Why Did US and European Indices Fall?
At the beginning of this week already, American and European stock indices decided to take a rest. Namely, the whole team of major indices took a lie-in: Dow Jones Industrial Average, S&P 500, NASDAQ Composite, STOXX 600, DAX, CAC 40, FTSE 100. You must be intrigued about what is going on, and so am I.
Things get even more curious when I mention that the Chinese largest developer and the Fed have to deal with it, right? Are you ready to put aside all of your current tasks and find out what’s going on? Let’s get started.
How deep did the indices fall?
On September 20th, at the very beginning of the week, things in the stock market started heating up threateningly, and the trading session closed by a serious falling of American and European stock indices.
In the USA, S&P 500 (SPX) dropped by 1.7% to 4357.73 points, Dow Jones Industrial Average (DJI) – by 1.78% to 33970.8 points, and NASDAQ Composite (IXIC) – by 2.19% to 14713.9 points. During the day, the deepest slumps reached 4305.91, 33614.43, and 14530.1, respectively.
The pan-European STOXX 600 (STOXX) headed down and closed at 454.12 points, losing 1.67%. The German DAX (GDAXI) decided to dive deeper and fell by 2.31% to 15132.06 points. The French CAC 40 (FCHI) got stuck somewhere in between at 6455.81, losing 1.74%. The British FTSE 100 (FTSE) seems to have tried not hard enough – just a 0.86% decline to 6903.91.
Analysts say that on Monday, the decline of the indices of the Old World became the deepest of the last two months. To make things even more dramatic, I show you the lows of the European indices that day: STOXX 600 – 420.25, DAX – 15019.49, CAC 40 – 6389.62, and FTSE 100 – 6828.28 points.
Why did indices drop?
Experts say that there are two reasons for such market tension. The first one is a possible bankruptcy of the Chinese largest developer Evergrande. The second one is the high chance that the Fed will start cutting down on stimulation measures in the nearest future. Let’s ponder on each one.
On September 23rd and 29th, Evergrande will have to pay interest on five-year bonds, $131 million total. The problem is, the developer has a $305 billion debt and is unlikely to pay the interest. For your information: $305 billion is 2% of the Chinese GDP and the world’s largest debt among public companies in real estate.
In a recent publication, Bloomberg compared Evergrande with Lehman Brothers. As you remember, the bankruptcy of the latter initiated the financial crisis of 2008. Analysts think that the devaluation of the Chinese developer will affect not only the Chinese economy but global economy as well.
As for the result of the Fed’s conference, we will hear them on September 22nd. No one has doubts about the base interest rate: it is to remain at 0-0.25% per annum. However, little is clear about the terms and speed of cutting down on support measures. As you know, the US regulator is now stimulating the financial market, every month pouring $120 billion in it for buying bonds.
Do large banks forecast a crisis?
Analysts of large banks are sure that a comparison of Evergrande and Lehman Brothers is preliminary. In UBS, they say that the overall level of devaluations in China is low, compared to the scale of the economy. In Barclays, they don’t see any serious worsening of the crediting situation out of real estate and don’t notice any serious mistakes of Chinese regulators.
In Citi, they tend to think that Chinese authorities won’t let Evergrande go bankrupt. JPMorgan calls the market reaction on Monday too sharp and mentions that now is a good chance to buy some shares at an appealing price.
Stock indices themselves have started to recover gradually. For example, on Septemer 21st, STOXX 600 grew by 1% to 458.68, DAX – by 1.43% to 15348.53 points, CAC 40 – by 1.5% to 6552.73 points, FTSE 100 – by 1.12% to 6980.98 points.
Among American indices, only NASDAQ Composite turned upwards, growing by 0.22% and reaching 14746.4 points. S&P 500 and Dow Jones Industrial Average just slowed down the falling but preserve the overall trend, declining by 0.08% and 0.14%, respectively.
The fears of investors around the possible bankruptcy of the Chinese largest developer and the end of the Fed’s stimulation program provoked falling of American and European stock indices on Monday.
But no matter how hard financial media try to pump up the nervousness, experts of large investment banks and entities say that the situation is complicated yet not critical or lacking control.