Tradingview Weekly Market Wrap 27 September 2021

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Last week was dominated by the meetings of the FOMC, BOE, and CBRT, the tension around one of the largest real estate developers in China, the elections in Germany, the updated growth forecasts by the OECD, as well as the energy crisis in Europe. Despite the eventful week, the S&P 500 VIX volatility index fell as much as 30%. Most likely, this is because the vast majority of the events have already been incorporated into prices, so investors simply received confirmation of their expectations.

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Nevertheless, everything could change in the following weeks. Starting from the energy crisis, we find it important to mention that increased costs of wholesale gas in the UK have imposed tough trading conditions for many energy suppliers and gas companies who now find themselves paying higher costs for gas than they are receiving from customers. Thus, if prices of natural gas continue to grow, dozens of UK power companies could fail this winter. To cope with the crisis and help cover the additional costs of hiring the clients of companies that have gone under, the country’s government is considering providing loan guarantees to large providers. Alternatively, the government could simply nationalize small and medium energy providers. Finally, among the most radical options is the proposal by the largest companies that customers of bankrupt suppliers move to a temporary option similar to the ‘bad banks’ created after the 2008 financial crisis.

On the other hand, it is worth mentioning that rising energy prices could lead to the closure of more companies or reduce production in the region and plants, thus negatively affecting the growth of the European economy. On top of that, rising energy prices would aggravate concerns about inflation and add to the rising costs that companies already bear for raw materials. As a result, we could see companies’ profit margins decrease because of growing production and transportation costs. In this context, it shouldn’t be a surprise that the Organization for Economic Cooperation and Development decreased its expectations for the world GDP from 5.8% to 5.7% in 2021.

Talking about Evergrande, according to the latest news, Chinese authorities have told local officials to prepare for the potential demise of heavily indebted property developer Evergrande. Local governments have been tasked with preventing unrest and mitigating the ripple effect on homebuyers and the broader economy, the officials said, according to the report. The question then should be asked – is the downfall of the Chinese company imminent? The company can still restructure its debts and continue working or it can be liquidated, however, in any case, investors who bought the company’s financial instruments are likely to incur losses. However, in the event of a liquidation, Chinese and global investors may decide that Evergrande’s debt problems could spread outside of China.

The good news is that, according to the president of the European Central Bank, Christine Lagarde, the effect of the crisis of the Chinese real estate Evergrande for Europe is “so far limited”. The Chairman of the Federal Reserve, Jerome Powell, also said that there is little direct exposure of the United States to the debt of the Chinese company Evergrande, but indicated that this could affect global financial conditions. According to him, the big Chinese banks are not tremendously exposed, but I would worry that it would affect global financial conditions through global trust channels and that sort of thing.

Speaking of the debt limit, the Democratic-controlled US House of Representatives last week approved a legislative package to extend government funding until December to suspend the debt ceiling. The project also requires the approval of the Senate, but Republicans are opposed to suspending the public borrowing capacity, which could lead the United States to a government shutdown due to lack of funds as of October 1. Treasury Secretary Janet Yellen has warned that if a new debt limit is not approved, the US could go into default on the national debt in October.

In conclusion, the following weeks will be crucial for the stock market, and who knows how things can unfold.

 

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