Wall Street heads for weekly gain while bond yields tick higher

Newsletter: Unhedged

Stocks on Wall Street wavered on Friday and government debt sold off as investors kept a close eye on the unfolding Evergrande crisis and digested hawkish signals from several leading central banks.

The US blue-chip S&P 500 index ended the day 0.1 per cent higher, after falling as much as 0.4 per cent early in the session. The advance — it’s third consecutive daily gain — helped to reverse the broad sell-off on Monday when market confidence had been shaken by Evergrande.

The tech-focused Nasdaq ended both the session and the week flat.

The market turmoil was evidenced in large redemptions from mutual and exchange traded funds over the past week, with investors pulling $24.2bn from global equity funds in the seven days to Wednesday. It marked the first weekly outflow this year, according to fund flows tracked by EPFR Global.

US stock funds suffered redemptions of $28.6bn over the same period, the largest weekly withdrawal since February 2018.

The yield on the US 10-year Treasury note, a key benchmark for global borrowing costs, also continued to rise after a sell-off on Thursday. It rose 0.02 percentage points to 1.45 per cent, and briefly on Friday hit its highest level since July.

The weakness in the Treasury market followed the Federal Reserve’s closely followed monetary policy decision earlier in the week, when the US central bank indicated that a growing number of policymakers expected to raise rates in 2022.

The Fed messaging was followed by Norway’s Norges Bank becoming the first big western central bank to raise rates on Thursday and the Bank of England revealing that the case had “strengthened” for “modest tightening of monetary policy” in the next few years.

“There’s a sense that one swallow does not a summer make, but you see two and investors start to think summer is here,” said James Athey, a bond portfolio manager at Aberdeen Standard Investments. “We had an unequivocally hawkish Fed . . . so people get the sense that central banks are moving towards tighter policy.”

Line chart of Indices rebased showing Evergrande crisis loomed over turbulent week for stocks

In response to the shift in stance from policymakers, the yield on the 10-year UK gilt jumped more than 0.1pp on Thursday and further 0.02pp on Friday. The yield on the equivalent German Bund rose 0.03pp to minus 0.23 per cent.

Global equities were mixed on Friday as a much-anticipated bond payment deadline passed for the Chinese property developer Evergrande, sending signs of stress across China’s real estate sector amid fears that the company’s escalating liquidity crisis could ripple across to other sectors and countries.

Evergrande, the world’s most indebted property developer, was due to make an $84m interest payment on an offshore bond on Thursday but creditors told the Financial Times that no payment had yet been received. Evergrande has a 30-day grace period before a failure to pay would lead to a default.

The Europe-wide Stoxx 600 benchmark closed down 0.9 per cent, although it ended the week up 0.3 per cent. London’s FTSE 100 also advanced more than 1 per cent for the week, even as it tallied a 0.4 per cent decline on Friday.

In Asia, Hong Kong’s Hang Seng index closed 1.3 per cent lower, taking its fall for the week to almost 3 per cent.

Hitting investor sentiment further on Friday was a move by Beijing to crack down on cryptocurrencies by declaring that all activities related to digital coins are “illegal”. The price of bitcoin fell 5 per cent in response as did the shares of scores of US-listed companies linked to digital finance such as Riot Blockchain and Marathon Digital.

The dollar index, which measures the greenback against six currencies, rose 0.2 per cent. Brent crude, the oil benchmark, rose 1.1 per cent on Friday to settle at $78.09 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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