U.S. stocks saw their biggest drop since May, with traders worried about the potential spillover effects if a debt-laden Chinese real estate company defaults and the likelihood that the Federal Reserve will signal that it will withdraw support for markets and the economy. The S&P 500 fell 1.7% on Monday. It had fallen to 2.9% earlier. Hong Kong’s main index fell 3.3%, its biggest loss since July, amid fears that huge Chinese developer Evergrande could collapse. The yield on the 10-year Treasury bill fell to 1.31% as investors turned to lower risk assets.

THIS IS A CURRENT UPDATE. AP’s previous story follows below.

Stocks slumped on Wall Street on Monday, mirroring losses abroad and putting the S&P 500 Index on track for its biggest drop since May.

Concerns about debt-engulfed Chinese real estate developers – and the damage they could do to investors around the world if they default – spill over into the markets. Investors are also concerned that the US Federal Reserve may signal this week that it is considering withdrawing some of the support measures it has given to markets and the economy.

The S&P 500 fell 2.1% at 3:46 p.m. EST. At one point, the benchmark was down 2.9%, the biggest drop since last October. The S&P 500 is also coming off two weeks of losses and is on track for its first monthly decline since January. The S&P 500 spent an unusually long time with no pullback of 5% or more.

The Dow Jones Industrial Average fell 745 points, or 2.2%, to 33,846, while the Nasdaq fell 2.7%. The Hang Seng, Hong Kong’s main index, fell 3.3% for its biggest loss since July. European markets fell around 2%.

“What has happened here is that the list of risks has finally become too long to ignore,” said Michael Arone, chief investment strategist at State Street Global Advisors. “There is just a lot of uncertainty at a difficult seasonal time for the markets.”

Concerns about Chinese real estate developers and debt have recently focused on Evergrande, one of China’s largest real estate developers, which appears to be unable to repay its debts.

The fear is that a potential collapse there could set off a chain reaction in China’s real estate development industry and spill over into the wider financial system, in the same way the Lehman Brothers bankruptcy ignited the crisis. financial 2008 and the Great Recession. These real estate companies have been major engines of China’s economy, which is the second largest in the world.

If they fail to repay their debts, the heavy losses suffered by investors who hold their bonds would raise concerns about their financial strength. These bondholders could also be forced to sell other independent investments to raise funds, which could hurt prices in seemingly independent markets. It’s a product of how global markets have become tightly connected, and it’s a concept the financial world calls “contagion.”

Many analysts say they expect the Chinese government to prevent such a scenario, and that it doesn’t sound like a Lehman-type moment. Still, any hint of uncertainty may be enough to shock Wall Street after the S&P 500 has climbed almost uninterruptedly since October.

Besides Evergrande, there are several other worries lurking beneath the generally calm surface of the stock market. In addition to the Fed possibly announcing it is letting go of the accelerator on its support for the economy, Congress could go for a destructive chicken game before allowing the US Treasury to borrow more money and the pandemic of COVID-19 continues to weigh on the world. economy.

Whatever the main cause of Monday’s market collapse, some analysts said such a drop was due. The S&P 500 hasn’t even seen a 5% drop from a high since October, and the almost unstoppable rise has left stocks more expensive and with less margin for error.

All the worries have prompted some on Wall Street to predict future stock declines. Morgan Stanley strategists on Monday said conditions could ripen to cause the S&P 500 to drop 20% or more. They pointed to weakening buyer confidence, the potential for higher taxes and lower prices. ‘inflation to undermine corporate profits and other signs that the economy’s growth may slow sharply.

Even if the economy can avoid this worse-than-expected slowdown, Morgan Stanley’s Michael Wilson said stocks could still fall around 10% as the Fed cuts support for markets. The Fed is due to release its latest update on economic policy and interest rates on Wednesday.

Earlier this month, Stifel strategist Barry Bannister said he expects the S&P 500 to decline 10% to 15% in the last three months of the year. He cited the reduction in support by the Fed, among other factors. Bank of America strategist Savita Subramanian also set a target of 4,250 for the S&P 500 by the end of the year. That would be a 4.1% drop from Friday’s close.

Tech companies have led the market as a whole to the downside. Apple fell 2.5% and chipmaker Nvidia 4.3%.

Banks suffered heavy losses as bond yields fell. This impairs their ability to charge more lucrative interest rates on loans. The 10-year Treasury yield fell to 1.31% from 1.37% on Friday night. Bank of America fell 5%.

Oil prices fell 2.3% and weighed on energy stocks.

Small business stocks were among the biggest losers. The Russell 2000 fell 3.3%.

Utilities and other sectors considered less risky have held up better than the rest of the market.

There were few bright spots. American Airlines led the S&P 500 winners, adding 2.6%.

Investors will have the opportunity to take a closer look at how the downturn has affected a wide range of businesses when the next round of earnings begins in October. Strong earnings have been a key driver for stocks, but supply chain disruptions, higher costs and other factors could make it harder for companies to meet high expectations.

“The market’s biggest strength this year could become its biggest risk,” Arone said.

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