Futures in the United States and Europe are trading higher today, as investors focus on China’s Evergrande whirlwind, which has even overshadowed the Federal Reserve’s meeting, which is set to conclude today. Investors are concerned about the crisis spreading to global markets after reports surfaced that the real estate powerhouse is on the verge of collapse.
Investors should keep a close eye on news related to Evergrande because the company’s ability to meet its obligations will be put to the test on Thursday, which will give investors a better idea of how deep the company is in trouble. Payments due on Thursday include interest payments worth $83.5 million on a five-year, 8.25%, dollar bond and coupon payments worth $36 million on an onshore bond.
Major lenders have already been informed by authorities in Beijing that they should not expect repayment, and Fitch Ratings has already downgraded the company’s credit rating to junk. Similarly, traders are considering a high probability of default, and this sentiment can be clearly seen in one of its bonds, which is trading at less than 30% of its face value. Evergrande has also initiated the sale of discounted properties in exchange for much-needed cash to repay investors who have overdue exposure to the firm’s products.
The main concern about the issue is the impact of the company’s likely default on Chinese financial markets, as well as the possibility of a spillover to global markets. Real estate company stock prices have already taken a hit, and aftershocks can clearly be seen in equity markets around the world. To appease the situation, China’s central bank pumped $14 billion in short-term cash into the system on Friday.
Moving onwards, the severity of the impact on the broader credit market will be determined by Evergrande’s ability to obtain extensions from financial institutions on its obligations. An uncontrolled default on loans could spark speculation of deep trouble, a situation that Beijing has already been working to avoid by tightening restrictions on overleveraged companies and discouraging government-led bailouts.
Equity markets in the U.S. have felt the heat from the Evergrande predicament in China even so that the news has taken away the thunder from today’s FOMC meeting. The Dow Jones Industrial Average and the S & P 500 have been posting losses for the last four sessions. In yesterday’s session, the Dow Jones Industrial Average dipped 0.15%, and the S & P 500 index dropped 0.08%. The Nasdaq, the tech-savvy index, surged 0.22%, and the Russell 2000, the small-cap index, jumped 0.18%.
Despite Monday’s massive sell-off, markets performed much better than expected on Tuesday, as investors seized the opportunity to buy the dip and resist a much larger drop. Stock traders should understand that unless Evergrande has a significant impact on the US economy, bulls will likely drive markets higher because the country’s fundamentals are strong.
Today, investors should examine the Fed’s policy statement, as well as its interest rate and economic forecasts, to determine how the central bank sees the economy performing in the short term. The two main areas of concern continue to be the state of the labour market and the outlook for inflation in the coming months. Most importantly, any communication regarding the eventual tapering of bond purchases will be valuable. Although the Fed is unlikely to provide an exact timeline for tapering, investors can anticipate some insight into the framework that officials are considering.
Over the last few days, Bitcoin has been on a downward spiral after sentiment related to riskier assets took a beating and as of now the digital coin is hovering around the $41,000 price level. The price action is currently testing the Ichimoku cloud technical pattern which supports the asset near $39,900. The price movement currently has a longer, lower shadow, and is forming a hammer candlestick, depicting that investors are closely monitoring these support levels for signs of further decline in prices.
Institutional investors, on the other hand, are continuing to show interest in the blockchain space. VanEck, a mutual fund and ETF manager, has launched a Bitcoin Tracker Fund to give its clients exposure to the infamous digital coin. The firm has also filed to launch a strategy fund that will invest in bitcoin futures, as well as an ETF that will invest directly in bitcoin.
The company is also excited about the technology behind Solana. The capacity to execute 50,000 transactions per second, which rivals Nasdaq, has enticed the firm to investigate the technology because it would allow the company to potentially securitise any asset and then trade tokens using the Solana technology.
Traders should watch today’s Fed meeting closely as any hawkish remarks by the Fed could push gold prices down as the appeal of the yellow metal would decline. Furthermore, any aggressive move by the central bank to change the policy rate will also adversely affect the precious metal as the opportunity cost of holding gold would rise and investors will prefer having exposure to riskier assets to earn higher returns. Over the last few days, the yellow metal has gained support from the worrisome situation in China as investors rush to safe-haven commodities in times of unforeseen volatility.