Analytics

Expert Review: China’s Evergrande fuels the markets with panic

Mid-term Analytics by Olymp Trade Experts


The main news of the week were, of course, central bank meetings. The US Federal Reserve held its meeting on Wednesday, on Thursday the Bank of England and the Swiss National Bank also made decisions on the key interest rate. Markets were shaky as early as Monday, but was this the consequence of anxiety concerning further actions of monetary authorities? This is what we’ll reflect on in our review.

 

Weekly Trends

  • ETH/USD  −8.51%. Trading down with $100 and a X10 multiplier, you could have easily made $85.10
  • BTC/USD  -4.78%. Trading down with $100 and a X10 multiplier, you could have easily made $47.80
  • Facebook  -7.26%. Trading down with $100 and a X20 multiplier, you could have easily made $145.20

 

Currency Markets

We observed the most substantial movement on the currency market during the week on the GBP/CHF cross currency pair. The increased volatility in the Swiss Franc lately can warn about possible changes in market trends. It seems that traders cannot decide whether to go for safe-haven assets or keep trading risk currencies. On 23.09, The Swiss National Bank decided to leave its key interest rate unchanged at -0.75%.

The Bank of England made the same decision and kept the interest rate at +0.1%. While everything is more or less clear with the SNB, the conclusion of the “Old Lady” was perceived on a positive note. Markets are beginning a further rate hike in the U.K., expecting in February 2022 to rise to +0.15% with a probability of 80%. This means that the spike in the currency is because market participants are aiming and preparing for tightening in monetary policy.

Meanwhile, during the week, EUR/USD trading was mixed. Before the U.S. Federal Reserve meeting, the U.S. Dollar strengthened, showing us that market participants expected Powell to continue in a tough stance. However, the “terrible” has not happened now, although the published statement already contains a phrase that “Q.E. tapering may soon be guaranteed.” The Fed expects inflation to start falling in 2022. However, it is projected to rise in the coming months. Characteristically, the analysis of F.X. options shows that the delta of a put option with a strike price of 1.16000 and expiration in 2 months is 0.73. This means that it’s highly likely that the market expects the USD to strengthen in the mid-term.

According to technical analysis, on the 1D T.F., the price is testing support in the vicinity of 1.16600 – 1.17000. The price is forming the classic “double bottom” pattern.

Olymp Trade - EUR/USD chart - Expert Review 2021.09.27
Pic. 1. EUR/USD currency pair. 1D T.F.

Stock Markets

The U.S. market practically collapsed at the beginning of the week. The Dow Jones made a rather deep GAP down at the open on Monday, almost reaching the level of 33 600 points. S&P 500 almost made a test of 4300, and the NASDAQ 100 fell to 14820 points. All GAPS were later closed by the market.

The story of the Chinese company Evergrande also played an essential part in this significant drop. The company is the largest developer and the largest debtor. The company’s liabilities amount to more than 300 billion dollars, and the company has repeatedly warned of a possible default. This example demonstrates very clearly how sensitive the markets have become to bad news. As soon as news surfaced that a large company was about to go bankrupt, there was an immediate micro-panic. Facebook’s stock suffered the most this week, dropping by more than 8%, and Alibaba decreased by nearly 4%.

By the way, Alibaba shares were recently amongst the leaders of price growth but are now gradually becoming a complete outsider. The U-turn began a year ago when there was information about the anti-monopoly investigation of Chinese authorities against the company. Currently, the Internet giant’s shares are moving at an accelerated pace towards $130 per share, which is where we are likely to find support.

Olymp Trade - Alibaba Stock chart - Expert Review 2021.09.27
Pic. 2. Alibaba Stock. 1M TF.

Commodity Markets

Of course, the week’s event is the potential default of China’sChina’s Evergrande Group, which also had an impact on the commodity market, but to a slightly lesser degree.

Beijing is already asking local authorities to prepare for a possible collapse of the company and is likely to inject short-term liquidity into the economy. It will follow the path of the U.S. in 2008 after the collapse of the Lehman Brothers.

The commodities market reacted with a slight drop in the short term, but the potential for danger lies ahead. The real estate sector accounts for about a quarter of China’sChina’s GDP. The government has already announced the privatization of the company. Nevertheless, there will likely be a downturn in the Chinese economy, which will put lasting pressure on the commodity markets, and above all, on oil.

Brent crude oil found support around $72.3 a barrel and soon continued to rise, climbing close to $76. The price is in a mid-term uptrend.

Olymp Trade - Brent Oil chart - Expert Review 2021.09.27
Pic. 3. Brent Oil. 4H T.F.

Natural gas couldn’t quite reach the $6,000 level. The price continues to fall and is likely to return to the $4,200 – $4,300 up trend line as support.

Olymp Trade - Natural Gas chart - Expert Review 2021.09.27
Pic. 4. Natural Gas. 1D TF.

We can expect further upward movement with the arrival of cold weather. This year cold weather is expected to arrive early and very strong. Demand for heating will turn into solid demand for Natural Gas, as usual. However, we’re likely to see this scenario only in a couple of months.

It is also worth remembering that the energy market is interchangeable. Goldman Sachs believes that if natural gas continues to rise, Asian and European consumers will switch to oil because it will be more profitable. In this case of events, approximately 2.0 million additional barrels will be utilized per day.

 

Cryptocurrency Markets

The cryptocurrency market also fell last week. Bitcoin momentarily dropped twice to $40,000. The first-time price recovered to $44,000, where previous support became resistant.

China’s impact drove the second time almost 10% drop. A document from the State Development and Reform Committee of the People’s Republic of China was made publicly available. The ban on mining activities is shown as part of the municipal government’s performance indicator. The document classifies mining as a “liquidated industry” and bans investment in the sector. China continues its current policy of cryptocurrency prohibition.

From a technical point of view, it looks like the price is forming a triangle pattern (marked in red), and in the mid-term, the price can go back to the level of $30,000, which is the strongest support level since the beginning of this year.

Olymp Trade - Bitcoin chart - Expert Review 2021.09.27
Pic. 5. Bitcoin. 1D TF.

The BTC dominance index added 1% over the week and stood at 42%. It will continue to rise, and altcoins will lose strength. The fear and greed index points to fear with a reading of 27. This, in general, is not surprising because the current wave of sell-offs is making all investors nervous.

Risk aversion due to Evergrande also affected the cryptocurrency market. Some long-term holders began to sell BTC in tune with the stock market sell-off. This correlation is not uncommon. We saw a similar situation last March.

Judging by Glassnode’s on-chain metrics, investors who bought cryptocurrencies more than six months ago in the $18,000-31,000 range were mostly selling now. In the meantime, miners are only continuing to increase bitcoin reserves.

Coinbase will propose a crypto sphere regulation project to the U.S. government in the coming months. Coinbase has previously received several complaints from the SEC. The federal regulatory system project, which the Exchange will soon present, should help settle these issues. However, whether it can fundamentally change the situation is unclear – users continue to withdraw funds from all centralized exchanges actively.

 

Conclusion

The looming default of China’s largest real estate developer shook several markets at once and showed the weak correlation between them. The stock and cryptocurrency markets reacted instantly, while the commodities market is likely to suffer the consequences in the mid-term.

One way or another, China is once again putting economic pressure on the global financial system, and one can only hope that the Evergrande default is simply an incident that the PRC authorities will deal with rather than a planned manipulation.

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