Daily Market Comment – Calmer markets despite Evergrande risks, loonie jumps on Trudeau win
- Raffi Boyadjian
- Fears of Evergrande contagion ease slightly but markets remain edgy
- Loonie soars after Trudeau narrowly secures third term
- Aussie and kiwi brush off dovish reserve banks
- Pound up too but UK energy crisis a worry, dollar off highs
Global equities were steadier on Tuesday, recouping some of the previous days’ losses, as fears of a huge spillover from Evergrande’s debt crisis subsided a little. As investors increasingly liken the Evergrande crisis with the collapse of the Lehman Brothers in 2008, they remain in the dark about the Chinese government’s intentions on whether or not to rescue the world’s most indebted real estate developer.
The secrecy behind a possible state bailout to prevent a collapse in China’s biggest property company will likely keep markets nervous over the next few days when two interest payments are due on its bonds. The first payment is on Thursday, which if Evergrande defaults, could quickly escalate the fallout, potentially triggering an even sharper selloff than those seen in recent sessions.
While some traders do not foresee a widespread global contagion should a default occur, the risk of a domino effect in China’s troubled property sector is uncomfortably high and it’s unclear how well authorities would be able to contain a major blowup.
For now, the mood has calmed a bit, with plenty of other events for investors to focus their attention on. The Hang Seng index turned positive to close up 0.5% after slumping to a fresh one-year low earlier in the day. US stock futures also rebounded and were last trading around 1.5% higher. The S&P 500 closed at a near two-month low on Monday, but its woes may not be over as the Fed begins a two-day monetary policy meeting today to debate how soon stimulus should be withdrawn.Dollar retreats slightly, loonie jumps on election outcome
Although it’s unlikely policymakers will reach a tapering decision this week, they will likely signal that an announcement should be expected at the next meeting in November. However, investors are probably more concerned about the timing of the first post-pandemic rate hike. The Fed is due to publish its updated dot plot chart tomorrow and should FOMC members predict a rate hike in 2022, that could lift Treasury yields and the US dollar slightly.
The dollar index is marginally lower today amid the somewhat improved risk appetite. The yen is also broadly weaker, with the risk-sensitive commodity dollars among the best performers, led by the loonie.
The Canadian dollar is up more than 0.5% versus its US counterpart, boosted by Canada’s election outcome that’s seen as maintaining the status quo. The ruling Liberal party won the most seats in yesterday’s federal vote, securing Prime Minister Justin Trudeau a third term in government. Although Trudaeu once again failed to get the majority he wanted, he should still be able to lead a minority government, keeping his party’s spending pledges intact and eliminating the immediate downside risks for the loonie from a more fiscally prudent administration.Aussie and kiwi perk up, pound lags
The Australian and New Zealand dollar were also attempting a decent rebound on Tuesday as the mood brightened.
The kiwi fought off some selling pressure after RBNZ Assistant Governor Christian Hawkesby downplayed the possibility of a 50 basis point rate rise at the October meeting. The RBA, meanwhile, reiterated its dovish stance in the minutes of its September policy meeting, sounding more worried about a slower recovery from the Delta variant. But on the whole, the minutes offered nothing new and the aussie is up 0.3% today.
The pound climbed as well, though more modestly, amid growing concerns about the impact on the British economy by a looming energy crisis in the country. The UK’s overreliance on natural gas for electricity has left energy firms highly exposed to the recent surge in prices and may need government help to stay afloat.
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