All but one of the EU and US major stock indices traded higher yesterday, perhaps due to investors’ relief that Evergrande would undergo with some payments on Thursday. However, risk appetite softened today, as the day passed with no official announcement. We also had a BoE decision yesterday, with the Bank appearing more hawkish than expected, prompting market participants to bring forth their rate-hike expectations.
Sentiment Softens in Asia on Evergrande Woes
The US dollar traded lower against all but one of the other major currencies on Thursday and during the Asian session Friday. It lost the most ground versus NZD, AUD, and CAD, while it gained only against JPY.
The weakening of the US dollar and the Japanese yen, combined with the strengthening of the commodity-linked currencies Kiwi, Aussie, and Loonie, suggests that financial markets continued trading in a risk-on fashion yesterday and today in Asia. Indeed, looking at the performance in the equity world, we see that all but one of the major EU and US indices traded in positive territory, perhaps still due to investors’ relief that China’s Evergrande could have undergone with some bond payments on Thursday. The only exception was the UK FTSE 100, which finished 0.07% down, perhaps due to the outcome of the BoE. Having said all that though, risk appetite softened during the Asian trading today, as Thursday passed without any official announcement from Evergrande on any potential payments.
In our view, this revived fears over a potential default, with the developer now having 30 days to settle payments scheduled for yesterday. With more payments due in the days to come, all this confirms what we said yesterday, and the day before, that the default risks are far from vanished. We continue to believe that the Evergrande sage will keep market participants on the edge of their seats. Even if the company starts negotiating a restructuring agreement with its creditors, anything pointing to such a deal being handled poorly could result in more concerns. Therefore, we cannot rule out further setbacks in equity markets in the short run.
DAX – Technical Outlook
The German DAX cash index traded higher yesterday, but overnight, it hit the downside resistance line drawn from the high of September 6th, and turned down. Although strong, the recovery from Tuesday’s low, may have been a corrective rebound. However, we would like to see a clear dip below 15610 before we start examining the case for further declines.
A clear and decisive break below that barrier, marked by the low of September 15th, may encourage the bears to push the action towards the low of September 9th, at 15450, the break of which could see scope for extensions towards Wednesday’s low, at 15255.
In order to abandon the bearish case and start examining whether the bulls have gained the upper hand, we would like to see a rebound back above 15710. This could signal the break above the aforementioned downside resistance line and may initially target the high of September 17th, at 15790. Another break, above 15790, could carry larger bullish implications, perhaps paving the way towards the high of September 6th, at 15960, or the record peak of 16032, hit on August 13th.
BoE Signals that Interest Rates Could Rise Sooner
Now, back to the FX sphere, the commodity-linked Aussie, Kiwi, and Loonie were the main winners as we already noted, but the next gainer in line was the British pound, which was lifted by a more-hawkish-than-expected Bank of England. The Bank kept all its policy settings unchanged but, in the statement accompanying the decision, it appeared more confident with regards to interest rate increases. Officials repeated that some modest tightening of monetary policy over the forecast period was likely to be necessary, but added that some developments appear to “have strengthened that case.” What’s more, officials agreed that any future initial tightening should come in the form of a rate hike, even if that becomes appropriate before the end of the existing government bond purchases program. Another hawkish tilt was that Saunders was joined by Ramsden in supporting a halt in the Bank’s purchases now.
All these signals may have been more hawkish than market participants may have been anticipating, and may have encouraged them to bring forth their rate-hike bets. Indeed, according to Reuters, after the BoE’s statement, sterling interest rate futures priced in a 90% chance for a hike by February, up from just over 60% before. The pound jumped higher on the outcome and it may continue to gain for a while more, as all this suggests that the BoE may become the first major central bank to lift interest rates since the covid pandemic. However, with such a likelihood quickly priced in, we will carefully monitor upcoming economic data and developments, as any disappointments could prompt investors to scale back their hike bets and thereby push the British currency down.
GBP/USD – Technical Outlook
GBP/USD traded sharply higher yesterday, breaking above the downside resistance line taken from the high of September 14th. The rebound came from near the 1.3600 barrier, which is the lower bound of the range the pair has been trading within since August 6th, and therefore, we would expect some more recovery within the range.
The bulls may take charge again from near the 1.3690 zone, marked by the inside swing high of September 22nd, and push the action above the 1.3764 barrier, marked by the high of September 16th. This may open the path towards the high of September 17th, the break of which could extend the advance towards the peak of September 15th, at 1.3853.
On the downside, a dip below 1.3600 could signal the exit out of the range, which may be a signal that the bears have gained full control. This could pave the way towards the 1.3520 zone, defined as a support by the low of January 18th, the break of which could allow extensions towards the low of January 11th, at 1.3450.
As for Today’s Events
During the EU session, the German Ifo survey for September is coming out, while later, from the US, we get the new home sales for August. With regards to the Ifo survey, the current assessment index is expected to have inched up to 101.8 from 101.4, while the expectations one is anticipated to have slid to 96.4 from 97.5. This is likely to take the business climate index down to 98.9 from 99.4. New home sales are expected to have increased fractionally.
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