Risk Off Trade To Start The Week As China Evergrande Falls 19%

Okay, very good morning. It is Monday the 20th of September. Hope you had a great weekend. In terms of this briefing, I'm quite excited to be honest because there's not only quite a lot coming out this week— we've got the likes of the FOMC meeting on Wednesday, the Bank of England on Thursday, got the Canadian elections happening today— but overnight in Asia we've had some market closures in the likes of mainland China and Japan and some other areas. But Hong Kong was open and that stock index was down close to 5%. Evergrande, the property company very much in focus at the moment, was down 19% overnight. We've got a bit of a negative then set up for the open of UK European trade this morning. So going to kick things off there, going to talk about as well potential halt or at least a delay in the US spending bill. What's the latest on Capitol Hill? Update on German politics. Iran as well. There's a few news items to be aware of, so let's get straight to it and look at the charts to kick things off. And the dollar firmer this morning with some of the prevailing risk-off sentiments, so some more relative classic, um, reaction across markets to reflect that general sentiment this morning. The DXY trading up 0.2%, both major currency pairs top left, EURUSD and Cable, under a bit of pressure. Cable underperforming, that is down about 40 pips to the 17-pip loss seen in EURUSD at the moment. And we'll talk about the UK in a moment, having a bit of an energy crisis which could well impede growth prospects going forward in the UK. But we'll get to that in a moment, as I said. Otherwise, equity index futures under pressure this morning. And really, I wanted to look at the S&P 500 from a technical perspective just briefly. You can see here quite an aggressive downward trend that we've seen through the APAC session, and as Europe has stepped into the market, taking the baton on and further pushing prices lower this morning. But take a look at the daily candlestick chart, and you'll see a very meaningful break here. The blue line I've got here is the 50 DMA, and you can see on some prior occasions here, going back to when we were trading in mid-August around this point here, we had a more of a concrete break, if you like, of that level, but quickly bounced off the trend line here And so a rising trend line from March's price activity with the 50 DMA has been really quite critical for the S&P 500 from a technical perspective. And as you can see here from the reopening of trade, we've gapped aggressively down from that price point as to where we're trading at the moment. So does leave the S&P a little bit vulnerable for further downside down to those mid-August lows that were seen at 4347.75. We're trading about 30 points above that at the moment. A pullback down to that level would put us in close proximity to around a 5% pullback from the all-time highs that were seen at the beginning of the month, of which of course a lot of the talk in media has been about. It's been a very long time since we've had a 5% pullback in US equities. So technically there's a bit of room there. So be interested to see how the US deemed this China contagion situation from Evergrande when they start to come in. And certainly a bit of a sour note to proceedings this morning in the UK European Open. In the NASDAQ equally so, there's a technical area on the daily chart that's worth considering. So here, just looking again, this goes back, this trend line, till September of 2020. And so this marking out then, flashing or fleshing out the, the all-time high that we saw in earlier this month. But as we pull back here, just going back to the peak in late July and early August, and we're pretty much in close proximity to that rectangle area of now resistance turns support at 15,169.70. Um, we're trading at 15,208 at the moment in the NASDAQ 100 future. So that's a keen level, uh, I've got my eye on today. Any breach of that then certainly could see some quite aggressive downward continuation towards 15,000 here in the NASDAQ, perhaps even beyond that. 15,000 was the peak of the previous all-time high we had in mid-July, would be the obvious target down here. And if that was to materialize, then we could well see that, um, lower target we just looked at in the S&P be achieved in today's session. So given what I've discussed, crude oil's seen a little lower, just targeting down around the bottom end of its range that was seen towards the back end of last week's session. And so we're just testing around the $71 handle on the downside at the moment. Gold moderately higher, up about $3, and the US 10-year is up about 3.5 ticks in that risk-off general multi-asset class move. So let's get straight to it and talk about the news and what's going on. And as you can see here, China Evergrande very much in focus. And the reason for that is because interest payments on two Evergrande notes come due on Thursday. And so just to give you a bit of an idea about size, $83.5 million of interest on an 8.25% 5-year dollar bond and $36 million coupon on onshore bond. And so despite the, the kind of details there, the key test here essentially is whether the developer can continue to meet its obligations or not. Simple as that. Investors are pricing in a high likelihood of default with one of the notes trading at less than 30% of face value at the moment. Evergrande is also scheduled to pay interest on bank loans today with a 1-day grace period. So given all of this, Hong Kong shares tumbled. As I mentioned, the Hang Seng was close down to 5%. Evergrande themselves were down nearly 20%. There was also reports circulating suggesting Beijing could widen its crackdown on private industries in Hong Kong to the city's real estate firms as well, just adding more weight to that move. And the absence, absence as well of Stock Connect. So if you're not aware of what Stock Connect is, it just basically connects then the financial centers of Hong Kong with mainland China. But the Stock Connect trade, or lack of it overnight, added to the lack of demand as mainland China, of course, was closed for the Mid-Autumn Festival, but Hong Kong opened. And so closures elsewhere were observed in Japan, South Korea, and Taiwan as well overnight, kind of exacerbated some of the move, making it more pronounced. So definitely this is still one of the main talking points at the moment, and obviously the potential for more conversations about contagion and so on and so forth. The other thing as well is we continue to see that senior Democrats They said late yesterday that they'll likely need to scale back Joe Biden's $3.5 trillion social spending bill, while passage of the linked bipartisan infrastructure bill may now slip past the deadline, which is due for this time next week. Um, in addition to that, not forgetting Democrats also face a looming October deadline to fund the government and raise the federal debt ceiling as well. And so there's just a lot of obstacles coming now on the fiscal side with some of this Chinese situation and contagion risk happening all seemingly at the same point in time. So equities just having a bit of a rough time of it for the time being. Other things to be aware of from Angela Merkel, German elections are happening this weekend on Sunday. I'm not going to dwell too much on this. I did share a few things on my Twitter account this weekend if you want to have a bit more of a deeper read about it, but let me give you the overview. Angela Merkel's conservatives narrowed the Social Democrat Party's lead by 1 percentage point in a weekly poll, though they remain in second place for the time being. So support for Merkel's CDU and its Bavarian affiliate, the CSU, increased to 21%, and the SPD were unchanged at 26% in the latest poll for the Bild am Sonntag. Scholz, the CDU/CSU candidate, Armin Laschet, and contender Baerbock, they faced off in their last televised debate last night. Scholz is then facing parliamentary hearings today about a raid on the finance ministry last week by prosecutors investigating how a ministry unit handled money laundering warnings. From banks. I'd be interested to see whether or not that has any impact on his favorability just going into the final run now ahead of that election happening at the weekend. So this isn't something moving the euro right now. The German elections will become more in focus as we get towards the back end of the week and for the reopening of trade this time next week. The other brief thing I wanted to mention was Iran, and the reason why I wanted to mention Iran briefly is they may hold talks on restoring the 2015 nuclear accord with world powers on the sidelines of the UN National or General Assembly happening this week. Informal consultations intended to set the date for a 7th round of negotiations may unfold at the Vienna conference. So it's not like we're looking for any type of breakthrough this week. Far from it. All we're looking for is a commitment to reinitiate those talks that were already ongoing that have been put on the sidelines for the last couple of months. All right, well, let's get into a couple of the week's main events on the calendar. Calendar today is relatively quiet, but, um, there's kind of 4 things I want to talk about: the CAD election, RBA minutes, the FOMC, and the Bank of England. And, and so this is quite a neat graphic put together by our friends at the Dutch bank ING. So again, all of these graphics that I'm showing in this briefing you can find on my Twitter account if you want to have them as a crib sheet to hand. I highly recommend it. So Justin Trudeau has hoped to cash in on his popular support and gain an outright majority after calling today's snap election. Opinion polls, though, suggest he could be disappointed. Fiscal stimulus plans and energy pipeline policy are set to be the main kind of market themes, but a workable majority should ultimately be the key to allow the CAD to benefit from what are relatively good fundamentals at the moment. And on this crib sheet, you can have and have a look at the most likely outcome to the least likely and the consequent impact that this could have then on USD/CAD and the expected consequences in terms of actual policy in itself. So feel free to check that out. Otherwise, the RBA minutes, they're happening tonight. So I'll be talking about them this time tomorrow in the briefing. A speech by the assistant governor Bullock will shed more light on any concerns over the financial system under the pandemic. And the minutes of the bank's most recent meeting may offer more details on the debate over tapering plans in light of the recent extension of lockdowns that we've had of Australia still trying to get on top of the latest Delta spread that we've seen in that country. One of the main things though this week, of course, is, is your main man Jay Powell. And of course, quite an eagerly anticipated event. Federal Reserve officials are expected to send a clear signal of their plans to begin phasing out the pandemic era stimulus as early as November on Wednesday night. The details will be accompanied by a fresh set of projections for growth, unemployment, inflation. Of course, we get the dot plots of what the Fed officials think about where rates will be, and that kind of median dot plot curve will be looked at very closely. Jay Powell, the Fed chair, said last month that he believes a move to reduce or taper those purchases by the end of the year would be appropriate if the economy continues to evolve as expected. And on that point, you know, there's a couple of interesting graphics here that I was also sharing over the weekend. This is having a look at the jobs that were lost on the onset of the pandemic, going back to the beginning of 2020, and then the gradual closing of that gap, looking at the headline change in nonfarm payrolls. And as we know, that figure has repeatedly kind of disappointed in that regard. And so therefore, hence the title, it's been a very slow crawl to substantial substantial. And the Fed had said it wanted to see progress in reclaiming the 10 million jobs still missing because of the pandemic as of December before changing its bond purchase program. And that has been a little bit slower than perhaps they might— or the hawks might have wanted to have seen. And hence the reason why, although we might get hints this week, the actual commencement of tapering might not be until November. Of this year. The other thing then is about, um, downside surprises have kind of complicated the Fed's task a little bit, and the reason for that is that after persistently coming in stronger than expected for the best part of a year, data in the US economy's performance has fallen notably short of economists' expectations in the course of the last 2 months. And that, in combination with the lack of acceleration and real consistency in that labor market pickup. And also now, of course, having seen inflation showing signs of a victory for Team Transitory, enough to put the Fed off of any immediate decisions over tapering for the time being. Um, comment here that I saw: a November move would give the Fed only one more jobs report to assess before making its decision. While waiting until December gives the central bank time to pass both the September and October job gains. So again, could be quite an interesting thing if some Fed officials might feel that they want to see more validation in that jobs figure to be a little bit more robust before making those calls. Another dud report could postpone the early timeline, as according to the chief economist at JPMorgan, although he did go on to say it would take something quite bad to knock the Fed off track. And I, I do totally agree with that statement for this point in time. Again, we're not talking about permanent delay of taper, it's just about whether or not it comes in November or some subtle tweaks towards a month or two thereafter. Next thing then is the Bank of England. This is going to be happening on Thursday. Investors of course will be watching this quite closely given the uptick, much more stronger than expected, that we saw in UK inflation, most recently in, in CPI. However, I must stress though that that's been relatively well telegraphed by the bank, and so I don't think causes too much cause for concern. Um, following the latest data, Bailey could indicate that the time for an interest rate rise is drawing closer by signaling that officials are comfortable with current market expectations, which are a little bit priced more aggressively than generally what the Bank of England have been communicating. Also, as far as this spectrum of MPC members is concerned, this will now meeting include Catherine Mann and Hugh Pill, the two new MPC members, picking up, putting us back up to a full team now into this latest meeting given the departing of Andrew Haldane. One thing that has obviously cropped up, you've probably read a lot of at the weekend, is that UK energy companies are seeking a massive Government bailout as a surge in gas and electricity prices threatens to push suppliers out of business. This is having then a distinct pass-on effect down with sharp price hikes for consumers. So be interested to see whether or not as well that might be another factor that impedes some of the more short-term outlook for the UK economy and thus keeps the, the Bank of England in a fairly passive mindset, at least for the time time being. Um, both of these events, the FOMC and the Bank of England, I will be covering these both live when they happen on the Amplify Me YouTube channel. So don't forget to subscribe to the channel if you haven't done so already. Hit the bell icon, you'll get notified as soon as I go live. And these are totally interactive sessions. I'll cover it and analyze everything in real time, and I would love to take some questions while we're doing it. Um, and that is it. I'm not going to go any further than that. If you'd like more detailed rundown of any of the graphics, as I said, or just a rundown in text form of the, the week ahead, then you can find it here. Otherwise, gonna let you guys get on with things. Feel free to leave me any questions on the video and have a good day and a good week ahead. Thanks very much.