September selling, Evergrande, Manchin, Oil slumps, Gold rebounds, CAD lower, Bitcoin collapses

US stocks are selling off sharply as seasonal factors have allowed the Evergrande story to help deliver the first meaningful pullback since February.  It just seems all the headlines to start the trading week are bearish; Evergrande’s debt fears and contagion, Chip shortage issues persist, PM Johnson is going after Amazon’s taxes, lackluster IPO performance after another record year, and as some Fed officials have begun to sell their stock amid ethics concerns.  (earlier this month Fed's Kaplan and Rosengren said they will sell all their individual stock holdings by September 30th).      

The Evergrande crisis and fears of a credit squeeze was enough to weigh on sentiment.  Market contagion in Asia is happening as excessive risk taking in China has always been the story.  Letting Evergrande fail would send the market the right signal that China is serious about controlling debt, but Beijing will likely support whatever is necessary to avoid sending shock waves through their financial system. 

The democratic senator from West Virginia threw a curve ball for the Biden administration in thinking Congress should take a “strategic pause” until 2022 before delivering on the spending bill which could derail everything else.  This might just be posturing but it does raise the risk that investors may have been a little too optimistic in expecting infrastructure and ~$2 trillion spending package.

S&P 500 futures has now dropped over 5% from the record high territory and is tentatively breaking below the 100-day simple moving average.  The 4,200 level should provide some support, with many institutional investors automatically buying the ahead of 4,094.55 level that would signify a 10% pullback from the record high. 

Oil

Crude prices are sharply lower after Evergrande debt default fears triggered a flight-to-safety that sent the dollar higher.  Evergrande’s woes are threatening the outlook for the world’s second largest economy and making some investors question China’s growth outlook and whether it is safe to invest there.  In addition to risk aversion flows pumping up the dollar, some investors are anticipating further hawkish signals that the Fed will set up a formal November taper announcement on Wednesday. 

Complicating the move in crude prices is the surge to record highs for UK gas futures.  Europe does not have enough gas and the energy problem could intensify if the early weeks of winter are cold. 

The US Gulf of Mexico production continues to recover from hurricane season, with now only 18.3% of offshore production being shut-in.  The oil market will still be heavily in deficit early in winter and if more demand comes that way, energy traders will buy any dip they get with crude prices. 

Gold

Gold’s rout is taking a break as investors run to safety over concerns Evergrande’s debt default concerns could spillover.  Gold got a boost as Treasury yields plunged, with the 10-year yield falling 5.4 basis points to 1.307%. 

Gold’s rally could have been much higher if not for the reports that Senator Manchin may be thinking of suggesting Congress take a “strategic pause” until 2022 before voting on the $3.5 trillion social-spending package.  Considering stocks are about to have their worst day since October, it is very disappointing that gold prices are only up around $10.  Gold may continue to stabilize leading up to the FOMC decision, with the next move likely being further downside.  Gold could struggle until the Fed finally starts tapering asset purchase.  It is then that it may start acting more like an inflation hedge.    

Canada

The Canadian dollar declined after a market-selloff sent crude prices tumbling and as investors await the outcome to the Canadian Federal Election.  In what is turning out to be a very close election, expectations are high that the biggest risk outcome of a minority government seems likely, which would mean gridlock and little optimism in the government getting any new policies done. 

The loonie is getting picked on because oil prices are tumbling and it looks like Canada may have to deal with a minority government that won’t be effective with any new policy initiatives.   

Bitcoin

A retest of the September low came far too easily for Bitcoin.  The fallout from the Evergrande is putting a tremendous dent in risk appetite that is sending everything lower. Cryptocurrencies, despite all the volatility, have been the best performing asset of the year, so it should not surprise Wall Street they are the first asset sold in the beginning of China-driven market selloff.    

Retail traders remain bullish, albeit many have capitulated in locking in some profit.  Some traders are anticipating a short pullback, while some lunatics are readying to buy more after tomorrow’s full moon.    

In El Salvador, President Bukele tweeted “We just bought the dip. 150 new coins!”  El Salvador’s total is now 700 coins and that enthusiasm has yet to be matched by other countries.   

If Bitcoin breaks below the $40,000 level, it could see momentum selling have it eventually return to the $30,000 to $40,000 range that it was in earlier this summer.