Market movers today
- Market focus this morning will be on the fallout from the turmoil related to the Chinese developer Evergrande. Key loan payments are coming up on which the company seems likely to default on (see below).
- Today is a very quiet day in terms of economic data releases but the week overall is extremely interesting with several important central bank meetings.
- The most important central bank meeting is the Fed meeting on Wednesday. After the weak jobs report for August and lower-than-anticipated CPI inflation print for August, we do not expect the Fed to provide any more details on tapering but still we expect the Fed to signal one rate hike in 2022 (up from zero currently). Read our preview here Fed Research: Preview – what to do in a bad trade-off?, 16 September.
- Besides the Fed meeting, we have policy announcements from the Riksbank tomorrow, the Bank of Japan Tuesday night, and Norges Bank and the Bank of England on Thursday. Especially the Norges Bank meeting on Thursday is interesting, as we expect Norges Bank to hike the policy rate to 0.25% from 0.00%.
The 60 second overview
Evergrande turmoil hits global risk sentiment: Hong Kong shares sold off sharply overnight as anxiety over a likely default by Evergrande this week escalated. The Hong Kong China Enterprise Index has plunged more than 4% this morning and the S&P future has dropped close to 1% adding to the 0.9% decline on Friday. An index of Chinese high yield bonds rose to 14%, the highest in nearly a decade. Evergrande loan payments on bank loans are due today and on Thursday interest payments on two bond notes are due. The contagion from Evergrande may spread to other developers and now the whole Chinese credit market shows a dangerous deterioration in investor confidence and it seems likely that only government intervention can halt the snowball from rolling.
No doubt Beijing is watching the situation closely but it is unclear when authorities will step in. To some extent the developer’s woes have been engineered by the government with tighter rules on debt implemented last year and they want to show that uncontrolled debt has a price. But they also do not want to see a deep financial crisis sending Chinese housing and the economy into a deep recession. The question is how bad it needs to get before they step in. With spill-over to global markets, the world will increasingly be watching how Beijing handles the situation. Chinese markets are closed on Monday and Tuesday due to national holiday but Hong Kong markets are open. They close on Wednesday when Chinese markets re-open.
Equities: Risk appetite faded on Friday, with equities mostly lower and defensives leading. US closed near worst levels, with S&P and Nasdaq -0.9%, Dow -0.5% but Russell up 0.2%. Implied volatility ticked up with VIX north of 20 as investors hedged their downside. Materials the worst performer globally on metal weakness, but industrials and tech also lower. Health care was the only sector in green. Most Asian markets are closed for holiday today, but Hong Kong is open and tumbling -4% (of which Evergrande -17%). Monday sentiment muted in DM as well with US futures roughly -1% lower.
FI: There is room for plenty of action in the financial markets given the high inflation, but also rising infections due to the delta variant of Covid-19 and the risk of a slowdown in growth in coming quarters. Hence, the probability of the central bank doing nothing (apart from Norges Bank) is significant and we continue to muddle through.
FX: It is a heavy central bank week but the most important meeting is the Fed meeting on Wednesday – also for scandies. EUR/USD ended the week below 1.18 and closer to 1.17 on negative risk sentiment. CNH has so far not been affected by the Evergrande turmoil.
Credit: CDS indices were under pressure on Friday while cash bonds were steady. iTraxx Xover widened 3bp and Main c.0.5bp. HY bonds were unchanged, but IG tightened 0.5bp. Today, trading commences in iTraxx Series 36. We estimate changes in index composition and extension should add approximately 5bp to Main and 20bp to Xover, with the largest share due to index extension.
Markets awaiting Riksbank meeting tomorrow and Norges Bank meeting on Thursday.
In Sweden, the government’s budget proposal for 2022 is presented to the Riksdag today. We already know the full amount (SEK75bn, approx. 1.5% of GDP) and some bits and pieces of its content, but today we will see the full picture. It should, however, be rather uneventful in itself. Our focus will instead lie on whether the support parties (Left and Centre) will signal their approval, as their combined support (somewhat of an unholy alliance) is likely to be pivotal for the budget to pass when it comes to voting in early November.