Wall Street snaps a two-week losing streak despite Evergrande 

Week from 20 to 26 September 2021

U.S. stocks bounced back after the Fed’s two-day meeting as Jerome Powell managed to calm markets. He confirmed that the process of tapering bond purchases would begin later this year and be completed by the middle of next year.

Yet the week had got off to a bad start with new declines resulting from the crisis at Evergrande. The Chinese real estate giant was due to make $83.5 million in coupon payments on Thursday, but bondholders did not even get a penny. Hence China's central bank injected up to 120 billion yuan – i.e. $18.6 billion- of reverse repos to maintain liquidity in the banking system that day. Even if analysts seemed to downplay the risk that a collapse could lead to a “Lehman moment” in Asia, fears of Evergrande's default continued to haunt the region.

The Hang Seng index thus plunged 2.92% after a loss of 4.90% last week. The Nikkei was down 0.82%. By contrast, the S&P 500 rose 0.51%, the Dow Jones Industrial Average gained 0.62% while the Nasdaq was virtually flat (+0.02%). Small cap stocks performed in line with their large-cap counterparts (Russell 2000 up 0.50%). European markets followed suit (MSCI EMU: +0.50%, FTSE: +1.26%).

Cyclicals in demand, climb in Treasury yields

Rising bond yields hurt interest-sensitive sectors of the economy and gave cyclical stocks the advantage this week. Energy was the best performer (+4.70%) thanks to higher oil prices (WTI crude up 2.79% for the fifth straight week of gains). U.S. crude stockpiles indeed fell by more than expected last week, amid a slow recovery of production following disruptions from Hurricane Ida. Financials fared well too (+2.21%), pushed by bank stocks in the wake of higher Treasury yields. Real estate (-1.51%), utilities (-1.20%) and communication services (-0.72%, weighed down by Facebook: -3.22%) lagged behind for the third week in a row.

Bonds in the red

Once again, U.S. and benchmark European government bonds closed lower. The 10-year U.S. T-note yield rose to +1.46%, i.e. +10bps week-over-week. In Europe, the 10-year Germany bond yield traded up more 5bps at -0.225% while that of the 10-year France OAT closed at +0.116%.

Higher yields hit corporate investment grade bonds (-0.19% in Europe, -0.39% in the U.S.) and emerging debt (-0.78% in local currencies). Unlike last week, high yield bonds also finished in negative territory (-0.19% on both sides of the Atlantic).

Elsewhere, gold was virtually unchanged (spot price at $1,750.42/Oz) as the dollar index treaded water (+0.1%).

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