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7 charts from the past week that tell an interesting story in markets and investing…
1) Ever Heard of Evergrande?
Before this week, you probably never heard of Evergrande Group. But China’s largest property developer ($111.9 billion in contracted sales during 2020) and world’s largest corporate debtor ($300 billion) suddenly became the topic du jour, missing an interest payment and sending Lehman-like fears throughout the market.
The company’s stock ($EGRNF) is now down 82% on the year.
And Evergrande’s 2022 bonds, which have been in freefall for months, are now trading at less than 30 cents on the dollar.
2) The Long-Awaited Pullback
Fears of contagion from an Evergrande default helped push the S&P 500 down just over 5% from its high earlier in the month. This was just the second 5% pullback in what has been an atypically quiet year for U.S. equities. But after a sharp move lower on Monday, stocks shrugged off the Evergrande news and actually rallied to finish higher on the week (S&P 500 +0.5%).
For some perspective, this is now the 25th correction greater than 5% since the March 2009 low. Will this prove to be yet another opportunity to “buy the dip”? Investors have been conditioned to believe that it will.
3) A Top 5 Uptrend
Regardless of what happens next, we are living today in one of the great uptrends of all time. The S&P 500 ETF ($SPY) has not closed below its 200-day moving average since May 2020. That’s the 5th longest streak since its inception in 1993.
4) Taper Tantrum 2.0?
What could bring the 200-day streak to an end? A normalization of the Fed’s easy money policy is probably at the top of the list.
On that front, the Fed met again last week and maintained the status quo for the time being (0% rates and $120 billion of bond buying/month). However, they did allude to an upcoming taper (“a moderation in the pace of asset purchases may soon be warranted”). The announcement could come as early as their next meeting (November 3) with implementation as early as December.
To be sure, this will merely be a slowdown in the rate of growth of the Fed’s balance sheet that continues to hit new highs, but it is a change nonetheless.
Investors will be watching closely to see how the bond market reacts. After a steady move lower from April through August, the 10-year Treasury is once again showing signs of life, ending the week at 1.46%, its highest level since early July.
Whether shorter-term rates move higher in tandem will depend on the expectations for future Fed hikes. There too we are seeing a change, with Fed Fund Futures now pointing to at least one hike before the end of 2022.
5) Negative Rates, Negative Returns
For those arguing that interest rates should be held at 0% forever or cut even further into negative territory, the following data point may be instructive.
Since the ECB implemented negative rate policy over 7 years ago, European Financials ($EUFN) are down 2% versus a 138% gain for U.S. financials ($XLF). The lesson: just because a central bank can do something, doesn’t mean they should. There are unintended consequences to everything, including excessive easy money and negative rates.
6) China Bans Crypto
Speaking of central bank power, the People’s Bank of China (PBOC) made all cryptocurrency-related transactions “illegal” this week. This includes overseas exchanges, many of which provide services for residents in China.
The announcement sent most of the major crypto assets lower, but not by nearly as much as one might have expected.
Which begs the question: does China’s actions make crypto more or less valuable. I ran a poll asking just that and the results may come as a surprise…
7) Delta Downswing Continues…
The Delta wave in the U.S. continues to subside, with covid-19 hospitalizations moving sharply lower over the past few weeks. Hopefully a trend that will continue…
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And that’s it for this week. Thanks for reading.
Have a great week everyone!
-Charlie
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