Well markets are certainly not off to a hot start this week with the major indices falling Monday as a result of news coming from China along with concerns that the Fed will hint at tapering asset purchases during the meeting that concludes on Wednesday. Additionally, cryptos fell sharply early today amid the Evergrande turmoil.
What's Going on with Evergrande?
The China Evergrande Group has been the center of attention Monday as investors grow concerned about the future of China's largest property developer. With some pundits concerned it could become Lehman Brothers 2.0.Evergrande has fallen behind on promises to more than 70,000 investors as construction on unfinished properties has come to a halt. More than a million homebuyers have been left in limbo as a result and traders are getting out of an already unstable real estate market in China. Considering the real estate market accounts for more than a quarter of the world’s second largest economy, investors are increasingly concerned about an Evergrande fallout that spreads across the rest of the economy.
However, the likelihood of this becoming a Lehman moment remains very slim as Chinese regulators will not let it reach that level. Most bankers and analysts are predicting a restructuring of Evergrande’s $300 billion in liabilities in order to minimize systemic risk.
Evergrande is a highly leveraged property developer but also owns 37% of Shengjing bank. The quasi-investment bank, which is where most of the concerns currently like, accounts for only about 2% of its total liabilities.
The chances of serious contagion to U.S. markets is fairly low suggesting Monday’s sell-off is more likely to be a blip than a serious crash. Even with the massive news coming from the Evergrande Group, the S&P 500 fell less than 2%.
It is also difficult to tell how much of today's drop is due to Evergrande and how much is due to concerns the Fed will hint at tapering asset purchases during Wednesday’s meeting.
Hints of Fed Hinting of a Fed Announcement
Nothing moves markets like concerns that the central bank could tighten monetary policy, which many expect the Federal Reserve to send some signals about when it meets this week.Why rush to taper asset purchases when you can affect markets by simply signaling your intent to do it?
This isn't a new trick for the Fed, but can be a delicate operation nevertheless.
The current expectation seems to be for the Fed to hint at tapering asset purchases during its meeting this week with a formal announcement coming in November.
It’s well understood that the Fed’s signaling of future decisions helps markets adjust, which can itself serve as an adjustment to financial conditions. The possibility that the Fed could send tightening signals, combined with the Evergrande news, led to some skittishness from investors still trying to evaluate a recovering economy.
The Real Crash
Somewhat lost during a busy Monday was that cryptocurrencies fell across the board. Bitcoin fell roughly 8% and Ethereum lost nearly 10% in about 24 hours. The total market value of cryptocurrencies fell almost 11%.Exactly why is hard to determine but but potentially a combination of traders needing to liquidate assets to cover margin calls, concern over debt default in China, and just a panic sell-off in cryptos after the slide began are probably the biggest reasons.
If anything, the recent move has once again shown that Bitcoin and other cryptos do not act as a "safe" asset to park money when markets sour as they appear to be heavily correlated with stocks and other so-called "risk assets". Instead of traders selling stocks to put into cryptocurrencies during a downturn, it seems that traders sell cryptos along with stocks when things turn for the worse.
Yet to Come
Apart from all the excitement surrounding China, the Fed and cryptos, new economic data for August is scheduled for release this week with a particular focus on real estate. Housing Starts, Building Permits, Existing Home Sales and New Home Sales for last month are all set for this week. Existing Home Sales are expected to decrease from 5.99 million to 5.86 million but New Home Sales are estimated to increase from 708,000 in July to 720,000 in August. Additionally, Housing Starts are expected to rise 2% month-over-month and Building Permits to decline 1.8%.Economic Events this Week
Tuesday - 8:30 a.m. - Housing Starts - 8:30 a.m. - Building PermitsWednesday - 9:15 a.m. - Existing Home Sales - 10:30 a.m. - EIA Crude Oil Inventories - 14:00 a.m.- FOMC Rate Decision
Thursday - 8:30 a.m. - Initial & Continuing Claims
Friday - 10:00 a.m. - New Home Sales
Earnings Reports this Week
Tuesday:
Before the bell: AZO, CBRL, APOGAfter the bell: ADBE, FDX, SFIX
Wednesday:
Before the bell: GISAfter the bell: BB, FUL, KBH, SCS
Thursday:
Before the bell: ACN, RAD, DRI, DAVAAfter the bell: AIR, CAMP, COST, NKE, TCOM