European markets had a bit of a shocker yesterday, posting their worst declines in two months with the DAX and FTSE100 both hitting a two-month low.
While most of the factors driving yesterday’s sell off have been on the radar for a while, concerns over the solvency of Chinese retail estate company Evergrande were the proverbial straw that broke the camel’s back, helping to send the Hang Seng to thirteen-month lows in the process. That said it’s not as if this denouement on the part of Evergrande hasn’t been coming, with the only surprise being why Chinese regulators have allowed it to fester in the way it has.
The absence of mainland Chinese markets as well as a holiday in Japan, may well have exacerbated yesterday’s sell off, but nonetheless it’s been quite clear for a while now that market nerves about the economic outlook have been rising for several days now.
With two US dollar bond interest payments due this week, and no way for the company to fulfil them, the Chinese government could well face the choice between allowing an orderly collapse of the business or face the disorderly consequences of a ripple out contagion effect across its entire financial system.
US markets also got caught up in yesterday’s mayhem with the S&P500 also slipping to a two-month low, rebounding off the 100-day MA, the first time it has come into contact with this indicator since 2nd November last year.
Yesterday’s sell off saw a flight into bonds with US treasuries, gilts and bunds all gaining, sending yields sharply lower.
The US dollar pushed higher, although its gains were more modest slipping back from one-month highs, ahead of the start of this weeks Fed meeting, which is due to get underway later today, and where the topic of tapering is likely to feature highly, along with speculation of where Fed members see the likely timing of future rate rises, by way of their dot plots. The bigger question given the risks emanating from events in China is whether the Fed adopts a less hawkish stance tomorrow in order to buy itself some time until the situation becomes clearer.
The pound was the biggest faller by some distance yesterday, over concern that the UK government might have to embark on a bailout of its energy sector as rising gas prices push some providers to the wall.
With the public finances already stretched due to the pandemic another bailout is probably the last thing on the UK governments mind, however it may not have much choice if prices continue to rise.
Today’s August public finances data will be an unwelcome reminder of the bill being paid to contain the worst effects of the pandemic, while also concentrating attention on recent comments by the Chancellor of the Exchequer about trying to get borrowing under control.
In July government borrowing fell back sharply to £10.4bn, from £21.5bn in June. Even with furlough payments coming down on a month-to-month basis, borrowing in August is expected to rise to £15.6bn, although it will still be much lower than the same month last year, when it came in at £30.1bn, as reduced furlough payments help to reduce the monthly borrowing number.
With Japanese markets returning today it is perhaps no surprise that we’ve seen a weaker Nikkei 225, as concerns over events in China, rising costs, and slowing growth keep investors on the back foot, however the losses while heavy have been contained, and with that European markets look set to open modestly higher this morning, with US futures also rebounding. Concerns about Evergrande remain but for now there appears to be a wait and see approach being adopted
EURUSD – slipped back to the 1.1700 level yesterday, with the main support at the August lows at 1.1660. The lack of follow through suggests we might see a rebound back towards last week’s peaks at 1.1845, however while below the downside momentum remains intact.
GBPUSD – the slide below 1.3725 on Monday has opened the potential for a retest of the August lows at 1.3600 and possibly 1.3570. We need to see a rebound back above 1.3730 to stabilise and open a move towards 1.3800.
EURGBP – squeezed higher through the 0.8560 area, and now opens a move towards the highs this month at 0 8610. Still range trading for now.
USDJPY – slipped back towards trend line support from the April lows at the 109.20 area yesterday. A break below 109.00 opens a move towards the 108.60 area.
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