World stocks sank on Monday as trading floors were gripped by contagion fears from the expected collapse of debt-plagued Chinese property giant Evergrande, with investors also on red alert over spiking wholesale gas costs.
Sentiment is being dented by strong inflation, the Federal Reserve's plans to taper monetary policy, surging infections with the Delta variant of coronavirus, and signs of weakness in the global recovery.
Hong Kong dived 3.3 per cent, spearheading Asian losses, with Evergrande widely expected to default on upcoming interest payments this week.
Europe tanked, with London losing 1.6 per cent and Paris down 2.2 per cent, while Frankfurt's newly expanded index dropped 2.3 per cent in early afternoon deals.
World oil prices shed about two per cent on energy demand worries.
Evergrande meltdown risks - "Contagion risks from the Evergrande meltdown are the prime cause of today's sell-off," said Markets.com analyst Neil Wilson. "It is definitely though a major cause for investor concern right now and it is possible we see further losses."
Evergrande, one of China's biggest developers, is on the brink of collapse as it wallows in debts of more than $300 billion.
Mining shares were hard hit because of the potential economic impact on China, which has a voracious appetite for raw materials.
"Evergrande... appears to be teetering on the precipice with concerns about contagion from the situation infecting the wider economy in China," said AJ Bell analyst Russ Mould. "Any downturn in China would have significant implications for commodities demand given its status as the world's largest consumer of many minerals and metals."
Anxiety is also running high over spiking wholesale gas costs, fuelling global inflationary pressures and sparking concern from the world's biggest central banks.
Against this backdrop, the Federal Reserve's monetary policy meeting this week will be particularly important, according to Wilson.
"Does a Chinese property collapse and energy crisis collide with expectations for a Fed rate hike next year and biting inflationary pressures?" he wrote in a note to clients. "That would be a pretty nasty cocktail for risk appetite and I think these are the risks being priced into today's selling."
Back in Hong Kong, property companies and banks bore the brunt of heavy selling.
Evergrande stock briefly plunged almost 19 per cent before ending down 10 per cent, sparking similar losses for Henderson Land and New World Development.
The Hang Seng Property Index meanwhile dropped more than six per cent, its worst performance since May 2020.
The selling was mirrored elsewhere in Asia, although Tokyo, Shanghai, Seoul and Taipei were closed for holidays.
In addition, a new Delta outbreak in China has raised fear about the effect on the recovery in the world's number two economy, which remains a key driver of global growth.
Analyst Philip Tse, of BOCOM International Holdings, warned “there will be further downside” unless leaders give a clear signal on Evergrande or ease up on their clampdown on the real estate sector.
Despite the growing crisis, the government has yet to step in to prevent Evergrande from going under. Analysts say that while leaders are looking to curb excessive risk-taking, they will probably work to prevent the issue from becoming unmanageable.
“The central government’s priority of social stability makes restructuring likely, with haircuts for debt holders, but spillovers to other listed property developers means there will likely be a real economy impact on the real estate sector,” said National Australia Bank’s Tapas Strickland. “To what extent Evergrande slows the growth momentum remains unclear.”
The selling followed another loss on Wall Street, where investors are tracking the progress of Joe Biden’s multi-trillion-dollar spending bills, while there is unease that lawmakers have yet to raise the US debt ceiling, risking the country defaulting on its own obligations.
The selling followed another loss on Wall Street, where investors are tracking the progress of Joe Biden’s multi-trillion-dollar spending bills, while there is unease that lawmakers have yet to raise the US debt ceiling, risking the country defaulting on its own obligations
The Fed’s policy meeting this week is being closely followed, with some experts predicting it could set a timetable for winding in its vast bond-buying programme put in place last year to support the economy and equity markets. Officials have flagged that they will begin tapering by the end of the year in order to keep a lid on inflation, though it is yet to indicate by how much and from when. Wednesday’s announcement comes as several other central banks around the world also prepare to make decisions, with many now considering tightening.
The shift towards turning off the taps to financial markets comes as the Delta variant continues to spread quickly around the world, forcing some governments to reimpose lockdowns or other strict containment measures. Among them is China, where a new outbreak is raising concerns about the effect on the recovery in the world’s number two economy, a key driver of global growth.