US pre-markets: futures extend losses

Scores on the doors midway through the European session and an hour before the US cash open: in summary, not good. As per the morning note, China risks abound with eyes on the Evergrande contagion. Markets also have one eye on inflation and the Fed meeting this week, plus the German election coming on Sunday. Many people – most investors seemingly – have been eyeing a correction in Sep/Oct after such a solid ramp this year and they’re getting one, it seems. If you have the Fed post max-accommodation – that is, on a path to tightening not loosening, inflation sticking around much more than optimists had thought, earnings growth stalling, and the economy past peak growth, you have the kind of perfect powder keg for a pullback and Evergrande may be the spark to set it off. Add to that a German election and an energy crisis in Europe and it is not the ideal backdrop for risk. The end game is not set here – a lot depends on what Beijing is prepared to do – or when it thinks it has sent a strong enough message to indebted companies in the property sector.

Euro Stoxx 600 down 2.3%, set for worst day since Dec 2020. DAX – 2.7% – its life as a 40-constituent index not off to the best start. FTSE 100 –1.7%, not as badly hit – make-up of the index and some pronounced sterling weakness alleviating some of the worst effects. Basic materials -4%, led by Anglo American -6% as iron ore prices collapse. Polymetal, Sainsbury’s, Astra and IAG managing to rally but 9:1 decliners to advancers tells the story of the day.

US futures keep extending losses – no signs of let up today and whilst we can expect some bounce at some point when cash equities are open for trade this may well get a lot uglier before it’s better. Dow called off 650pts, biggest decline since July 19th, while the S&P 500 is called down roughly 80pts at 4,353 for its biggest fall since May – looking perhaps to test the 100-day SMA at 4,326. Tails up for volatility longs with VIXX is north of 24 and highest since July 19th. There were ~10% corrective moves in Sep 20 and Oct 20 – a similar move would see SPX return to test its 200-day SMA near 4,100.

The 5-min chart for e-minis shows how relentless the selling has been this morning – not a freefall, but very steady.

US 10yr yields slipping sharply to 1.31%, on track for biggest decline in 5 weeks – reflects broader market tensions around the sell-off and the potential fallout Evergrande could have on the Chinese property sector and therefore growth. Gold not doing an awful lot despite the risk-off sentiment and drop in yields as the dollar is catching some very solid bid, keeping the metal’s progress in check around $1,760.

Bitcoin continues to feel the heat as the entire crypto space gets a pounding today. Who knew the crypto market was so correlated to Chinese property stocks…suffice to say this is not an uncorrelated asset. Bitcoin -9% with a $42k handle as it tests the Aug lows.

The FTSE 100 keeps making new lows today – the rally of 6% from Jul 19th through to the August peak is now in jeopardy as the index trades around 6,840. Looking for a bounce here, perhaps to around 6,900 but longer-term momentum clearly with the bears. That July swing low around 6,800, which sits right on the 23.6% retracement so we look to this level to offer some near-term support. If this cracks – and we look to see what kind of follow through we get when the US cash equities open at 14:30 for a guide – then we consider the next level to watch out for is around 6570, the 38.2% retracement.