Caution lingers as some markets recover after Evergrande sell-off

Global stock markets stabilised yesterday, with investors appearing to be more confident that contagion from the possible collapse of debt-saddled Chinese property giant Evergrande would be limited.

Investors pointed to the broadly positive market backdrop with central bank money printing and the recovery in the world economy post-pandemic as reasons to stay bullish.

"Accommodative monetary and fiscal policies and macro recovery are still suggesting a buy-the-dip strategy," said Mr Angelo Meda, head of equities at investment management firm Banor SIM in Milan.

Some caution still lingered, however, given the simmering worries over the spillover from an Evergrande debt default, as well as a raft of central bank meetings, including the Federal Reserve statement expected today that may bring the US central bank a step closer to tapering.

The Straits Times Index advanced 0.7 per cent to 3,063.2, even as nervous investors await the latest Evergrande developments. The gains were partly owing to traders buying the dips, given recent losses in the local market.

Shares in Hong Kong clawed back some of the previous day's steep losses, with the Hang Seng Index closing up 0.5 per cent.

Evergrande's own stocks and bonds tumbled further, after S&P Global Ratings said the world's most indebted developer is on the brink of default.

Its shares in Hong Kong dropped as much as 7 per cent before finishing down just 0.4 per cent, still settling near a 10-year closing low. Its 8.25 per cent US dollar bond due next year fell 0.3 cent to 24.9 US cents, leaving it down about 75 per cent since late May. The junk-rated company is the biggest issuer of high-yield notes in Asia.

"We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy," said an S&P report on Monday. "Evergrande failing alone would unlikely result in such a scenario."

Mainland Chinese markets were closed for a second day for a public holiday.

Japan's Nikkei returned from a market holiday with a drop of 2 per cent, while Australian stocks rose 0.35 per cent.

Wall Street futures rebounded 1 per cent after the S&P 500 and Nasdaq on Monday suffered their biggest daily percentage drops since May.

S&P 500 futures rose 0.3 per cent after the index's biggest fall in two months overnight.

Investors fear that a messy collapse or liquidation at Evergrande could ripple through China's property sector at a time when growth in the world's second-largest economy is already looking fragile.

A major test looms tomorrow, when Evergrande bond interest payments are due. Failing to settle the interest within 30 days would put the bonds in default. Evergrande shares fell 4 per cent in Hong Kong, though they remained above Monday's lows.

Regulators have warned that the company's US$300 billion (S$405 billion) of liabilities could spark broader risks to China's financial system if its debts are not stabilised.

Evergrande chairman Hui Ka Yan told staff that he firmly believes the company will step out of the darkest moment soon, Securities Times reported, citing a company letter.

It said that the developer will accelerate full-on resumption of construction to ensure the handing over of buildings.

Evergrande aside, other market tests loom, with central banks spanning the United States, Britain, Japan, Norway, South Africa, Sweden and Switzerland meeting this week.

Nerves ahead of the Fed statement kept the US dollar from moving much lower, though it notched small losses against the euro and the Australian dollar.

"Central banks rightly need to think about the ways they withdraw from these historically high levels of monetary accommodation, but the task is being made much more difficult by Evergrande and by fiscal blockages in the US," GSFM investment strategist Stephen Miller said.

He was referring to US congressional wrangling over passing a spending package and lifting the Treasury's borrowing limit.

Brent crude prices, meanwhile, rose by more than 1 per cent, ending days of losses sparked by Evergrande's troubles.

REUTERS, BLOOMBERG