Daily Market Pulse

Evergrande sell-off takes a breather amid risk on pulse


The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, retraced from yesterday’s highs as the massive Evergrande sell-off fades in the global markets. Market participants remain uncertain about the Chinese policy and measures to contain the financial fallout, while tensions ahead of tomorrow's Federal Open Market Committee keep mounting amid tapering expectations. However, market participants seem to have taken a breather from the Evergrande financial distress and equity sell-off, after a syndicate of banks, including Barclays, UBS, and Citi, which hold exposure against Evergrande, said that this is not a “Lehman moment", referencing to the 2008 fallout of the Lehman Brothers which triggered a major financial disaster on the real estate market. Nonetheless, despite Evergrande missing another debt payment and going under, investors seem less fearful of contagion to the wider Chinese and global economy. As the market mood cools off, equity futures point at recovery following the worst correction since May, while Treasury Yields smoothened, slowing down the pace for the dollar. The Federal Reserve is set to announce no imminent adjustments in policy, with hopes for tapering hints in November or December. Market participants believe that Powell could signal tapering coming later this year, despite worries about the virus, Evergrande, and supply-chain bottlenecks, which he might soften by spreading the process. Additionally, the U.S. agreed to reopen borders and ease constraints for vaccinated travelers from Europe and other countries from November, a step that suggests a return to normality. 


The EUR is attempting a bounce back against the dollar following yesterday’s risk-off flows, which sustained pressure over the common currency. However, the EUR intend seems fragile despite the softer dollar during the early hours of the trading session, amid broader uncertainty around tapering which keeps treasury yields muted ahead of FOMC. Officials from the European Central Bank tamed speculation for a shift in monetary policy after Governing Council Isabel Schnabel pledged to act more patiently as the central bank struggles to achieve its one and only mandate for price stability. Policymakers flagged that the committee needs to see clear signs that inflation is reliably moving towards our 2% target before they can switch gears, as inflation is expected to be below the 2% target in the medium term.   


The British Pound closed 0.70% lower against the greenback during yesterday's trading session amid a broader risk-off sentiment supporting the greenback. Prime minister Boris Johnson joined President Joe Biden’s promotions to the United Nations partnership to underpin the latest cautious optimism, which is snapping three consecutive days of losses for the Pound during today's early trading session. Additionally, chatter relating to the U.S. debt limit extension, and recently positive U.S. housing data is challenging Powell’s tapering concerns. Moreover, comments from U.K business secretary Kwasi Kwarteng rejected warnings about energy shortages, highlighting that Britain’s relationship with France is “indestructible”, which also favoured the Sterling to recover from yesterday's lows.  


The Japanese Yen advanced 0.48% against the dollar amid yesterday’s risk-off mood, which underpinned the safe-haven Yen amid Evergrande’s sell-off and Treasury Yields easing down ahead of the Fed’s interest rate decision. However, the dollar seems to gain traction, as the risk-off sentiment eases down following comments from major banks flagging that Evergrande will not translate into a major financial disaster like Lehman Brothers. The risk-on impulse triggered a fresh recovery of the greenback ahead of FOMC, which keeps investors cautious amid tapering expectations. The Fed is scheduled to announce its interest rate decision on Wednesday, and participants expect policymakers to leave policy unchanged, although investors will look for clues about the likely timing of the Fed’s tapering plan, which will be reflected on the treasury yields’ behaviour.


The Loonie remained on the backfoot during yesterday's trading session amid snap elections in Canada, which kept the country on the verge of their seats. Uncertainty around the election outcome and broader risk-averse sentiment sustained pressure over the Canadian dollar until the election outcome was released. The Canadian Prime Minister Justin Trudeau managed to keep his seat, although he failed to achieve an absolute majority, which was the original purpose of calling a snap election amid solid numbers in the polls. The election outcome supported the Loonie as even with a minority government, Canadians are expected to have a stable government, most likely to be backed by the left-leaning New Democratic Party, which will allow the PM to continue running loose fiscal policy to support the economic recovery. 


The Mexican Peso sustained pressure during yesterday's trading session, closing 0.71% lower against the dollar amid a broader risk-off sentiment in global markets. However, the dollar now trades off its highs against most of its peers amid sentiment recovery and cautious optimism ahead of FOMC, which is expected to announce tapering in November or December. Moreover, Mexico’s President Andres Manuel Lopez Obrador hosted a summit of the Community of Latin American and Caribbean States (Celac), where regional leaders discussed challenges and concerns. Several heads of state had something to say to Maduro and the Venezuelan government.


The Chinese Yuan remains subdued against the dollar amid the Evergrande impact and worries over the Chinese and global economies. Intensifying concerns about China Evergrande’s Group debt crisis dragged down the stock market of the world's second-largest economy, and this spilled over to other markets. The Hang Seng slumped 3.3%, extending the contagion to S&P, which closed 1.3% lower alongside European indexes edging 1.5% lower as well. Economists from major banks highlight that there are two main channels of contagion from the China Evergrande Group debt crisis: sentiment, and economic slowdown. While equities and credit are directly impacted by the Evergrande Default, the effect on currencies and rates may be mild. Market participants believe the policymakers are likely to respond if the onshore market shows severe contagion in the form of overall funding market, suggesting that the Peoples Bank of China could cut the Required Reserve Ratio by 50 bps, which could immediately release close to 1 trillion yuan of liquidity into the banking system, easing down repercussions. However, a slowdown in China’s growth may hurt the region's sensitivity to growth, as capital flows are susceptible to expectations and growth output.  


The Brazilian Real extended losses up to 1.12% against the dollar before attempting a bounceback ahead of yesterday's close, overall recording 0.24% losses. Brazilian assets are set to suffer amid broad risk-off sentiment triggered by the ongoing Chinese Real Estate fallout, in addition to general uncertainty around the Fed, and the BCB’s interest rate decision to keep investors' actions while commodities tumble. Negative sentiment also weighed on the already depressed raw materials market with Iron ore extending losses below USD 100 a tone. The Decline in commodities weighs on Brazil's terms of trade, which reached record levels in the 2Q and was seen as one of the main reasons behind the BRL rally.  


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