2 factors causing panic on Wall Street


Stocks fell sharply on Monday morning, as investors woke up for another week with lingering concerns about some key issues fueling the global economy and financial markets. At 11:30 a.m. EDT today, Dow Jones Industrial Average(DJINDICES: ^ DJI) was down 504 points to 34,081. S&P 500(SNPINDEX: ^ GSPC) had lost 69 points to 4,364, and the Nasdaq Composite(NASDAQINDEX: ^ IXIC) had lost 307 points to 14,735.

Two of the main issues that investors seem to be almost panicking about are the Evergrande Group in China (OTC: EGRNF)immovable development company in China, and the state of the US debt ceiling. It is reasonable to ask whether market participants are overreacting to the situation or whether their nervousness is justified. Below, we’ll take a closer look at both issues to see why everyone seems so nervous.

â–º Stock exchange: S&P 500 drops amid fears of real estate contagion in China

Could Evergrande cause a Chinese financial crisis?

The Chinese economy has grown at a faster rate than the rest of the world for years now, and the country’s real estate boom has played a substantial role in driving its economic expansion. The prolific use of debt financing has been a key driver for the Chinese real estate market, helping developers like Evergrande to grow at an impressive rate.

Still, Evergrande has been facing growing problems for several months. Entrepreneurs are suing Chinese courts over concerns about its debt, and investors are increasingly concerned about its ability to continue paying interest. With hundreds of thousands of potential buyers potentially at risk of losing down payments on homes that are yet to be built, Evergrande could easily ripple through negative economic impacts if it does. proves unable to manage its outstanding debt. passive efficiently.

A default on Evergrande bonds would put the Chinese government in a position similar to that of the United States in 2008. It is far from clear that China is about to bail out Evergrande, while taking steps to attempt to reduce the collateral damage of a real market collapse. real estate developer could be a happy medium. In the event of liquidation, Chinese real estate assets would likely suffer significant write-downs, and investors from other real estate companies serving China and the surrounding region are watching very closely.

At this point, investors seem to be trying to figure out how pervasive exposure to Evergrande is. Most believe the scope of the company is not broad enough to pose a global systemic threat, but that may not rule out significant losses for some surprising names as things unfold.

Running out of debt

Meanwhile, the US government faces its own debt crisis. The legal debt limit of $ 22 trillion was suspended in August 2019 for two years, with a reset to $ 22 trillion plus accumulated borrowing during the two-year period that ended in early August. 2021.

Shortly after the suspension ended, Treasury Secretary Janet Yellen sent a letter to Congress advising lawmakers of the need to raise the debt ceiling. It also included a list of extraordinary measures the Treasury would begin to take, including suspending reinvestment of various public funds and suspending sales of new specialized Treasury securities.

The Treasury got a break as estimated tax payments from individuals and corporations were due on September 15, providing vital liquidity to fund government operations. Nonetheless, most expect the government to run out of cash in October without action.

Controversies over the debt ceiling have happened before, sometimes even leading to short-term government shutdowns. The problem now, however, is that a technical debt default would arise at a time when international confidence in the United States is much lower than it has historically been. So it makes sense that investors are nervous.

Keep a long-term view

In all likelihood, the Evergrande and debt ceiling issues will be resolved favorably. Until that happens, however, you can expect volatility to continue – volatility that could actually create buying opportunities for those brave enough to take advantage of it.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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