European markets down as investors continue to fret about Evergrande

·3 min read
China Evergrande Centre building in Hong Kong. Photo: Reuters
The China Evergrande Centre building in Hong Kong. (Reuters)

European markets closed lower on Friday as investors focused on whether China’s Evergrande Group (3333.HK) will default as it grapples with debt.

In London, the FTSE 100 (^FTSE) was down 0.3% as markets closed, while the French CAC (^FCHI) lost about 1%. The German DAX (^GDAXI) was down 0.8%.

Evergrande, China’s second-largest real estate developer, owes a cumulative debt of approximately $305bn (£222bn). Its shares had plunged almost 12% in Hong Kong as Asian markets closed on Thursday.

The company missed the deadline for an interest payment of $83.5m on Thursday and has not issued any communication around future payments or the likelihood of a restructuring.

"Investors are fearing that a probable default by the Chinese real estate group could unsettle China’s financial system, as well as investor confidence across the globe, at a time when multiple businesses are struggling with the unending troubles of raw material shortages, limited staff and hardships of the pandemic," Kunal Sawhney, CEO of equities research firm Kalkine Group, told Yahoo Finance UK.

"The market mayhem of a potential default has been already witnessed by the global equities with the leading stock indicators from New York to London to Tokyo collapsing after each other on 20 September," he added.

He said a third consecutive drop in the Germany’s Ifo Business Climate indicator and a moderate correction in Italy’s Business Confidence Index have "furthered the pain for equity investors".

Meanwhile Naeem Aslam, chief market analyst at AvaTrade, warned that investors should expect the UK to implement monetary tightening policies in the future as inflation is expected to soar.

Read more: UK economy slows in September amid rising inflation

The Bank of England (BoE) maintained its monetary policy unaltered on Thursday. Interest rates were held constant at a record low of 0.1%, and the central bank will continue its $1.2tn asset buying programme.

“Investors should note that although the monetary policy has not been changed, monetary tightening seems to be on the horizon,” said Aslam.

This is because of higher than expected inflation, which the BoE has warned will go above 4% this year – more than two times the targeted level of 2% – in part because of a rise in energy prices.

However, officials have labelled these issues as “transitory” and expect the figure will likely drop to the 2% target in the medium term.

“The BoE will continue to closely monitor England's macroeconomic environment, with a particular focus on the coronavirus situation and the endurance of supply-side problems such as rising energy costs,” Aslam said.

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Over in the US, the tech-heavy Nasdaq (^IXIC) was down 0.4% at the European close. The S&P 500 (^GSPC) and the Dow Jones (^DJI) ticked 0.2% lower.

In Asia, the Hang Seng (^HSI) closed 1.3% lower and the Shanghai Composite (000001.SS) was down 0.8%. In Japan, the Nikkei (^N225) closed 2% higher.

The US Federal Reserve earlier in the week had held benchmark interest rates near zero, but indicated rate hikes could be coming sooner than expected. It also significantly cut its economic outlook for the year.

Aslam expects investors to further dissect Fed chairman Jerome Powell's speech for more signals about its monetary policy move.

But he said: "Overall, investors are confident about economic growth, they believe that any spike in coronavirus infections and supply chain restrictions will likely be temporary."

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