European stocks fall as German business confidence weakens
Chinese property firm Evergrande’s default anxiety continues to weigh on investor sentiment
European stocks traded down on late Friday morning, as data indicated a weakening of German business confidence and continuing anxiety over Evergrande Group’s potential default.
Evergrande’s debt woes
With liabilities of more than $300bn (£219bn), Evergrande is the world’s most indebted real estate developer. Although the Chinese firm recently made good on the interest payments to domestic investors, the deadline for an $83.5m payment on a $2bn dollar bond came and went on Thursday (23 September). The company now has a grace period of 30 days to settle the payment lest it default.
Uncertainty as to whether Evergrande will collapse and what impact this could have on the global economy has weighed on investor sentiment since the start of the week. Both the company and Chinese authorities have been silent on the ongoing situation.
Speculation has built in recent weeks that President Xi Jinping may allow Evergrande to fall. For two years, Xi has sought to address what is thought to be China’s overinflated property market. Indeed, Evergrande’s woes began when its rapid expansion came to an end following the introduction of debt limits for real estate developers.
With property accounting for two-fifths of Chinese household wealth, some commentators have argued that Evergrande is ‘too big to fail’ because its collapse would significantly damage the wider economy.
International investors are believed to be more anxious about a default because it has become evident that the company will go to greater efforts to limit the damage down to domestic investors than those from abroad.
Fall in German confidence
Friday also saw the publication of data showing that German business confidence fell for the third consecutive month in September.
The ifo Institute said that severely disrupted supply chains “are putting the brakes on the German economy” and had resulted in a ‘bottleneck recession’ for the nation’s manufacturers.
The Munich-based organisation’s Business Climate Index fell to 98.8 from August’s upwardly revised figure of 99.6. Although the Service Sector Climate Index rose from 17.8 to 19.1, the Manufacturing Climate Index slumped from 24.2 to 20, its lowest level since March 2020.
On Thursday, the leading German research institute cut its GDP growth expectations for 2021 by 0.8% to 2.5%. Head of forecasts Timo Wollmershäuser stated: “The strong post-pandemic recovery that was originally expected in the summer has yet to materialise.”
Only two days before Germany’s federal election, the DAX stood 0.7% lower at 15,534, down by 2.3% in the past month.
The pan-European Euro STOXX 50 stood 0.8% lower at 4,160, while the FTSE 100 traded down by 0.2%.
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