For a while, the WSE indices lost more than three percent on Monday, but then things calmed down a bit and eventually the stocks fell more or less like the stocks in Italy or Russia. Either way, the collapse of Chinese developer number two, Evergrande, has damaged investor confidence in riskier markets. Perhaps the more important news is that the US Fed’s central bank is considering the end of the dollar reprint, and the decision may be made in two days.
- The panic on the Warsaw Stock Exchange ended before 15:00, but at the close of trading, WIG20 lost a lot, 2.6 percent.
- There are fears that the collapse of the Chinese housing giant Evergrande will spill over the world. The company issued dollar bonds and this is part of its gigantic debt
- However, a plan to reduce the dollar printing, which will be considered by the Fed this week, may be a more important reason for stock market falls than the potential collapse of the big developer.
- The flow of empty money into stocks has provided gains on Wall Street for years, but has been accompanied by high inflation recently
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Before 15:00, the index of the most important companies on the Warsaw Stock Exchange, WIG20, was losing 3.1 percent. and it looked much worse than in other markets. After the close of the session, however, the declines were smaller and the WIG20 is 2.6%. below Friday’s closing. What caused the panic?
The first thing is the collapse of the second largest Chinese developer Evergrande Group. $ 305 billion debts that can be troubled to pay off are a harbinger of troubles in financial markets around the world. Part of Evergrande’s debt is in the form of dollar bonds issued abroad by both the parent company and a special financial vehicle. Soon we can hear information about institutions announcing that they are entering them into losses. Will they stay alive after such a discount?
Evergrande shares fell by more than 10 percent on Monday, and by as much as 30 percent last week. In fact, the seventh consecutive week of decline of this company has already begun the value decreased by as much as 84 percent this year. and the rate has reached its lowest level in 11 years. Other Chinese developers, including number four on the Sunac market (-10.5%) and the state-controlled Greentown China (-6.7%), also recorded declines.
Other businesses run by Evergrande are also losing ground, such as the electric car manufacturer China Evergrande New Energy Vehicle Group Ltd (-2.7%) and the streaming service HengTen Networks Group (-9.5%) competing with Netfliks. Perhaps, however, everything will end with a takeover by the state.
However, Chinese problems increased risk aversion in the markets, so some global capital began to withdraw money from stock exchanges. First of all, stock exchanges of developing countries, incl. from Poland or Hungary, where the declines of the main indices were identical on Monday.
In Europe and the USA, it is also falling, but the drops are mostly in the order of 1.5%. Greater than 2% losses include the stock exchanges in Milan and Frankfurt. In the case of German DAX indexwhich, by the way, undergoes the greatest change in history just on Monday and instead of 30, it includes the 40 largest companies, the declines may be related to the expectations of the problems of the Chinese economy. Germany is the only developed country with a trade surplus with China, incl. thanks to car exports.
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However, it is difficult to determine to what extent the falls in the stock markets are related to the troubles of the Chinese developer, and to what extent the inflow of empty money to capital markets will decline. This could have a much greater impact on the stock markets this week than the troubles of even a huge developer in the Middle Kingdom.
Fed to finish reprinting?
– The outflow from risky assets continues, but you should be aware that in the event of assistance from Evergrande or the dovish tone of a Fed meeting, the current market problems may pass in the second half of the week as if by magic – comments analysts from the BM mBank.
This week there will be a meeting of the US MPC, ie the Federal Reserve Committee. Investors predict that the printing of dollars will start to end next year due to inflation, which is close to the Polish one, but there are fears of the markets swollen with empty money that the communiqué will announce it now.
It is possible the Fed will announce a cut from $ 120 billion in its current government and mortgage redemption. monthly already this week, then the whole operation would start in November. However, a lot depends on the data from the economy.
Inflation breaks records in the US for several yearsbut the Fed is also looking at the labor market, and there is no concrete evidence of a steady improvement there yet. The next Fed meeting will be held at the beginning of November, that is before the October labor market data are released, so investors suspect that the decision will not be made until December – writes Reuters.
Another issue is raising interest rates, which would probably trigger similar movements of central banks around the world, including Poland. Contrary to the end of reprinting, this decision will be more difficult, as it will burden the economy. At a meeting with investors in June, Fed representatives predicted two rate hikes, but only in 2023. The market is currently predicting the first rate hike in March 2023.
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