Monday Minutes: Sharemarkets tested by news flow - CommSec
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Economics | September 27, 2021
Monday Minutes: Sharemarkets tested by news flow
Evergrande; High oil prices; US Federal Reserve meeting; Geopolitics
.
What are the current issues of note?
Last week had almost everything. Oil prices hit 3-year highs; US Federal Reserve members appeared open to winding
back some of the stimulus put in place; Aussie wealth hit record highs; and some investors worried that the collapse of
a Chinese property developer, Evergrande, could signal the start of a global financial crisis. There were even some
geopolitical machinations thrown in for good measure.
So how did sharemarkets fare? All major US indices actually ended higher over the week. The Dow Jones rose by 0.6
per cent; the S&P 500 index rose 0.5 per cent; and the Nasdaq rose by 0.02 per cent. In Europe, the Euro STOXX 600
index rose by 0.3 per cent; the UK FTSE rose by 1.3 per cent; and the German Dax lifted 0.3 per cent.
But the week was less positive in Asia with the Australian S&P/ASX 200 index and Japanese Nikkei both down by 0.8
per cent.
Over the coming week issues to watch include the Evergrande debt crisis in China; rising global oil prices; US
government funding negotiations (could lead to a closure of government operations); the potential for further falls in
iron ore prices; US economic growth and inflation data; testimony from both the US Federal Reserve chair and Treasury
Secretary; speeches by Federal Reserve presidents; and the potential for falls in cryptocurrency prices after China's
central bank put a ban on crypto trading and mining.
Monday September 20: A new financial crisis?
On Monday, global sharemarkets broadly dropped 1.5-2.5 per cent on fears that large Chinese property developer, The
Evergrande Group, might default, leading to contagion across real estate and financial sectors.
There is no doubt that since 2008 some investors have been on the look-out for a spark to ignite the next global
financial crisis (GFC). And while there is still much to be
played out on the Evergrande crisis, the control exercised
by the Chinese Government over its economy – and the
measures that can be taken - stand in stark relief to that of
the control the US Government and central bank had back
in 2008.
Evergrande is a diverse conglomerate focusing on wealth
management, food manufacturing, electric vehicle
production, sports and theme parks, and property
development. Evergrande Real Estate reportedly owns
around 1,300 projects across 280 cities in China.
Evergrande has been on a borrowing binge over the past
two decades but is now struggling to meet interest
payments on its debts.
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Economic Insights: Monday Minutes: Sharemarkets tested by news flow
Read our report on the Evergrande crisis here:
https://www.commsec.com.au/market-news/the-
markets/2021/not-so-grand-evergrande.html
The CBA Senior Asia Economist, Kevin Xie, made the following
top level points: “Evergrande’s potential default is unlikely to
trigger systemic issues in our view; Regulators will balance
maintaining financial stability and enforcing market discipline;
Growing spill overs from Evergrande’s potential default will
likely exacerbate a property downturn and pose downside risks
to our GDP growth forecast for both 2021 and 2022.”
Tuesday September 21: Moving on.
Some stability returned on Tuesday. Investors hadn’t forgotten about Evergrande. Rather they preferred to see how the
crisis would play out. Investors that panicked in the past – when Covid hit 18 months ago, or back in the GFC – paid
the price. And besides that, there was the small matter of the US Federal Reserve meeting to be held over Tuesday and
Wednesday (US time). European markets lifted around 1 per cent on Tuesday, rebounding from some of the biggest
falls in two months recorded on Monday. US markets were mixed.
After falling by 2.1 per cent on Monday – the biggest fall since February 26 – the Australian S&P 200 index only rose
by 0.2 per cent on Tuesday. The perception was that Australia would be amongst the biggest casualties if Evergrande
was to collapse. And not just because China is by far Australia’s largest trading partner. But also because demand for
our iron ore – a key steelmaking ingredient – may be crimped should there be wider problems in the Chinese real estate
sector.
Wednesday September 22: The US Federal Reserve sends a signal.
On Wednesday there were two key pieces of news. China’s Evergrande group said it would make some interest
payments. Evergrande's Frankfurt-listed shares jumped 40.7 per cent. The German Dax index lifted 1 per cent and the
UK FTSE index jumped 1.5 per cent. And the US Federal Reserve dropped hints that it was preparing to wind back
some of the monetary stimulus. Fed Chair Jerome Powell said the central bank could begin tapering asset purchases
"as soon as the next meeting [November 2-3]" and complete the process by mid-2022. In addition, according to the
Fed's economic projections and policy statement, nine of the US central bank's 18 policymakers projected borrowing
costs will need to rise next year.
The Dow Jones index rose by 338 points or 1 per cent. The S&P 500 index also gained 1 per cent and the Nasdaq
index added 150 points or 1 per cent.
After edging up 0.3 per cent on Wednesday, prior to the Fed statement, Australia’s ASX 200 index rose by 1.0 per cent
– the biggest gain in seven weeks – on Thursday.
The US Fed will clearly proceed slowly in ‘tapering’ (winding
back bond purchases). The number of Delta cases,
vaccination rates, global factors and the all-important
activity and inflation data will all be taken into account
before tapering begins. But tapering is a sign of confidence
in the US economic recovery.
Read the report from CBA International Strategists on the
Federal Reserve meeting outcomes:
FedMonetaryPolicy-23-Sep-2021-0908-1.pdf
Thursday September 23: Celebration.
On Thursday, gains of 1.0-1.5 per cent were commonplace
on US and European markets. But the UK FTSE index fell
September 27, 2021 | 2
Economic Insights: Monday Minutes: Sharemarkets tested by news flow
by 0.1 per cent after the Bank of England said the case for
higher interest rates "appeared to have strengthened"
after it lifted its inflation forecasts for the year. Other
markets were supported by positive corporate news.
One development of note on Thursday was a lift in oil
prices. US crude jumped to the highest in nearly two
months as investors focused on declining global stockpiles.
The Brent crude price rose by 1.4 per cent and the US
Nymex crude price rose by 1.5 per cent.
Friday September 24: Choppy going.
Global investors kept a watch on developments at
Evergrande. Shares in Nike fell after the company cut its
sales forecasts.
And oil prices rose again, lifting by around 1 per cent –
Brent crude hit 3-year highs. The key problem is that there
are a number of supply disruptions in the oil market – some caused by events like hurricanes.
OPEC+ nations are not filling the supply void and demand for oil is rising as global economies re-open from
lockdowns. While positive for energy producers, higher oil prices could crimp spending just as consumers try to get
back on their feet.
Weekly oil market update
Over the week, Brent crude rose for the third straight week, up by US$2.75 or 3.7 per cent. Nymex crude rose for the
fifth straight week, up by US$2.01 or 2.8 per cent.
The benchmark Singapore gasoline price rose by US$2.72 or 3.2 per cent to a 3-year high of US$87.01 a barrel last
week. In Aussie dollar terms, the Singapore gasoline price lifted $3.82 or 3.3 per cent to a 3-year high of $119.24 a
barrel or 74.99 cents a litre.
Last week, the national average price of unleaded petrol fell from near 3-year highs, down by 2.0 cents to 155.4
cents per litre (c/l), according to the Australian Institute of Petroleum.
The national average wholesale (TGP) petrol price rose by 2.3 cents last week to 139.5 cents per litre. Today the
TGP price sits at 140.8 cents per litre.
MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 151.3c/l;
Melbourne 155.1c/l; Brisbane 159.1c/l; Adelaide 146.6c/l; Perth 147.5c/l; Hobart 157.1c/l; Darwin 151.8c/l and
Canberra 159.8c/l.
Craig James, Chief Economist
Twitter: @CommSec
What is the importance of the economic data?
Weekly petrol prices data are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the
weighted average of each State/Territory metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in
each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.
September 27, 2021 | 3
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