China’s largest property development group, Evergrande, has been officially labelled a defaulter for the first time. The company failed to pay bond coupons totaling $82.5 million on Monday. By Wednesday, Evergrande had still failed to transfer the funds, setting the stage for Asia’s largest default.
Key themes for the week include:
- United States (US) unemployment below 5%
- South African economic growth falters
- Johannesburg Stock Exchange (JSE) shrugs off Omicron fears to reach another all-time high
- Oil trending up as demand concerns abate
- Strong dollar ahead of US inflation data
EVERGRANDE DEBT DOWNGRADED TO RESTRICTED DEFAULT
For weeks, global markets have been watching Chinese real estate development giant, Evergrande, teeter on the edge of default, as it is weighed down by $300 billion, or more, in financial obligations and is barely able to make its payments to investors. On Thursday, perhaps to nobody’s surprise, a major ratings firm declared that Evergrande was in default.
Fitch Ratings downgraded Evergrande, and two key subsidiaries, to a “restricted default” rating on Thursday, a move that may trigger cross defaults on the developer’s $19.2 billion dollar debt. The designation means that Evergrande has formally defaulted but has not yet entered into any kind of bankruptcy filing, liquidation or other process that would stop its operations. Neither the company nor the Chinese government has confirmed that Evergrande has defaulted on its debts, although the company did state last week that there was no guarantee that it would meet its debt repayments as it entered a restructuring process with assistance from local government.
Long regarded as too big to fail by many investors, Evergrande has now become the largest casualty of President Xi Jinping’s campaign to rein in the country’s overindebted, conglomerated and overheated real estate market. Before the Evergrande default this week, Chinese borrowers have already defaulted on $10.2 billion in offshore bonds this year, with real estate firms accounting for 36% of the total. There was little sign of Evergrande contagion in the markets on Thursday, partly as the markets had been anticipating a default for months, and thanks to a flurry of activity on the part of the Chinese government in the real estate sector, to help soften the blow.
DATA IN A NUTSHELL
The US economy boasted a 4.2% unemployment rate for November, a marked improvement on a year ago when the unemployment rate was 6.7%. The improvement in the US unemployment rate suggests that slack in the labour market is reducing.
The Caixin China General Manufacturing Purchasing Managers Index (PMI) data disappointed in November at 49.9 points, down from October’s 50.6 points, against expectations of a steady PMI. China’s Services PMI at 52.1 points was 1.7 points below October and close to six points down year-on-year. Furthermore, China’s consumer confidence fell by 1.2% year-on-year in November. This week, China announced it would cut the reserve requirements ratio by 0.5% for most banks, effectively releasing $188 billion of liquidity into the market.
According to the British Retail Consortium’s (BRC) and KPMG’s Retail Sales Monitor, retail sales in the United Kingdom (UK) improved by 1.8% year-on-year in November, beating a forecast of 1.1%. UK consumers are said to be shopping early for the festive season despite inflationary headwinds, with positive sales growth across multiple categories.
South Africa’s third quarter GDP growth rate of 2.9% year-on-year disappointed the market which was expecting 3.8% growth for the quarter. On a quarter-on-quarter basis, GDP declined by 1.5% compared to the 1% decline expected by economists. The quarter-on-quarter decline reflects the impacts of the July riots on South Africa’s economic output.
MARKETS DUST OFF OMICRON SHOCKWAVE
The S&P 500 index traded at 4 701 on Thursday after a brief wobble during the first week of December saw it fall to as low as 4 502. The onset of volatility came as the market awaited further information on the likely impact of the Omicron variant of COVID-19, but with signs pointing to the variant being less dangerous than expected, the S&P 500 rebounded. The S&P Information Technology index has been resilient through the turbulence, and currently trades 5% above its Monday open. The S&P Financials index bucked against prevailing headwinds and has remained flat this week.
The European Union’s (EU’s) EURO STOXX 50 Index endured a similar drop to US markets last week, however, the former’s recovery this week has been less convincing. While the S&P500 is close to peak levels, the EURO STOXX 50 is currently trading 4.4% below its peak of 4 401 as the EU continues to grapple with rising Omicron infections. In UK markets, the FTSE 100 rallied 2.6% this week and is currently trading 1% off its all-time high of 7 384 achieved in mid-November.
South Africa’s JSE All Share Index crossed the 72 000 mark for the first time in history this week, gaining 1.6% after last week’s momentum led to a 3.2% increase. The index seemingly shrugged off both the Omicron fears and the disappointing GDP growth data to achieve an all-time high of 72 955 on Tuesday. The JSE Consumer Discretionary Index led the way with a 3.1% weekly gain owing to luxury goods maker, Richemont, which surged by 4.7% on Tuesday. The Health Care Index was the laggard of the week, down 4.6%, as Aspen took further pain.
OIL RECOVERS AS OMICRON CONCERNS DIMINISH
The oil market continued to strengthen over the last couple of days as concerns around the demand impact from the Omicron variant started to fade. While the outbreak sparked a 16% slump in prices from the 26th of November to the 1st of December, oil markets recovered this week and recouped around half of that drop as Brent Crude managed to rally over 3.5% on Wednesday, taking it above the $75 per barrel mark. Further recovery could however be limited until the impact of the new variant is clearer.
In the metals markets, copper slipped in early Thursday trade, after having three straight days in the green, as the dollar firmed, Omicron fears subsided, and the market’s attention turned towards the unwinding of US monetary stimulus. Benchmark copper, on the London Metal Exchange (LME), was down 1.1% in the early afternoon. Copper prices have been supported by low inventories but there has been pressure from cooling growth in China, the commodity’s main consumer market. Copper prices are up 20% for the year, compared to the wider index of industrial metals (LMEX) which is up nearly 30%.
CURRENCIES REACT TO US INFLATION
The US Dollar Index remains in a position of strength, despite trading within a tight range this week. The index remained above 96 for the most part. The dollar awaits today’s critical US inflation data in the face of rising inflation expectations.
The British pound was relatively defensive this week after losing only 0.27% in value against the greenback following a decline in the exchange rate from $1.35/£ in mid-November to $1.32/£ currently. The Euro currently trades flat on the week at $1.13/€ but significant mid-week volatility sent the Euro to as low as $1.12/€ during Tuesday’s trading.
The rand’s reaction to the Omicron variant was relatively subdued compared to developed market currencies, and we saw it gain against the dollar for most of the week. However, Thursday’s trading saw the rand lose ground ahead of key economic data being published, and currently trades at R15.99/$, R18.06/euro and R21.15/£.
Kindly note that this is the final Weekly Wrap for 2021 and it will resume on 14 January 2022.