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U.S. stocks dropped following decisive drawdowns out of Europe and Asia as a weakening of global sentiment shook the markets. Market participants appeared rattled as contagion uncertainty stemming from a potential default of China's Evergrande, the world's most indebted property developer, escalated. Meanwhile, uncertainty over whether the U.S. debt ceiling would be raised, further amplified the skittishness, all while the markets braced for the looming monetary policy decisions out of the U.S., U.K., and Japan later this week. Treasuries rose amid the global shift away from risk, to apply downside pressure on yields, and the U.S. dollar was little changed. Gold was higher and crude oil prices fell. September homebuilder sentiment unexpectedly improved to snap a three-month decline. Corporate news was relatively light today, but Pfizer and partner BioNTech SE announced positive topline results from their trial of their COVID-19 vaccine in children 5-11 years old.
The Dow Jones Industrial Average declined 614 points (1.8%) to 33,970, the S&P 500 Index fell 75 points (1.7%) to 4,358, and the Nasdaq Composite dropped 330 points (2.2%) to 14,714. In heavy volume, 1.1 billion shares were traded on the NYSE and 4.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.68 to $70.14 per barrel. Elsewhere, the gold spot price rose $12.40 to $1,763.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was little changed at 93.22.
In light equity news on Monday, Pfizer Inc. (PFE $44) and partner BioNTech SE (BNTX $339) announced positive topline results from their trial of their COVID-19 vaccine in children 5-11 years old. The companies said, "These trial results provide a strong foundation for seeking authorization of our vaccine for children 5 to 11 years old, and we plan to submit them to the FDA and other regulators with urgency." PFE traded higher and BNTX lost ground.
The stock markets began the week on shaky footing, with the continued uncertainty and warnings of potential default at China Evergrande Group (EGRNY $9) exacerbating global contagion fears, given the company's massive size and potential systemic significance as it is the world's most indebted property developer. The company's default concerns has weighed heavily on Asian markets, notably Hong Kong, which sold off again overnight to spook the global markets as the new week began. Additionally, uncertainty regarding whether the U.S. debt ceiling will be raised also fostered market skittishness, with Treasury Secretary Janet Yellen warning a failure of could spark a financial crisis. The markets sold off to begin the week that will bring a highly-anticipated Fed monetary policy decision, which likely also added to the volatility and bolstered risk aversion.
September and October have historically been blustery months for stock market performance as discussed in the Schwab Center for Financial Research's Quarterly Market Outlook: Is Seasonal Volatility Ahead?.
Treasury yields lower as market uneasiness boosts bond demand, busy economic week begins
Treasuries rose amid the market skittishness as the yield on the 2-year note dipped 1 basis point (bp) to 0.21%, while the yields on the 10-year note and the 30-year bond decreased 5 bps to 1.31% and 1.85%, respectively.
The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in September unexpectedly improved to 76 from August's 75 level, and compared to the Bloomberg consensus estimate of a dip to 74. The index ended a three-month decline as the NAHB said builder confidence inched up in September on lower lumber prices and strong housing demand, even as the housing sector continues to grapple with building material supply chain issues and labor challenges.
Tomorrow’s economic calendar in the U.S. will be relatively light, offering only the August housing starts and building permits report, forecasted by FactSet analysts to show starts advanced 1.4% month-over-month (m/m) to an annual rate of 1,550,000 units, and that permits fell 2.0% m/m to an annual rate of 1,598,000 units. Meanwhile the markets will continue to look ahead to Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC). Accompanying the decision will be updated FOMC economic projections, and shortly after the announcement Chairman Jerome Powell will deliver his customary press conference.
The markets continue to expect the Fed to begin trimming its monthly asset purchases sometime in Q4, despite August's much softer-than-expected nonfarm payroll report, but the first rate hike is not expected for some time. Schwab's Chief Fixed Income Strategist Kathy Jones and Senior Fixed Income Analyst, Christina Shaffer, note in their commentary, Fed Tapering: Will it Be Different This Time?, that although the prospect of the Federal Reserve tapering its bond purchases has unsettled markets in the past, we expect it to be more orderly this time around.
Asia and Europe fall as global markets selloff
European equities dropped to begin the new week, with the global markets taking risk off the table amid debt contagion concerns as the struggles continue for China's Evergrande the world's most indebted property developer. Stocks in Asia continued to slide and markets in the U.S. began the week solidly in the red. The markets also seemed to be skittish as a key U.S. debt ceiling decision looms, while monetary policy decisions are due out this week from the U.S., the U.K., and Japan. The euro was little changed but the British pound lost ground versus the U.S. dollar, which rose amid the global risk aversion. Global bond yields also moved to the downside as bond prices advanced amid the exacerbated sentiment. Most sectors were in the red, with value/cyclical issues—Financials, Materials, Industrials, and Energy—leading to the downside. Defensively-natured—Utilities and Consumer Staples—issues were some of the best performers but remained in negative territory, while the defensive/growth Health Care sector was the only one to finish in the green.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Payback Time With a Potential Payoff. Jeff notes how a gradual slowing of stimulus heralds a potential drop for the world's stock markets, but the evidence suggests a possibility for a positive outcome. Jeff also discusses in his article, Can Investors Avoid Rising Supply Chain Risks?, how supply chain issues are worsening, increasing the risk to sales, production, and inflation. He points out how European stocks may offer an opportunity to avoid these risks.
The U.K. FTSE 100 Index was down 0.9%, France's CAC-40 Index decreased 1.7%, Germany's DAX Index fell 2.3%, Switzerland's Swiss Market Index declined 1.4%, Spain's IBEX 35 Index descended 1.2%, and Italy's FTSE MIB Index dropped 2.6%.
Stocks in Asia sold off to begin the week on skittish footing with debt problems at real estate company China Evergrande remaining the catalyst and fostering contagion concerns. The Hong Kong Hang Seng Index continued to take the brunt of the blow, tumbling 3.3%, while Australia's S&P/ASX 200 Index fell 2.1% and India's S&P BSE Sensex 30 Index dropped 0.9% to retreat from record high territory. For a look at the Chinese and Hong Kong markets amid the ramped-up volatility, check out Schwab's Jeffrey Kleintop's, CFA, article, Is China’s Bear Market an Opportunity. However, volume was much lighter than usual as markets in Japan, mainland China, and South Korea were closed for holidays.
Tomorrow’s international economic calendar will also be quiet with the only a British manufacturing trends report slated for release.
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