Wednesday, September 27, 2023
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Wall Street courts, then skirts, disaster as Evergrande bonds loom large

It’s been a while since the market has posted huge jumps in both directions within a week, but the news from China’s property developer and renewed assurances from the Federal Reserve brought back memories of the early, volatile days of the Covid pandemic.

MANHATTAN (CN) — A rollercoaster of gains and losses rollicked Wall Street this week in an unexpected echo of the wild swings of early 2020, when the Covid-19 pandemic first struck.

It began Monday with the Dow Jones Industrial Average falling 614 points — which was an improvement from the point that day when it was down nearly 900 — while the S&P 500 and Nasdaq dropped 75 points and 330 points, respectively.

Presaging the rout is the imminent collapse of Evergrande, a Chinese developer weighted down by about $300 billion in debt. In addition to a $83.5 million interest payment on its bonds, Evergrande faces an additional $42.5 million payment later this month. It has 30 days to pay those bills, or it faces default.  

The dire Evergrande situation may have caused Monday’s losses, but on Wednesday and Thursday investors recovered, and then some. The Dow itself gained 844 points on those two days of trading, with the S&P 500 and Nasdaq enjoying similar returns.

By Friday’s closing bell, the three indices had flattened but still had a positive week, with the Dow gaining 213 points in total for the week, with the S&P and Nasdaq netting 23 points and five points, respectively.

Some say the Evergrande debacle is a Chinese “Lehman moment” — a frightening callback to the collapse of Lehman Brothers in late 2008, which heralded the acceleration of the Great Recession — while others are more sanguine.

“The reason that Evergrande isn’t causing more global turmoil is because the Chinese government will end up paying for it,” Tom Essaye of the Sevens Report wrote. “Yes, there are ‘private’ banks in China, and yes, there are ‘private’ corporations, but in the end the Communist Party owns anything and everything (if it wants to).”

Simon MacAdam, senior global economist at Capital Economics, also isn’t terribly worried about the fallout from Evergrande, noting that “we think that a restructuring of Evergrande or other indebted property developers in China will be achieved without major consequences for the rest of the world beyond some temporary market turbulence.”

McAdam noted, however, some ripples could still roil markets since “foreign creditor losses could be concentrated at systemically important institutions.” If other property developers come under fire, he added, big institutional investors with leveraged exposure could take a hit.

Hoping to calm investors, the Federal Reserve once again provided some stability to markets, with the release of its Federal Open Markets Committee meeting minutes on Wednesday firing a warning shot to investors that the central bank would soon taper its bond-buying program. At a press conference, Fed chair Jerome Powell called it “time for us to begin to taper.”

Most experts predict the Fed will formally announce in November that it will taper its purchases of Treasuries and mortgage-backed securities, with the tapering itself not actually kicking off until December or January.

During his statement, Powell said tapering would likely conclude during the middle of 2022, noting that its employment and inflationary goals have nearly been met.

Powell also told investors, however, that the Fed would not soon change its interest rate from near-zero. Half of the FOMC’s members expect the central bank to raise interest rates slightly next year, though only three anonymous members expect the rate to exceed 0.5%. In 2023, all but one of the members said the interest rate would increase, with all members in 2024 expecting the rate to exceed 0.5% and the majority predicting a 2% interest rate.

There is less consensus among experts as to when the Fed would raise interest rates, but many believe it will be later in 2022. “With the latest Covid wave showing signs of abating we also expect a re-acceleration of activity through [the fourth quarter of 2021], which we think will lead to even more Fed members backing a 2022 rate hike in the December forecast update,” wrote James Knightley, chief international economist at ING. He expects a second rate hike after the first one three months after that in 2022.

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Categories / Economy, Financial, Securities

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