By Geoffrey Smith
Investing.com -- U.S. stock markets tumbled at the open on a combination of worries from China's mounting debt problems to the outcome of this week's policy meeting at the Federal Reserve.
By 9:35 AM ET (1335 GMT), the Dow Jones Industrial Average was down 488 points, or 1.4%, at 34.097 points, its lowest in two months. The S&P 500 was down 1.5%, also at a two-month low. while the NASDAQ Composite was down 1.6% at a one-month low.
Market sentiment has clearly deteriorated in recent days, with a series of warnings about a possible correction from the likes of Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). The latter's analysts said in a note to clients this weekend that they see an increasing risk of a 20% drop in the S&P 500, against a backdrop of gradually tightening monetary policy and the withdrawal of fiscal stimulus in the U.S., as well as foreign risks such as a debt crisis in China and a slowdown in Europe caused by soaring energy prices.
The U.S. economy is starting to slow as the sugar rush of pandemic-era stimulus starts to fade. Stronger-than-expected retail sales failed to convince the market last week of the consumer's strength, especially after the University of Michigan's consumer sentiment survey came out on the weak side. Analysts at Bank of New York Mellon (NYSE:BK) said in a note to clients that they expect real consumer spending to slow to an annualized growth rate of 4.2% in the fourth quarter, with further downgrades quite likely. They added that GDP growth is currently running at around 3.5% on an annualized basis, well below the rates seen earlier this year.
At the same time, expectations that the Fed will start to run down its bond purchases have also hardened. Julia Coronado, founder of MacroPolicy Perspectives, said via Twitter (NYSE:TWTR) that a majority of her survey respondents expect a "strong signal" from the Fed this week that it is about to start tapering asset purchases, most likely beginning in November. Across the Pacific meanwhile, the closure of mainland markets for a public holiday couldn't hide the increasing sense of panic as China Evergrande Group, the country's second-largest real estate developer, inches toward a likely default on Thursday. The Hong Kong Hang Seng index fell over 3% on Monday, with other real estate developers falling 10% or more.
Stocks with high China exposure were among the biggest early losers: Caterpillar (NYSE:CAT) stock fell 4.0% while Alibaba ADRs (NYSE:BABA) fell 4.3%. Elsewhere, Coinbase Global (NASDAQ:COIN) stock fell 4.0% as crypto assets once again demonstrated their high correlation to other risk assets.
"This is just the beginning," said Daniel Lacalle, chief economist at Tressis in Madrid, via Twitter. He noted that property accounts for 25% of Chinese GDP, something that will make it difficult for the authorities to contain the fallout from a player of such size. Sharply rising borrowing costs for other developers have already translated into a collapse in prices for iron ore and steel, for which the property sector is the biggest customer. U.S. Steel (NYSE:X) stock was consequently down 6.1% while miner Freeport-McMoran (NYSE:FCX) stock was down 5.3%.
Airline stocks were among the outperformers, after a Financial Times report claiming that the U.S. administration is prepared to lift the ban on non-essential arrivals from the EU and U.K., ending 18 months of rupture on what have typically been the world's busiest long-haul routes. American Airlines (NASDAQ:AAL) stock rose 0.9% while Delta Air Lines (NYSE:DAL) lost a relatively modest 0.5%.