Stock futures crumble amid Evergrande default risk in China and debt ceiling debates

U.S. equity futures were sold on Monday morning, following the drop in foreign stocks as investors nervously watched the potential ripple effects of the failure of a major Chinese real estate company and ongoing debates over the limit debt in Washington.

Dow futures fell more than 500 points, or 1.6%, at the start of the session. Futures on the S&P 500 also fell more than 1%, adding to losses last week. The CBOE volatility index, or Vix (^ VIX), jumped more than 30% as a confluence of worries rocked markets.

Shares of China Evergrande Group (3333.HK) plunged more than 10% on the Hong Kong Stock Exchange as fears mounted that the Chinese real estate juggernaut would collapse under a heavy debt burden, affecting markets. shareholders, bondholders and potentially triggering unrest elsewhere in the markets. The specter of a broader crackdown by the Chinese government on Hong Kong’s real estate sector has further heightened concerns.

Meanwhile, heated debates in Washington over increasing the government’s borrowing limit have leaned on the risk-averse tone of the markets. US Treasury Secretary Janet Yellen called on Congress to raise the US debt ceiling again in a Wall Street Journal op-ed, and suggested doing otherwise would risk leaving the government in default and generating a “generalized economic catastrophe”. The US House is due to vote this week on the debt ceiling and an interim spending measure to keep the government in business beyond the end of the fiscal year to the end of September.

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Even before Monday’s session, all three major U.S. stock indexes had fallen so far in September amid growing concerns about the Delta variant, the pace of the economic recovery, inflation and the way forward for the economy. monetary and fiscal policy. Retail sales data last week suggests consumers are turning to spending on goods rather than services amid the latest coronavirus wave, and still weak data on consumer sentiment suggests many people are increasingly concerned about inflationary pressures.

And on the monetary policy front, the prospect of a near-term shift to showcase ultra-accommodative Fed policy has also injected additional uncertainty into the markets. The Federal Open Market Committee is expected to hold its two-day policy-making meeting on Tuesday and Wednesday, the event culminating with a new monetary policy statement, an update on economic projections and a press conference by the president of the Federal Reserve, Jerome Powell.

One of the main goals of this week’s meeting will be whether the Federal Reserve will step up its signals when it begins to scale back its crisis asset purchase program. The central bank has suggested that this quantitative easing – which currently includes purchases of $ 120 billion per month of treasury bills and mortgage-backed securities – would begin once the economy makes “substantial progress” towards the Fed’s inflation and employment targets.

“While we readily admit that the committee may make changes to the September statement to signal that the reduction is approaching, we believe that August’s low hiring impression and recent increase in COVID cases have added enough ‘Uncertainty about the economic outlook that would prevent officials from making substantial comments on wording changes,’ Sam Bullard, senior economist at Wells Fargo, wrote in a note Sunday.

“If economic data improves sufficiently in the coming weeks, Fed officials could use public comments throughout October to signal that the reduction will begin in November,” he added. .

For investors, the Fed’s decision to gradually reduce its duration will be closely watched as asset purchases have been one of the main tools used by the central bank to bolster liquidity and support economic recovery during the pandemic. , and by extension helped support the rise in equities to record levels.

Although 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 congestion is, and right now there are so many negative feelings about the market. That’s why we bought this drop this week and told our customers that we think that the market setup is perfect for a pretty big rally for the rest of September and maybe early October, ”Eddie Ghabour, Managing Partner of Key Advisors, Yahoo Finance told Yahoo on Friday. “The next big hurdle we have to overcome is the Fed meeting on Wednesday. If the Fed doesn’t disappoint, I think it’s a risky rally… right now everyone is so pessimistic about the market, and in our opinion markets don’t crash when everyone is positioned for it. ”

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6:57 a.m. ET Monday: Stock futures plunge, Dow Jones loses more than 500 points

Here are the main movements on the markets as of Monday morning:

• S&P 500 Futures Contracts (ES = F): -56.75 points (-1.28%) to 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

• Raw (CL = F): $ -1.43 (-1.99%) to $ 70.54 per barrel

• Gold (CG = F): + $ 8.20 (+ 0.47%) to $ 1,759.60 per ounce

• 10-year cash flow (^ TNX): -3.9 bp for a yield of 1.331%

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck