China’s Evergrande contagion fears rock markets

Jeremy Thomson-Cook
Jeremy Thomson-Cook 20 September 2021

GBP: Growing stagflation fears/MPC meeting Thursday

EUR: German elections

USD: All eyes on the Fed as the FOMC meet Wednesday

Sterling

Ahead of Thursday’s Bank of England MPC meeting, sterling continues to be dominated by risk on/off flows . The recent poor retail sales data only helped to exacerbate the threat of stagflation as growth begins to stall but inflation remains stubbornly high. Surging energy prices captured the headlines last week but perhaps of more significance is the worsening in supply chain disruptions with many leading companies now warning over empty shelves at Christmas.

Brexit trade regulations are starting to bite, highlighted by US House of Representatives Speaker Nancy Pelosi warning the UK on Friday that a possible US-UK trade deal will be jeopardised if disagreements with the EU, which threatens peace in Northern Ireland, are not eliminated.

Euro

The recent ECB meeting was much more benign than many market percipients had expected with the Central Bank making it very clear there will be no move on interest rates for the foreseeable future. Post the meeting, we have heard from a plethora of ECB members who have been at pains to re-emphasise their dovish mantra with Isabel Schnabel, a German member of the ECB, stating that inflation will significantly decrease early next year "in all likelihood."

Ahead of Sunday’s German elections, opinion polls continue to show centre-left candidate Olaf Scholz in the lead. While he is considered a safe pair of hands as finance minister – and more experienced than Armin Laschet, Merkel's successor at the ruling CDU party – Scholz is open to a coalition with the hard left.

USD

The dollar rose to multi-week highs last week as a surge in US retail sales continue to show the US consumer is still very much alive and kicking despite renewed Covid restrictions hitting most US states.

Whilst the most recent inflation data was slightly below forecast, it still remains at very elevated levels which is testing the Fed’s belief that above target inflation remains transitory.

This week’s FOMC meeting on Wednesday is expected to guide the markets to a commencement of the tapering of asset purchase starting in November/December. Of more importance perhaps is the committee’s guidance around the timing of raising interest rates, which is currently forecast to begin in Q4 2022.

Elsewhere

Overnight the US Dollar has again been the main beneficiary of huge risk of flows as shares in China’s Evergrande plunge again as fears of contagion grow. Shares in the embattled Chinese property company plunged 17% as investors weigh up whether the group’s massive debt problems could trigger a broader sell off across all financial markets.

Market rates

Today's Interbank Rates at 09:12 against sterling. Movement vs Friday.

Euro €1.168
US dollar $1.367
Australian dollar $1.889
South African rand R20.25
Japanese yen ¥150.0

Have a great day.