Stocks Slammed Amid Evergrande Default Fears

September 22, 2021 at 09:08 PM

This Monday the US stock indices were down 2-3%. In addition, during the three last weeks the medium-term top has been formed. It was caused by the recent situation with a real estate collapse in China that forced investors to sell risky assets in a fear of contagion. 

So what actually happened? The Chinese real estate giant Evergrande will likely default this week, possibly causing some tremors in the financial markets as several US banks have notable holdings of Ever bonds. The company is scheduled to pay its interest on 23rd and 29th of September. However, Evergrande is scheduled to pay interest on bank loans Monday, with a one-day grace period and if it fails to arrange an extension of Monday’s payments, it could be in technical default as soon as Tuesday.

When the most extensive sell program happened in May, it took the markets several days to shake it off before running higher again. Should the exact scenario repeat, we might see further selling before going higher again. 

The banks should be prepared for this massive sell-off to escalate and Morgan Stanley seems to have had it right from the start when set the lowest target on Wall Street which is currently at 4,000 USD for the SP500 index. 

“With our year-end target 10% below current levels, our view is clear: the mid-cycle transition will end with the rolling correction finally hitting the S&P 500.” The bank reiterated its target this week. They expect the correction to continue amid many factors – rising inflation, tapering expectations, extremely overbought market, and more. 

Later this week, the Federal Open Market Committee (FOMC) meeting takes place, and the Federal Reserve (Fed) would need to sound really dovish to calm the markets otherwise it could risk a much steeper sell-off.

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