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Stock markets rallied in Europe and Greater China as concerns faded about a systemic crisis in China from a potential debt default by property developer Evergrande.
Also shrugging off a widely expected move by the US central bank away from pandemic-era monetary support, the regional Stoxx Europe 600 rose 1.2 per cent by mid-morning in London, on track for its second day of gains.
London’s FTSE 100 added 0.6 per cent, while Hong Kong’s Hang Seng index rose 1.2 per cent. The CSI 300 index of mainland Chinese shares gained 0.7 per cent.
Evergrande, the world’s most indebted property developer whose business has been hit hard by Beijing government curbs on lending to the real estate sector, has a payment due on a dollar bond on Thursday and prices of its bonds indicate investors expect it to default.
Fears about Evergrande’s problems spiraling into China’s vast real estate and banking sectors and beyond shook global markets on Monday.
Earlier on Thursday, however, the People’s Bank of China added a net Rmb110bn ($17bn) into the country’s financial system, in the biggest liquidity boost in eight months, which investors viewed as a sign Beijing would move to prevent any crisis of confidence. A day earlier, the stressed developer had said it had “resolved” payment on a bond held by mainland Chinese lenders.
“The narrative has moved away from Evergrande being a systemic issue, to one where Evergrande is eventually restructured, but where collateral damage will be localised,” said Robert Carnell, regional head of research for Asia Pacific at ING.
Futures contracts that wager on the direction of the S&P 500 indicated the blue-chip stock index would gain 0.7 per cent in early dealings while the technology-focused Nasdaq 100 would add 0.9 per cent.
The yield on the 10-year US Treasury note, which moves inversely to its price, ticked 0.01 percentage point higher to 1.343 per cent.
Federal Reserve chair Jay Powell on Wednesday said the central bank could “easily move ahead” with a reduction of its $120bn of monthly bond purchases that have supported lending and spending throughout Covid-19, if the US economic recovery from 2020’s shocks continues as expected.
Half of the central bank’s Federal Open Market Committee officials now expect the first post-pandemic rate rise to take place next year, up from seven in June, the last time the Fed released their projections.
This hawkish turn by the world’s most influential central bank had not rattled financial markets, said NN Investment Partners head of multi-asset Ewout van Schaick, “because it is largely what markets had been expecting.”
US interest rates, he added, “are likely to rise very, very gradually,” meaning there was little risk of companies and households sharply reining in their spending anytime soon.
The dollar index, which measures the US currency against six others, dropped 0.3 per cent as traders dismissed the possibility of a swift monetary tightening cycle.
Powell, at his press conference following the conclusion of the Fed’s monthly meeting, also said Evergrande’s debt issues seemed “very particular to China.”
Analysts expect S&P 500 companies to increase their earnings by more than 40 per cent this year, according to data collated by investment bank Jefferies.
“Earnings are still growing and while we’ve got the steepest part of the recovery [from the pandemic] behind us, we are still in a recovery phase,” van Schaick said. “The backdrop for investing in equities really isn’t bad.”
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