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Hang Seng, ASX 200 May See Relief After Fed. Evergrande Set for Restructuring?

Hang Seng, ASX 200 May See Relief After Fed. Evergrande Set for Restructuring?

Brendan Fagan, Contributor


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Evergrande, CCP, ASX 200, Hang Seng, Federal Reserve – Talking Points

  • Evergrande nears a potential restructuring ahead of an expected debt payment
  • Hang Seng Index down 10% from Sept. high, may look to rebound on improved sentiment
  • Federal Reserve pushes taper announcement out, leaves interest rates unchanged

Asia-Pacific equities, such as the Hang Seng and ASX 200, may see some relief as Evergrande could be set for a swift restructuring by the Chinese Communist Party (CCP), according to sources close to the government. The report highlighted that Evergrande will be broken into three separate entities, with an announcement expected in the coming days. Evergrande, one of China’s largest real estate developers, has come under severe stress as it struggles to repay its many creditors. Evergrande is Asia’s largest junk bond issuer, and its significance to the Chinese economy has kept risk assets on a knife-edge of late.

In a likely effort to backstop markets yesterday, the People’s Bank of China injected 120 billion Yuan into the market in an effort to mitigate potential turbulence emanating from the Evergrande situation. Fears lingered over the company’s immediate solvency, but Evergrande negotiated an interest payment on domestic debt, which is expected later today, following negotiations with bondholders. Market participants will be looking to see if Evergrande makes its next dollar bond coupon payment, which totals roughly $83.5 million.

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The notion of a potential restructuring may come as a welcome surprise to APAC risk assets, particularly the Hang Seng Index and the ASX 200. Shares in Hong Kong have struggled as sentiment soured as a result of the Evergrande debacle. The Hang Seng Index is more than 10% off its September high, and almost 20% off of the June peak. Investor angst has grown not just with Evergrande, but also with Beijing’s crackdown on tech, education, and gaming stocks. A potential restructuring would go a long way in preserving sentiment, as global market participants fear potential contagion from China.

Hang Seng Daily Chart

Chart created with TradingView

The rumored announcement of a restructuring for Evergrande represents a massive potential tailwind for Australia as well. A restructuring may quash any remaining fears over an economic collapse in China, potentially reinvigorating the Australia-China trade relationship. China’s slowing economy over the summer months saw iron ore prices plummet, aiding to push the Australian Dollar to fresh yearly lows. These trends may reverse as the PBOC and CCP work to prevent an economic catastrophe from severely damaging the Chinese economy. Improving sentiment and additional liquidity in China could boost investor morale in Australia, potentially taking the Aussie Dollar and domestic equities higher as a result.

S&P/ASX 200 Index Daily Chart

Chart created with TradingView

Sentiment in Asia may begin to reverse, given that the Federal Reserve left its taper announcement for a later meeting. Federal Reserve Chair Jerome Powell spoke on the Evergrande situation during his press conference, highlighting that the situation is “unique to China” and that he does not expect any spillover into global markets. Powell’s reassuring comments spurred market activity in the US, with the Nasdaq 100, S&P 500, and Dow Jones all closing up roughly 1% on the day. US markets declined heavily earlier in the week, likely over fears that there would be global exposure to the Evergrande crisis.

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--- Written by Brendan Fagan, Intern

To contact Brendan, use the comments section below or @BrendanFaganFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.