US Open Note – Evergrande ghost haunts markets; euro weaker ahead of German election



Evergrande's drama continues

Evergrande’s drama continued to spook markets on Friday as investors had no clue whether China’s giant property developer, which owes a debt larger than the external debt many entire countries face, had successfully met Thursday’s $83.5 million coupon payment.

The company now has a 30-day grace period before it declares a default, and it will not be the first time a Chinese company uses this period to arrange its obligations. Though, it's historically proven that the wait could drive investors’ imagination wild and make markets swing, with rumors currently moving from the best scenario of a restructuring arranged and no global domino effects, to the worst case of a global financial crisis a la Lehman.

Certainly, China’s recent regulatory crackdown suggests that the government will not be generous to troubled companies, as throwing a saving net will probably reward additional moral hazard behaviors, especially after the massive release of liquidity over the past two years because of the pandemic. Hence, China might use a carrot and stick approach to bring the balance, but that remains to be seen.

Stocks give up Thursday's wins; Fed speakers, house data in focus

For now, stock indices weigh the bad news more than the good ones, with the pan-European STOXX 600 index retracing yesterday’s gains, but still holding slightly positive for the week. The S&P 500, Nasdaq 100, and Dow Jones are also set to join the bearish camp according to futures.

In bond markets, US Treasury yields pulled slightly lower after marking fresh highs today. Yesterday’s rebound was probably a delayed response to the Fed’s hawkish policy views, and it would be interesting to see if the bulk of Fed speeches can cause extra volatility later today. Powell, Bowman, Clarida and George will all be on the wires at 14:00 GMT, followed by Bostic at 16:00 GMT and Williams on Saturday at 11:00 GMT.

On the data front, US new home sales for August will come under the spotlight at 14:00 GMT amid Evergrande’s risks, as traders look for any signs of weakness in international property markets. Monthly building permits for August came well below July’s highs earlier today.

Germany goes to polls

The dollar index is in recovery mode within the 93.00 area as the euro gives back yesterday’s wins ahead of Sunday’s German general election. The latest polls show Merkel’s Conservatives (CDU/CSU) are still on the back foot despite the gap with Olaf Scholz’s SPD party– who is the favorite to replace Merkel – narrowing a bit. That is not necessarily negative for the euro, as investors anticipate an SPD victory to boost fiscal spending in the euro area, especially if this happens under a coalition with greens and the FPD. Yet, it may take weeks or months to form a coalition, in case no majority is achieved.

Euro/dollar is currently changing hands lower at 1.1716, euro/yen is facing resistance around 129.65 despite topping at a 10-day high of 129.74, while euro/pound has quickly reversed yesterday’s losses thanks to the pound's weakness.

Pound unable to extend BoE's rally

The Bank of England raised prospects for rate hike to come sooner than analysts previously expected on Thursday, boosting pound/dollar up to 1.3749. However, ongoing challenges such as soaring energy prices, supply bottlenecks, and shortage of workers could keep weighing on the pound in the near term.

From a technical perspective, pound/yen is interesting to watch as the pair is in a battle with the fourth-month-old resistance trendline at 151.71, whilst dollar/yen has already knocked down the wall at 110.00, aiming for additional upside movements.

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