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European stocks edge higher after Evergrande bond payment update

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Newsletter: Unhedged

European equities and Wall Street index futures rose after indebted Chinese property developer Evergrande said it had struck a deal on a domestic debt payment, soothing fears of a credit crisis in the world’s second-largest economy.

The regional Stoxx Europe 600 index gained 0.7 per cent during the London morning while the UK’s FTSE 100 added 1.2 per cent as mining and commodities stocks rallied.

Brent crude, the international oil benchmark, rose 1.4 per cent to $75.38 a barrel.

Futures contracts that bet on the direction of Wall Street’s blue-chip S&P 500 index added 0.6 per cent while those on the technology-heavy Nasdaq 100 rose 0.4 per cent.

Evergrande, which has financial obligations of more than $300bn and has been hit by government restrictions on lending to China’s vast real estate sector, said a payment due to domestic bondholders on Thursday had “already been resolved”.

The developer did not say how it would meet its onshore bond payment. But the statement reassured investors who had hoped Beijing policymakers would work with its domestic creditors to limit potential losses by mainland Chinese lenders, suppliers and homeowners.

“It’s likely we will see government intervention that gives some relief to the domestic creditors,” said Francesco Sandrini, senior multi-asset strategist at Amundi, Europe’s largest fund manager. “Chinese authorities will do the best job they can to contain any spillover.”

Evergrande also has an interest payment on a bond held by foreign investors due on Thursday.

“China’s authorities have a very clear motive, and the necessary means, to contain any threat of a systemic crisis in the country’s domestic financial system,” said Udith Sikand of research house Gavekal.

“What happens to international investors is another matter.”

Sunil Krishnan, head of multi-asset funds at Aviva Investors, warned that while Beijing would “try and contain” Evergrande’s problems, investors should be concerned about “a chilling effect on real estate development activity and some knock-on impact on property prices” that could slow China’s decelerating economy further.

Mainland Chinese stocks fell on Wednesday as markets reopened after a two-day national holiday, although less badly than feared as investors viewed the onshore bond repayment pledge as a sign Evergrande may avoid a disruptive collapse. China’s CSI 300 share index fell 0.7 per cent.

In debt markets, the yield on the 10-year Treasury note ticked up 0.01 of a percentage point higher to 1.336 per cent, reflecting cautious trading ahead of the conclusion of the Federal Reserve’s latest monthly meeting.

Later on Wednesday the Fed will update its economic forecasts and produce policymakers’ latest projections on the timing of the US central bank’s first post-pandemic interest rate rise.

Investors are also awaiting clear signals on when Fed policymakers plan to reduce its $120bn of monthly bond purchases that have boosted lending and spending throughout Covid-19. While headline consumer price inflation in the US has topped 5 per cent for three consecutive months, Fed chair Jay Powell and other policymakers have spoken of the need for further labour market recovery.

The dollar index, which measures the greenback against six key currencies, was flat as currency traders held back from making bets ahead of what could be a significant monetary policy communication. The euro was also steady against the dollar, buying $1.1731.

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