Todays podcast

Overview Burning Down The House

• China property sector woes/Evergrande saga hits risk sentiment globally…
• …though last ‘hour of power’ sees S&P losses reduced by >1%, VIX back to 25.3 from 28.8
• CHF and JPY show better safe haven attributes than USD; AUD now firmer than where we left it
• Bond yields back lower ahead of first day of FOMC meeting
• RBNZ’s Hawkesby comments suggest 25bps OCR hike more likely than 50bps on 6 Oct.
• RBA Minutes today should be a non-event; China back from holiday

Hold tight wait till the party’s over, Hold tight We’re in for nasty weather, There has got to be a way, Burning down the house – Talking Heads

A torrid day for Hong Kong’s hang Seng index yesterday, driven by sharp fall in property sector stocks and led by a 16% fall in Evergrande ahead of Thursday’s bond coupon payment day, spilled over to the global arena on Monday with equities down sharply, bond yields lower and safe haven currencies in the ascendancy. The last ‘hour of power’ of NYSE trading has though seen losses for the S&P 500 pared to 1.7%, having been down 2.75% at 3pm NY time, pulling the VIX back to nearer 25 from 29 earlier (latter the highest since February) while AUD/USD, having been as low as 0.7220, is currently back near 0.7250.

Yesterday’s local market session was all about Evergrande and other Hong Kong listed property sector stocks, the expectation being that the former would come under some form of regional government control following an expected miss on bond coupon payment this Thursday. The question then being, how much pain would have to be endured by its creditors who include not just Chinese banks, but offshore bond holders, contractors, suppliers and retail investors, the latter including employee who own substantial amounts of Wealth Management Profits (WMP) issued by the stricken property behemoth. The latter is where the risk of social stability/unrest lies first and foremost. So the response of the Guangdong provincial government, assuming it takes effective control of Evergrande after Thursday, is going to be important.

Together with a further sharp in iron ore prices on the Singapore futures example yesterday (down from $102 to close to $91 at one stage (back to $96 now), spill over from weakness of HK property sector stocks was most evident in Australian mining sector shares, contributing most to the 2.1% loss for the ASX. Together with the dummy spit from France following last week’s AUKUS nuclear submarine deal, which includes a demand from France to cancel EU-Australia Free Trade Agreement talks, AUD/USD was the weakest major currency during our time zone Monday, amid generalised USD strength.

Of note though, the USD has not fared nearly as well as the JPY or CHF overnight, the latter both up 0.5% on the day while the DXY USD index has pared its gains back to just 0.05% at the NY close. This, alongside the late day reversal in US stocks, has helped AUD/USD pull up to around 0.7250 from a low of 0.7220, so only about 10 pips below where it ended in New York last Friday. Its way to soon to suggest that the AUD pull-up could mean that the worse is over, and epically with the FOMC just ahead, though we do note that FX futures market positioning data published last Friday from the IMM in Chicago shows record net speculative short positions in AUD/USD – sometimes a signal that a reversal should not be far off.

GBP was actually the worse performing major currency overnight, and where concerns about the impact on the economy from soaring gas prices and what, in particular, this is doing to CO2 supplies which are essential to so many industrial process (from animal slaughtering to fresh food preservation to carbonating beer and soft drinks), is clearly a factor. 40% of UK CO2 supplies are a by-product of fertiliser production, where the two big UK producers have ceased production given too-high gas prices – up 50% in the last month and 300% in the last year – rendering production unprofitable. The irony of a chronic shortage of CO2 crippling the UK economy, when excess CO2 emissions are the prime source of global warming and climate change, is not lost on your scribe.

A text of a speech from RBNZ Assistant Governor Christian Hawkesby just released included this: “In the world of setting monetary policy, this translates to having confidence in the outlook for the economy, and inching in the right direction based on how the economy is likely to evolve. This is consistent with the observation that when there is a typical amount of uncertainty, and the risks are evenly balanced, then central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25 basis point increments”. This likely takes the market somewhat off the scent of a 50bp OCR rise next month, where as of yesterday the money market priced for about 40bp of tightening out of the October 6 meeting.

Bond markets have received a decent safe haven bid everywhere overnight, notwithstanding the proximity of the FOMC decision (4:00am Thursday AEST), with  10-yr treasuries off 5bps and following a 4bp fall in equivalent German Bunds and 5bp drop in UK gilts.  Commodity prices have ended Monday in a sea of red, including crude oil down +/- 2% despite news that the US is relax travel restrictions for UK and EU citizens who are fully vaccinated. Copper is down 3%, leading the falls in base metals.

Coming Up

• In what is a very quiet week in Australia as far as domestic data/events go, today we have the ‘highlight’ courtesy of the  RBA September meeting Minutes. We are unlikely to learn much new from these, given Governor Lowe’s recent speech where he expanded upon his confidence in the economy rebounding once lockdown restrictions ease in NSW, VIC and the ACT. Dr Lowe stated: “while it is hard to be precise about the pace and timing of this bounce-back, in the RBA’s central scenario, economic activity is expected to be back on its pre-Delta track by the second half of next year ”. NAB’s rough modelling suggests NSW will reach its re-opening hurdle of 70% full adult vaccination around October 10, with ‘Freedom Day’ possibility being as early as October 12. Most states are within 1-1½ months of each other in hitting the 70-80% vaccination targets.
• Polling booths close in Canada’s general election at various time during our (late) morning but results are unlikely to be known during our day, or potentially not until much later in the week given the proliferation of postal ballots – which will not even be opened before being verified and postal votees determined not to have already voted in person – and with the polls virtually fairly neck and neck between the incumbent Liberals and the Conservative oppositions. PM Trudeau’s hopes – in calling the snap election on the success of Canada’s vaccination efforts – of transforming a minority liberal government into a majority one, are not what the polls are suggesting is likely.
• Elsewhere tonight, the OECD will publish its interim economic outlook, scheduled for 7pm AEST. Data wise, just US Housing Starts (expected +1% after -7% in July) and UK public finances. ECB VC Luis de Guido is due to speak at a Financial times Conference on financial stability, starting at 17:05 AEST

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