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Stocks on Wall Street wavered and government debt sold off as investors kept a close eye on the unfolding Evergrande crisis and digested hawkish signals from several leading central banks.
The US blue-chip S&P 500 index was roughly unchanged during afternoon trading on Friday in New York, heading for a weekly rise of 0.4 per cent.
Stocks had largely recovered from a broad sell-off on Monday, which shook market confidence. Investors pulled $24.2bn from global equity funds in the seven days ending on Wednesday, the first weekly outflow this year, according to data from EPFR Global.
US stock funds recorded a weekly outflow of $28.6bn over the same period, the highest levels seen since February 2018.
The yield on the US 10-year Treasury note, a key benchmark for global borrowing costs, ticked up 0.03 percentage points to 1.46 per cent after the Federal Reserve indicated earlier this week that a growing number of its policymakers expect a rate rise in 2022.
The Fed messaging was followed by Norway’s Norges Bank becoming the first big western central bank to raise rates on Thursday and the Bank of England revealing that the case had “strengthened” for “modest tightening of monetary policy” in the next few years.
“There’s a sense that one swallow does not a summer make, but you see two and investors start to think summer is here,” said James Athey, a bond portfolio manager at Abrdn. “We had an unequivocally hawkish Fed . . . so people get the sense that central banks are moving towards tighter policy.”
In response to the shift in stance from policymakers, the yield on the 10-year UK gilt jumped more than 0.1pp on Thursday and further 0.01pp on Friday. The yield on the equivalent German Bund rose 0.03pp to minus 0.23 per cent.
The sell-offs were driven in part by persistent fears over higher inflation, which erodes the real returns on the fixed-interest securities such as sovereign debt.
On Thursday the BoE kept interest rates at a record low of 0.1 per cent but warned that UK consumer price inflation could rise to slightly above 4 per cent in the final quarter of the year. Analysts are now predicting a further rise in consumer prices driven partly by the surging cost of natural gas.
“We are in the camp that [high inflation] is not a permanent problem,” said Jorge Garayo, head of inflation strategy at Société Générale. But “we are going to have a lot of uncertainty and volatility in the inflation prints for the coming months”.
Global equities were mixed on Friday as a much-anticipated bond payment deadline passed for the Chinese property developer Evergrande, sending signs of stress across China’s real estate sector amid fears that the company’s escalating liquidity crisis could breed contagion across other sectors and countries.
Evergrande, the world’s most-indebted property developer, was due to make an $84m interest payment on an offshore bond on Thursday but investors told the Financial Times that no payment had yet been received. Evergrande has a 30-day grace period before a failure to pay would lead to a default.
The Europe-wide Stoxx 600 benchmark closed down 0.9 per cent and London’s FTSE 100 dipped 0.4 per cent. In Asia, Hong Kong’s Hang Seng index closed 1.3 per cent lower, taking its fall for the week to almost 3 per cent.
Hitting investor sentiment further on Friday was a move by Beijing to crack down on cryptocurrencies by declaring that all activities related to digital coins are “illegal”. The price of bitcoin fell 6 per cent in response as did the shares of scores of US-listed companies linked to digital finance such as Riot Blockchain and Marathon Digital.
The dollar index, which measures the greenback against six currencies, rose 0.3 per cent.
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Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday