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The looming collapse of China Evergrande Group (HKG:3333), the world’s most indebted property developer, has roiled financial markets for months, threatening a contagion with far-reaching implications on China and the wider economy.

In the early months since Evergrande’s financial crisis came to light, Beijing stayed mum on the issue, although the People’s Bank of China pumped billions of yuan in liquidity in what was seen as an attempt to quell liquidity concerns.

Over this time, Evergrande’s stock price slipped 95%, from ~25HKD to ~1.5HKD, where it has stagnated for all of 2022.

HKG:3333 W1

Evergrande’s massive debt pileup

Evergrande, once China’s second-largest real estate developer, is drowning in more than $300 billion in debts to suppliers, contractors, creditors and investors. The company’s crisis partly stemmed from the introduction of Beijing’s "three red lines" rule in 2020 that made it harder for developers to seek bank financing to fund their projects.

Another Lehman Brothers moment

The large exposure of Chinese banks like Minsheng Bank, Ping An Bank and Everbright Bank to Evergrande prompted many financial watchers to predict that Evergrande's debt crisis could extend beyond China’s property and financial markets, warning that it could spill over to the global markets similar to the Lehman Brothers collapse that resulted in the 2008 global financial crisis.

These fears intensified as Evergrande missed payments on a number of onshore bonds. The world’s three major credit rating agencies have already declared the developer to be in default after missing on its bond interest payments late last year.

However, some analysts have played down concerns of Evergrande being the next “Lehman moment,” as they expect Beijing’s policymakers to prevent the crisis from being a systemic risk.

Beijing steps in to limit fallout

To minimize the potential impact of Evergrande’s looming collapse, Beijing has stepped up its efforts, but without a state-led bailout in sight. Back in October, the Chinese central bank said the risk of Evergrande’s liabilities spilling over to the country’s financial sector is "controllable,” while confirming reports that relevant government agencies and local governments have been carrying out risk disposal and resolution work to mitigate a potential contagion.

In recent weeks, a number of news outlets reported that some banks in China have lowered mortgage rates, offered subsidies and allowed developers to access their funds on escrow in an attempt to revive the housing market.

Beijing also started urging state-owned developers to acquire some projects of troubled builders to help ease the sector’s liquidity crunch. Fitch Ratings recently said Chinese developers are poised to see more small-scale mergers and acquisitions and the impact on buyers’ leverage are predicted to be small "as they select projects with promising returns."

Light at the end of the tunnel

It may take months or years for the property sector to recover as developers continue to struggle with a cash crunch that prevents them from meeting their debt obligations.

However, with Beijing’s subtle approach in reviving the property market, Evergrande’s recovery may be drawing near. In February, new home prices in 100 cities in China rose for the first time in two months, further recovering from the slump in November when prices contracted for the first time since 2015.

Policy reforms could encourage home-buying this year as the government included the healthy development of the real estate sector in its government work report unveiled by Premier Li Keqiang over the weekend. Li said authorities will seek to promote the commercial housing market and stabilize house prices this year.

Foreign investors that purchase bonds and other securities from Chinese builders should closely monitor developments surrounding Beijing’s policies for the sector.

Evergrande Group (HKG: 3333) is China’s second-largest real estate developer, responsible for over 1,300 construction projects across mainland China. Alongside its many apartments and commercial buildings, Evergrande has also constructed an extremely precarious balance sheet since going public in 2009.

As such, the Group is struggling to meet its debt obligations. Evergrande has approximately US $300 billion worth of debt in bank loans, supplier invoices, and corporate bonds. An interesting note that helps put Evergrande’s level of debt into perspective is the amount the Company is liable for over the next four months, in interest-bearing corporate bonds alone: US $670 million.

In 2020, Evergrande posted a Net income of US $1.24 billion, on Revenue of US $77.71 billion. The squeeze on its balance sheet becomes more worrisome when you consider that Evergrande has reported a 29% decrease in Net Income in the first half of 2021.


When Did Evergrande’s Trouble Seriously Begin?

On 31 August 2021, Evergrande announced that, barring major restructuring and negotiations with debtors, it would have trouble servicing its liabilities. The problem primarily lay with the Company’s lack of cash flow due to a cooling Chinese real estate market, coupled with its extremely high rate of leverage.

Evergrande’s financial predicament has understandably spooked investors, creditors, and rating agencies. Since 22 June 2021, Fitch Ratings have downgraded Evergrande’s credit rating twice (falling from B to CC), and its stock price has plummeted by 80%.

Investors Around The World Are Watching

Investors are concerned about what becomes of Evergrande and the Chinese real estate sector as a whole. These will be concerns shared by Chinese Government officials, who might seek to mitigate the damage already done to investor confidence in Chinese real estate or the future, much worse, effects of an insolvent Evergrande. However, Chinese authorities have thus far remained eerily silent on the issue.

Ultimately, no one knows what will happen if Evergrande defaults on its debt or if it will, in fact, default at all. But what we do know is Evergrande is indebted to approximately 200+ Chinese financial institutions, including major national and regional banks. Even if Evergrande manages to remain upright, we might expect tighter lending conditions from these institutions, which is not ideal for a Chinese economy that is still rebounding from the global pandemic. A scenario such as this would be one of the more pervasive and far-reaching consequences of the Evergrande crisis.

Further afield, Evergrande’s dollar-denominated corporate bonds are trading at a 30% discount, reflecting the risk that Evergrande will default or drag out reparations for years. The unlikelihood that the Chinese government will step in with a bailout package that goes as far as protecting foreign investors must also be weighing on investors’ minds.

Cathie Woods, founder of ARK Investment Management, appears to have made a U-turn in this regard. Ark's exposure to Chinese stocks has fallen dramatically over the past few months. ARK’s flagship fund, ARK Innovation ETF (NYSEARCA: ARKK), decreased its exposure from 8% to 1% since July. On record, she has noted that Chinese stocks needed a "valuation reset" as there is a disconnect between the price and risk.

In August, Woods revealed that that ARK has begun buying back into China, bigly. Tencent (HKG: 0700), (HKG: 9618) and Pinduoduo (NASDAQ: PDD) being some of her favourites.

Regulatory crackdowns in the country are still ongoing, but by in large, investment continues to flow into Chinese stocks, where opportunity persists.

The fabled Ant Group, one of China's largest financial services providers, may still IPO.

Ant Group, founded by Alibaba's (NYSE: BABA) Jack Ma, has agreed to pair with several State-owned organisations in a joint venture. Participation in the joint venture is hoped to place Ant Group back in the Government's good books and help revive its attempt to list on Beijing and Hong Kong stock exchanges.

Almost a year ago, Ant Groups IPO hopes were dashed in the first in an ongoing series of regulatory crackdowns. Regulators accused the Group of straying too far from its role as a financial services provider. The Group was asked to restructure as a banking entity. It may be true that Ant Group was acting outside their parameters as a payment service provider. However, it is widely believed that Jack Ma's public criticism of the Chinese banking industry was the real indiscretion that caused regulators to apply pressure to the Group.

Ant Group could list before the end of 2021 if they play their cards right.

The latest industry to be put under the thumb of Chinese regulators; Gaming.

Last week, it was announced that persons under 18 could only engage in online video games from 8 pm to 9 pm on Friday, Saturday, and Sunday. I'm curious how this will be monitored, but I don't doubt the authority's ability to do so.

Authorities in China see the excessive time its 100 million youth spend playing video games threatening their education and home life. Estimates put average weekly gameplay at twelve and half hours. If accurate, the new policy will cancel 900 million hours of weekly gameplay.

In response, some of the top video makers' shares dipped on the day of the announcement. However, In the past five days, the prices have inextricably increased. China's (NASDAQ: SOHU) is up 5.58%, and Hong Kong's NetEase (HKG: 9999) is up 6.55% since the regulatory news broke. It is possible these equities were under-priced, to begin with, and the regularity news bought this into view.

How has Foreign Direct Investment fared?

FDI and Chinese stocks

Curiously, we are yet to see a drop in Foreign direct investment (FDI) in China. As it is, FDI is outpacing previous year growth in FDI. It wasn't until September 2020 that FDI passed 1,000 CNY. In 2021, This figure was surpassed in July.

FDI for August is due this week, and this is where we might see how much the world has been spooked by multi-industry crackdown occurring in China.

It should be noted that FDI does not include foreign investment in a country's stock market.

NASDAQ sits above 11,000 after Trump TikTok Ban

NASDAQ is up 1% fueled by President Donald Trump issuing an executive order banning U.S. residents from doing business with Chinese owned TikTok and WeChat 45 days from now.

NASDAQ in Blue, Facebook (FB) in Orange

With the election 90 days away, some critics may point to this latest move as a hail Mary to gather up votes before the election. However, the U.S. government has cited security risks that take users' data from both apps and allow the Chinese Communist Party access to American's personal information. While TikTok denies all claims regarding the CCP's access to the platform's information, TikTok's terms and conditions state that the company may share information with its parent, subsidiary, or other affiliates, including Chinese businesses and law enforcement legally required to do so.

Paul Triolo, Head of Global Technology Policy at Eurasia, states the ban is akin to a "U.S. – China technology war." "The U.S. government is targeting these two very popular Chinese apps, and basically, they have national security problems." Furthermore, from the think tank New America, Graham Webster states that "A ban on WeChat could be consequential because it would practically shut down communication between U.S. and China."
However, specifically with TikTok, President Donald Trump has given them an out: Sell their U.S. related parts to an American company. The logic being, a trusted American company, will not turn over U.S. data to the Chinese government. Recently, the company that has been in talks to purchase the U.S. operations of TikTok is Microsoft. Furthermore, with a stellar reputation and over $184 Billion on the balance sheet, the U.S. technology conglomerate is in a good position for any acquisition.

Microsoft x TikTok in the future?

This will test Satya Nadella's deal-making skills, as it is either a ban on TikTok or a purchase from Microsoft; therefore, they have a decent amount of leverage over TikTok regarding the acquisition price. Furthermore, with a suggested price of $50 Billion for the U.S. business without any negotiation, around $25 - $30 Billion on $3 Billion of earnings will represent approximately 8 – 10 times earnings acquisition price. In comparison, Facebook currently trades at 30 times earnings. This may be a lucrative deal if Microsoft can pull it off.

NASDAQ futures are up around 1%,sitting healthily about the 11,000 level, Facebook led the charge up 6.59% as they take advantage of the situation by releasing their TikTok alternative, Facebook reels. Just one week ago, Facebook's CEO, Mark Zuckerberg, testified to Congress just last week regarding anti-competitive practices.

With Non-farm payrolls coming up, retaliation from China and/or further pressure from the U.S. government may provide a volatile trading session.

PBoC, Inflation and Jobless Claims - Week ahead

The markets continue to grapple with the immediate effects of the Coronavirus. The second wave in pockets of the world has forced cities to take active measures to control the virus. Melbourne, Australia has gone into a secondary lockdown while Florida and Los Angeles see cases surge, with the Mayor of Los Angeles stating that the city is “on the brink” and a Democratic representative from Florida reports the outbreak is “totally out of control.” Here is your week ahead

Monday, 20 July – Peoples Bank of China Interest Rate decision

PBoC's Interest Rate

China’s Central Bank, the Peoples Bank of China has been wary of cutting interest rates, even during the peak of the pandemic. Ma Jun, a PBOC adviser, stated in early April, “The PBOC doesn’t use its bullets all at once. China has plenty of room in monetary policy.” The PBOC has kept interest rates at 3.85%, after dropping it 30 basis points from 4.05% in April. However, forecasts and estimates expect the PBoC to keep rates as is at 3.85% this week ahead.

Tuesday, 21 July – Inflation rate YoY Bank of Japan

With 660 new cases of the Coronavirus yesterday, Japan has struggled to keep ahead of the virus after the world praised it for its lighter approach to restrictions. However, that approach, as seen similarly from Australia, has not bode well for the country. Japan has seen triple-digit daily increases for the whole month of July. This has caused consumption and spending to decrease dramatically. Analysts predict an inflation rate of 0.1%; however, there is a high chance that this may be pushed to the downside, which may put downward pressure on the JPY.

 Tuesday, 21 July – Reserve Bank of Australia minutes

Australia is continuing to grapple with the effects of the Coronavirus, with Melbourne being put back into lockdown and the state of Victoria imposing mandatory mask restrictions. With RBA minutes earlier in the year having a tone of optimism, likely, that tone will not continue here. The second lockdown is a massive blow to the country, socially and economically. The Trans-Tasman bubble between New Zealand and Australia has been delayed, with economic activity in the state of Victoria plummeting. We may see Aussie weakness against its New Zealand counterpart as Australia reels back their reopening.

 Thursday 21st July – Canada Consumer Price Index (CPI)

Canada continues to post double-digit daily Coronavirus cases as they, too, implemented a looser lockdown restriction like Japan and Australia.  We saw a drop in the CPI from March to April as citizens decreased their spending. We saw a slight increase in the Month of May, however, analysts expect to stabilize around 137 for the month of June.

Thursday 23 July, US Initial Jobless Claims

US Initial Jobless claims. Source: Bloomberg

With Initial Jobless Claims posting the smallest decline since March last week, the US jobs market is showing a slight rebound. However, we are all aware of the current situation with the Coronavirus cases in the US. Florida and Los Angeles are posting daily record numbers every week, while President Donald Trump focuses on reopening the economy and the US-China trade deals. I expect this number to slowly creep up as the full effects the second wave of the Coronavirus becomes evident. Analysts predict Jobless Claims to drop to 1.29m from 1.3m previously.

We have seen this mindset in the market, which discounts negative news and rallies on positive news. This is partially due to liquidity propping up many markets. Investors and traders must take this into account when placing trades.

Trade safe!

Shanghai composite plummets as data shows patched recovery

After a 24% rally in their stock market from the start of July, the Shanghai Composite index saw a sharp reversal down 17% as data shows a patched recovery in China.

Bloomberg reporting industrial output was lower by 1.3% while retail sales plummeted 11.4%, showing strong weakness in the consumer, which use to be the backbone of many economies. Michelle Lam, China economist at Societe General SA in Hong Kong, stated that the recovery was "driven by credit stimulus as evident in the strong infrastructure and property investment, while the recovery in sales in retail sales and private investment has continued to lag."

It is interesting to note that the strong infrastructure and property investment gains are on the back of the PBOC's wary of cutting rates earlier in the year when the Coronavirus hits. In favour of a more direct approach, China issued bonds, facilitated direct lending and lowered the reserve ratio required for banks to provide liquidity into the money markets. These measures injected more than 1.7 Trillion Yuan ($220 Billion) of liquidity into the money markets. This is a stark contrast to how 38 other central banks around the world tackled the Coronavirus early this year by slashing interest rates. Michelle continues, stating that "Policymakers will probably save bullets and hold back broad-back easing and find the current growth trajectory acceptable." This sentiment is backed by Ma Jun, a PBOC adviser, stating that "the PBOC doesn't use all its bullets at once. China has plenty of room in monetary policy."

China has been giving investors something to cling on to

The recent bull run has given many Chinese retail traders great euphoria. Bloomberg documented Min Hang, who opened her trading account, stating that "There is no way I can lose" and that "[she] feels invincible." The rally added $1 Trillion of value in the span of 8 days, topping China's equity market valuation to 10 trillion – the top of the bubble in 2015. However, being known as the world's manufacturer, China continues upward hinges on the global economy to recover. Ding Shuang, chief economist for China and North Asia at Standard Chartered, stated that Coronavirus around the world continues to affect businesses around the world, which "may weaken demand for China's goods and services and is the main risk facing China's economy."

This highlights a significant problem with Globalization: Dependency with all the other markets. Amid a trade war between China and the United States, Globalization faces an imminent threat akin to mutually assured destruction. With both countries' interests in the forefront of their foreign policy, they are blinded to the fact that in this day in age their rely on each other more than they give each other credit for.

Are you riding China's bull market?

Will Hong Kong abandon the peg against the USD?

Will Hong Kong abandon the peg against the USD? The financial hub of Asia, which connects the East to the West has been in the middle of pissing contest between the United States and China, not to mention their domestic struggle between them and China. If protests for autonomy in Hong Kong continue, and President Trump implements drastic foreign policy measures against Hong Kong, extreme capital outflows may ensue, forcing the Hong Kong Monetary Authority to abandon its peg on the U.S. dollar.

Could Donald Trump’s election woes force the Peg to break?

As the November Election edges nearer, President Donald Trump risks losing the presidency due to his mismanagement of the Coronavirus. David Rocke describes his reopening the American Economy as “gambling for resurrection.” A branch of game theory, which essentially states everything that the President is doing with regards to the Coronavirus is perfectly rational. He has two choices: He does nothing drastic, the death increase, therefore basically ensuring his loss in the election. Or he reopens the economy, maybe squashes the curve, and promotes that it was a success, giving him a higher chance of winning the election. If that doesn’t work, well, he was going to lose the election anyway. As the Jobless claims reached 41 Million yesterday, President Trump is losing the grip on the election. Desperation may be a giant risk for Hong Kong's peg.

However, there is one thing the President has full control over – foreign policy. With a China conference set tomorrow, there a high possibility given his election chances that he implements drastic sanctions against Hong Kong to please his supporters. This is alongside Secretary Pompeo announcing that “It could no longer verify Hong Kong’s autonomy from China,” which gave it special trade exceptions with the U.S. This may put upwards pressure against the Hong Kong Dollar, which is pegged against the USD as the financial instability from the sanctions may cause extreme capital outflows. However, this alone may not cause a capital outflow, nor may the capital outflow force the peg to break. Hong Kong may impose restrictions on capital outflows for the time being.

History of the Hong Kong / U.S. Dollar Peg

As the financial hub connecting the West to the East, Hong Kong teased investors with its free-flowing capital policies, with a promise of financial stability and consistency. In 1983, the currency was pegged to the USD. This was due tp Concerns regarding the future of Hong Kong after 1997, when the handover of control from the British to China was set to take place. The rate at which the Hong Kong dollar was pegged to the U.S. Dollar has changed over time, however, for the past 37 years, it has remained pegged to the U.S. currency. For the past 12 years since the Great recession, Hong Kong has flourished being the brokers between the East and the West. The pegged currency gave the country stability when it came to trade and investors.

However, history shows that pegged currencies are disastrous in extreme conditions.

This was the case in the Thai Bhat in 1997 and the Argentinian Peso in 2000. In the case of the Thai Bhat, Thailand was experiencing high levels of growth from 1992 onwards as banks loosened restrictions, causing a lending boom and inflated real estate prices. However, from 1995 onward, growth slowed, with investors increasingly worrying about the returns on their investments. This caused a massive capital outflow out of Thailand, devaluing the Thai Bhat. The government tried to prop up the currency by using its allocated $38B USD foreign reserves. However, in half a year from the start of 1997, their foreign reserves dropped 93% to $2.65B before they stopped the regime.

Thailand's Foreign Exchange Reserves from 1995-1999

The Thai Bhat subsequently depreciated against the USD, from 25 to 52 Thai Bhat per $1 USD, effectively abandoning the peg between the Bhat and the USD.

Exchange rate of the Thai Bhat against the USD

Similarly, the Argentinian Peso shared the same fate

Argentina’s government was citing the control of inflation as the reason for the currency peg. However, a multitude of socioeconomic factors such as an increase in income inequality and external shocks driving interest rates higher would see Argentina’s growing economy stall. With the Peso pegged to the USD 1:1, there was pressure for Argentina to keep the peg as most of its debt was denominated in U.S. dollars. However, restrictions on withdraws of 1000 Pesos/USD dollars pushed the sitting President, and the Minister of Economy resigned. The new finance minister imposed a new exchange rate of 1.4 to 1 U.S. dollar, however, what sealed the abandoning of the peg was when “pesification” of all the accounts in Argentina – which changed every single dollar that was in USD to Peso. This saw an increase in demand for the U.S. dollar – increasing the exchange rate from 1.4 pesos to 1 USD to around 4 Peso to 1 USD. Currently, 1 U.S. Dollar sits at 68 Argentinian Pesos. – Further reading, “Convertibility Law”

Exchange rate of the USD against the Argentinian Peso

What is the Catalyst for Hong Kong?

It will require a multitude of events to occur at the same time. The Hong Kong protests, for the most part, have been mainly domestic, with geopolitical parties watching from the sidelines. However, with China putting its foot down and enforcing national security law, the eyes of democracy have caught attention. President Trump stated that “we are not happy with China” with Larry Kudlow stating that China has made a “huge mistake” in passing the national security regarding Hong Kong. Carrie Lam, the Chief Executive of Hong Kong, assures Hong Kong citizens that the law will not undermine the freedom Hong Kong citizens face. However, she is on the side for the law passing, stating that “regrettably, the current legal system and enforcement mechanism for Hong Kong to safeguard national security [this is regarding the protests] are inadequate or even ‘defenseless.’ Despite returning to the Motherland for 23 years, Hong Kong has yet to enact laws to curb acts and activities that seriously undermine national security.”

Currently, Hong Kong’s Monetary Authority (HKMA) foreign reserve sits at around $441B U.S. dollar with Hong Kong using the Fed’s repo facility to its full advantage. The HKMA has the goal of pegging the currency between 7.75 – 7.85 HKD for 1 USD, and currently sits around the strong end of the band at 7.752 as the HKMA bolsters the strength of the HKD during the Coronavirus. This may be in anticipation of a devaluing in the currency because of the Coronavirus and domestic tensions.

Tensions are slowly picking up, putting pressure on the peg.

With the election on the horizon for Trump alongside China taking a strict stance against Hong Kong, fireworks may ensure as both sides battle it out. With Hong Kong directly in the firing line, all eyes are on what President Donald Trump imposes on Hong Kong tomorrow. The HKMA has enough foreign reserves to continue to prop up the HKD, given current circumstances. But the uncertainty with Hong Kong has finally started to settle in – not a feeling you want when your country was built on ensuring certainty and consistency within the Financial Markets. There is a chance that capital in Hong Kong talks themselves into pulling their money out of Hong Kong. If that occurs, the peg on the Hong Kong Dollar may serve the same fate as Thailand in 1997.

Risk on prevails pushing stocks higher

It is a firing start to the trading week as significant indices are in the green as risk on prevails. The SP500 reached a gain of 3%, breaching that psychological 3,000 mark. Although bears took some control near the end of the trading day, the sentiment was overall bullish.

I feel as though we have seen this repeatedly for the past 2 weeks. Restrictions on lock down are loosening, major central banks are providing unprecedented amounts of liquidity, and the backbone of the US economy, the consumer, is shopping again. However, recent economic data is disastrous; central bankers' words don't match the markets, and tensions between geopolitical parties have only gotten worse. Why has the market been so detached from real life recently?

SP500 popping off at the start of the US trading week for the past two weeks

Risk on in a low yield environment, killing institutional investors

With interest rates all around the world nearing 0%, institutional investors are grasping onto any positive yields in the market. It could also be due to an influx of all around the world retail investors "buying the dip". Another reason could be traders moving big lots taking advantage of the risk-on / risk-off dynamic. Whatever the case, it is evident that this risk on/risk on dynamic will continue to prevail in the markets if there is no vaccine.

However, there are some real markers of the economy recovering

The AUD/USD pair typically associated with risk on has been rallying in the past couple of weeks. With manufacturing across the world slowly starting up again, signs of economic activity have been showing. With summer arriving in a couple of days in the United States, a pick-up in oil demand is predicted to occur as Americans scratch the urge to take a holiday in a period where air travel still leaves a distaste in many peoples' mouths.

Tensions are rising in this risk on rally

It would be reasonable to think that in times like these, where a virus had ravaged the world out of nowhere, there would be unity and cooperation between all geopolitical powers. However, it seems like China has setting many bridges on fire lately. China against the United States, Hong Kong Taiwan, Australia – is not the sign of unity. However, it is not just China throwing hands. United States cutting ties and funding with the WHO is another example of how politics gambles with regular people's lives.

As China and Hong Kong protests start up again, concerns over the future of Hong Kong become real. 3 days ago, China's parliament said that it would impose a new national security law, with Hong Kong Citizens fear that this may be the last straw before the freedom that they have had enjoyed under colonial the United Kingdom's colonial rule. A Hong Kong expert at the Shanghai Institutes for international studies, Zhang Jian, told the Financial times that the national security law "Will reignite the protests but that's not a reason to give up [with regards to Xi's power move into Hong Kong] ".

We have yet to see an ounce of certainty in the past two weeks. Traders should be cautious and keep an eye out on any news that may fundamentally affect their trading strategy.

Andre Almeida has brilliant analysis technical on USD/CAD. You can watch it here.  

Week ahead - GDP and Inflation

Last week was a bloody week in the markets, with US equities selling off on fears that the market has been overstretched. The NASDAQ, Dow Jones, and the S&P 500 were down 4.52%, 3.66%, and 3.28%, respectively.

As we approach election season in the United States, traders should be looking out for changes in future policies which may whipsaw the market.

Investors and traders are heading into a turbulent start of the week, with Hong Kong/ China Tensions increasing as we get close to election season. This may incentivize countries like Australia and the United States to implement policy changes that many move the markets.

Leshgo! Here is your week ahead.

All dates are in NZDT.

Last week's equity selloff

Tuesday, 8th September – Japan GDP Growth Annualized

It has been a turbulent week for Japan, as total Coronavirus cases are starting to creep up amidst Prime Minister Shinzo Abe's resignation. Furthermore, Typhoon Haishen just landed, causing more disruption to an already chaotic year. Analysts predict a significant drop in GDP growth by 28.6% - Brutal, considering the Japanese economy has been in the slump in the past couple of years.

Tuesday 8th and 10th September – Euro Area GDP Growth Quarter over Quarter and ECB Interest Rate Decision.

With the European bloc having a relatively collective response regarding the pandemic, individual countries have started to release specific stimulus plans. For example, France revealed a 100 billion Euro stimulus plan, the biggest than any other country in Europe. The stimulus is just under 4% of its GDP. Analysts predict a 12.1% drop in their growth rate quarter over quarter, with the ECB expected to leave rates at 0%.

Thursday, 10th September – Bank of Canada Interest rate decision

Canada has been relatively prosperous in trying to contain the Coronavirus without implementing a strict lockdown. In Quebec, the Coronavirus's epicenter earlier this year has stated that they plan to have students return to school as soon as possible. Economists predict the central bank to keep interest rates at 0.25%, with 80% of Economists surveyed by Finder expecting no rate change until 2022. Oxford Economists Tony Stillo and Michael Davenport stated that the Bank of Canada has signaled that they will keep the interest rates at 0.25% "until economic slack is absorbed so that the 2% inflation target is sustainably achieved."

Friday, 11th September – UK GDP Year over Year

As the United Kingdom continues to grapple with the Coronavirus, Prime Minister Boris Johnson insists that Brexit talks should continue with no delay. The United Kingdom has recorded over 347,000 Coronavirus cases, with the UK recording the highest number of daily Coronavirus cases today since May.

Saturday, 12th August – United States Inflation Rate Year over Year

Similar to Japan, the United States has a turbulent couple of weeks ahead. With main market indices diving, traders and investors should brace for market volatility in the times ahead alongside election season getting into full swing. With the Federal Reserve pledging a new tool combatting inflation, these data figures may be too early to see whether this tool is working. However, a higher than expected figure than the market forecast of 1.2% may see Gold push higher alongside the dollar go lower.

Trade safe this week ahead.

Commodity currencies strengthen as demand for oil and metals increase

Commodity currencies are set to advance as manufacturing and oil usage rise across the world.

The returns of the CAD & AUD against the USD. Note: Lower is better as it means the USD is depreciating against the respective currencies.

The Australian dollar and the Canadian dollar have been stuck within their respective consolidation zone, strengthening over the past couple of days. As the correlation between commodity currencies and commodity prices remain relatively strong, with the Bloomberg commodity index advancing 2.5% to 63.24, the highest since the start of April.

Commodity currencies getting a boost from demand

As China’s oil demand starts to reach pre-Coronavirus levels, manufacturers have started to purchase more iron and copper from Australia. However, tensions between the two countries have slowly risen, possibly dampening the likelihood of a breakout. In this case, China slapped an 80% tariff on Australian Barley exports, a $330 million industry. Many analysts speculate that these tariffs are in response to Australia’s strong push for an independent investigation into China's response regarding the Coronavirus. However, it is more likely due to the Australian government subsidizing exports barely, enabling exporters from Australia to sell them barely at lower than market prices – a process also known as “dumping.”

However, Adam Kibble, an investment specialist at Inisght, is bullish on the Australian dollar, seeing it rally to 70c against the greenback by year-end. Furthermore, he told Bloomberg that “Exiting the virus earlier [Australia], compared to Europe and the U.S., will be very positive for the Aussie.”

Moreover, with the Canadian dollar being sensitive to the change in oil prices, the price of the black gold has strengthened the loonie against the U.S. dollar. As a result, the boost cushions agriculture and commodity exporters into the U.S. Furthermore, other oil sensitive currencies such as the Norwegian Krone and Russian Ruble have strengthened over the past two days as demand for oil increases.

In spite of these currencies rising, today was generally a risk-off day after the risk-on rally yesterday. Here are the leading market moves:

As a senior analyst at Blackbull markets, Andre Almedia did some excellent technical analysis on the USD/CAD pair. You can watch it here.