after.

Evergrande is likely to default without seeing any direct support from the Chinese government, S&P Global Ratings said Monday.

"We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy," the global rating agency said in a note. "Evergrande failing alone would unlikely result in such a scenario."

Amid fear and uncertainty, Tokyo's Nikkei 225 stock exchange posted its largest single-day decline, 660.34 points, in the last three months, as it shed 2.17% to close Tuesday at 29,839 points -- its lowest level since Sept. 6.

Asia Dow, which includes blue-chip companies in the region, slid 1.54% from Monday through Tuesday.

The Hang Seng, the benchmark for blue-chip stocks trading on the Hong Kong stock exchange, posted the most decline in Asia by diving 821 points, or 3.3%, to 24,099 on Monday. The index showed some recovery Tuesday by climbing 0.51%.

Singapore index fell by 0.96% and the Indian Sensex benchmark lost 0.9% on Monday, as they also bounced back on Tuesday by gaining 0.71% and 0.88%, respectively.

Risks and fears have also hit the cryptocurrency market on Monday.

Bitcoin, the world's largest crypto by market cap, plummeted a whopping 9%, while some altcoins dove as much as 30%. The total market value of the global crypto market lost around $200 billion in a single day.

Fed rate hike, tapering fears

Risks in global financial markets were coupled with the upcoming meeting of the US Federal Reserve that will start on Tuesday and end late Wednesday. ​​​​​​​

The Fed signaled on June 16 that it can make two rate hikes, by 0.25% each, in 2023. The central bank, however, may carry one of those to late 2022, and possibly signal two or three more rate hikes for 2023.

The bank's decision of tapering, the process to reduce accumulating new assets on its balance sheet, is a much more heated topic in the near term.

The Fed Chair Jerome Powell said on Aug. 17 that the bank is in the process of putting away its emergency tools, and this was viewed as a hint that the bank would soon decide to begin unrolling its massive $120 billion monthly asset purchase program.

While some experts believe tapering would start in early 2022, when the bank would unroll $15 billion in each of its eight meetings, some analysts warn that the process could start as early as next month.

An earlier start of tapering would result in less liquidity, which global markets had an abundance in the past 18 months since COVID-19 was declared a pandemic by the World Health Organization.

The risk and worries surrounding less liquidity, however, caused massive losses in European and American markets on Monday.

The STOXX Europe 600, which includes around 90% of the market capitalization of the European market in 17 countries, fell 1.67%.

London's FTSE 100 lost 0.86%, and Germany's DAX index fell 2.3%. While the French CAC 40 lost 1.7%, Spain's IBEX was down 1.2%, and Italy's FTSE MIB was the worst performer of Monday with a decline of almost 2.6%.

All European indices were on a positive territory with more than 1% daily gains each, as they were trying to recover from their losses in the previous session.

Major indices in US stock exchanges also had daily losses of around 2% apiece on Monday.

The blue-chip Dow Jones industrial average dove 614.41 points, or 1.8%, to 33,970.47 and marked its biggest single-day loss since July 19, according to official figures.

The S&P 500 plummeted 1.7%, or 75.26 points, to 4,357.73 -- its worst one-day performance since May 12.

The tech-heavy Nasdaq declined the most by falling 330 points, or 2.19%, to 14,713.90 by the final bell.

US futures were pointing out to a strong opening for the three indices later Tuesday.

Global financial markets, however, will await the Evergrande crisis to resolve and the Fed meeting to conclude before settling down and reaching their previous high levels.

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