Risk averse mood dominates global markets

Investors sitting at their screens this morning are feeling a bit anxious. The red colour can be seen across the globe from Asian stocks to European and US futures. Commodity prices are also tumbling with iron ore extending losses below $100 per metric ton. Oil, precious metals and cryptocurrencies are all in negative territory with the dollar being the main beneficiary of today’s turmoil.

Hong Kong is feeling most of the pain with the Hang Seng index dropping 4% as the crisis at real estate developer Evergrande Group dragged the property index lower by 7% at the time of writing. The fate of China’s second biggest property developer remains unknown as it is expected to default on debt due to its creditors this week. The company has $300 billion in liabilities and there are growing concerns that Evergrande’s crisis could spread into other developers and possibly become a Lehman moment for China’s markets.

So far, we are not seeing contagion risk outside China’s property markets and their high yielding debt. Bond yields in China’s investment grade debt remain well within the range of the past several weeks, but whether this event turns into a bigger crisis depends a lot on how the government responds. If the Chinese government doesn’t restructure Evergrande’s debt things will get messy, and not just impact China’s markets but other emerging markets and developed ones. The next few days are going to be crucial, and all investors hope policymakers will avert another Lehman crisis.

This week also features several central banks meetings, with Norges Bank expected to be the first in the G10 to raise interest rates on Thursday. The Bank of England will also be watched closely on how it will respond to the surprise jump in inflation. If Andrew Bailey indicates that we’re getting closer to an interest rate hike, sterling should receive a boost, particularly against the euro.

The Federal Reserve monetary policy meeting remains at the top of risk events this week when it concludes a two-day meeting on Wednesday. The disappointing August employment figures may delay the announcement of tapering the $120 billion in monthly purchases of Treasuries and mortgage-backed securities, but the Fed could provide a clearer signal on when the process will start. The Fed’s dot plot is probably of even more interest as it will include 2024 expectations of where interest rates will be. In their last projections, the Fed brought interest rates hikes forward to 2023 and it only requires two members to shift 2022 expectations higher. With all these risk events, be prepared for a volatile week ahead.