Last week, the S&P 500 increased its market cap by 0.5%, while the Nasdaq 100 remained at the levels of the end of the previous week. At the beginning of the week, it became known about the financial problems of the largest Chinese developer Evergrande. On Monday, the company missed loan payments to at least two banks. The intensity of the situation around the debt problems of Evergrande had a serious impact not only on the Chinese stock markets, but also on the global ones. However, closer to the middle of the week it became known that the Chinese authorities are ready to provide support so that Evergrande does not allow default. On Thursday, the company was supposed to pay the coupon for the Eurobonds, but it is still not clear whether the payment was made. This information should appear this week. In our baseline scenario, we expect to see Evergrande’s managed debt restructuring that should not cause significant damage to the Chinese financial system.
The most important event of the previous week was the two-day Fed meeting. It became known on Wednesday that the Fed kept its key interest rate in the range from 0% to 0.25% per annum, which fully coincided with market expectations. The Fed announced that it will continue to buy back assets totaling $ 120 billion on a monthly basis, including US Treasuries for $ 80 billion and mortgage bonds for $ 40 billion. which will take place on November 2-3. Moreover, he noted that the regulator could “easily” begin to reduce the buyback of assets in November in the event of strong data on the labor market. Powell did not rule out that the asset repurchase program could be completed by mid-2022. Half of the members of the Federal Reserve Board of Governors and the heads of the Federal Reserve Banks expect a base rate hike as early as 2022. Moreover, three of them believe that it will be increased twice.
In a statement released at the end of the meeting on Wednesday, the FRS confirmed that it is ready to use all the tools at its disposal to support the US economy in this difficult time, helping to move towards the goals of maximum employment and price stability. Inflation is high, reflecting mainly temporary factors. Overall, financial conditions remain favorable, driven in part by the Fed’s actions to support the economy and the flow of loans to US households and businesses. The Fed also drew attention to the fact that, thanks to progress in vaccinations and strong political support, indicators of economic activity and employment continued to strengthen. The sectors most severely affected by the pandemic have improved in recent months, but rising incidences of COVID-19 have slowed their recovery. We believe that the spread of Covid will be an important factor in making monetary decisions, as risks to the economic outlook remain.
This week, investors will be closely watching political developments in both the US and the Eurozone. Speeches by Fed Board of Governors Leil Brainard, Chicago Fed President Charles Evans and New York Fed President John Williams will be on Monday, and preliminary data on durable goods orders for September will be released. Powell and Treasury Secretary Janet Yellen will report to the Senate Banking Committee on the implementation of the CARES Act, which was passed in response to the Covid-19 pandemic. Lagarde will open the ECB-sponsored forum of central banks. Powell, Lagarde, Bailey, Bank of Japan Governor Haruhiko Kuroda will speak at the ECB forum on Wednesday. The European regulator maintains an ultra-soft monetary policy, while the Fed is ready to curtail stimulus and raise the key rate. A significant difference in the monetary policies pursued may become the subject of heated discussion at the forum organized by the ECB. Powell and Yellen are expected to speak at the US House of Representatives Financial Services Committee hearing Thursday on the Fed and Treasury’s response to the pandemic. Thursday (September 30) is the deadline for Congress to suspend the national debt limit to prevent a government hiatus from October 1. In the US, the final data on GDP for the 2nd quarter will be released. A number of macroeconomic data will be released on Friday in the US, such as personal income and spending for August, manufacturing PMI for September from Markit and ISM.