Asian central banks will be taking cues from the US Federal Reserve in a week packed with monetary policy meetings, while economic activity data should underscore the shifting balance of risks towards growth from inflation.
European stock markets are expected to open lower Monday, weighed by sharp losses in Asia amid concerns about the health of property giant China Evergrande Group and ahead of the week’s crucial Federal Reserve meeting. The moment of truth has arrived for Evergrande with bondholders about to find out if liquidity crisis is as dire as it as appears. Investors have priced a high likelihood of default with on of the notes trading at 30% of face value.
European equities have received a negative handover from Asia, despite China, Japan and South Korea being on holiday, with Hong Kong’s Hang Seng index dropping more than 3%, dragged down by the continued dumping of shares in Chinese property company Evergrande.
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Investors seem to be taking a dim view of its business prospects, with a bond interest payment due on Thursday and concerns growing that a default on its $300 billion of liabilities could crystallize broader risks in China’s financial system.
CENTRAL BANKS IN FOCUS
There seems to be growing optimism around the US federal reserve around the health of the US economy after a few dissapointing data releases. Many economists believe the stimulus offered by the US central bank has done its job and tapering needs to start. However, we advise caution as we see no statement this week but rather Novemeber or December as more appropriate with interest rate hikes in 2023 at the earliest.
European stock focus this morning will be on Lufthansa, after the German airline said on Sunday it would launch a capital increase that was expected to raise 2.14 billion euros ($2.51 billion) to pay back part of a state bailout it received during the coronavirus crisis. As much as the cash injection was needed at the time and appreciated it did however come with strict conditions around the issuance of dividends as well as any merger and acquisition plans.
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Crude prices fell as supply increased in the U.S., the largest consumer in the world. The country’s oil and gas rig count rose by nine to 512 in the week to Sept. 17, its highest since April 2020 and double the level from this time last year, Baker Hughes said on Friday.
Additionally, only 23% of U.S. Gulf of Mexico crude output remained offline as of Friday, an improvement from the 28% seen on Thursday, more than two weeks after Hurricane Ida hit. Analysts have adjusted their outook with some targeting as high as $100 a barrel. We do believe that a bit of caution is warranted as the world continues to grapple with reopening economies and countries. Until we see international travel opened on a large scale we are of the firm opinion that oil could potentially range between $60-$80 a barrel through to year-end.
US DOLLAR AND GOLD
The dollar also climbed to a three-week high ahead of the Fed meeting, making commodities priced in the currency more expensive. This comes on the back of continued global supply issues and continued covid fears.
Gold had a extremely bearish week coupled with renewed dollar strength. After a significant fall last week we do expect retracement this week whether that is pre or post the fed meeting. Optimal idea on gold this week would see prices dip and test the YTD lows. We will be interested in long positions around $1700-$1720 dollar level.