Stocks are back in positive territory on Wednesday, paring some of Tuesday’s losses that suggested cracks are appearing in the markets.
The list of downside risks has been growing in recent months and it seems it’s finally become impossible to ignore. The debate over averting a government shutdown, the debt ceiling, infrastructure package and social spending bill is heating up as key deadlines draw nearer.
It’s exceptionally unlikely that the US will default on its debt but with less than three weeks until it can no longer avoid it, the pressure is mounting. Markets have to start pricing it in, no matter how unlikely at this stage, and perhaps that’s part of the reason we’re seeing yields rising this last week.
This comes as the Federal Reserve is preparing to pull back from pandemic stimulus measures and announce its intentions to taper, probably at the next meeting in November. With policymakers seemingly becoming more concerned about inflation, rate hikes may follow relatively soon after net asset purchases fall to zero in the middle of next year.
Not the ideal environment to be having debt ceiling debates that could go all the way to the wire. It’s already questionable whether the decision should wait until the turn of the year, considering the risks of another Covid spike in winter and the economic toll that could take. Not to mention the energy crisis that’s coming for us all this winter, especially if it turns out to be a particularly cold one again.
It will therefore be interesting to get the views of the heads of four major central banks today, a rare occasion when all will take part in the same virtual panel discussion at the ECB Forum on Central Banking.
In all honestly, I don’t think we’ll get any surprises from the heads of the Fed, ECB, BoJ and BoE today. All have been quite consistent in their views in recent days and communication between central banks and the markets have been very clear. Of course, as the situation evolves in the coming weeks, those views may change but in the meantime, I expect we’ll hear more about the transitory nature of inflation.
Evergrande shares jump as another coupon payment set to be missed
Evergrande shares rose almost 15% in Hong Kong even as the company appeared to miss another offshore coupon payment worth $47.5 million. This will come as no surprise after the company missed last weeks $83.5 million payment, while its wealth management products sold to retail investors have also reportedly gone unpaid.
The sale of a 20% stake in Shengjing Bank to a state-owned investment group may be what’s driving the share price up today, with the move potentially giving a clue as to the role the state will play in the restructuring process. And let’s face it, no one expected the firm to make the coupon payment today. The 30 day grace period seemingly takes the pressure off for now but that will return in the coming weeks.
Oil pares gains after surge to $80
Oil has pulled back off their highs over the last 24 hours, with yesterday’s risk aversion, dollar strength and surprise inventory build from API triggering some profit-taking in crude prices. The outlook for the market continues to look bullish, with soaring natural gas prices dragging oil higher. A cold winter could see the rally pick up a few notches again.
Natural gas prices also pulled back after being up more than 10% at one stage yesterday, with oil prices falling in tandem. The reversal came just as Brent was flirting with $80 a barrel, something it may have to wait a little longer for. Profit-taking took the wind out of its sails but there’s still so much momentum with the rally. Any pullbacks may be short-lived, with a big test of support coming around $75 in Brent and $73 in WTI.
Gold fails to generate any upside momentum
Gold’s rally fell at the first hurdle today, with the yellow metal running into immediate resistance around $1,740-1,750, where it had seen strong support over the last couple of weeks.
Higher yields have weighed heavily on gold this past week and the dollar performing well in risk-averse trade over the last couple of days has been a further blow. It’s hard to build much of a bullish case for gold at the minute; inflation is high but not high enough, yields rising, technicals unfavourable.
We could see the sell-off lose some momentum as it closes on $1,700, although the big test comes a little below here around $1,680 which is long-term support.
How long can bitcoin bulls hold out?
Bitcoin is continuing to show huge resilience and hold above $40,000 despite pressure mounting from above and the technicals suggesting a correction is already underway. But there is massive support around $40,000 and a determination to prevent a collapse through the important psychological level.
Perhaps bullish traders are hoping their pal Elon Musk will come and save the day if they hold out long enough, just as he has in the past when it showed similar resilience between May and June around $30,000.
A failure of this support could see the sell-off pick up pace, with support then potentially falling around $36,000. A move above $45,000 may suggest the momentum has tipped back in favour of the bulls but it’s an uphill battle.
