The China Evergrande Group saga moves into the next stage after ratings agency Fitch calls a default. Plus: Is SPAC-mania back from the dead?
Here’s your week ahead in markets from Kevin Buckland https://www.reuters.com/journalists/kevin-buckland in Tokyo; Ira Iosebashvili in New York; Abhinav Ramnarayan https://www.reuters.com/journalists/abhinav-ramnarayan, Dhara Ranasinghe https://www.reuters.com/journalists/dhara-ranasinghe and Karin Strohecker https://www.reuters.com/journalists/karin-strohecker in London.
1/A TAPER LITTLE XMAS
How much Federal Reserve hawkishness are markets willing to tolerate? We may get the answer on Wednesday when the Fed concludes its last meeting of 2021.
Its largesse has helped the S&P 500 more than double from its March 2020 lows, but lately stocks have oscillated between Omicron woes and taper expectations, with Fed Chairman Jerome Powell flagging https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 policymakers would discuss a faster taper of bond purchases.
Some have speculated that a degree of Fed hawkishness may already be baked into equities https://www.reuters.com/markets/europe/wall-st-hits-reset-after-market-froth-fed-fears-loom-2021-12-08, which have risen in recent days.
Signs the Fed is growing more worried about inflation – even after suggesting it was time to retire “transitory https://www.reuters.com/article/usa-fed-instant/feds-powell-floats-dropping-transitory-label-for-inflation-idUSKBN2IF1S0” from its description of U.S. price rises – could roil markets. So could suggestions of a more aggressive rate hike path in the “dot plot” projection of rates.
2/READY FOR MORE?
Across the pond, the Bank of England and European Central Bank unveil policy decisions within 45 minutes of each other on Thursday. Both are potentially market-moving https://www.reuters.com/markets/europe/global-markets-cenbanks-analysis-graphic-pix-2021-12-06.
Uncertainty fuelled by the Omicron COVID-19 variant has dented expectations for a near-term BoE rate hike https://www.reuters.com/markets/europe/boe-rate-hike-plan-up-air-again-due-omicron-risks-2021-12-07, but markets are not entirely ruling out a 15 bps move either.
The ECB should confirm its 1.85 trillion euro PEPP pandemic stimulus scheme will end in March. Its hawks and doves now go to battle over how much support to leave in place once PEPP ends -Omicron and sticky inflation complicate the debate https://www.reuters.com/markets/rates-bonds/euro-zone-inflation-hump-near-its-peak-will-decline-next-year-lagarde-2021-12-03.
Meanwhile the Bank of Japan concludes a two-day meeting on Friday. A decision to phase out some pandemic-stimulus programmes when they expire in March could be made https://www.reuters.com/world/asia-pacific/boj-has-no-need-modify-ultra-easy-policy-says-deputy-gov-amamiya-2021-12-08. Then again, they may be extended due to Omicron.
3/D FOR DEFAULT
Embattled developer China Evergrande Group seems to have reached the end of the line.
A missed $82.5 million coupon payment is set to be the domino https://www.reuters.com/markets/rates-bonds/whats-next-china-evergrande-after-missing-coupon-payments-2021-12-07 that triggers cross-defaults worth around $19 billion on Evergrande international debt, along with the more worrisome risk of contagion for the broader economy and markets from its $300 billion in total liabilities.
A Fitch downgrade https://www.reuters.com/business/chinas-kaisa-kicks-off-12-bln-debt-restructuring-after-missing-pay-date-source-2021-12-09 to “restricted default” knocked commodities including crude on renewed worries about China’s economy. Authorities assure that the fallout is manageable, but they have a lot on their plates right now.
The central bank cut bank reserve ratios https://www.reuters.com/markets/rates-bonds/china-central-bank-cut-reserve-requirement-ratio-second-time-this-year-2021-12-06 to stimulate growth and then raised FX reserve requirements https://www.reuters.com/markets/currencies/china-raises-banks-fx-reserve-requirements-2nd-time-this-year-2021-12-09 to stem a yuan rally. The government also faces a growing diplomatic boycott of https://www.reuters.com/lifestyle/sports/no-plans-uk-ministers-attend-china-winter-olympics-pm-johnson-2021-12-08 the Beijing winter Olympics, potentially drawing battle lines with the West.
4/SPAC-TACULAR REBOUND
Special purpose acquisition companies (SPACs) have made a comeback thanks to a flurry of deals, some poor trading and Donald Trump.
Choppy markets saw the SPACs boom grind to a halt in recent months, but now it’s all go again after Omicron-driven expectations for more central bank largesse pushed volumes for blank-cheque vehicles above $144 billion for the year so far.
A number of SPACs listed in New York https://www.reuters.com/markets/us/grove-collaborative-go-public-via-15-bln-deal-with-branson-backed-spac-2021-12-08, Amsterdam https://www.reuters.com/markets/deals/amsterdams-odyssey-buys-benevolentai-europes-biggest-spac-deal-2021-12-06 and London https://www.reuters.com/markets/europe/arnault-backed-group-launches-second-spac-listing-2021-12-07 while “de-SPACs” have seen news website Buzzfeed, British pharma firm BenevolentAI and bitcoin miner Griid Infrastructure agreeing mergers. Donald Trump’s social media venture https://www.reuters.com/markets/us/exclusive-trumps-social-media-venture-seeks-1-billion-raise-sources-2021-12-01 is raising $1 billion to augment its October SPAC merger.
There have been reminders of risks with EV maker Lucid subpoenaed https://www.reuters.com/technology/electric-car-maker-lucid-receives-subpoena-us-sec-2021-12-06 by the SEC and Singapore ride-hailing firm Grab tumbling https://www.reuters.com/markets/us/singapore-ride-hailing-firm-grabs-nasdaq-debut-set-tone-regional-listings-2021-12-01 20% on its debut. For now, SPAC-mania continues.
5/WILL TURKEY TRIM AGAIN?
Thursday is another day of reckoning for Turkey’s central bank. Policymakers must decide whether to follow President Tayyip Erdogan’s lead https://www.reuters.com/markets/rates-bonds/turkeys-lira-weakens-2-erdogan-endorses-low-rates-anew-2021-12-08 and double down to cut rates in the face of more than 21% inflation or whether a weak lira – down 36% this quarter https://www.reuters.com/world/middle-east/erdogan-says-he-hopes-turkish-lira-will-steady-soon-2021-12-04 – has stymied the push lower.
The week will also confirm Turkey as an outlier among hawkish emerging central banks struggling with rising inflation and the prospect of the Fed kicking off its tapering and hiking cycle. Hungary https://www.reuters.com/markets/europe/hungary-central-bank-seen-raising-base-rate-again-next-week-2021-12-08 is expected to hike 30 bps on Tuesday, Russia https://www.reuters.com/markets/europe/russian-annual-inflation-rises-84-highest-level-since-early-2016-2021-12-08 could follow with a 50 bps hike on Friday.
Across Latin America, a region that has seen sizeable rate hikes over the past year, expectations are high that Chile on Tuesday, Mexico on Thursday https://www.reuters.com/markets/stocks/mexico-inflation-quickens-faster-than-expected-20-year-high-2021-12-09 and Colombia on Friday will all raise benchmark rates.
Source: Economy - investing.com
