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China fears spark strong risk off mood


Overnight Headlines

*USD continues higher, close to March high at 93.43

*US stocks fell on Friday to their lowest point in nearly a month

*Gold hits a one-month low as stronger dollar dents appeal

*Hang Seng falls over 4% on Evergrande concerns

USD jumped higher again on Friday and is building on last week’s gains this morning. The year-to-date top in DXY is at 93.72. EUR/USD ended the week below 1.1750; its cycle low is at 1.1664. GBP has fallen this morning below the early September low at 1.3726. Next support comes at 1.3679. Although AUD is the weakest major today, it is holding up relatively well with iron ore sharply lower.

US equities fell for a second straight week with the S&P500 losing roughly 2% in September so far. European bourses had spent most of Friday in positive territory before turning lower to reflect the cautious mood on Wall Street. Asian markets have been hit with the Evergrande fallout grabbing investors attention. The stock has dropped over 14%, though mainland China markets, Japan and South Korea are closed today. European and US futures are both pointing lower with the S&P500 taking out the 50-day SMA.

Market Thoughts – Evergrande moment

Market focus this morning is on the turmoil related to the Chinese developer Evergrande. Key loan payments are coming up on which the company is likely to default. For some context, Evergrande is the second largest property developer in China with $110 billion in sales last year. It has $355 billion of assets across 1,300 developments and hires 3.8 million workers every year.

The Chinese authorities are expected to step in with some sort of restructuring. But they face something of a quandary. The company is in trouble largely due to Beijing clamping down on property developers last year through the “three red lines” policy. But they do not want to see a deep financial crisis pushing the wider economy into a full-blown recession. So, the question is when and how do they step in, and whether Asian contagion spills over into other markets. Volatility is not being helped by Chinese markets being closed today and tomorrow.

Chart of the Day – EUR/USD sinking ahead of FOMC

We have the all-important Fed meeting on Wednesday and a do they or don’t they moment. After the weak NFP and lower-than-expected CPI for August, the market is less hopeful for more taper details than it was. A more cautious stance is expected from Chair Powell. He has made it clear he wants to see more progress on the employment part of the Fed’s mandate.

In the meantime, general risk sentiment is key and this is favouring more dollar strength. EUR/USD broke down last week continuing its downtrend from the early September highs above 1.19. Support sits at the figure before the cycle low at 1.1664. Only a breach above 1.1825/50 would suggest a reversal of the trend.

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