European, US Stock Markets Drop On Evergrande Worries

Sep 21 21, 08:45 GMT

European and US stockmarkets retreated considerably yesterday as worries about a possible collapse of China’s mega developer Evergrande tended to intensify, especially for a possible contagion. It’s characteristic that all three major US indexes retreated with Dow Jones and S&P 500 leading the way since their last highs early September. It should be noted that Evergrande is considered to be one of the largest property Developers in China and has more than $300 billion in liabilities, and most analysts expect the developer to default. A rescue with an intervention by the Chinese government could be possible yet for the time being does not seem probable and the risk of defaulting rises as two major interest payments are due in the following days. The bearish sentiment intensified for the US stockmarkets as the risk factor increased due to US Congress failure to reach a deal about raising the US debt ceiling, thus risking the US government defaulting by mid-October. Should there be any signs of the Evergrande issue being containable, we may see the rebound of the US stockmarkets extending and vice versa.

Dow Jones dropped yesterday breaking all of our support levels yet managed to recover somewhat and float above the 34060 (S1) support level. The bears seem to remain in neighborhood, yet the correction higher seems to be gaining momentum as the RSI indicator is below the reading of 50 yet with an upward slope. Should the bears actually maintain control over the index, we may see Dow Jones breaking the 34060 (S1) support line and aim if not breach also the 33740 (S2) level. Should the bulls take over, we would expect the index to break the 34400 (R1) resistance line and aim for the 34700 (R2) level.

BoJ to maintain accommodative stance

During Wednesday’s Asian session, we get BoJ’s interest rate decision, and the bank is widely expected to remain on hold at -0.10% as JPY OIS imply a probability of 97.79% for such as scenario to materialize currently. In general, we would expect the bank to maintain a wait and see position keeping an accommodative stance, with an eye on Japan’s fundamentals and the path of the Japanese economic recovery. We would like to highlight though that the momentum in the Japanese economy seems to be easing despite the GDP rate for Q2 having accelerated. Overall, the bank’s meeting could pass as a non-event unless the bank deepens its dovishness, given the most recent wave of the pandemic that has passed over Japan in August and the resignation of Japan’s PM Suga.

USD/JPY dropped yet remained in the boundaries of its sideways movement between the 109.25 (S1) support line and the 110.20 (R1) resistance line, as both levels have been extensively tested since the 16th of August. We tend to maintain a bias for a sideways motion between the aforementioned levels, given also that the RSI indicator below our 4-hour chart is near the reading of 50, implying a rather indecisive market. Should market display a selling interest we may see GBP/USD breaking the 109.25 (S1) support line and aim for the 108.45 (S2) level. Should buyers be in control of the pair’s direction, we may see the pair breaking the 110.20 (R1) resistance line paving the way for the 110.90 (R2) level.

Other economic highlights today and the following Asian session:

During today’s European session, besides Riksbank’s interest rate decision, we also note the speech of ECB vice president De Guindos and UK’s CBI trends (orders) for August. In the American session, we get from the US the number of building permits and housing starts, with the releases being simultaneous and both being for the month of August. Just before the Asian session starts oil traders may be interested in the release of the API weekly crude oil inventories figure.

US30 Cash H4 Chart