The people in the Asia Pacific region need growth and employment, not submarines and gunpowder. — China’s Foreign Ministry spokesman Zhao Lijian on the recent US-UK-Australia (Aukus) defence deal.
Fed taper could start ‘soon’ and end around mid-2022: Powell
Federal Reserve Chair Jerome Powell said the US central bank could begin scaling back asset purchases in November and complete the process by mid-2022, after officials revealed a growing inclination to raise interest rates next year.
Powell, explaining the US central bank’s first steps toward withdrawing emergency pandemic support for the economy, told reporters on Sept 22 that tapering “could come as soon as the next meeting.”
That refers to the policy gathering on Nov 2 and Nov 3, though he left the door open to waiting longer if needed and stressed that tapering was not meant to start a countdown to lift-off from zero interest rates.
“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate lift-off,” he said following the completion of the two-day gathering of the Federal Open Market Committee (FOMC).
Powell said he did not expect the Fed to begin rate increases until after completing the taper process, which would wrap up “sometime around the middle of next year.”
“It is a bit faster than the last cycle,” said Jim O’Sullivan, TD Securities chief US macro strategist. “He was very clear in the press conference that ‘soon’ means November.”
The Fed took 10 months to complete the exercise of scaling back bond buying back in 2014. Powell’s performance was being parsed both by investors and the White House: The central bank chief’s term expires in February and President Joe Biden is expected to decide this fall whether or not to renominate him to another four years in his post. Bloomberg News has reported that White House aides are considering recommending the President keep him on the job.
In addition to signalling a scale back in upcoming bond buying, officials also published updated quarterly projections which showed officials are now evenly split on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year, according to the median estimate of FOMC participants. In June, the median projection indicated no rate increases until 2023.
The projections are not a policy commitment and reflect the personal views of policy makers, some of whom may no longer be serving at the Fed next year. Biden is expected to fill an open slot on the seven-seat Board in Washington as well as name two new vice chairs when the terms of the current incumbents — Richard Clarida and Randal Quarles — expire in coming months.
“The chairman is a dove among hawks,” said Diane Swonk, chief economist at Grant Thornton LLP. “He would like to divorce tapering from lift-off and stressed the threshold for rate hikes is much higher than that for tapering.”
The US rates market continued to price in a first hike around the start of 2023, although fiveyear Treasury rates rose as traders anticipated a slightly more aggressive path once benchmark increases begin.
That helped flatten the yield curve as longend rates fell, while the Bloomberg Dollar Index gained after being whipsawed around the decision. US stocks pared their advance.
The muted market reaction “is a very good outcome for the Fed in terms of signalling their intent to get the market information well ahead of the tapering decision,” said Jeffrey Rosenberg, senior portfolio manager for systematic fixed income at BlackRock. “The Fed has to be pleased that their communication on the long-awaited tapering has avoided the dreaded fear of the tantrum.”
The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25%, and continue purchases of Treasuries and mortgage-backed securities at a pace of US$120 billion ($162 billion) per month. The vote was unanimous.
Projections for 2024 were also published for the first time, with the median suggesting a federal funds rate of 1.8% by the end of that year. The median for 2023 rose to 1%, from 0.6% in the June projection. — Bloomberg
Local banks have no direct exposure to Evergrande
Banks in Singapore have no direct exposure to China Evergrande Group (Evergrande), one of China’s largest property groups that is now buckling under a mountain of debt. A DBS Group Holdings spokeswoman says “DBS has no exposure to Evergrande”, while a United Overseas Bank (UOB) spokeswoman says: “UOB does not have any exposure to Evergrande”. The Edge Singapore understands that Oversea-Chinese Banking Corp (OCBC) has no exposure to Evergrande as well.
In the US, Bloomberg reported that the US Federal Reserve chair Jerome Powell said that there is little direct US exposure to China Evergrande’s debt. “The Evergrande situation seems very particular to China, which has very high debt for an emerging economy,” Powell said, according to Bloomberg. However, he noted that the Evergrande situation could “impact global financial conditions”.
For instance, Reuters reported that BlackRock and the investment banks of HSBC and UBS were among the largest buyers of the debt of Evergrande, citing Morningstar data. “BlackRock added 31.3 million notes of Evergrande’s debt between January and August 2021, pushing its stake in the company to 1% of the assets in its US$1.7 billion Asian High Yield Bond Fund, according to Morningstar. HSBC increased its positions in the company by 40% through July, according to Morningstar. UBS increased its position by 25% through May, the latest date available in the fund tracker’s database,” Reuters reported.
The indirect impact should Evergrande default could be felt in the equity markets through fund redemption if there is any. As a case in point, Blackrock funds and ETFs own 2.37% of OCBC, 2.16% of UOB and 2.06% of DBS.
According to a Sept 23 Citi report, markets had some relief from Evergrande’s onshore subsidiary announcing to honour the coupon payment on an onshore bond due on Sept 22. But there is no clarity on another coupon due on an offshore bond of Evergrande’s financial holding company due on Sept 23. Bond covenants state a 30-day grace period from a missed coupon payment date before it triggers a default.
Meanwhile, Asia Markets reported highlighted sources close to the Chinese government that “a deal that will see China Evergrande restructured into three separate entities is currently being finalised by the Chinese Communist Party and could be announced within days. State-owned enterprises will underpin the restructure, effectively transforming the property developer into a state-owned enterprise.” “Any such confirmation of nationalisation of the troubled real estate company shall ease concerns over potential disruptive moves in markets, in our view, which have so far been calm. However, a longer term concern over a slowdown in China’s property sector and its impact on China’s growth prospects is likely to persist,” Citi says. — The Edge Singapore
China pumps RMB110 billion into system amid Evergrande concerns
China’s central bank net-injected the most shortterm liquidity in eight months into the financial system, with markets roiled by concerns over China Evergrande Group’s debt crisis.
The People’s Bank of China (PBOC) pumped in RMB110 billion ($22.9 billion) of cash with seven- and 14-day reverse repurchase agreements. That was the largest addition through open-market operations since late January, when a funding squeeze sent interbank rates soaring. Prior to Sept 23, the PBOC had injected liquidity for three straight sessions, stoking bets that Beijing hopes to soothe market nerves over Evergrande.
The need to help calm market jitters is pressing, as concerns over Evergrande’s ability to make good on its liabilities spills over into global markets. Focus is on whether the developer can pay US$83.5 million of interest due on Sept 23 on a five-year dollar note. The coupon on the security, which has a 30-day grace period before a missed payment would constitute a default, is part of US$669 million of bond interest due through the end of this year.
The indebted developer’s Hong Kong-listed shares jumped as much as 32%, the most since 2009, in early Sept 23 trading on bets the company would avoid a disorderly debt resolution after one of its units negotiated interest payments on Yuan bonds.
Apart from attempting to ease market concerns over Evergrande, authorities also tend to loosen their grip on liquidity toward quarter-end due to increased demand for cash from banks for regulatory checks. Lenders also need to hoard more funds ahead of the one-week holiday at the start of October. — Bloomberg
Photo: Bloomberg
