Graphic: What could break under higher-for-longer interest rates?
29/09/2023 06:10
LONDON, Sept 29 (Reuters) - As the final stretch of the
year approaches, there's relief in markets that the sharpest
global monetary tightening cycle in decades is finally nearing
an end.
Yet, the strain from interest rate hikes has just started to
come through and with central banks signalling that rates will
likely stay higher for longer, the notion of something
"breaking" remains strong.
Here's a look at some pressure points on the radar.
1/ PROPERTY PAIN
Nowhere is the impact of higher rates being felt more
acutely than in real estate, still reeling from COVID-19.
A string of German developers have been tipped into
insolvency, London's office market is in a "rental recession" as
vacancies hit a 30-year high and U.S. banks revealed spiralling
losses from property in first half figures and warned of more to
come.
Sweden is the hardest hit in Europe since much of its
property debt is short-term, making it a harbinger for the
region.
Property group SBB, which owns large tracts of property
including hospitals and schools, is scrambling to repair its
battered finances, marred by a heavy loss and dwindling cash.
The crisis has also sucked in Sweden's biggest residential
landlord, Heimstaden Bostad. The $30 billion investor with
swathes of homes from Stockholm to Berlin is grappling with a
multi-billion dollar funding crunch.
2/ MADE IN CHINA
Property is also at the heart of China's woes and one reason
why the world's No.2 economy has shot up investors' worry list.
China Evergrande Group 3333.HK , the world's most indebted
developer with over $300 billion in total liabilities, is at the
centre of an unprecedented property sector liquidity crisis.
Country Garden 2007.HK , China's largest private developer, is
battling to avoid a default.
Since property accounts for roughly a quarter of the
economy, concerns about the impact for China's already faltering
growth and the ripple effects have risen.
Chinese real estate was viewed as the most likely source
of a global systemic credit event, according to BofA's September
fund manager survey.
3/ MONEY PROBLEMS
Corporate debt defaults have started ramping up, even in
typically quiet months.
The number of new corporate defaults globally reached 16 in
August, the highest August tally since 2009, according to S&P,
the latest sign that corporate stress is building.
"There is lots of talk in the market about corporate stress
and hidden leverage, but it has not erupted yet. We still think
defaults are coming," said Markus Allenspach, head of fixed
income research at Julius Baer.
"We have many zombie companies in the United States and
Europe from the low interest rates era, and I cannot imagine how
they can survive now with high interest rates."
S&P forecast that defaults among junk-rated European
companies will reach 3.75% by June 2024 from 3.4% in August.
4/ BANKING ON IT
Banking stress has gone down the worry list since the March
crisis wrecked havoc.
Big U.S. banks sailed through the Federal Reserve's annual
health check in June. The European Central Bank has asked banks
to provide weekly liquidity data so it can carry out more
frequent checks on their ability to ward off potential shocks as
rates rise.
Guy Miller, chief market strategist at Zurich Insurance
Group, said banks are in a better position in terms of their
capital and liquidity compared with March.
Still, big question marks remain over their future, not
least from a global property rout.
"There is still an inherent vulnerability to deposit flight
as well as to commercial real estate and other credit exposures
for smaller banks," said Miller.
The S&P 500 U.S. regional banks index .SPLRCBNKS is down
almost 40% this year, set for its biggest annual drop since
2008.
Miller noted that European banks are also vulnerable given
their bigger size relative to the economy that leaves them more
exposed to risks from various pockets.
5/ THAT JAPAN FACTOR
The Bank of Japan has held steadfast to ultra-easy monetary
policy but a tighter stance is on the cards. And the risks are
rising of a sharp unwind from an era of Japanese cash pumping
into everything from U.S. tech stocks to high-yielding emerging
market currencies.
Capital Economics expects the BOJ to hike its policy rate in
January. It notes that Japanese investors, who have long sought
better investment yields elsewhere, own around a trillion
dollars of U.S. bonds. They are big holders of European and
Australian debt.
Japanese selling of Treasuries could further push up yields
-- already at their highest since the global financial crisis.
That could hurt equities, which tend to perform worse when
investors expect higher returns from low-risk government bonds.
Expect markets to show increased sensitivity to the BoJ in
coming months.
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The race to raise rates The race to raise rates https://tmsnrt.rs/3LAFq6P
Growing strains on the European housing market https://tmsnrt.rs/46xoQgt
China property sector slump https://tmsnrt.rs/46drY19
Defaults in August reach highest monthly total since 2009
Defaults in August reach highest monthly total since 2009 https://tmsnrt.rs/3PvSRq5
Regional banks underperform https://tmsnrt.rs/3PsdC5W
Japanese holdings of foreign assets Japanese holdings of foreign
assets https://tmsnrt.rs/48xOSSr
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