Fears over-indebted Chinese developer Evergrande have rocked global markets.
Peter Parks/AFP via Getty Images
The Dow Jones Industrial Average rally that started off Tuesday fizzled by the closing bell, evidence that investors are still worried about the teetering China Evergrande Group and chewing on what the Federal Reserve will do next.
Dow Jones Industrial Average
fell 51 points, or 0.15%. The
dropped 0.1% and the
advanced 0.2%. This came after the indexes had experienced gains and losses at different times during the trading session, part of a technical picture that signals markets still aren’t fully confident in the market outlook. It also comes after the Dow and S&P 500 fell 4.2% and 3.9%, respectively, from their all-time highs into Monday’s close.
Today’s calmer movements shouldn’t make investors feel comfortable yet. The Dow is still below its 100-day moving average at 34,700 and horizontal support near 34,500, explains Fiona Cincotta, senior financial markets analyst at City Index. It would need to reclaim those levels to stage a “meaningful recovery,” she writes. The index is currently not even close.
The S&P 500 is trading below its 50-day moving average, raising some concern for some market technicians.
“In addition to worries about Evergrande sparking systemic risk throughout the entire financial system, investors are also worried about the Federal Reserve’s potential tapering of stimulus and the risk of a prolonged period of inflation,” writes George Ball, chairman of Sanders Morris Harris.
Fears over China Evergrande appear to have subsided, at least for the moment. According to S&P Global, the Evergrande disaster is contained and doesn’t presently require government support.
While there are several ways in which the Evergrande crisis could cause pain in the U.S. economy or financial markets, the U.S., at the very least, does not have a high degree of direct exposure to the problem. None of the major U.S. banks, JPMorgan (JPM),
Bank of America
(GS) and Morgan Stanley (MS) have more than 1.5% of their assets tied to Chinese cross-border deals, according to Wells Fargo analysts.
Still, “It also has been our experience that risk flare-ups typically do not disappear overnight. We believe the capital market stress could take 1-2 weeks to wash through the system,” writes Christopher Harvey, head of equity strategy at Wells Fargo.
Investors will have to wait until Wednesday, when Chinese exchanges–now on holiday–come back online, to see the next major update. Evergrande continued its steady decline in Hong Kong, albeit more slowly, with the stock down 0.4%. The shares have fallen 84% so far this year.
Meanwhile, a key meeting from the Federal Reserve’s monetary policy-making committee–the Federal Open Market Committee–gets under way Tuesday. On Wednesday, Fed Chair Jerome Powell is due to give a statement and officials will also update projections of future interest rates and inflation.
Investors are closely watching the Fed for clues as to how and when the central bank will begin slowing, or tapering, its Covid-19 pandemic-era program of monthly asset purchases, which add liquidity to markets.
“If the Fed implies a tapering pace of more than $15 billion/month…likely market reaction: Not good,” writes Tom Essaye, founder of Sevens Report Research.
Housing starts rose to an annual rate of 1.615 million in August, up from 1.53 million in July, but construction of single-family homes declined 2.8% due to continued bottlenecks.
“Demand remains torrid, but builders, who were already struggling to keep up, have been forced to limit their output further by a variety of supply and labor bottlenecks,” writes Amherst Pierpont’s Stephen Stanley. “This is a recipe for relatively steady starts and sales, a continuing shortage of available inventory, and further increases in home prices.”
Overseas, Tokyo’s Nikkei 225 fell 2.2%, in a delayed response to Monday’s action as Japanese traders returned from a Monday holiday. Hong Kong’s Hang Seng Index rose 0.6% to bounce off five-year lows seen in the previous session. The pan-European Stoxx 600 rose 1%.
Commodity prices, which also broadly declined Monday, rebounded. Futures contracts for international oil benchmark Brent rose 0.2% to around $74 a barrel. Copper prices initially rose, then ended the day essentially unchanged.
Here are 12 stocks on the move Tuesday:
Universal Music Group
(UMG.Netherlands)–the label behind acts including Justin Bieber, Taylor Swift, and The Weeknd–soared more than 35% in its trading debut in Amsterdam.
But the fortunes of UMG’s former parent, French media giant
(VIV.France), which retains 10% of the music group’s shares, were different. Vivendi slumped 19% in Paris.
Warner Music Group
(WMG), meanwhile, has climbed 11.8% after getting upgraded to Outperform from Neutral at Credit Suisse.
(LEN) stock dropped 0.6% after the home builder reported a profit of $3.27 a share, beating estimates of $3.24 a share, on sales of $6.9 billion, below expectations for $7.1 billion. The company said supply chain constraints are hampering its ability to meet its sales objectives, a challenge that will persist for the current quarter. Still, higher prices boosted the company’s gross margin and bottom line.
Johnson & Johnson
(JNJ) stock rose 0.5% after the company said its Covid-19 booster shot is 94% effective in the U.S. when administered 2 months after the initial dose.
Bath & Body Works
(BBWI) fell 0.1% even after getting upgraded to Buy from Hold at Argus.
(SHOO) jumped 3.6% after getting upgraded to Buy from Hold at Jefferies.
(MTN) advanced 1.2% after getting upgraded to Overweight from Sector Weight ahead of its earnings release on Thursday.
Royal Dutch Shell
(RDS.A) has risen 4% the U.K.-Dutch oil major said it would exit the largest U.S. oil field by selling its Permian Basin assets to
for $9.5 billion.
(COP) advanced 4% in New York.