What’s Happening Today?
Wall St. Sinks Amid China’s Evergrande Contagion Fears, US Debt Politics
Stocks plunged today, with major indices tumbling by over 2% during the afternoon session, as investors nervously eyed the potential ripple effects of the default of a major Chinese real estate company, as well as ongoing debates over the debt limit in Washington. Shares of China Evergrande Group (3333.HK) plunged by more than 10% on the Hong Kong Stock Exchange as fears mounted that the Chinese real estate juggernaut would collapse under a major debt burden, impacting shareholders, bondholders and potentially triggering turmoil elsewhere across global markets.
What’s on the Agenda for this Week?
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Central Bank Palooza, (2) China Implosion, and (3) Geopolitical.
(1) Central Bank Palooza: Interest rate decisions will be issued from five major central banks this week, including (listed in GDP size) United States, China, Japan, Great Britain and Switzerland. Any of the first four can have a big impact on pricing. Japan and Great Britain will get a lot of attention on their asset purchases and China will be in focus given number 2 below. Of course, the main focus of the global markets is Wednesday’s Federal Reserve Open Market Committee announcement. The bond market will be looking for either a “nod” to November’s FOMC for an official taper announcement or a walk-back from those expectations. There will also be their Economic Projections, and the markets will focus on the “dot plot” charts for growth, inflation, rates, etc.
(2) China Implosion: As detailed in the article cited above, the big story is about one of China’s largest financial institutions that is in major trouble and the Evergrande bank is set to miss a series of interest payments by Thursday. Last week, they made headlines by restricting Chinese depositors from access to their systems and giving property at discounted values to creditors. They are the largest funder of commercial and residential real estate in that country. Will this be their “Lehman” event or will China bail them out?
(3) Geopolitical: Our Debt Ceiling needs to be resolved by the end of the month and the massive $3.5T budget reconciliation is likely going to be smaller in scale when the smoke clears and not a reality until October/November.
Taking it to the House: The September NAHB Housing Market Index moved from 75 in August to 76 in September. Any reading above 50 is good. Readings in the upper 70’s are very high.
On Deck for Tomorrow: Housing Starts, Building Permits, 20Y Treasury Bond Auction, FOMC starts two days of meetings.