Global stocks sink on Evergrande contagion fears

World stocks sank 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.

European markets mostly closed lower, with London losing 0.9 per cent and Paris 1.7 per cent.

In Germany, the first day of the DAX blue-chip index's expansion to 40 firms from its previous 30 was marred by the Evergrande woes, shedding 2.3 per cent.

On Wall Street the Dow Jones Industrial Average fell 2.0 percent and the tech-heavy Nasdaq 2.5 per cent in morning trading.

Hong Kong earlier dived 3.3 per cent, spearheading Asian losses, with Evergrande widely expected to default on upcoming interest payments this week.

"Contagion concerns are ramping up amid intensifying uncertainty regarding a potential default of China's second-largest property developer Evergrande," Charles Schwab analysts said.

Meanwhile,  "uncertainty regarding whether the US debt ceiling will be raised is also fostering market skittishness," they added.

Treasury Secretary Janet Yellen recalled in an article for the Wall Street Journal how in 2011  "debt-limit brinkmanship pushed America to the edge of crisis", saying a Washington default would  "likely precipitate a historic financial crisis".World oil prices also fell on energy demand worries.

With all eyes on Evergrande,  "Investors are not sure whether Chinese authorities will be able to contain the fallout from a possible disorderly collapse of the heavily indebted company," Thinkmarkets analyst Fawad Razaqzada said.

"This could have repercussions on many other companies. So, the contagion risks may be much wider than the markets currently expect," he added.

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.

"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," said AJ Bell analyst Russ Mould.

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 Markets.com analyst Neil 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 percent, its worst performance since May 2020.

The selling was mirrored elsewhere in Asia, although Tokyo, Shanghai, Seoul and Taipei were closed for holidays.

Despite the growing crisis, the Chinese government has yet to step in to prevent Evergrande from going under.

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.