Stocks cling to weekly gains despite Evergrande hit and bond yield jump

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(C) Reuters. FILE PHOTO: A man wearing a protective mask, amid the COVID-19 outbreak, is reflected on an electronic board displaying stock prices outside a brokerage in Tokyo, Japan, September 21, 2021. REUTERS/Kim Kyung-Hoon

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By Tommy Wilkes and Anushka Trivedi

LONDON (Reuters) – Stocks fell on Friday as uncertainty about Chinese developer Evergrande sapped confidence but the major markets remained on course for a weekly gain, while European and U.S. bond yields extended their rise after talk of central bank tapering.

That European and United States indexes look set to end the week higher had seemed unlikely on Monday when fears about an Evergrande debt default sparked widespread selling of risky assets.

Investors even shrugged off the more hawkish tone at Federal Reserve and Bank of England policy meetings and the first interest rate rise — in Norway — from a major central bank since the pandemic.

Analysts say investors remain bullish on the outlook for global growth and are confident that central banks’ withdrawal of their stimulus schemes won’t derail the rebound and that the Evergrande crisis can be contained.

On Friday, however, there was some nervousness after solid gains the previous session.

The regionwide STOXX 600 index slid 0.8% after a three-day run of gains, while Britain’s FTSE 100 also weakened.

Germany’s fell 0.8% ahead of federal elections over the weekend to elect German Chancellor Angela Merkel’s successor.

In Asia MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.5% to take its weekly losses to 1.2%, its third drop in a row.

U.S. stock futures, the S&P 500 e-minis, were down 0.4%.

The MSCI World equity index dropped 0.17% but was just into positive territory for the week, leaving it 2.7% off record highs.

Evergrande’s debt crisis continued to rattle confidence, with Hong Kong and Shanghai stocks closing lower after Reuters reported that some offshore bondholders of the company had not received interest payments by the Thursday deadline.

The property developer’s shares also fell 11% on Friday. They had rallied 17.6% the previous day after the company said it had agreed to settle coupon payments on a domestic bond.

Global investors are worried an Evergrande default poses systemic risks to China’s financial system.

“For the long-term investor, we would treat any meaningful rebound (in Chinese property stocks) as a chance to trim positions, as structurally we do not see any re-rating story for the developers,” Karl Chan, vice president on JPMorgan (NYSE:JPM)’s China property team said on a conference call on the Evergrande situation.

JPMorgan downgraded its view on the whole Chinese property sector last week and its strategists said markets faced further risks in the coming two to four weeks.

RISING YIELDS

Bond yields in U.S. and the euro zone extended their rise after Thursday’s jump as expectations grow that the Fed will begin tapering its asset purchases by year end and other countries are not far behind.

The yield on benchmark 10-year Treasury bonds was last at 1.425%, near a three-month high after gaining 13 basis points overnight.

(GRAPHIC: U.S. 10-year government bond yield – https://fingfx.thomsonreuters.com/gfx/mkt/mopankbqkva/bond%20yields.PNG)

UK gilt yields extended their surge as investors brought forward their expectations for a BoE rate hike to March.

The 10-year yield rose 5 bps to 0.965%, its highest since March 2020, before settling at 0.91%. The 2-year yield reached 0.437% — also the highest since March 2020 — before falling to 0.377%, down 1 bps on the day.

Italy’s 10-year yield rose to 0.796%, its highest since July 6.

A sense that an inflation surge across many countries may not be as temporary as central bankers believed a few months ago is also fuelling the rise in yields.

“Central bankers have been talking in unison about inflation being transitory but if even the Fed is softening its stance on this, then that could also be the case elsewhere,” said Jan von Gerich, chief analyst, Nordea.

“There is a difference though between the U.S. and euro area, where it’s easier to buy into the story that price pressures are transitory.”

The Fed said on Wednesday it could begin reducing its monthly bond purchases by as soon as November, and that interest rates could rise quicker than expected by next year. The November deadline was largely priced in by markets.

The dollar index on Friday rose 0.1% after dropping sharply overnight against a basket of its peers. [FRX/]

The euro dipped to $1.1721 while the yen was flat versus the dollar.

Oil prices rose for a fourth straight day due to global supply concerns following powerful storms in the United States. [O/R]

Brent crude rose 0.1% to $77.33 a barrel and U.S. oil gained 0.1% to $73.35 per barrel.

Gold rose 0.5% to $1,751 per ounce. It fell over 1% the day before as higher yields hurt the non-interest bearing asset. [GOL/]

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