China fears trigger stocks sell-off, sinking Dow futures and crypto
Good morning, Bull Sheeters.
Dow futures are sinking 😬, off nearly 500 points, as investors grow increasingly concerned about China contagion issues around the troubled property developer Evergrande. Stocks in Europe are selling off, and U.S. futures are under major pressure.
Meanwhile, Beijing is on holiday today. And so, in the absence of any real news, investors are selling, with plenty of markets chatter about whether this will be China’s Bears Stearns (rock) or Lehman Brothers (hard place) moment.
As UBS chief economist Paul Donovan says in an investor note this morning, “the main issue appears to be uncertainty about the scope of future regulation—in the absence of a transparent framework for regulation, it is difficult for markets to price in the risks, adding an uncertainty risk premium.”
Uncertainty risk premium => risk-off Monday. Even crypto is proving to be a lousy safe haven this morning.
Let’s see what else is moving the market. We begin, as always, out East.
- All eyes are on Hong Kong this morning. The Hang Seng is down 3.6% in afternoon trading, sunk by real estate stocks. It’s a holiday in mainland China, Japan and South Korea today.
- The big drag today is China Evergrande, off an additional 14.2% as investors and creditors fret whether the troubled property developer can meet huge interest payments that come due on Thursday.
- Australia markets were taking it on the chin as iron ore prices tumble below $100 a ton.
- The European bourses were down big with the Stoxx Europe 600 off 1.6% in the first hour of trading with France’s CAC 40 and Germany’s DAX, each with high China exposure, down even more so. Every sector was in the red this morning in early trading.
- The pound sterling has been in a weeklong slump as one supply shock after another rocks that island nation in the North Atlantic. Last week, it was an energy crisis. This week, it’s a red-meat and poultry crisis. Actually, the two crises are intertwined because that’s the kind of world we live in.
- Deutsche Lufthansa, an outlier, traded up 3.7% on Monday morning as the German airline seeks to raise $2.5 billion in a share offering, the proceeds to pay back a chunk of what the German government lent it last year at the height of the pandemic slowdown.
- U.S. futures point to an ugly start to the week. That’s after S&P 500 fell for a second straight week, pushing it further in the red for the month. Meanwhile, the Dow is on its longest losing streak of 2021, off three consecutive weeks.
- Shares in Pfizer, BioNTech and Moderna all fell on Friday after an FDA advisory committee rejected the Biden Administration-backed plan for universal COVID booster shots. They’re down again pre-market.
- What’s on tap this week? We have the FOMC meeting (Tuesday-Wednesday), existing home sales data (Wednesday) and Nike earnings (Thursday).
- Gold is flat, trading around $1,750/ounce.
- The dollar is climbing.
- Crude is off, with Brent below $75/barrel.
- Bitcoin sank nearly 7% overnight to trade below $45,000. Ethereum is faring even worse.
Whatever you do, don’t mention “Lehman”
I was all set to talk FOMC meeting today, and then China happened. More specifically, Evergrande happened.
From Hong Kong to London, the markets are a sea of red this morning, with Chinese real estate stocks really getting hammered. U.S. futures too aren’t being spared.
The prospect that such a major player in China’s property market could collapse is a big enough deal to get the attention of the global markets. On cue, any sector with big China exposure is underperforming today: German auto stocks, French luxury stocks, European mining stocks. To be fair, investors were already jittery. It didn’t take much to turn the mood risk-off.
Already, stock watchers are reaching for 2007-08 global financial crisis metaphors. The hope is Evergrande is more Bear Stearns (got bailed out and sold off) than Lehman Bros (collapsed and took down others with it).
Truth is we have no idea what it is right now—whether it’s a Bear, a Lehman of something else entirely. That uncertainty, of course, amps up the volatility.
“It’s a confus[ing] world when equity markets are generally within a couple percent or so of their record highs whilst we’re seeing the biggest dollar-Asian-high-yield company, Evergrande, with $300 billion of liabilities, on the brink, with no-one really aware of how the work-out will be managed and whether [there will] be contagion,” writes Jim Reid, Head of Global Fundamental Credit Strategy at Deutsche Bank, this morning in a markets note.
Here’s what we do know: Beijing is on holiday today. And the next big point on the calendar is Thursday when Evergrande needs to meet a big interest payment on its debt liabilities.
This cloud will hang over the markets for at least a few more days.
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Iron ore prices are seen as proxy on global growth. That doesn't bode well then when you look at the collapse in market for this vital commodity, down 60% since May, and off 12% just today. A big culprit is China, which is dialing back its steel production ahead of the Beijing 2022 Winter Games. The reason: it wants cleaner skies for the opening ceremony.
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