Stocks Bounce On Evergrande Bond Payment & PBOC Liquidity Injection (+ FOMC Preview)

Okay, very good morning. It is Wednesday, 22nd of September, and of course we get the FOMC meeting later on today. I will be covering that live on the YouTube channel, and so don't forget, if you're not already done so, to subscribe to the channel, hit the bell icon, and you'll get a notification as soon as we go live. I'll be kicking that off at around 15 minutes before the initial Fed statement, so 6:45 London time for the statement at 7, and then we'll cover press conference with Jerome Powell as well at 7:30. So hopefully you can join me. But otherwise, in terms of the briefing this morning, there's a little bit of relief seen overnight in the Asia-Pac region on the back of some latest news in regards to Evergrande to make a domestic bond coupon payment. So alleviating at least short-term some of those fears that have really been shackling market sentiment of late. And also the PBOC did a sizable liquidity injection overnight, which we'll discuss in a moment. Otherwise, got an update on the BOJ meeting that also took place overnight, some movement on the US debt ceiling from the House as well late yesterday, talk about J&J vaccines, and then we'll have a look at the day ahead if there's anything else to be aware of outside of the Fed. So to kick things off as we always do, let's have a look at the charts this morning. And as you can see here, I'll take the S&P 500 as an example. Yesterday, pretty seesaw price action. It did look a little bit precarious and whether or not we'll get a repeat of that Monday sell-off, but that didn't materialize. At the close, the S&P and Dow were relatively flat to very marginal losses of just 0.1%. The Nasdaq actually finished up about 0.2%. But looking at the overnight session, you can see here quite a noticeable pop in futures prices. And this came after those reports that I've just suggested about China Evergrande. So what was said was here. So a couple of things. The company's onshore property unit, the name of that is called the Hengda Real Estate, or Hengda Real Estate. They said overnight that it has negotiated a plan with bondholders to pay interest due on its 5.8% 2025 domestic notes. And remember, it was the fears over the lack of payment of these notes, or at least restructuring to be able to deal with them, that was creating fears of this default and systemic risk to the banking system in, in China and beyond banking, I should say. And so that was definitely a key headline that came out overnight. It came out shortly after 2 AM, and hence the reason why going into the European open, the market's generally showing a positive footing in equity space. Elsewhere, we're pretty flat. We're flat in the Dixie, more broadly speaking, pretty much unchanged in gold and also T-notes as well this morning. But oil getting a bit of a light reprieve as well from the situation, is trading up around $1.12, just above the $71.50 mark at the moment. But we also had some inventory data last night that I'll make you aware of as well. So the other thing is, beyond this headline, you had China come out And they basically have said that they've pumped 120 billion yuan— that equates to around $18.6 billion— into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan overnight. And the action there from the central bank domestically aimed at just soothing nerves as the market continues to worry. So as such, providing additional short-term liquidity to the system. A couple of other things to be aware of. For one, I guess understanding of what the next steps could be is quite key, and listening to big bank commentary can be quite helpful in that regard. And analysts at Morgan Stanley have said that Beijing may initiate a managed debt restructuring of the troubled property lender in the coming week, followed by policy easing— is what their economists are anticipating in China in October— to contain the spillover. Perhaps into the broader economy. The other thing as well that I guess is a question right now is just given how large Evergrande is, I did see a couple of tweets yesterday of infographics of all the different units, and it was just mind-boggling how, how big this company is and how far-reaching a potential default could reverberate across the globe, not just in China. And so a key question here, are there any western US-based financial firms that could face exposure on any further complications at Evergrande. And there's a report Bloomberg have released this morning talking about Citigroup apparently has no direct lending exposure to Evergrande, as according to the spokeswoman. JP Morgan and Bank of America also have no such links, according to people familiar with the matter, as cited by Bloomberg sources. And so again, the combination really of 3 things. And so I'd say first and foremost, the idea that for their major property unit in real estate that they've negotiated a plan with bondholders is very important. You've then also got the net liquidity injection from the central bank. And then a smaller third point as well, it's becoming more apparent that there isn't this kind of more broader systemic risk that could spread out into North American financial institutions as well. Couple of those positive points. I wouldn't say the market's in outright just runaway positivity right now, but it certainly has put a bit of a floor on that negative developments that we're seeing at the beginning of the week. Okay. Elsewhere, we had the BOJ meeting overnight. Pretty boring, if I'm being honest. Kept its negative interest rate, asset buying targets unchanged, all very much as expected. The bank trimmed its view of exports and production to reflect the hit to supply chains that we've seen from the continuous kind of dealing with the Delta variant and COVID outbreak that's been impactful in Japan over the recent weeks. And they kept their overall view on the economy then unchanged. The decision, of course, comes as well a week before the ruling party election to pick the new PM, Suga's successor. So definitely on the political side, we're going to be looking out for more information from that next week. But again, not really too much to mention here on the BOJ. The other thing then is the US debt ceiling. So amongst all the other things that Biden is trying to deal with at the moment, this is another one that's on the near-term horizon that definitely will probably become much more of a talking point. But to get you up to speed, last night the Democratic-controlled House passed a bill, a bill that would suspend the US debt ceiling into December 2022 and provide the government funding to operate past the 30th of September. However, Republicans have vowed to block it when it reaches the Senate over the debt limit provision. Now, important thing to be aware of here is one alternative, and this will probably help just make sense of all of this, would be to strip the debt ceiling provision from the funding bill in order for it to avoid a government shutdown on October 1st. Democrats could then use the fast-track budget process to pass a debt ceiling increase without the Republican support. So again, it's in the Democrats' interest though to try and bolt on the debt ceiling provision into the, then, the government funding bill. This is that really big one that's being hotly contested not only by Republicans across the floor but also by people like Manchin and so on, other Democrats as well. And so by unconnecting the two, the House or the Democrats in a sense could probably deal with this debt situation, but they're trying to force the risk of that shutdown in order to then push it through with a sizable fiscal spending plan that they're after. In the end, a lot of this, as always with politics, is posturing. There's a cliff edge, right? These politicians love walking up and peering over the edge of the cliff, threatening each other of what they're going to do. It could well even be tantamount to a short, brief period of a government shutdown, We've seen this many times before, but in the end, deals are always done. And so, yeah, I think that's why the market's fairly sanguine about the whole idea of a government shutdown at this point. But certainly it's something that you're going to hear a lot more about in the period ahead. The debt ceiling suspension is obviously urgently needed, though, from the point of view of the Treasury Department. They've warned they could run out of accounting measures to starve off a payment default sometime in October. And the whole reason why this has come back to the forefront, of course, is that the debt limit came back into effect last month in August after a 2-year suspension. But given the likes of the US Treasury, they're always going to sound like that. They're kind of— that's part of the posturing and optics to leverage then the side of the Democratic view at the moment to get that tied into the spending bill. So, but Again, long story short, it's a talking point. It's going to become more so. Is it that important? Yes, there are some risks around it. In the end though, I think it will be a non-issue. Personally, that's what I see at this point. Vaccines. Yeah, very briefly, Johnson Johnson came out yesterday and said a second shot of its COVID-19 vaccine, given about 2 months after the first, increased its effectiveness to 94% in the US against moderate to severe forms of the disease. So by any stretch, particularly high numbers. And of course, this was a single shot originally. And so a second shot keeping that up. And somewhere like the US, which is obviously critical not just for that economy but the global economy, is heavily as well using that particular vaccine in terms of its rollout strategy. So yeah, quite, quite positive there to some respect. In terms of the day ahead, The actual calendar is really quiet for the UK European morning, so it would not be a surprise to see fairly conservative trade, perhaps barring anything unexpected, fairly respecting of technical near-term levels of relevance, perhaps range-bound trade. Because really, it's until we get into the US session. Even then, there's no major 1:30s. We do have US existing home sales at 3:00, and we've got the DOE oil inventory numbers at 3:30. Just briefly, we did have a bullish headline last night in the API's drawdown of 6.1 million, was almost double of what analysts were anticipating. Also draw across the board, Cushing was a draw of 1.748 million as well. And as I said, WTI is on the front foot, it's got its eyes on 72 at the moment on the upside, which would be about near-term point of resistance from Friday's trading levels. Um, the big thing then, of course, is the FOMC. And as I said, I will be covering this live later, so I'm not going to go into too much greater detail right here, right now. But a few things to be aware of: the September meeting, obviously widely anticipated, um, since the central bank is expected to signal it's getting ever closer to tapering its bond purchase program. Again, this isn't about, yes, we're doing it, It's about laying hints to then really looking to commence this thing later on in the year. November, December time is what most analysts are expecting. This will be then the first big step away from policies put in place to counteract, obviously, the pandemic. And so hence the reason why markets are so sensitive to this upcoming meeting this evening. To quote one of the banks, Bank of America's US short rate strategy team, Couple of things they said that I think quite interesting. They said Powell will probably do his best to distinguish, and I think important, decouple the association of tapering and rate hikes. Again, what they're trying to explain there is that there's a sequence to how policy normalization occurs. And so you taper, you then start to taper down over a prolonged period of time. So in this case, several months where you reduce then the size of your monthly bond purchases. And then you have a period, typically if we go part on historical precedence of no action, but rates remain low as they are at the moment. And then thereafter rates start to gradually increase. And obviously the first rate hike, key, the timing of that, because then typically it's a sequence in the cycle of rate hikes going forward. Uh, and so what Powell will be very conscious of doing is, is trying to decouple the two because what he won't want people to think is just because we're tapering, we're hiking rates. That's not what he would want to convey. So he's going to try and potentially hedge himself in communication tactics by saying, yes, things have got positive enough, we are going to taper. He needs to drop now more definitive hints if they are going to start at the end of the year, which is policy tightening. But he also doesn't want that to become a point of which then markets start to get spooked by accelerated overall policy tightening, by hedging himself, by using perhaps the outlook to soften the blow that, look, rates aren't going to rise particularly soon. And with that being said then, given the recent data might give validation for that, so they might mark down their growth estimates for the year. Obviously we're going to get the projections as well going forward. The key thing, of course, is going to be on the dot plots, probably, and arguably other than just probably the first snap headline that we see on how he describes the tapering situation is going to be the number of dots for liftoff in 2022 or 2023. As a reminder, 7 of 18 officials in June, the last time we got these projection— projections penciled in a liftoff in 2022, though the median estimates saw rates on hold. Into 2023. To give you a guide, more than a third of economists surveyed think the median for 2023 could increase from 2 rate hikes. And you remember, that was the surprise at the time because people were anticipating 1 and it came out as 2. That might well go higher again, an indication that the first rate hike then could well occur in the first half of the year if there was going to be 3 conducted, for example. The forecast will also include the first view of 2024 because remember, we're— the way it rotates now will bring in that year of where rates would be on that period where 3 additional hikes are expected by that time. So again, I'm going to go through all of this in more detail. Obviously, I'll talk about potential scenarios, probabilities, subsequent market reactions. I'll do that all live when we come on at 6:45. Later on this evening. But that is it, gonna leave it there. Any questions at all, of course, feel free to drop me a comment. If you need my morning notes, it's on my Twitter account as ever. And so have a good day, and I'll catch you online later on. All right, take care.