Evergrande Jitters Return, Yen Climbs, Dollar Steady

• Evergrande stocks plunge after unit sales fall, mood starts in stocks
• Treasury is tightening as the Fed prevents early rate-raising talk
• Yen rebounds, dollar rises, but commodity currencies fall

Stocks under pressure as Evergrande default risks increase

Stock markets felt the tension of a recent panic over China’s heavily indebted property sector after a troubled real estate giant – Evergrande – told investors that the sale of its property service unit for $ 2.6 billion had collapsed. Evergrande is urgently trying to get the funds it needs to meet the bond interest payments on its $ 305 billion debt and the sale of Evergrande Property Services Group was seen as essential to avoid default.

The company has until Monday to pay a coupon payment of $ 83.5 million on a foreign bond as the 30-day grace period expires later this week. Default could have a huge dominant impact on China’s entire real estate market and the wider construction industry. And while it is unclear how large the international spread would be, the outlook for the Chinese economy alone slowing even further than it already is could cast a massive shadow over the growth outlook globally.

Shares in Evergrande group fell 12.5%, however, the Hang Seng index in Hong Kong managed to rebound from its session lows and China’s CSI 300 index ended the day in positive territory. While the Evergrande saga is not over at all, assurances from the government that the debt crisis is unlikely to grow to something bigger seem to be helping to maintain some order in the markets at the moment.

Stock market panic or profit?

Shares in Europe opened red and U.S. futures declined, but losses were modest. Although the renewed worries certainly weighed heavily on Thursday, markets had to correct after six straight days of gains for the S&P 500. The tech heavy Nasdaq indexes were already exhausted, closing lower on Wednesday even as Dow Jones Industrial Average flirted with record territory.

Unless the Evergrande crisis really erupts into a major disaster, Wall Street still has a lot of support that could keep the rally going for a while. Democrats are concluding an agreement on a key part of President Biden’s economic agenda. The social spending bill looks almost certain to be priced much lower than the original $ 3.5 billion figure, but anything more than $ 1 billion along with the $ 1.2 billion infrastructure bill nonetheless should give a big boost to the U.S. economy, which appears to be slow.

Meanwhile, some reassuring words from Fed politicians that a rate hike is far from over are also likely to put a floor under stocks. Speaking Wednesday, both Mester and Quarles suggested it’s too early to start talking about rates, easing the upward pressure on 10-year Treasury yields that climbed to five-month highs yesterday.

The recent rise in inflation expectations in the U.S. and elsewhere has accelerated long-term government bonds. But today’s decline in yields is likely to continue as the 5-year U.S. inflation rate rose to 2.9% and shows no sign of easing.

Crude currencies are impacting as the dollar and yen climb

The U.S. dollar, however, rose on Thursday despite the softer yields as the increased risk-off drew some safe-haven demand. The Japanese yen also benefited from safe havens, pushing the dollar below the 114-yen level.

The euro and pound both slipped, but the biggest losers were the riskier commodities tied to commodities. The Australian and New Zealand dollars fell about 0.35% against their U.S. counterpart, while the Canadian dollar fell 0.1%, finding some support from oil prices, whose losses were small compared to their recent gains.

All three currencies have risen to multi-month highs against the dollar this week as the market tone has improved and in line with rising expectations that the respective central banks will have to tighten monetary policy at a faster-than-expected pace. Fed speakers and the weekly unemployment claims coming later today could determine whether the mood is brightening again.