With Chinese mainland markets closed today, along with Japanese markets, the Evergrande inspired sell-off in the Hang Seng, which hit 13-month lows, has bled into today’s European session with big falls for the FTSE 100 and the DAX, with both hitting a two-month low, although we have pulled back from the lows of the day.
Europe
It’s certainly not been an auspicious start for the new DAX 40, however it’s hard to imagine that the old DAX performance would have been any different given the extent of today’s sell off. The fear of an Evergrande bankruptcy appears to be leading to concern about China’s very own Lehman moment, and a big overspill across the region, with two bond payments due this week, and concerns over whether they get paid.
Coming as it does with concerns about soaring energy prices, debates about whether inflation is transitory or persistent, how much the global economy is slowing, and whether central banks can look at tapering their bond buying programmes, and there appears to have been a collective throwing in of the towel, as markets adopt a safety-first approach and move into cash and bonds.
The biggest fallers today have been the usual suspects of basic resources and financials as concerns about the economic outlook and falling yields drag on both. Unsurprisingly Asia-focused brands are also getting clobbered with the likes of Prudential the biggest faller as it announced it was looking to raise $2.9bn in Hong Kong to pay off debt, as well as invest in expansion in its core Asia markets as well as Africa.
Standard Chartered is also getting clobbered, trading down near two-month lows, while the likes of Anglo American, Glencore, Rio Tinto and BHP are all sharply lower, as iron ore prices slid further below $100 a ton, with prices now down over 60% from their recent peaks. It's not all doom and gloom however with airlines starting to see a little less turbulence, and gain altitude, in the wake of the recent announcement on the simplifying of international travel and quarantine restrictions by the UK government on Friday.
While the UK relaxations had been well trailed for most of last week, the confirmation of the 4 October is welcome news when it comes to overseas travel, with IAG getting an even bigger lift, and on course for its best day this year after it was reported that the Biden administration would be announcing that from November, fully vaccinated passengers would be able to travel to the US, from the EU and UK. This news comes with an enormous caveat about what “fully vaccinated “means given that the US FDA hasn’t certified the AstraZeneca vaccine as being safe. As with everything the devil is in the detail.
This is an even bigger boost for the likes of IAG which relies on its US routes for a good chunk of its revenue, and if implemented could well unlock a lot more cashflow than was looking likely a week ago. It could also help alleviate concerns that the airline might have to raise fresh capital, in the wake of last week’s decision by easyJet to do just that. This has also helped Rolls-Royce, which is also seeing a strong rebound as the prospect of a reopening od the transatlantic travel routes offers up hope that they will be able to hit their EFH target by year end.
This morning’s news that Lufthansa has also gone down the fund-raising route has been overshadowed by the US announcement with a slightly more tempered reaction initially, before the afternoon ramp higher, when the news broke.
AstraZeneca is also higher after announcing that in phase 3 trials its Enhertu drug for breast cancer showed a 72% reduced risk of disease progression or death.
US
US markets opened sharply lower in response to the negativity sweeping through the Asia and European session, with the S&P500 set to close below its 50-day MA for the second day in a row, the first time this year that this has happened.
The biggest fallers have been in areas which have got sizeable China exposure with Alibaba, Tencent and JD.com lower along with Tal Education Group and China Online Education. We’re also seeing losses in the likes of NIO, Tesla, and Li Auto.
We’re also seeing big losses in the likes of Freeport McMorran, as iron ore and copper prices fall back while Occidental Petroleum is lower, along with Devon Energy and Baker Hughes as oil prices sag as well.
Airlines outperforming stateside as well, although the gains are much smaller than their European counterparts.
FX
In a day of risk aversion, we’ve seen flows into the Swiss franc, Japanese yen, and the US dollar, while the worst performers have been the commodity currencies of the Australian dollar and the Canadian dollar.
The pound has also slumped, falling close to a one month low ahead of this week’s Bank of England meeting, with the UK currency getting caught up in the broader risk off sell down.
Commodities
Iron ore prices have continued their slump, now down around 60% of the peaks of this year, and this is now starting to drag on copper prices as well, which have slipped back to their 200-day MA, and almost a one month low.
Crude oil prices have seen similar weakness, however despite this the losses are modest with US crude still above $70 a barrel, while brent crude prices have slipped below $75 a barrel, as concerns rise over what effect a disorderly outcome to the Evergrande saga might have on the Chinese economy. The company has two bond payments due this week with concerns rising that they may not be able to pay then, and what happens if they don’t.
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