The Daily Update: The Week Ahead

It was a brutal start to the week for equities, especially for HK stocks, falling 3.5% as the Evergrande debt crisis continued. The likes of Henderson Land were down over 13% on continued concerns about the financial health of China’s real estate sector. It was a slower start to the week for rates, oil and gold which were all unchanged while Bitcoin was also a non-mover around $46k. On the wires we read that the French were very unhappy after Australia cancelled a USD66bn submarine order under the terms of the new defence pact with the UK/US while Yellen renewed her call for congress to suspend the debt ceiling or risk ‘widespread economic catastrophe’.

Market volatility continued on Tuesday as we opened to sea of red for global equities. The main culprit was of course the ongoing worries around the spill-over from Evergrande, and with it the global, and economic outlook. According to S&P, Evergrande was on the brink of defaulting on debt payments and wouldn't likely get direct government support. In the US, the S&P was down almost 2%, the biggest one day drop since May, with financials and energy sectors hit hardest. Bitcoin also got hit, falling below 43,000.

After Tuesday’s sell off in risk, we had a 180 degree turn as markets rose and the global contagion worries seem to have abated, for the time being at least. Treasuries sold off, but to a much smaller degree compared to the rally yesterday. Despite the weakness in Treasuries, the 20y bond auction was fairly strong. The auction stopped 0.3bps through and non-dealers were allocated the highest percentage (83.1%) since the introduction of the 20-year bond last May.

Evergrande continued to do its level best to muddy the waters. The company’s onshore property unit said in a loosely worded exchange filing that it reached an agreement with RMB bondholders on an interest payment due. The unit said that the interest for its 5.8% 2025 bond ‘has been resolved via negotiations off the clearing house’ under a section in the filing on the bond interest payment. However, the statement didn’t divulge any of the terms of the arrangement, which in doing so keeps investors on tenterhooks.

On Thursday the main event was of course the FOMC. They left rates unchanged and did not announce a taper of asset purchases, yet. The statement noted that ‘the economy has made progress toward these goals. If progress continues broadly as expected the Committee judges that a moderation in the pace of asset purchases may soon be warranted’. Powell said a ‘decent’ employment report is all that's needed before slowing asset purchases between the next meeting in November and the middle of 2022, while half of FOMC members now favour hiking rates by the end next year. ‘My own view would be that the substantial further progress test for employment is all but met’, Powell told reporters. ‘For inflation, we appear to have achieved more than significant progress, substantial further progress’. A November start ‘will put us to complete our taper somewhere around the middle of next year, which seems appropriate’ Powell said.

On Friday morning the silence continued to be deafening from Evergrande as holders of the dollar denominated bonds awaited to hear news about the distressed developers $83.5 million interest payment that was due. Several holders of the bonds say they had not received any payment along with hearing nothing from the company. To add the uncertainty, there were reports that staff at the firm’s electric vehicle business hadn’t been paid. With no confirmation on coupon payment all the dollar denominated bonds saw heavy selling again.

Away from Evergrande, data was light, however we did see the largest treasury move since February, with the 10-year selling off 13bps in a bear steepening move. This mirrored a general move higher on optimism about the economic outlook around the globe, indeed India's Sensex topped 60,000 for the first time.

The other big news that we saw flash across the screens was the Chinese central bank's announcement that all cryptocurrency-related transactions were illegal. China will ban all crypto transactions and vowed to root out mining of digital assets. Crypto-related transactions will be considered illicit financial activity, including services provided by off-shore exchanges, the People’s Bank of China said on its website. Not that the announcement had much impact, after initially selling off bitcoin regarded its losses to close flat on the day.

This week we have plenty of Fed speakers after the FOMC, along with Consumer Confidence tomorrow and Personal Income/Spending, PCE, ISM, and Auto Sales on Friday. In Europe we have ECB asset purchases for the week ending September 2, plus any fallout from the German elections. Japan’s Liberal Democratic Party will elect a new leader Wednesday along with retail sales on Thursday. In China we have official and Caixin PMIs.