Risk rally likely as stocks improve after Evergrande relief

Stocks found support and US futures lifted in relief on Wednesday after teetering developer China Evergrande said it would pay some bond interest due on Thursday, allaying fears of an imminent and messy collapse that had spooked investors.

The news also helped the risksensitive Australian dollar, though anticipation that the US Federal Reserve may move a step closer to tapering later on Wednesday kept a lid on gains and the mood. Markets in Taiwan and China reopened lower after a two- day break, catching up with a sharp selloff around the world triggered by concern over Evergrande’s predicament, but were soon paring losses as the payment promise buoyed the mood. MSCI’s broadest index of Asia- Pacific shares outside Japan was 0.3percent lower midmorning. Japan’s Nikkei fell 0.6percent, while Australian shares rose 0.7percent. Hong Kong markets were closed for a holiday. S& P 500 futures reversed an early loss to trade slightly higher after Evergrande pledged to pay the scheduled coupon on a yuan bond that was due on Thursday. Safe- haven assets such as the yen and US treasuries also were sold after the announcement. Evergrande is still due to pay $ 83.5m in interest on a separate dollar bond, but the signal that it has at least some ready cash for creditors seems to have cheered investors. “That provides some reassurance,” said Ryan Felsman, senior economist at brokerage CommSec. “We may see certainly some improvement in terms of the volatility … it looks as though we’re going to see a little bit of a risk rally,” he said. Globally, markets had also already started to calm down as analysts downplayed the threat of Evergrande’s troubles becoming a “Lehman moment” and setting off a financial crisis. Overnight on Wall Street the S& P 500 fared little worse than flat, to sit about 4percent below a record peak made early in September. Evergrande’s distress has already spread to other Chinese developers, but investors are now anticipating that the global fallout can be contained and concern is shifting to worrying but more gradual economic consequences.

“The Evergrande debacle is further stoking concern over the fallout from China’s broadening crackdown,” analysts at Rabobank said in a note to clients, pointing out new rules on everything from online gaming to developers debt levels. “As a consequence, Evergrande can perhaps be seen not so much as a potential crisis trigger but rather a symptom of a broader policy shift which threatens Chinese growth as politics dominate economic considerations.” In currency markets, the Australian dollar jumped 0.3percent to $ 0.7253 after Evergrande’s news and the yen handed back small early gains on the euro and the dollar. Moves were capped ahead of Wednesday’s Fed meeting, however, and the dollar was firm at $ 1.1727 against the euro. The 10- year US treasury yield lifted as high as 1.3450percent from a morning low of 1.3140percent. Most analysts think the Fed will not go into detail about its tapering plans but say risks lie in board members’ “dot plot” of rates projections.