Global stocks rebound after Evergrande-induced sell off

Newsletter: Unhedged

Global stock markets on Tuesday clawed back losses from the heaviest sell-off in months as investors bet that policymakers would step in to prevent a calamitous fallout if the Chinese property developer Evergrande defaulted.

In the US, the technology-heavy Nasdaq Composite added 0.2 per cent for the day, having dropped 2.2 per cent a day earlier. It followed Europe’s Stoxx 600 benchmark, which closed up 1 per cent following the continent-wide benchmark’s steepest dive in nine weeks. Frankfurt’s Xetra Dax jumped 1.4 per cent while London’s FTSE 100 ended the session 1.1 per cent higher.

However, late selling pressure erased bigger gains on the Nasdaq and pushed the benchmark S&P 500 share index 0.1 per cent lower at the close, having gained as much as 0.8 per cent in morning trading in New York. The index had spent most of the day in positive territory, in line with global bourses, after tumbling 1.7 per cent on Monday in its sharpest fall since May.

On Monday fears swept across global financial markets that the woes of Evergrande, the world’s most-indebted developer whose share price has dropped about 85 per cent this year, would knock China’s property and banking sectors, exacerbating the nation’s economic slowdown.

Evergrande’s US dollar bonds have also tumbled in price to highly distressed levels ahead of a crucial interest payment due on Thursday. But analysts now widely expect Chinese policymakers to act to prevent contagion.

The Evergrande crisis had spurred a retreat to the relative safety of core government debt. However, by Tuesday bond prices were steady. The yield on the 10-year US Treasury note, which had slid as much as 0.07 percentage points earlier this week, rose 0.01pp to 1.32 per cent.

Line chart of Share price (HK$) showing China’s Evergrande tumbles on default fears

“It’s not that a systemic spillover risk is impossible but it is unlikely,” said Farhad Kamal, chief investment officer at the private bank Kleinwort Hambros. “The state will probably step in” to protect the interests of Beijing government-backed banks and local retail investors, he added.

“A possible Evergrande default could be a significant drag on the property sector. But we think it is far from being China’s Lehman moment,” analysts at Barclays said, referring to the collapse of the US investment bank in 2008 that sparked the global financial crisis.

After Beijing capped bank lending to the real estate sector earlier this year, it could ease such curbs “should the need arise”, argued Barclays.

“Equity markets are overall bullish, so people are buying the dips,” said Marija Veitmane, senior strategist at State Street Global Markets.

Sentiment remained sanguine owing to a flurry of positive second-quarter earnings results and the easy monetary policies from the Federal Reserve and the European Central Bank that has helped to prop up financial markets.

But George Ball, chair of the Texas-based wealth manager Sanders Morris Harris, was less sure about the wisdom of buying “the dip in stocks in the broader indexes”.

“China’s market is opaque and unpredictable and the stock market doesn’t react well to those characteristics, which is one reason why Monday’s sell-off was so dramatic,” he added.

Mainland China’s stock markets remained closed for a two-day holiday on Tuesday. “Evergrande’s situation remains highly volatile, and markets may be enjoying only a shortlived respite before China’s markets reopen tomorrow,” analysts at ING warned.

Brent crude, the global oil benchmark, climbed 0.8 per cent to $74.54 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday


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