Nasdaq recovers after early declines, China’s problems worsen

Early loses saw Nasdaq off 1%, but declines were eroded by lunchtime. Bonds and the oil rallied. Future progress for financial markets could be limited by higher US interest rate fears and eroding confidence in China's economy. The dollar index slipped below 103.4, after recent strength, while remaining above the 200-day moving average. Bitcoin saw its largest decline this year,

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Bitcoin’s tumble signals waning risk appetite

Bitcoin is often the canary in the coalmine, signaling a waning appetite for risk assets. Bitcoin fell 9% on Thursday and 11% for the week, briefly falling below a key $26,000 technical support level. As we’ve highlighted in recent days, smaller currencies in fragile economies (and Bitcoin fits this category) have been devalued against the US Dollar this year, a haven of safety. Amongst theories for the Bitcoin decline: investors sold close to $500 million in bitcoin futures over a 24-hour period; Elon Musk’s SpaceX sold holdings;  the belief that interest rates are going higher; or turmoil in the Chinese economy, where many wealth businessmen hold crypto.

China property crisis getting worse, hits consumer confidence

China’s economy continues to spiral, with bad news undermining consumer confidence. This comes at a time when authorities are trying to encourage domestic consumer spending to offset lost export demand from Europe and the US. Chinese developer Evergrande Group filed for US bankruptcy protection in New York as part of one of the world’s biggest debt restructurings, further contributing to mounting anxiety over China’s worsening property crisis and its resulting aftershocks for China’s weakening economy.

Evergrande last made headlines when it faced a liquidity crunch in mid-2021, but it now joins other Chinese property companies in recent days who are struggling to meet debt obligations. The property sector makes up 20-25% of China’s economy, with roughly 70% of average household assets tied up in property. Companies accounting for 40% of Chinese home sales have defaulted on debt since mid-2021, mostly private property developers.

Can China’s government fill the property black hole?

The Chinese property sector is now seen by some in the industry as a black hole now too big for the central government to fill after being too slow to respond. The absence of concrete stimulus programs from the Chinese government continue to send chills through the investment world. China has taken small steps designed to stimulate the economy, but its biggest problem currently is the lost confidence from both consumers and investors that continue to undermine any efforts made by the government. The Yuan is flirting with 16-year lows versus the dollar currently, undermining China’s efforts to sell the currency as a strong alterative option to the dollar as the world’s currency of trade.

China’s central bank now faces pressure to stabilize the currency before it reaches record weakness versus the dollar, which again goes against its efforts to promote the yuan in world trade. There’s been plenty of talk coming out of China’s government, but little meaningful action to turn the economic ship around. China now has to worry about the chilling effect that this is having on overseas direct investment dollars (ODI) that it heavily depends on for growth. We are not predicting an imminent collapse of China, but rather what China’s leaders might do to distract its citizens from the domestic problems at home by redirecting them toward a “greater threat.”

Markets still too optimistic on US rate cuts

Fed Chair Jerome Powell has been quite clear on the Fed’s objective: keeping rates “higher for longer” rather than pivoting too soon. Its primary focus is on the service sector, and the biggest concern in that sector is wage inflation. There are few signals currently available to suggest that the labor sector is softening. There are plenty of signals to suggest that such is coming, but none have yet materialized into a softer labor market. Hence the pause, but not the rate cuts. The risk would be that rising commodity prices, especially energy, could spark more rate hikes.

The market currently gives less than 10% odds of another Federal Reserve rate hike at its September meeting, although those odds grow to roughly 37% by the September meeting, with perceptions of big rate cuts next year starting to scale back. Historically, the Fed tends to cut rates fast when it pivots its policy, but it tends to do so when the market doesn’t expect it to do so. Wall Street has been expecting a pivot for much of the past year, wrongly.

TODAY’S MAJOR MARKETS

Equity markets recover after morning swoon

• Equity markets rallied by lunchtime after morning weakness, with Nasdaq and the S&P 500 back to unchanged, while the Russell 2000 was up 0.8%
• Global markets were generally weaker, catching up with declines in the US market, with the DAX, FTSE 100 and Nikkei 225 all down by 0.7%
• The VIX, Wall Street’s fear index, fell back to 19.2

Bonds recover, dollar unchanged

• The dollar index was flat against a basket of currencies to 103.4, with Sterling and Euro major cross rates unchanged while the Yen rallied by 0.4%
• Bonds recovered, after marked weakness, with 2-year and 10-year Treasuries yields falling back to 4.92% and 4.25%

Oil continues to lead commodity markets

• Crude oil prices continues to rally, up 1.3% to $81.5 per barrel. Energy analysts reckon the oil price is bound in its recent $70-$80 range, with good reasons to rally further (Saudi and Russian supply cuts) or fall bac (weaker global demand)
• Gold and Silver were unchanged after recent weakness, at $1,917 and $22.8 per ounce

• Corn Soybeans led the way higher in today's trade, with traders worried about how this year's crop will finish amid extreme heat and dryness expected for the Midwest in the next two weeks
• Corn prices followed soybeans higher, but a larger balance sheet for the feed grain limited gains
• Wheat prices were strong in Chicago as tensions build in the Black Sea ahead of the weekend, raising fears for traders holding large short positions

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected] 

Market outlook by Paul Walton, Financial Writer: [email protected]