Market movers today
- Today’s key event is tonight’s policy announcement from the Fed. While we do not expect the Fed to provide any details on tapering after the weak jobs report and lower-than-anticipated CPI inflation print, we do believe the Fed will raise its ‘dots’ signalling one rate hike next year (up from zero in June), as inflation overall has been higher than anticipated. We still think the tapering pace is more important from a market perspective than the exact start date of tapering, as the Fed has made it pretty clear that it expects to start tapering before the end of the year. For more details see also Fed Research – Preview: what to do in a bad trade-off?, 17 September. The policy announcement is at 20:00 CET and the press conference starts at 20:30 CET.
- Still a lot of focus on Evergrande and Chinese financial markets.
- Besides that preliminary euro area consumer confidence in September is due out at 16:30.
The 60 second overview
Evergrande situation remains unclear: This morning the company issued a press release stating in vague terms that it intends to pay interest on its bonds in Chinese currencies following “negotations off the clearing house”. However, the statement did not specify how much interest would be paid or when. The People’s Bank of China increased its injection of short-term cash into the financial system, helping to soothe sentiment, which may help prevent broader contagion in the Chinese credit market. The Chinese equity markets fell slightly but not as much as feared after they re-opened after two days of holiday closing.
Our expection on Evergrande: Overall, we expect the turmoil related to Evergrande to get worse before it gets better. But we believe the Chinese government will eventually intervene as the alternative could be a financial crisis with very severe effects on the Chinese economy and the Chinese people, for more details see our piece from yesterday: Research China – The Evergrande situation and what we expect, 21 September.
Bank of Japan sticks to its policy stance: As widely expected, The Bank of Japan (BoJ) kept its QQE with yield curve control unchanged at a meeting ending this morning. Japan still has a growth rebound ahead with parts of the country in lockdown at least through September. The BoJ acknowledges the supply constraints currently affecting production but kept its assessment of the economy unchanged, which is “picking up as a trend, although it remained in a severe state due to the impact of the pandemic.” USD/JPY has increased somewhat this morning after closing in on the 109 threshold overnight.
Equities: Global equities were in a choppy session on Tuesday. Europe went for the rebound, but the US session was unable to find any real momentum. Instead, S&P closed slightly lower -0.1%, Dow -0.2% but Russell 2000 and Nasdaq 0.2% higher. Sector performance was more aligned between regions, as investors picked up defensives and quality (tech and health care) that was sold in Monday’s risk-off session. Worst hit industrials and materials however continued lower. VIX ticked down slightly but still in the 25 range. Asian markets very mixed as Chinese markets reopen after a long holiday. Slightly optimistic undertone though as Shenzhen and Shanghai are only moderately lower and Hong Kong is continuing its rebound. US futures point to a positive opening.
FI: The uncertainty surrounding the Chinese developer Evergrande continues to dominate the market sentiment. Overnight, Evergrande stated that it’s onshore company will make an interest payment on Thursday on its 5.8% 2025 bond, but whether this is enough to stabilise markets is uncertain. However, the Chinese Central Bank (PBOC) has been out adding liquidity to the Chinese market as the market opens after a 2-day holiday.
FX: EUR/SEK moved only marginally higher after the Riksbank policy announcement yesterday. EUR/SEK ended the day above 10.19. Today everything in the FX market is about the Fed’s policy announcement in the evening. We continue to see downside risk to EUR/USD in the medium-term, even if EUR/USD moves higher on the back of a Fed today that is more dovish than anticipated.
Credit: CDS indices outperformed cash yesterday, with iTraxx Xover and Main tightening 5bp and 0.8bp, respectively (to close in 248bp and 50.7bp). HY bonds widened around 1.5bp and IG tightened marginally.
The Riksbank decisions yesterday were in line with our expectations: repo rate path left at zero throughout the forecast horizon and a repeat message on QE – even as they raised GDP and inflation forecasts.