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Week Ahead: US Debt Ceiling, Evergrande, and An Impending Energy Shortage

There was a barrage of central bank meetings last week, with the FOMC and the BOE having the most market impact.  Watch for the volatility to continue this week.  In addition, there will be plenty of storylines to follow, including the results of the German elections.  The drama around the US debt ceiling and the infrastructure spending bill also will be watched in the US.  Will Congress be able to raise the debt ceiling by September 30th?  Traders also will continue to monitor the fallout from the  Evergrande saga. How much of their debt is China willing to bailout?  In addition,  with colder months right around the corner, an energy crisis may be looming, beginning with the UK.  And, it’s month end! Therefore, traders will most likely face month end and quarter end volatility.

Central Banks

September’s FOMC statement was mostly in line with expectations, in that most thought the Fed would signal that tapering will occur sometime in the near future.  They chose to use the words “moderation in bond buying may soon be warranted”.  However, it was the press conference afterwards which got traders excited.  The first comment from Powell that drew attention was that the “taper could conclude in the middle of next year”.  Powell didn’t even give a start date, and yet, he already said when tapering may end! His next comment was even more of a surprise, “Language in statement was meant to be bar for taper could be as soon as next meeting”.  And the cherry on top of the cake was Many of the FOMC feel substantial further progress test on employment has been met.  My own view is that it is all but met”.  And with that, Powell instantly went from dove to hawk.  Stocks bonds, and the US Dollar traded erratically into the close on Wednesday and they have continued to trade volatile since, including a possible “By the rumor sell the fact” in the DXY.

The BOE wasn’t quiet as dramatic, though the hawkish statement gave GBP a bid.  The Committee noted that “some market tightening over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term”.  In addition, Ramsden joined Saunders as the two dissenting voters.  They voted to reduce total asset purchases to GBP 865 billion vs the current amount of GBP 890 billion.

Other central banks of note from last week were the CBRT, which surprisingly lowered Turkey’s interest rates from 19% to 18% and sent the Turkish Lira to all time lows, and the Norges Bank, which hiked 25bps (as expected) to become the first central bank in the developed world to hike rates.  They also suggested an additional hike of 25 bps may be on the way!

German Elections

Moving into the week, German elections will take place on Sunday.  Although current Finance Minister Olaf Scholz is predicted to be the next German Chancellor, his lead has shrunk from a probability of over 80% to 61%, as of the time of this writing.  Anything less than a Scholz victory could send the Euro lower. There is also currently a 32% chance of a CDU/CSU-Greens-FDP coalition. Watch the opening on Sunday evening if the outcome is different than expected!

US Politics

The House Budget Committee will have an emergency meeting over the weekend in order to get their ducks in a row for a possible vote on the $3.5 trillion social welfare spending package.  However, even if passed by the House, there is little chance it would pass the Senate in its current form.  Nancy Pelosi also said the House of Representatives would take up the $1.2 trillion bi-partisan infrastructure bill.  In addition,  if Congress doesn’t raise the debt ceiling by Thursday, the government will shut down.  Although Senate Minority Leader Mitch McConnell said that Democrats will have to “go it alone” to raise the debt ceiling, Democrats say they will not be solely responsible, as both parties have been spending over the years. They feel it should be a bi-partisan issue. Watch this week for more!

Evergrande

Evergrande seems to be a story that just won’t go away!  Earlier last week, Evergrande, China’s number two property developer said they would pay their interest payments for bonds issued in Yuan.  However, at the time, it was still up in the air as to what would happen to the bondholders that held bonds in US Dollars. China began pumped Yuan into the markets over the last 4 days (460 billion Yuan in total) in case of any liquidity problems (recall Lehman Brothers).   In addition, China warned local governments to prepare for a potential downfall of Evergrande.  The company failed to make their $83.5 million payment on Thursday, and they have another $47.5 million payment this week.  The company has many ties to the national government; therefore, it is unlikely China will let the firm fail on its local payments.  However, internationally may be a different story.  There is a 30-day grace period for Evergrande to make its payments.  Watch as the story continues to unfold this w