The Overnight Report: China Syndrome

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World Overnight
SPI Overnight	7159.00	– 87.00	– 1.20%
S&P ASX 200	7248.20	– 155.50	– 2.10%
S&P500	4357.73	– 75.26	– 1.70%
Nasdaq Comp	14713.90	– 330.06	– 2.19%
DJIA	33970.47	– 614.41	– 1.78%
S&P500 VIX	25.71	+ 4.90	23.55%
US 10-year yield	1.31	– 0.06	– 4.45%
USD Index	93.25	+ 0.05	0.05%
FTSE100	6903.91	– 59.73	– 0.86%
DAX30	15132.06	– 358.11	– 2.31%

By Greg Peel

Evergone

What does Beijing do now? After months of applying communist pressure to its capitalist share market, clamping down on Chinese Big Tech, education companies, gaming and casinos, and warning against excessive property market speculation, the government now has to decide whether it should bail out the country’s second biggest property developer.

Property is the biggest sector of the Chinese economy, and the biggest consumer globally of raw materials including steel and base metals. Evergrande has to make an interest payment at the end of this week to avoid default, and can only do so if there is some sort of rescue. The company employs thousands, and thousands of Chinese have been left penniless on off-the-plan purchases of now demolished apartments.

There is some talk of China’s biggest property developer moving in to pick up some distressed assets to provide a stay of execution, but if Beijing lets Evergrande go under the ripple effect through the property sector, the Chinese economy and the global economy, could be stark.

We won’t know until Wednesday, because China is on holiday.

That holiday did not stop the spot iron ore price dropping to US$94.00/t yesterday, down another -7%. And while iron ore is the centre of attention in Australia, no commodity, and no sector was spared yesterday.

Materials fell another -3.7% and energy -3.0% yesterday. AGL Energy ((AGL)) fell another -3.4% but the utilities sector did close in the green (+1.0%) because of a takeover offer for AusNet Services ((AST)), which had that stock up 19.2%. Next best index performer was Endeavour Group ((EDV)), up 2.2% as traders headed straight to the pub after the bell.

While the Big Three iron ore miners all saw another session of falls, the top five index loser’s board featured iron ore, rare earths, lithium and nickel miners. Champion Iron ((CIA)) was the hardest hit on -12.3%.

Given the resource sectors are the Australian economy, it was a Sell Everything session. The banks fell -2.2%.

The most defensive sector – staples – fell -0.5% to be the “outperformer” on the day.

The Evergrande story flowed on into the US last night, triggering a long awaited technical correction on Wall Street. The S&P500 closed down -1.7% but given (a), we had our sell-off for the same reason yesterday and (b), Wall Street saw dip-buyers move in swiftly in the last half hour, one might assume we would not be down hard again today, and maybe even up.

But we’re not off to a good start. Our futures are down -87 this morning.

Technical Trigger

The post-war average of Wall Street -10% corrections is around one and a half times per year. Wall Street has not seen a -10% correction since last year’s covid-plunge, and in 2021 has not even seen a -5% correction to this week, with the S&P500 50-day moving average being the bounce-back level of each -3 or -4% pullback this year.

Wall Street has had plenty to worry about in the seasonally worst month of the year. Firstly, it is the seasonally worst month of the year. Then there’s Fed tapering concerns, worries over the delta variant and a slowing economic recovery, worries about sticky high inflation, and concern that the approaching debt ceiling deadline will be met with partisan politics.

On Friday night, after a decent sell-off, Wall Street closed just below its moving average. 2021 history suggested that should be the bottom of the pullback, as long as nothing out of the blue happened in the meantime.

Enter Evergrande.

When Wall Street dropped from the open the technical trade kicked in. It mattered not that the trigger was Evergrande specifically – anything would have sufficed. With around half an hour to go in the session, the Dow was down -970 points.

The Nasdaq was down well over -3%. While the biggest falls were seen in the S&P materials, energy and financials sectors, the FAAMGs were hit as well, despite, for example, Facebook having no exposure to China.

A simple fact is that while the Wall Street indices, and the Nasdaq in particular, had pushed on to new highs in the last few months, a sizeable number of individual S&P stocks were already experiencing -10% and even -20% corrections. The sheer size of the Big Tech companies, and their defensive earnings streams, have distorted the indices to a great extent and thus painted a misleading picture.

Last night investors sold Big Tech, which had been trading at stretched valuations, to cover losses elsewhere. It’s what typically happens to gold if things start to turn really ugly (GFC, covid crash). But gold was supported last night by its safe haven status, and a -6 basis point drop in the US ten-year yield to 1.31% as fixed income again became a safe haven.

It was a holiday in China yesterday. What do Chinese investors do if they can’t sell (bearing in mind the Chinese market has been trashed all month on government intervention)? Bitcoin fell -7.2% last night.

Back in the US, there was one silver lining last night. Foreign travellers will once again be allowed into the country as of November, as long as they are fully vaccinated. Airline stocks actually went up last night.

There is also some comfort in noting that the trigger for a late bounce, as the dip-buyers moved in, was the S&P hitting -5% from its high.

Looking ahead, S&P Global Ratings put out a report last night that suggested were Evergrande to default there would not be a “tidal wave” of defaults across the Chinese economy, but nor would it be but a ripple in a pond.

Somewhere in between.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1764.00	+ 10.20	0.58%
Silver (oz)	22.25	– 0.11	– 0.49%
Copper (lb)	4.12	– 0.09	– 2.23%
Aluminium (lb)	1.30	– 0.00	– 0.29%
Lead (lb)	0.99	– 0.02	– 2.01%
Nickel (lb)	8.72	– 0.21	– 2.35%
Zinc (lb)	1.37	– 0.02	– 1.54%
West Texas Crude	70.29	– 1.68	– 2.33%
Brent Crude	74.13	– 1.21	– 1.61%
Iron Ore (t)	94.00	– 6.80	– 6.75%

Every picture tells a story.

Gold looking lonely.

The Aussie is down -0.2% at US$0.7255, which doesn’t seem like much under the circumstances, but the commodity rollover did not begin yesterday.

Today

The SPI Overnight closed down -87 points or -1.2%. Beware the momentum algos giving it a red hot go from the open.

The minutes of the September RBA meeting, out today, are now looking a bit old hat.

The Fed begins its two-day meeting tonight.

Sigma Healthcare ((SIG)), Kathmandu ((KMD)) and Clover Corp ((CLV)) report earnings today.

Qube Holdings ((QUB)) goes ex-dividend.

Something to lighten up the mood perhaps: today is the equinox – the real beginning of spring.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
FMG	Fortescue Metals	Downgrade to Sell from Neutral	UBS
IPL	Incitec Pivot	Downgrade to Neutral from Outperform	Credit Suisse
NHC	New Hope	Upgrade to Outperform from Neutral	Macquarie

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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