Wall Street Suffers Worst Drop Since May as Global Markets Swoon

Stocks swooned on Monday as investors fretted that the governments of the world’s two largest economies — China and the United States — could act in ways that would undercut the nascent global economic recovery.

The sell-off started in Asia and spread to Europe before landing in the United States, where the S&P 500 fell 1.7 percent, the worst one-day slide since mid-May. It would have been worse were it not for a late rally; the index was down as much a 2.8 percent in the afternoon.

The Chinese government’s unwillingness to step in and save a highly indebted property developer just days before a big interest payment is due signaled to investors that Beijing might break with its longstanding policy of bailing out its homegrown stars. And in the United States, investors were worried that the Federal Reserve could soon begin cutting back its purchases of government bonds, which have driven the sharp rebound in stocks and helped prop up corporate profits since the coronavirus pandemic hit.

Before this month, Wall Street were enjoying a seven-month run that had lifted stocks more than 20 percent, as investors seemed to shrug off any bad news. But there has been a clear shift in the market’s tone since the high on Sept. 2, and it worsened on Monday because of the spiraling debt woes of Evergrande, a vast Chinese real estate business that has struggled to meet its obligations, worrying investors there and around the globe.

Evergrande’s struggles are an important consideration for Chinese financial markets: The company owes more than $300 billion to a range of lenders, and a default on its debts would have ripple effects on China’s economy. Investors were left to wonder about which other real estate companies were likely to stiff creditors, and whether banks and insurers that lend to them could also be hamstrung.

“We have been asked repeatedly in recent weeks if ‘this’ — a likely Evergrande default — is China’s Lehman moment,” wrote analysts at Barclays in a client note on Monday, referencing the collapse of Lehman Brothers, the investment banks whose 2008 collapse was a seminal moment in the last financial crisis.

Evergrande’s fortunes may have been less of a consideration for investors were it not for lingering unease over the state of the global pandemic recovery. The Delta variant of the coronavirus continues to be a threat to stability in many parts of the world, and investors are also nervous about a range of policy matters, from the infrastructure spending and tax plans in the United States to what, exactly, China would do if Evergrande were to fail.

Senate Democrats are coalescing around imposing a new tax on corporations that repurchase their shares, something that could potentially weaken a key source of demand for stocks. Democrats are also set this week to turn their focus to raising the federal borrowing limit. Analysts say that until the ceiling is raised, investor exuberance could be hard to find.

But foremost in investors’ minds is the Federal Reserve, which is expected on Wednesday to discuss a timeline for slowing bond purchases that are aimed at shoring up the U.S. economy. Some economists expect the Fed to signal that it will start winding down the bond purchases later this year. The central bank could then begin to raise interest rates in 2022.

On the other side of the globe, the questions surrounding Evergrande also involve governmental policy: Investors are closely watching how Beijing deals with the company’s struggles. For decades, much Chinese growth was driven by investment in infrastructure, including the market for residential property, which was financed with enormous sums of borrowed money.

Under the Chinese system, loans to developers are often extended under the strong influence of the government, which looked at property building as a source of jobs and economic growth. As such, many lenders viewed companies such as Evergrande as having an implicit guarantee from the government, meaning that if the company couldn’t pay its debts, the government would ensure creditors get repaid.

“The market to some degree was looking for a catalyst for a broader sell-off,” said John Canavan, lead analyst at Oxford Economics. “The Evergrande situation is probably not going to resolve itself without support from China and, if China doesn’t offer that support, the question is to what degree are there spillover risks within Chinese equities and then cascading into the global markets.”

Evergrande’s shares plunged 10.2 percent in Hong Kong, as the Hang Seng index fell 3.3 percent to its lowest in nearly a year.

Wary investors pushed the Hong Kong-listed shares of some of China’s biggest property developers deep into the red amid worries that Evergrande’s problems could affect the funding abilities of other developers at a time of heightened regulatory scrutiny. Shares of the Chinese developer Sinic Holding fell by 87 percent after regulators in one Chinese province said they would punish certain sales practices by developers.

Mike Bell, a strategist at JPMorgan Asset Management in London, said the situation with Evergrande could lead to more volatility over the next month or so, but he wasn’t overly concerned that the company’s problems would have global consequences.

“When we look at China at the moment, we still think the earnings outlook — outside of companies like Evergrande —  for the broader market remains very positive,” he said.

In addition to investor worries about Evergrande’s problems and policy maneuvers in Beijing and Washington, other factors have been rippling through the global markets. High natural gas prices in Europe are sending energy bills soaring and causing factories, such as those that make fertilizer, to shut down in Britain, where smaller energy companies are seeking government bailouts. The Stoxx Europe 600 fell 1.7 percent, while the FTSE 100 in Britain was down 0.9 percent.

Alexandra Stevenson contributed reporting.