Tuesday's Market Minute: Equities Endure A Meaningful Pullback Before The Main Event
U.S. and global stock markets have repeatedly hit record highs this year but had already begun to slip this month due to worries about slowing economic growth, the impact of the Delta variant, and the potential for central banks to begin withdrawing stimulus measures. The S&P is close to seeing its first 5% pullback since early May as evidence is starting to point to weaker growth and falling consumer confidence alongside a typically weak seasonal month for equities.
The potential fall of a major Chinese company in an influential industry feeds the perception that the Chinese economy and global economic recovery could be further slowed. China’s largest property developer Evergrande is facing a liquidity crisis, and its ballooning balance sheet is under considerable strain.
In a normal economy, the woes of a single real estate development company wouldn’t be such a big deal. But in China, real estate is estimated to account for up to a quarter of GDP, which creates more of a concern. It doesn’t help that the property developer also has some $300 billion of outstanding obligations to pay, with two interest payments on its bonds due Thursday. Defaulting on its debts is unlikely to cause a financial credit crisis in China that has a contagious effect across the world. Although the direct impact of Evergrande’s woes is likely to be limited in the U.S., the trouble comes just after weeks of rising concerns over equity valuations, economic hesitancy, investor complacency, and a highly anticipated Fed decision tomorrow.
Throughout the trading day, I anticipate attention will pivot towards the main event of the week. The FOMC policy meeting will likely be a reiteration that committee members are poised to taper before the end of the year. The FOMC has the full attention of investors, and any comments from Fed members will make headlines and could move the markets. Investors haven’t been able to put a finger on the timing of a taper, but there is growing speculation that at the upcoming meeting the Fed will signal that it will begin tapering at the November meeting.
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