Marketmind: E-Day and Central Banks Galore

A look at the day ahead from Karin Strohecker.

Whether or not the payment is made, few harbour hopes that China’s overextended property sector – a dominant force in Asia’s corporate bond market – will escape disruption. In turn the hit to the country’s financial system, commodity imports and economic growth is bound to be felt globally.

And there’s little solace to be had from a more hawkish Fed, likely beginning to trim its monthly bond purchases as soon as November. At the end of two-day meeting on Wednesday, the Fed also signalled interest rate increases may follow more quickly than expected as its turn from pandemic crisis policies gains momentum.

Autumn storm clouds are also gathering elsewhere with the U.S. debt ceiling nearing and the flu season approaching fast in many parts of the world.

But for today, optimism prevails.

Evergrande shares rose as much as 32% in Hong Kong after its chairman sought to reassure retail investors, many Asian markets are trending higher. Both European and U.S. stocks futures point to cautious gains with crude oil futures rising and the dollar taking a breather.

The central banking marathon continues with policy makers in the U.K., Switzerland, South Africa, Turkey and Norway all due to give their verdict. Norway is set to become the first major western central bank to deliver post-pandemic rate hikes.

Data on PMIs coming in from around the globe meanwhile should give markets more hints to gauge the economic trajectory ahead.

Key developments that should provide more direction to markets on Thursday:

– Evergrande seeks to reassure retail investors as key debt deadline looms

– Central banks: Norway, UK, Switzerland, South Africa, Turkey, Taiwan, Philippines

– Bank of England expected to keep rates steady as inflation risks mount

– Fed issues quarterly accounts

– U.S. weekly initial jobless claims

– Auctions: US 4 week bills, 10-yr TIPS

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karin Strohecker, editing by Dhara Ranasinghe)

Wall St Ends Higher as Fed Signals Bond-Buying Taper Soon

Trading was choppy, however, following the Fed’s latest policy statement, in which the central bank also suggested interest rate increases may follow more quickly than expected.

Overall indicators in the economy “have continued to strengthen,” the Fed said.

Bank shares rose following the news.

Stocks were already sharply higher before the statement from the Fed, with stocks bouncing back as concerns eased over a default by China’s Evergrande.

Strategists said what eventually happens with tightening may be less hawkish than some expect.

“I don’t think the Fed’s tightening is going to be anywhere near as hawkish as they anticipate. It’s going to be hard for them to execute on this plan as the economy slows next year,” said Joseph LaVorgna, Americas chief economist at Natixis in New York.

Unofficially, the Dow Jones Industrial Average rose 341.11 points, or 1.01%, to 34,260.95, the S&P 500 gained 41.54 points, or 0.95%, to 4,395.73 and the Nasdaq Composite added 150.45 points, or 1.02%, to 14,896.85.

Evergrande’s main unit said it had negotiated a deal with bondholders to settle interest payments on a domestic bond, calming fears of an imminent default that could unleash global financial chaos.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Caroline Valetkevithc; additional reporting by Ambar Warrick and Medha Singh in Bengaluru; Editing by Maju Samuel and Lisa Shumaker)

U.S. Home Sales Fall, House Price Inflation Cooling

Still, prices remain high enough to keep some potential buyers from a hot housing market. The report from the National Association of Realtors on Wednesday showed the smallest share of first-time homebuyers in more than 2-1/2 years and houses continuing to be snapped up typically after only 17 days on the market.

“The recent moderation in existing home sales reflects some easing of the buying frenzy that carried over into early 2021,” said Mark Vitner, a senior economist at Wells Fargo in Charlotte North Carolina. “The frantic race for space sent prices soaring. We continue to expect the housing market to move back into balance over the next couple of years.”

Existing home sales dropped 2.0% to a seasonally adjusted annual rate of 5.88 million units last month. Sales fell in all four regions, with the densely populated South posting a 3.0% decline. Economists polled by Reuters had forecast sales would decline to a rate of 5.89 million units in August.

Single-family sales fell 1.9%, while condo/co-op sales dropping 2.8%. The decrease in sales coincided with a recent change in consumer attitudes towards buying a home.

Home resales, which account for the bulk of U.S. home sales, fell 1.5% on a year-on-year basis. The annual comparison was distorted by the pandemic-driven surge in sales in August 2020. Sales are up 16% so far this year compared to the same period in 2020 and remain well above their pre-pandemic level.

The housing market boomed early in the coronavirus pandemic amid an exodus from cities as people worked from home and took classes online, which fueled demand for bigger homes in the suburbs and other low-density areas.

The surge, which was skewed towards the single-family housing market segment, far outpaced supply. Expensive building materials as well as land and labor shortages have made it harder for builders to boost production. At the same time, some homeowners are reluctant to sell because of concerns they might not find something affordable, keeping inventory tight.

Government data on Tuesday showed single-family homebuilding fell for a second straight month in August.

Though the pandemic tailwind is fading, demand for housing remains strong thanks to near record low mortgage rates and rising wages from a tightening labor market. A separate report from the Mortgage Bankers Association showed a modest rise in applications for loans to purchase a home last week.

Mortgage rates could rise after the Federal Reserve on Wednesday cleared the way to reduce its monthly bond purchases “soon” and signaled interest rate increases may follow more quickly than expected.

Stocks on Wall Street were trading higher, recouping some of the recent losses as concerns over a default by Chinese property developer Evergrande eased. The dollar fell against a basket of currencies. Prices of longer-dated U.S. Treasuries rose.

TIGHT SUPPLY

The median existing house price increased 14.9% from a year ago to $356,700 in August. That is a deceleration from a 23.6% jump in May. The slowdown in house price inflation adds to anecdotal evidence that some sellers are reducing their asking prices. Realtors are also noting that bidding wars are subsiding.

“We expect home price growth to slow further over the balance of this year and through 2022 as the housing inventory shortage eases and demand moderates,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

Sales remained concentrated in the upper price end of the market, with transactions of homes in the below-$250,000 price range continuing to experience double-digit declines.

Residential investment contracted in the second quarter after three straight quarters of double-digit growth.

August’s sales decline implies lower broker commissions. This together with the drop in housing starts suggests a further decrease in residential investment this quarter.

There were 1.29 million previously owned homes on the market last month, down 13.4% from a year ago. At August’s sales pace, it would take 2.6 months to exhaust the current inventory, down from 3.0 months a year ago. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

In August, properties typically remained on the market for 17 days, unchanged from July, but down from 22 days a year ago. Eighty-seven percent of the homes sold last month were on the market for less than a month.

First-time buyers accounted for 29% of sales, the lowest since January 2019 and down from 30% in July and 33% a year ago. All-cash sales accounted for 22% of transactions, down from 23% in July and up from 18% a year ago.

“There is a suggestion here in the moderation of price gains and sales, and a declining share of first-time buyers, that a considerable portion of the stock adjustment of demand for homes to low rates and pandemic-driven population moves has taken place,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)

Six ex-U.S.Treasury Chiefs Urge Debt Limit Hike

“Even a short-lived default could threaten economic growth. It creates the risk of roiling markets, and of sapping economic confidence, and it would prevent Americans from receiving vital services,” the six former secretaries said in the letter, released by Treasury. “It would be very damaging to undermine trust in the full faith and credit of the United States, and this damage would be hard to repair.”

The letter was not signed by former Republican Treasury secretaries Steven Mnuchin, John Snow, Nicholas Brady or James Baker. Those signing were Democrats Jacob Lew, Timothy Geithner, Lawrence Summers, Robert Rubin and Michael Blumenthal. Republican former secretary Henry Paulson also signed.

Mnuchin could not immediately be reached for comment. He presided over the last debt limit suspension, in August 2019, passed by both Democrats and Republicans.

U.S. Treasury Secretary Janet Yellen has warned that without a debt ceiling increase, the U.S. government will likely exhaust Treasury cash balances and extraordinary borrowing capacity under the $28.4 trillion debt limit in October, leaving the government at risk of default on Treasury debt and other obligations.

Republicans have refused to support a debt ceiling hike because of Democrats’ plans to pass a massive social spending bill of up to $3.5 trillion without Republican support.

Senate Republicans are indicating they will sink a bill passed by House Democrats to suspend the debt ceiling and fund the government past the Sept. 30 fiscal year end, with a showdown vote likely next week.

The letter from the former Treasury secretaries left out references to Democrats’ “reconciliation” spending bill, but acknowledges the contentious political divide in Washington and said the Biden administration had a role to play in lifting the debt limit.

“We recognize that in recent years, as our politics have become more polarized and divisive, addressing the debt limit has become more contentious and politically fraught,” they wrote. “This makes it all the more important that Congress and the Administration begin the process to extend the nation’s borrowing authority without delay.”

The letter concentrated on economic consequences of failure to raise the debt limit and said the risk of an “accidental default” was heightened because pandemic rescue spending had made borrowing needs more uncertain.

“There is no viable way to manage payments across the federal government to prevent a default if there are insufficient resources available absent action on the debt limit,” the former Treasury chiefs wrote, adding that postponing action until close to the default deadline “undermines confidence in our political system at home and abroad.”

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by David Lawder in WashingtonEditing by Diane Craft and Matthew Lewis)

Fed Signals Bond-Buying Taper Coming ‘soon,’ Rate Hike in 2022

The moves, which were included in the Fed’s latest policy statement and separate economic projections, represent a hawkish tilt by a central bank that sees inflation running this year at 4.2%, more than double its target rate, and is positioning itself to act against it.

That action may proceed slowly, with interest rates seen rising to 1% in 2023, faster than projected by the Fed in its projections in June, and then to 1.8% in 2024, which would still be considered a loose monetary policy stance.

Inflation throughout that time would be allowed to run slightly above the Fed’s 2% target, consistent with its new, more tolerant approach to the pace of price increases, while unemployment is seen falling back to around the pre-pandemic level of 3.5%. Policymakers also downgraded their expectations for economic growth this year, with gross domestic product expected to grow 5.9% compared to the 7.0% projected in June.

Still, the shift shows movement among policymakers divided over whether the coronavirus pandemic’s ongoing impact on the economy or the threat of breakout inflation constitutes the bigger risk.

While no decisions have been made on the exact pace and timing of how the central bank will reduce its asset purchases, Fed Chair Jerome Powell said it seems “appropriate” that the taper could begin “soon” and be completed by the middle of 2022.

“Participants generally view that as long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” he said in a news conference after the end of the Fed’s latest two-day policy meeting.

Powell told reporters financial conditions would remain accommodative even after the Fed stops purchasing Treasuries and mortgage-backed securities and emphasized that the decision on the bond-buying program was separate from any actions regarding interest rates.

The Fed on Wednesday held its current target interest rate steady in a range of 0% to 0.25%.

“It’s probably a little bit more hawkish than many would have anticipated basically acknowledging that should the economy continue to grow as we have seen it would warrant a tapering to occur,” said Sam Stovall, chief investment strategist for CFRA Research in New York. “You could say it’s a tentative tapering announcement even though they did lower their 2021 GDP forecast.”

U.S. stocks extended gains after the release of the statement before retreating slightly during Powell’s news conference, with the S&P 500 index up 1.2% on the day. The dollar rose while the yield on the U.S. 10-year Treasury note edged lower.

SLOWING RECOVERY

Though acknowledging the new surge of the pandemic had slowed the recovery of some parts of the economy, overall indicators “have continued to strengthen,” the central bank’s policy-setting Federal Open Market Committee said in its unanimous policy statement.

If that progress continues “broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” it said.

The statement had been widely expected to signal that the Fed would soon begin winding down the $120 billion in monthly bond purchases it has been making to blunt the economic impact of the pandemic.

Fed officials said last December that they would continue purchasing bonds at the current pace until there was “substantial further progress” on the central bank’s goals for maximum employment and inflation.

Powell on Wednesday said officials could decide as soon as the next policy meeting in November that both of those standards have been met, based on what happens with the labor market and the broader economy, and make a decision on whether to taper.

But it was in their broader economic outlook that Fed policymakers made a less anticipated change.

The outlook for inflation jumped 0.8 percentage point for 2021 and the unemployment rate seen at the end of this year rose. In turn, two officials brought forward into 2022 their projected timeline for slightly lifting the Fed’s benchmark overnight interest rate from the current level, enough to raise the median projection to 0.3% for next year.

The move to lower GDP growth expectations for 2021 reflected concerns that the coronavirus is weighing on the economy.

“The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery,” the Fed said in its policy statement.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Howard Schneider; Additional reporting by Jonnelle Marte and U.S. Finance and Markets Breaking News teamEditing by Paul Simao)

Oil Prices Settle Up on U.S. Stocks Draw, Rising Fuel Demand

Despite recent wobbles from U.S. economic figures, overall demand for fuel has rebounded to pre-pandemic levels. Product supplied over the last four weeks has come in at nearly 21 million barrels per day, not far from 2019’s peak.

U.S. crude inventories last week fell by 3.5 million barrels to 414 million barrels, the lowest since October 2018, the U.S. Energy Information Administration said on Wednesday.

“Crude oil prices remain supported as demand recovers around the world and inventories continue to draw,” said Andrew Lipow, president of Lipow Oil Associates in Houston.

U.S. West Texas Intermediate (WTI) crude futures rose $1.74, or 2.5%, to $72.23, while Brent crude futures settled up $1.83, or 2.5%, to $76.19 a barrel.

Oil facilities in the Gulf of Mexico continue to return to production, with weekly output rising 500,000 bpd in the most recent week to 10.6 million bpd, the EIA said. BP on Wednesday said all four of its offshore facilities in the region have resumed operations after Hurricane Ida, brought back online and producing as of Sept. 12.

Also supporting prices has been difficulties by OPEC members struggling to raise output. Rising prices in other markets like natural gas have also supported oil, with energy market shortages causing a supply crunch in Europe and Asia.

“Given the variety of supportive factors in the energy space, notably sky-high natural gas prices … dips in prices right now are likely to be short-lived,” said Jeffrey Halley, an analyst at brokerage OANDA.

Iraq’s oil minister said OPEC and its allies are working to keep crude prices close to $70 per barrel as the global economy recovers, state news agency INA reported on Wednesday.

The U.S. Federal Reserve, which began a two-day policy meeting on Tuesday, signaled interest rate increases may follow more quickly than expected. Tightening monetary policy could cut investor tolerance for riskier assets such as oil.

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Sonali Paul in Melbourne and Koustav Samanta in Singapore; editing by David Gregorio, Nick Zieminski and Sonya Hepinstall)

FOMC Teases Start of Taper “soon”

The actions, which were included in the Fed’s latest policy statement and separate economic projections, represent a hawkish tilt by a central bank that sees inflation running this year at 4.2%, more than double its target rate, and is positioning itself to act against it.

The current target interest rate was held steady in a range of 0% to 0.25%.

In a press conference after the statement Fed Chair Jerome Powell elaborated that if the economy continues to improve the FOMC could easily move ahead with tapering at the next meeting in November. The bar for lifting rates from zero is much higher than for tapering, he said.

STOCKS: The S&P 500 briefly extended a rally and was last unchanged from before the statement up 0.95%

BONDS: The 10-year U.S. Treasury note yield seesawed and was last up at 1.3226% and the 2-year yield firmed to 0.2342%

FOREX: The dollar index turned 0.2% firmer

COMMENTS

LAWRENCE GILLUM, FIXED INCOME STRATEGIST, LPL FINANCIAL, FORT MILL, SOUTH CAROLINA

“There are some notable takeaways. The divergence of views within the committee is interesting. We’re seeing a 50-50 split in terms of rate hikes in 2022. There’s just a big divergence of opinions on rate hikes and even further into 2023, a big range of potential Fed Fund target rates.

“The Fed did talk about potentially moderating its asset purchases soon, that’s setting up the committee to announce tapering in November, with a decision to actually taper coming in December. The Fed has made progress in that taper timeline and we think that will likely take place this year.”

“The other takeaways were the adjustments to the summary of economic projections. Inflation expectations have move higher for a touch longer than they originally thought, and then those growth expectations have come down a touch as well.”

JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON

“Very mixed signals from the Fed, resulting in the dollar’s choppy performance. Once the dust settles it seems that there are enough hawkish signals to keep the dollar biased higher, as the market pencils in a sooner-than-expected rate hike. Inflation also continues to trend higher. And although the Fed marked down its forecasts for growth and unemployment, it still has robust expectations for the economy.”

KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CAMBRIDGE GLOBAL PAYMENTS, TORONTO

“Markets initially read the statement as hawkish, but that reaction is fading out as traders read more deeply into the Statement of Economic Projections. Fed officials acknowledged making ‘substantial further progress’ toward the central bank’s inflation goal, and demonstrated confidence in the labor market meeting that test by the end of the year.

“The FOMC warned markets of an imminent tapering decision, saying that a ‘moderation in the pace of asset purchases may soon be warranted’ if  economic conditions continue to evolve as expected.

“A record number of participants are worried about upside risks on the inflation front, suggesting that the central bank could move aggressively if price growth remains elevated into the early part of next year.”

“Officials are now deadlocked on raising rates in 2022, but the median forecast is for a 1% Fed funds rate in 2023, and only 1.8% by the end of 2024. This is not rapid tightening by any means – it’s slightly slower than the 25-basis-point-per-quarter pace seen in previous cycles.

“This could also mean that estimates of the ‘terminal rate’ at the end of the cycle have been lowered. This is dovish, and will be welcomed in financial markets. The dollar could tumble from here, particularly if Powell follows prior patterns and tramples on the dot plot during the presser.”

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA Research, NEW YORK

“It’s probably a little bit more hawkish than many would have anticipated basically acknowledging that should the economy continue to grow as we have seen it would warrant a tapering to occur. You could say it’s a tentative tapering announcement even though they did lower their 2021 GDP forecast.”

“The reason the Fed is tapering is because the economy and corporate earnings are strong enough to withstand it. So investors are basically saying let’s buy equities because the economy is strong and the Fed won’t be raising rates until a year plus from now.”

“The Fed is not going to get behind the curve and won’t have to end up surprising us by raising rates much more quickly than currently anticipated.”

JOHN CANAVAN, LEAD ANALYST, OXFORD ECONOMICS, NEW YORK

“Basically what we’re seeing here is a (U.S. Treasury yield) curve flattening shift in response to the summary of economic projections pulling forward Fed rate hikes. The Fed is now projecting a rate hike in 2022 as their median forecast, which is up from steady in the July summary of economic projections. As a result, what we’re seeing is a little bit of pressure on the front end (of the curve), while the long end views the slightly more hawkish Fed as a positive sign for keeping inflation in check along with some potential risk of the Fed moving too quickly and acting to slow the economy in the coming years.”

“We have seen a bit of an acceleration in the curve flattening based on the view that we’ve seen peak inflation and some of the risks related to the slowing economy in the third quarter.”

STEVEN VIOLIN, PORTFOLIO MANAGER, F.L.PUTNAM INVESTMENT MANAGEMENT COMPANY, WELLESLEY, MASSACHUSETTS

“It is an interesting point in time here, the tapering of quantitative easing seems very likely now in November but this was something of a given and remains couched in a lot of qualifying criteria in the event that various risks emerge, whether it is the debt ceiling debate, COVID outlook, the China property market intervening. The increase in the Fed’s projections in future interest rates though seems to be more what has caught the market by surprise at the margin, it is still consistent with our view that the Fed is likely to continue allowing inflation to run hot and remain anchored in the same measured pace as prior cycles. It really only increases the inflation risk that we have been taking seriously as we see some of the supply chain and labor shortages clearly not resolving with the end of unemployment benefits. Longer-term there is a lot of powerful disinflationary forces but for the moment they are clearly being offset and the risk is that becomes entrenched in consumer expectations.”

“For the moment, the markets seem to be taking this in stride with a relatively positive reaction from the stock market and from longer-term bonds, as far as the inflation outlook goes, I’m not sure this is a positive development.”

“It is also the measured pace, some increase in the dots was expected by the market and priced in to some extent but there wasn’t any acceleration, in fact there is a deceleration, which indicates perhaps some members of the committee have revised lower their terminal rate, it is hard to know, but the current dots as they are showing fewer increases in the out years and this is the first look we have gotten in the 2024 projections. So that is a notable development that perhaps is what is driving the positive response in longer-term interest rates and the shifts in currency markets.”

TOM GARRETSON, SENIOR PORTFOLIO STRATEGIST, RBC WEALTH MANAGEMENT, MINNEAPOLIS

“Across the board it’s exactly what we were expecting, the Fed took another step towards a formal taper announcement, and that’s probably going to come at the next meeting or two.

“The key behind the potential rate hike was the upgrade to their inflation outlook. There are signs inflationary pressures are going to be transitory, but they are more persistent than expected. That’s the key driver as to why the balance has shifted to a potential rate hike in 2022 as opposed to 2023.

“We’re watching yield curves flatten. The Treasury market’s interpreting it as a hawkish surprise.

“It was very inline with expectations. Powell will use the press conference to reiterate to the idea that tapering is coming in the several months. It’s what I expected, not too hawkish and not too dovish.”

JOSEPH LAVORGNA, AMERICAS CHIEF ECONOMIST, NATIXIS, NEW YORK

“Unless we know who is who, which we don’t, I’m not sure the dot-plot accurately reflects the Fed’s thinking. I don’t think the Fed’s tightening is going to be anywhere near as hawkish as they anticipate. It’s going to be hard for them to execute on this plan as the economy slows next year.”

For a look at all of today’s economic events, check out our economic calendar.

(Compiled by the U.S. Finance & Markets Breaking News team)

Stocks Hold Gains, Dollar Strengthens After Fed Flags Taper Soon

Asset price moves were volatile following the Fed’s latest policy statement, in which the central bank also signaled interest rate increases may follow more quickly than expected.

“It’s probably a little bit more hawkish than many would have anticipated basically acknowledging that should the economy continue to grow as we have seen it would warrant a tapering to occur,” said Sam Stovall, chief investment strategist at CFRA Research in New York.

Stocks had been stronger earlier in the session, as investors already were scooping up equities as market jitters around property developer China Evergrande eased.

Evergrande agreed to settle interest payments on a domestic bond, while the Chinese central bank injected cash into the banking system, soothing fears of imminent contagion from the debt-laden property developer that had pressured equities and other riskier assets at the start of the week.

MSCI’s gauge of stocks across the globe gained 0.65%, bouncing back for a second day after it logged its biggest one-day percentage drop in two months on Monday.

On Wall Street, the Dow Jones Industrial Average rose 382.01 points, or 1.13%, to 34,301.85, the S&P 500 gained 42.06 points, or 0.97%, to 4,396.25 and the Nasdaq Composite added 125.46 points, or 0.85%, to 14,871.86.

The pan-European STOXX 600 index rose 0.99%.

In currency trading, the dollar index rose 0.132%, with the euro down 0.13% to $1.1708.

Benchmark U.S. 10-year notes last fell 1/32 in price to yield 1.3277%, from 1.324% late on Tuesday.

Oil prices climbed after U.S. crude stocks fell to their lowest levels in three years as refining activity recovered from recent storms.

U.S. crude rose 2.26% to $72.08 per barrel and Brent was at $76.05, up 2.27% on the day.

Spot gold dropped 0.2% to $1,770.30 an ounce.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Tom Wilson in London; additional reporting by Sinead Carew and Stephen Culp in New York, Tom Westbrook in Singapore and Anushka Trivedi in Bengaluru; editing by Sam Holmes and Alistair Bell)

Evergrande Domestic Debt Deal Calms Immediate Contagion Concern

Evergrande, Asia’s biggest junk-bond issuer, is so entangled with China’s broader economy that its fate has kept global stock and bond markets on tenterhooks as late debt payments could trigger so-called cross-defaults.

Many financial institutions have exposure to Evergrande through direct loans and indirect holdings, while any defaults will also trigger sell-offs in the high-yield credit market.

In an effort to reassure investors, the People’s Bank of China’s injected 90 billion yuan to the banking system, signalling support for markets as they braced for what is expected to be one of China’s largest-ever debt restructurings.

Evergrande is scrambling to avoid defaulting on a number of bonds with payments due this week and its main unit, Hengda Real Estate Group, said on Wednesday it had “resolved” one coupon payment due on Thursday on its Shenzhen-traded 5.8% September 2025 bond, via “private negotiations”.

It did not specify how much interest would be paid or when, nor did Hengda mention Evergrande’s other pressing debts, leaving it unclear what this means for $83.5 million in dollar bond interest payments due on Thursday.

Evergrande did not immediately respond to questions about its deal or its intentions.

But engagement with bondholders, a common way to avoid default, on top of chairman Hui Ka Yuan’s vow this week that Evergrande would “walk out of its darkest moment,” cheered investors and soothed markets more broadly.

“These events seem to suggest that the company is taking control of the situation and is trying its best to work out a solution with creditors,” Singapore-based Dexter Tan, a senior fixed income analyst at Bondsupermart.com, said.

Evergrande, which epitomised the borrow-to-build business model and was once China’s top-selling developer, also has a $47.5 million dollar-bond interest payment due next week.

“We do not have a clearer picture as how Evergrande settled its onshore coupon,” Singapore-based Chuanyo Zhou, a credit analyst at Lucror Analytics, said.

“It doesn’t look like a cash payment. It may still miss the coupon on offshore bonds due tomorrow.”

Evergrande’s woes have seen its shares fall 85% this year. The concerns have reverberated throughout China’s property market.

Shares of R&F Properties and Sunac China have both slumped around 50% year-to-date, Shimao is down more than 40% and Country Garden and Greenland Holdings have shed 30% and 20%, respectively.

Evergrande’s Hong Kong shares did not trade due to a public holiday but rose 40% in Frankfurt to 0.38 euros ($0.45).

Its dollar bonds maturing next year and in 2024 remained below 30 cents on the dollar.

In the wider market, the U.S. dollar slipped while the S&P 500 rebounded from recent losses.

BREAKDOWN

Analysts have been downplaying the risk that a collapse threatens a “Lehman moment”, or liquidity crunch, which freezes the financial system and spreads globally.

Only some $20 billion of $305 billion outstanding debts is owed offshore, according to Refinitiv data.

But the risk of failure remains high, particularly if offshore bondholders are less willing than those in China to cut deals, and the fallout has already begun to trigger tremors in the property market of the world’s second-largest economy.

“There are now comparisons being made between Evergrande with the collapse (of) Lehman Brothers and the crash in the U.S. housing market, with many analysts dismissing this comparison,” wrote Sebastien Galy of Nordea Asset Management in a recent note. “The reality is that it will take weeks to figure out the impact on growth given the impact on the real estate market.”

There is also mounting political pressure to act as the anger of retail investors with their savings sunk in Evergrande properties or wealth management products swells.

Asked at a regular daily briefing on Wednesday whether China would take measures to intervene, foreign ministry spokesman Zhao Lijian only referred to the “responsible departments”.

Some funds have been increasing their positions in recent months. BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande’s debt, Morningstar data and a blog post showed.

Other bondholders include UBS Asset Management and Amundi, Europe’s largest asset manager.

Still, many market participants believe the fallout from Evergrande is likely to be contained.

“Despite the worry, so far this looks like a corporate bankruptcy and not something worse,” said Brad McMillan, chief investment officer for Commonwealth Financial Network in a recent note. “It’s a big one, to be sure, but one that can be handled within the system.”

(Reporting by Anshuman Daga in Singapore, Andrew Galbraith and Samuel Shen in Shanghai. Additional reporting by Hideyuki Sano in Tokyo, Clare Jim in Hong Kong and Gabriel Crossley in Beijing and Ira Iosebashvili in New York. Writing by Anne Marie Roantree and Tom Westbrook. Editing by Richard Pullin, Jacqueline Wong and Alexander Smith)

Dollar Choppy After Fed Statement, Evergrande Exhale Lifts Risk-Sensitive Currencies

The Federal Reserve on Wednesday cleared the way to reduce its monthly bond purchases “soon” and signaled interest rate increases may follow more quickly than expected, with half of the 18 U.S. central bank policymakers projecting borrowing costs will need to rise in 2022.

“The tapering of quantitative easing seems very likely now in November but this was something of a given and remains couched in a lot of qualifying criteria in the event that various risks emerge, whether it is the debt ceiling debate, COVID outlook, the China property market intervening,” said Steven Violin, portfolio manager at F.L.Putnam Investment Management Company in Wellesley, Massachusetts.

The dollar index rose 0.094%, alternating between gains and declines after the announcement, with the euro down 0.1% to $1.1711.

Property giant and Asia’s biggest junk bond issuer Evergrande said it “resolved” one payment due on Thursday via a private negotiation, easing concerns of default and possible contagion risk, while the People’s Bank of China injected 90 billion yuan into the banking system to support markets.

“Being able to make tomorrow’s bond coupon payment, that definitely lifted risk sentiment overnight and you saw a typical follow-through reaction in risk currencies, so Canadian dollar high, Aussie dollar higher, Kiwi dollar higher – that was kind of an understandable reaction,” said Erik Bregar, an independent FX analyst in Toronto.

Still, uncertainty remains whether the developer will be able to pay the coupon on its offshore dollar bonds, due on Thursday.

The Australian dollar rose 0.33% versus the greenback to $0.726 after rising as much as 0.49% to $0.7268 while the Canadian dollar rose 0.58% versus the greenback to 1.27 per dollar.

The offshore Chinese yuan strengthened versus the greenback to 6.4628 per dollar.

The safe-haven Japanese yen weakened 0.50% versus the greenback to 109.78 per dollar in the wake of the Bank of Japan’s decision to keep policy on hold.

Sterling was last trading at $1.3637, down 0.16% on the day ahead of a policy announcement by the Bank of England on Thursday, with expectations for a rate hike being pushed down the road by investors.

In cryptocurrencies, Bitcoin last rose 6.93% to $43,409.48 following three straight days of declines.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Will Dunham and Andrea Ricci)

Soaring Gas Prices Ripple Through Heavy Industry, Supply Chains

By Bozorgmehr Sharafedin, Susanna Twidale and Roslan Khasawneh

Some companies, including steel producers, fertiliser manufacturers and glass makers, have had to suspend or reduce production in Europe and Asia as a result of spiking energy prices. That includes two of the world’s largest fertiliser makers, which said they would cut production in Europe. The UK on Tuesday said it agreed to provide state support to one of the companies to restart production of by-product carbon dioxide, which is used in food production, to avert a supply crunch.

Natural gas prices have risen sharply around the globe in recent months. That has been due to a combination of factors: including increased demand particularly from Asia due to a post-pandemic recovery; low gas inventories; and tighter-than-usual gas supplies from Russia.

Gas prices in Europe have risen more than 250% this year, while Asia has seen about a 175% increase since late January. In the United States, prices have surged to multi-year highs and are about double where they were at the start of the year. Electricity prices have also risen sharply as many power plants are gas-fired.

Industrial Energy Consumers of America, a trade group representing chemical, food and materials manufacturers, has in recent days called on the U.S. Department of Energy to stop the country’s liquefied natural gas producers from exporting gas to help keep the energy costs down for industry.

Additional supplies of gas could alleviate pressure. Norway has allowed increased gas exports. More supply could flow from Russia by the end of the year with the country’s new Nord Stream 2 pipeline awaiting approval from Germany’s energy regulator. The pipeline project has drawn criticism from the United States, which says it will increase Europe’s reliance on Russian energy supplies.

PRODUCTION DISRUPTIONS

The pressures so far have been particularly acute in Europe, where gas stocks are much lower than usual heading into winter. Norway’s Yara International ASA, one of the world’s largest fertiliser makers, on Friday said it would cut about 40% of its European ammonia production due to high gas prices. That came after U.S.-based CF Industries Holdings Inc said gas prices were prompting it to halt operations at two of its British plants. Natural gas is the most important cost input for nitrogen-based chemicals and fertilizers.

Yara’s chief executive, Svein Tore Holsether, told Reuters in an interview Monday that the company was bringing ammonia to Europe from production facilities elsewhere, including the United States and Australia. “Instead of using European gas, we are essentially using gas from other parts of the world to make that product and bring it into Europe,” he said.CF Industries didn’t respond to requests for comment.

Some industries are calling on governments to intervene on their behalf. These pleas come as some countries have acted to protect consumers from soaring energy bills, such as Spain, which last week approved a package of measures including price caps.

Among those asking for help is the food industry following a shortage of carbon dioxide (CO2) caused by the suspension of production in some fertiliser plants. CO2 is used in the vacuum packing of food products to extend their shelf life, to stun animals before slaughter and to put the fizz in soft drinks and beer.

In the UK, meat processors had warned they will run out of CO2 within five days, forcing them to halt production. Soft drink manufacturers, who rely on the gas to make carbonated drinks, said supplies were running low.

On Tuesday, the British government said it struck a three-week deal with CF Industries for the American company to restart the production of carbon dioxide in the UK. Britain’s environment minister, who said the state support could run into tens of millions of pounds, also warned the food industry that carbon dioxide prices would rise sharply.

CF Industries said in a statement it is immediately restarting ammonia production at its Billingham plant following the agreement.

WEATHERING THE STORM

Other energy-intensive sectors such as steel and cement are also feeling the pinch.

Soaring gas prices have in the past couple of weeks “forced some steelmakers to suspend operations during those periods of the night and day when the cost of energy rockets,” said Gareth Stace, director general at industry group UK Steel. He declined to identify which companies.

British Steel, the country’s second-largest steel producer, said it was maintaining normal levels of production but that the “colossal” energy-price increases made “it impossible to profitably make steel at certain times of the day.”

Some manufacturers say they are able to cope, so far.

Germany’s Thyssenkrupp AG, Europe’s second-largest steelmaker, said hedging mechanisms it had in place against energy price increases, especially gas, meant it was not curbing production. But it said it was indirectly affected because the industrial gases it used are linked to electricity prices.

HeidelbergCement AG of Germany, the world’s second-largest cement maker, said higher energy prices were driving up production costs but that operations had not been halted as a result.

In China, several steel, ceramic and glass makers have reduced production to avoid losses, according to Li Ruipeng, a local supplier of liquefied natural gas in the northern province of Hebei. And, China’s southwestern province of Yunnan this month imposed limits on production of some heavy industries, including producers of fertilisers, cement, chemicals, and aluminium smelters due to energy shortages, a move that analysts said could reduce exports.

To weather the storm, some energy-intensive industries and utility firms in Asia and the Middle East have temporarily switched from gas to fuel oil, crude, naphtha or coal, analysts and traders said. That trend is expected to continue for the rest of the year and into the beginning of next, according to the International Energy Agency, the Paris-based energy watchdog.

In Europe, demand for coal as an alternative power source has also risen significantly. But options for switching to alternative sources of energy are limited in the region largely due to government policies aimed at encouraging the use of gas over more polluting fuels such as coal.

The glass industry was historically run on fuel oil, but almost all sites in the United Kingdom have now transitioned to natural gas, according to Paul Pearcy, federation coordinator at British Glass, a UK trade association. Only a few sites have fuel oil tanks that enable them to switch energy source if prices skyrocket, he added.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Bozorgmehr Sharafedin and Susanna Twidale in London, Roslan Khasawneh in Singapore; Additional reporting by Guy Faulconbridge, Nigel Hunt, Eric Onstad and Ahmad Ghaddar in London, Jessica Jaganathan and Chen Aizhu in Singapore, Yuka Obayashi in Tokyo, Nidhi Verma in Delhi, Scott DiSavino in New York, Heekyong Yang in Seoul, and Christoph Steitz in Frankfurt, Tom Kaeckenhoff in Düsseldorf, Polina Devitt in Moscow, Arathy S Nair in Houston; Editing by Cassell Bryan-Low)

ECB to Mull Upping Regular Bond Purchases After Emergency Scheme: Bloomberg

“I realise that it would be a problem if there is a very sharp cliff effect at the end of the pandemic emergency purchase programme (PEPP),” the Estonian central bank chief was quoted as saying by Bloomberg.

He reportedly added that increasing the ECB’s Asset Purchase Programme would be “part of the discussion we will have on how to phase out PEPP and what it would mean for asset purchases going forward”.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting By Francesco Canepa; Editing by Kevin Liffey)

 

Marketmind: Some Relief – But How Long Will it Last?

A look at the day ahead from Dhara Ranasinghe.

U.S. stock futures, the yuan and the risk-sensitive Australian dollar are riding high, while the safe-haven yen and U.S. Treasuries are on the back foot.

Don’t get too comfortable — even if Evergrande makes its Sept. 23 onshore bond payment, it has not indicated whether it can pay $83.5 million in interest due on its March 2022 bond on Thursday. Nor is there any sign the Chinese government plans to mount a last-minute rescue.

And with the U.S. Federal Reserve set to conclude its two-day meeting later on Wednesday, perhaps this week’s market excitement is not over yet.

After all gas prices are at lofty levels, threatening to hurt consumption, which means central banks meeting across the globe this week are likely to be challenged on the message that inflation is transitory.

For the Fed, weaker-than-anticipated jobs numbers have already dampened expectations it will announce an imminent start to tapering bond-buying stimulus.

It might however clear the way for tapering later this year and show in updated projections whether higher-than-expected inflation or a resurgent coronavirus pandemic is weighing more on the economic outlook.

The Bank of Japan just kept monetary policy steady but offered a bleaker view on exports and output, reinforcing expectations it won’t join peers mulling a withdrawal of crisis-mode support.

Elsewhere, Democrats in the House of Representatives passed a bill on Tuesday to fund the U.S. government through Dec. 3 and suspend a borrowing limit until end-2022. Senate Republicans however have vowed to block it.

Key developments that should provide more direction to markets on Wednesday:

– Macy’s to hire 76,000 workers for holiday shopping season

– China keeps lending benchmark LPR unchanged

– DraftKings makes $22.4 bln offer for UK’s Entain

– Euro zone flash consumer confidence

– U.S. existing home sales data

– U.S. sells 2 year FRNs

– Deputy Bank of England governor Sam Woods speaks

– Brazil may raise interest rates by 100 basis points.

– European earnings: Playtech, IG Group

– U.S. earnings: Nike

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Dhara Ranasinghe; editing by Sujata Rao)

U.S. House Approves Bill to Suspend Debt Limit, Fund Government

The House vote was 220-211 along party lines. It was unclear how soon the Senate would act.

If Republicans stick by their refusal to support the measure in the Senate, Democrats will have to come up with a new strategy or quickly face the twin problems of a government in partial shutdown that is unable to pay its bills and the risk of a default for the first time in modern history.

House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer set the stage on Monday for a showdown with Republicans when they said they would combine spending and debt measures in one bill, despite Senate Republican leader Mitch McConnell’s vow to block an increase in the $28.4 trillion debt ceiling.

On Tuesday, McConnell reiterated that vow. But he also said: “I want to repeat once again: America must never default. We never have and we never will.”

Speaking to reporters, McConnell repeated an argument he has made for weeks, that it is the majority party’s responsibility to raise the debt ceiling. That would have the effect of letting Republicans avoid voting for a debt limit increase ahead of next year’s congressional elections.

After the House vote, McConnell and fellow Republican Senator Richard Shelby said they had introduced a bill to fund current government operations through Dec. 3, but without raising the debt limit.

Republicans have said Democrats could raise the debt limit on their own through reconciliation, a maneuver that gets around the Senate’s rule that 60 of the chamber’s 100 members must approve legislation. Democrats have resisted doing that so far, saying the vote to raise the debt limit should be a bipartisan one.

“Playing games with the debt ceiling is playing with fire and putting it on the back of the American people,” Schumer said in a speech.

Schumer and Pelosi will meet with their fellow Democrat, President Joe Biden, at the White House on Wednesday afternoon, a source familiar with the planning said.

The meeting comes as Washington grapples with the twin deadlines of funding the government and raising the debt limit, as well as a Democratic push to pass Biden’s mammoth $3.5 trillion domestic agenda, using the reconciliation maneuver.

SEPT. 30 DEADLINE

Congress faces a Sept. 30 deadline to approve stopgap funding that would avert partial government shutdowns with the start of the new fiscal year on Oct. 1.

The Treasury Department will some time in October exhaust its borrowing authority unless the debt limit is raised.

The bill would suspend the limit on government borrowing through December 2022.

The current debt ceiling already has been breached, with debt at $28.78 trillion. It is being financed temporarily through Treasury Department “extraordinary measures” that are projected to be exhausted in October.

As Congress hurtles toward a possible partial government shutdown if a deal is not reached, Democrats and Republicans both have warned of dire consequences, including eventual disruptions in benefit checks to veterans and Social Security retirement recipients.

Republicans said they would support a temporary spending bill to avert a shutdown if the debt limit extension were stripped out of the bill.

Schumer said a historic breach in borrowing authority could ripple through the U.S. economy, raising consumer interest rates and possibly forcing state governments to raise taxes to cover their higher interest payments.

“Republicans simply don’t have to vote to force a default,” Schumer said.

Republicans argued that while they do not want a debt default, they do not support increasing the borrowing limit at a time when Democrats aim to pass such a huge amount of new domestic spending – programs Democrats say will be paid for with tax increases on the wealthy and corporations.

“The bill that Speaker Pelosi is bringing through this week will not become law. They’re going to have to go back to the drawing board,” No. 2 House Republican Steve Scalise told a news conference.

Schumer said much of the latest debt is related to spending that Republicans supported during Donald Trump’s presidency, including December’s emergency COVID-19 relief bill.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Richard Cowan and Susan Cornwell; Additional reporting by David Morgan; Editing by Scott Malone, Kieran Murray and Peter Cooney)

U.S. Corporate Bonds Perk Up After Stock Selloff

Amid caution ahead of Wednesday’s Federal Reserve policy announcement, Wall Street clawed back some losses from Monday’s selloff and corporate debt offerings were returning after being sidelined by the market volatility, according to Refinitiv’s IFR.

The iShares exchange-traded fund tracking high-yield corporate bonds, which fell 0.35% on Monday, was up about 0.17%.

High-yield bond spreads rose on Monday, after falling last week to their lowest level since July in a sign of a general risk-on mood.

The option-adjusted spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, widened to 323 basis points from Friday’s 304 basis points in its biggest move since July 19.

The spread refers to the interest rate premium investors demand to hold corporate debt over safer Treasury bonds.

The spread on the ICE BofA U.S. Corporate Index, a benchmark for investment-grade debt, increased only a basis point to 91 basis points on Monday.

BMO Capital Markets analysts said high-grade spreads held in relatively well compared with other risk assets and that demand remains strong.

“Nonetheless, event risk remains high in the near-term, and we do not expect spreads to materially outperform ahead of tomorrow’s (Federal Open Market Committee meeting) and a concrete resolution to the Evergrande situation, even if a reversal of yesterday’s move is possible,” they said in a report on Tuesday.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karen Pierog in Chicago; Editing by Alden Bentley and Matthew Lewis)

Wall Street Ends Near Flat on Cautious Note Ahead of Fed

Concerns over China Evergrande Group have put investors on edge amid coronavirus and economic growth worries.

Persistent default fears overshadowed efforts by Evergrande’s chairman to boost confidence in the firm on Tuesday, while Beijing showed no signs it would intervene to stem any effects across the global economy.

“People have been preconditioned to buy pullbacks for most of the last year plus,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

“But that overhead nervousness is still there,” he said. “The Evergrande situation is still a black cloud hanging over global markets. Combine that with uncertainty with Fed commentary coming tomorrow, and there’s a reluctance to get overly aggressive on the long side.”

Investors are waiting for the end of this week’s Fed meeting that may shed light on when its massive purchase of government debt will begin to ease.

Officials will reveal new projections as investors also are on alert for any timing on rate tightening.

Unofficially, the Dow Jones Industrial Average fell 47.93 points, or 0.14%, to 33,922.54, the S&P 500 lost 3.58 points, or 0.08%, to 4,354.15 and the Nasdaq Composite added 32.50 points, or 0.22%, to 14,746.40.

The S&P 500 index traded below its 50-day moving average, its first major breach in more than six months. The average has served as a floor of sorts for the index this year.

Analysts say a breach of the index’s 200-day moving average is now in sight.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Caroline Valetkevitch; additional reporting by Sagarika Jaisinghani and Ambar Warrick in Bengaluru; Editing by Anil D’Silva and Lisa Shumaker)

Oil Edges Up, as Investors Worry About Global Demand

Both benchmarks were at one point up by $1 per barrel, but Brent crude pared gains and settled just up 44 cents at $74.36 a barrel, after falling by almost 2% on Monday.

The October West Texas Intermediate (WTI) contract, which expired on Tuesday, rose 27 cents to settle at $70.56 a barrel, after dropping 2.3% in the previous session. The more active November contract rose 35 cents a barrel to $70.49.

Brent and the November WTI contract earlier reached session highs of $75.18 a barrel and $71.48 per barrel, respectively.

“It seems to be a very nervous trade today,” said Phil Flynn, senior analyst at Price Futures group in Chicago. “It’s a little bit of ongoing concerns about the potential impact of demand going forward.”

The TASS news agency said Russia believes global oil demand may not recover to its 2019 peak before the pandemic, as the energy balance shifts.

However, the Organization of the Petroleum Exporting Countries and its allies including Russia (OPEC+) struggled to pump enough oil in August to meet current consumption as the world recovers from the coronavirus pandemic. Several countries appeared to have produced less than expected as part of the OPEC+ agreement – suggesting a supply gap could grow.

Investors across financial assets have been rocked by fallout from the China Evergrande crisis that has harmed asset values in risk markets like equities.

“Traders worried that it could trigger a domino effect in China’s major debt-driven companies, and a rollover bearish effect for stocks and commodity prices,” said Nishant Bhushan, oil markets analyst at Rystad Energy.

“However, given that all Chinese major banks and lending institutions are controlled by the government, there is a ray of hope in the market that the second biggest economy in the world would be able to absorb shock waves from the Evergrande.”

In addition, the U.S. Federal Reserve is expected to start tightening monetary policy, which could cut investor tolerance for riskier assets such as oil. Fed policymakers began a two-day meeting Tuesday.

U.S. oil production is still recovering from hurricanes that hit the Gulf Coast region. Royal Dutch Shell, the largest U.S. Gulf of Mexico oil producer, said on Monday that damage to offshore transfer facilities from Hurricane Ida will cut production into early next year.

About 18% of the U.S. Gulf’s oil and 27% of its natural gas production remained offline on Monday, more than three weeks after Ida.

Industry data later on Tuesday was expected to show U.S. crude and product inventories fell last week. Government data is due on Wednesday. [EIA/S] [API/S]

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Stephanie Kelly in New York; additional reporting by Ahmad Ghaddar in London and Aaron Sheldrick in Tokyo; Editing by Marguerita Choy and David Gregorio)

Dollar Eases From Near 1-Month High as Fed, Evergrande Eyed

After reaching its highest level since Aug. 23 on Monday, the dollar straddled around the unchanged mark on the day, briefly moving higher as early gains on Wall Street’s benchmark equity indexes faded.

Investors are looking toward the Fed’s policy announcement on Wednesday for any signs of when the central bank will begin to scale back its massive bond-buying program, in a week filled with policy statements expected from a host of central banks around the globe.

“The market was trying to get a sense of was this turnaround Tuesday going to last, and if we had that continued improvement of risk appetite the dollar was going to pull back even more here,” said Edward Moya, senior market analyst at OANDA in New York.

“But there is just a lot of wait-and-see as far as what is going to happen with the Fed, what is going to happen with Evergrande. And right now if you are trying to make a dollar bet you really just want to wait until you get a better sense of what is going to happen with Evergrande and what the Chinese government is going to do.”

The dollar index fell 0.019% after reaching a high of 93.455 on Monday, while the euro was down 0.01% to $1.1724.

The greenback strengthened on Monday, along with other safe-havens such as the yen and Swiss franc, as concerns about the fallout from the possible default of China Evergrande unnerved financial markets.

Those concerns overshadowed efforts by Evergrande’s chairman to lift confidence in the embattled firm on Tuesday, as Beijing showed no signs it would intervene to stem any domino effects across the global economy.

The offshore Chinese yuan weakened versus the greenback to 6.4817 per dollar.

Before Evergrande’s debt crisis rattled markets, the dollar had been supported ahead of the Fed meeting this week, with economists surveyed in a Reuters poll expecting policymakers to signal expectations of a tapering plan to be pushed back to November.

The Japanese yen strengthened 0.13% versus the greenback, to 109.23 per dollar, while Sterling was last trading at $1.3658, up 0.01% on the day.

The Canadian dollar was poised to halt three straight days of declines against the greenback, after Canadian Prime Minister Justin Trudeau was re-elected to a third term but failed to win a majority in the parliamentary elections.

The Canadian dollar rose 0.06% versus the greenback at 1.28 per dollar.

In cryptocurrencies, bitcoin last fell 2.01% to $42,172.11.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci and Leslie Adler)

Commodity Markets Set for High Volatility, Says Louis Dreyfus

Prices of agricultural commodities have risen sharply, a trend contributing to increased first-half profits reported by LDC, but remain well below peaks seen a decade ago, Michael Gelchie said.

“Unlike in 2010-2011, we’re likely in store for a period of elevated volatility,” Gelchie told Reuters in a telephone interview.

Continued waves of COVID-19, shipping congestion and question marks over when the U.S. Federal Reserve will start tapering monetary support were all fuelling volatility, he said.

“We still haven’t necessarily seen a normalisation of the supply chain,” Gelchie said.

A broader surge in commodity and energy prices also reflected a shift towards a low-carbon economy, given that “the infrastructure to support that costs money,” he added.

LCD, one of the world’s larggest agricultural commodity merchants, earlier on Tuesday announced a sharp rise in first-half profit, supported by higher prices and strong demand for staple crops.

Gelchie declined to comment on the group’s prospects for the rest of the year, noting that prices remained high and crush margins for oilseeds strong.

The improved results further ease financial pressure on LDC after it completed this month the sale of a stake to Abu Dhabi holding firm ADQ, bringing in the first non-family shareholder in the agricultural commodity group’s 170-year history.

The deal with ADQ, which allowed LDC’s parent company to repay $1 billion borrowed from its operating group, would help LDC accelerate investments, Gelchie said, without giving details.

ADQ has secured four seats on an enlarged nine-member supervisory board headed by main shareholder Margarita Louis-Dreyfus.

The deal with LDC also involves a plan to supply food commodities to the United Arab Emirates.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gus Trompiz; editing by Barbara Lewis)

China Evergrande’s Rising Default Risks Shift Focus to Possible Beijing Rescue

Analysts played down the threat of Evergrande’s troubles becoming the country’s “Lehman moment,” though concerns about the spillover risks of a messy collapse of what was once China’s top-selling property developer have roiled markets.

In an effort to revive battered confidence in the firm, Evergrande Chairman Hui Ka Yuan said in a letter to staff the company is confident it will “walk out of its darkest moment” and deliver property projects as pledged.

In the letter, coinciding with China’s mid-autumn festival, the chairman of the debt-laden property developer, also said Evergrande will fulfil responsibilities to property buyers, investors, partners and financial institutions.

“I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment, resume full-scale constructions as soon as possible,” said Hui, without elaborating how the company could achieve these objectives.

Investors in Evergrande, however, remained on edge.

Its shares fell as much as 7%, having tumbled 10% in the previous day, on fears its $305 billion in debt could trigger widespread losses in China’s financial system in the event of a collapse. The stock ended down 0.4%.

Other property stocks such as Sunac, China’s No. 4 developer, and state-backed Greentown China on Tuesday recouped some of their hefty losses in the previous session. The Hong Kong property sector index rose nearly 3%.

“We are uncertain of how far and how strong the ripple effect would be on the housing market and the developer industry,” analysts at Deutsche Bank said in a recent note. “We think investors should remain on the sideline until there is more clarity.”

Fund giant BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande’s debt, Morningstar data showed.

BlackRock added 31.3 million notes of Evergrande’s debt between January and August 2021, while HSBC increased its position by 40% through July, according to Morningstar. UBS increased its position by 25% through May, the latest date available in the fund tracker’s database showed.

The Chinese government has been largely quiet on the crisis at Evergrande in recent weeks.

“There must be negotiations behind the scenes about a systemic recapitalization (of Evergrande) by state proxies,” said Andrew Collier, managing director of Hong Kong-based Orient Capital Research.

“If one piece of Evergrande’s debt is allowed to default, it would trigger questions about all of their remaining debt from investors and the government doesn’t want a wider crisis like that,” he said.

World stocks stabilised somewhat on Tuesday and oil prices recovered from the previous day’s heavy selling, as investors grew more confident that contagion from the distress of Evergrande would be limited.

Hedge fund managers contacted by Reuters said they were not yet concerned about any contagion risk into other equities markets.

“From our perspective, we … do not see any potential fundamental long-term effects on our portfolio companies,” said one London-based hedge fund professional. However, “there could likely be a lot of volatility around this one in the short term.”

A default by Evergrande has been widely anticipated by some corners of the market.

“I would characterize Evergrande as a telegraphed and controlled detonation,” said Samy Muaddi, the portfolio manager of the $5.1 billion T. Rowe Price Emerging Markets Bond fund, who does not have a position in the company. “If an investor was still investing in Evergrande they were investing against Chinese policy makers, which is a good way to lose.”

However, the spillover concerns at least in the property sector remained. S&P Global Ratings downgraded Sinic Holdings to ‘CCC+’ on Tuesday, citing the Chinese developer’s failure “to communicate a clear repayment plan”.

Hong Kong-listed shares of small-sized Chinese developer Sinic plunged 87% on Monday, wiping $1.5 billion off its market value before trading was suspended.

A major test for Evergrande comes this week, with the firm due to pay $83.5 million in interest relating to its March 2022 bond on Thursday. It has another $47.5 million payment due on Sept. 29 for March 2024 notes.

Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

“I think (Evergrande’s) equity will be wiped out, the debt looks like it is in trouble and the Chinese government is going to break up this company,” said Andrew Left, founder of Citron Research and one of the world’s best known short-sellers.

“But I don’t think that this is going to be the straw that breaks the global economy’s back,” said Left, who in June 2012 published a report that said Evergrande was insolvent and had defrauded investors.

Evergrande missed interest payments due Monday to at least two of its largest bank creditors, Bloomberg reported on Tuesday, citing people familiar with the matter.

SPILLOVER RISKS

The Chinese government will help Evergrande at least get some capital, but it may have to sell some stakes to a third party, such as a state-owned enterprise, Dutch bank ING said in a research note.

“The spin-off of non-core businesses, for example, those that are not residential real estate type businesses, will probably be done first,” wrote Iris Pang, ING’s Chief Economist, Greater China.

“After that could come sales of stakes that are at the core of Evergrande’s business,” Pang said.

Citi analysts in a research note said that regulators may “buy time to digest” Evergrande’s non-performing loan problem by guiding banks not to withdraw credit and extend the interest payment deadline.

Still, Citi said that while Evergrande’s default crunch was a potential systemic risk to China’s financial system, it was not shaping up as “China’s Lehman moment.”

At the same time, the U.S. market is in a better position to absorb a potential global shock from a major company default compared with the years prior to the 2007-2009 financial crisis, Securities and Exchange Commission (SEC) chair Gary Gensler said on Tuesday.

In any default scenario, Evergrande, teetering between a messy meltdown, a managed collapse or the less likely prospect of a bailout by Beijing, will need to restructure the bonds, but analysts expect a low recovery ratio for investors.

S&P Global Ratings said in a report on Monday it does not expect Beijing to provide any direct support to Evergrande.

“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,” the rating agency said.

“Evergrande failing alone would unlikely result in such a scenario,” S&P said.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Svea Herbst-Bayliss, Clare Jim, Tom Westbrook, Alun John, Anshuman Daga, and David Randall; Writing by Megan Davies and Sumeet Chatterjee; Editing by Stephen Coates, Shri Navaratnam and Nick Zieminski)