Liam Dann: Phew! Market meltdown averted – for now
Soothed by cool words from the US Federal Reserve and a reassurance on debt repayment by faltering Chinese property giant Evergrande, global markets have bounced back from the brink of a serious meltdown – for now.
After suffering its biggest fall in months on Tuesday, Wall Street’s major indices bounced up almost 1 per cent last night.
The local NZX-50 was up about 0.4 per cent (at 2pm).
That’s is no small thing given how anxious investors were at the start of the week … and how downright disastrous a global market meltdown would be for the world right now.
As we head into the infamously cursed month of October (the month for the big market crashes in 1929 and 1987) investors are on edge.
There are always plenty of reasons why markets could crash.
Some, like the end of easy monetary policy settings, have been bubbling away for years.
Others, like the fears about the Chinese property market and debt default, are more specific.
Regardless, as the world stumbles its way towards pandemic recovery, propped up by mountains of government debt and battling into inflationary headwinds – now seems like a very bad time for investor confidence to break.
So, phew! Not today.
Evergrande still has big problems. It owes a staggering half-trillion New Zealand dollars and faces a series of deadlines which all present further opportunities for default.
It also owes impatient Chinese investors some 1.6 million apartments that don’t look like getting built anytime soon.
Many analysts believe it is still a case of “when” not “if” it collapses.
But at least the surprise of its failure is gone.
It no longer makes sense to describe Evergrande as China’s Lehman Brothers moment.
If and when it does go down, it won’t be with the same degree of shock that Lehman unleashed.
Beijing has had time to consider its options.
Thus far Xi Jinping has held firm, offering no hints that the Communist Party will come to the rescue and deem Evergrande too big to fail.
But one suspects there’s a plan if and when one is required.
Say what you like about the CCP, but they do like to make plans.
US Fed chairman Jerome Powell talked down the chances that Evergrande would be the contagion for a market meltdown.
In a timely speech, after the latest meeting of the Fed’s Board of Governors, he emphasised that the direct links between Evergrande debt and US corporations – or even the big Chinese banks – were limited.
Any contagion effect would be purely due to the effect on global market confidence, he said.
Powell and the Fed also held their nerves and outlined clear plans to ‘taper’ the central bank’s bond-buying programme from as early as November.
In plain language, he’s talking about winding back on Quantitative Easing – or money printing – to tighten the money supply and head off inflation risk.
The move is seen as a precursor to actually lifting interest rates.
Wall Street investors don’t like this.
But Powell’s speech was clear and measured and markets coped.
He was careful to reassure that the tapering process didn’t mean cash rate hikes were imminent.
“You’re going to be well away from satisfying the lift-off test when we begin to taper,” he said.
Powell has proved to be a happy accident of Donald Trump’s presidency.
There was understandable trepidation in the world when Trump was tasked with deciding on a new Federal Reserve chair and opted, for politically partisan reasons, not to reappoint the incumbent Janet Yellen.
Trump chose Powell despite warnings that he lacked the deep background in economics of some of his predecessors.
But Powell turned out to be the kind of guy who listened to experts – not to Trump.
He has proved a competent, moderate and pragmatic.
Trump hated him for it, saying he regretted his decision, and attacked Powell openly through the remainder of his term.
Ironically, his appointment is one of the only things the former President has ever admitted getting wrong.
Which, of course, means he got it right.
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