China property crisis

The possibility of China property company Evergrande collapsing and overall worries about China's crackdown on indebted firms is taking its toll on Hong Kong shares. The Hang Seng Index (HSI) is down more than 3% with China and Japan closed for a holiday. The benchmark index hit an 11-month low earlier, with the index tracking construction and property off more than 6%. Evergrande (OTCPK:EGRNF) (OTCPK:EGRNY) is down more than 11% today and has fallen more than 80% this year as it struggles to meet debt payments. The company has more than $300B in debt and has warned about default. It has an $83.5M interest payment due on Thursday for a March 2022 bond, according to Reuters.

Domino effect: A collapse of Evergrande would have a domino effect on other China and Hong Kong property developers and a systemic effect on the rest of the economy, according to Jenny Zeng, co-head of Asia fixed income at AllianceBernstein.

“In the offshore dollar market, there is a considerable large portion of developers (who) are implied to be highly distressed,” Zeng said on CNBC. Developers “can’t survive much longer” if the refinancing channel continues to be shut. But she played down the possibility of Evergrande being akin to the collapse of Lehman Bros., noting the fragmentation of the China property market.

“Despite Evergrande’s size, we all know it is the largest developer in China, probably the largest in the world, (the company) still accounts for only 4% and now it’s even less of the total annual sales market,” Zeng says. “The debt, particularly the onshore debt, is well collateralized.”

Regulatory crackdown: Along with Evergrande, pressure is on the Hong Kong market as China's leaders look to rein in what it calls monopoly behavior, much like it has taken aim at the tech sector. But also like the moves against big tech companies, the exact actions the government will take are unclear. It is part of President Xi Jinping's "common prosperity" plan to address inequality.

“People may be worried about whether they have to take up extra responsibility to build more subsidized housing,” Philip Tse, head of Hong Kong and China property research at BOCOM International, says, according to Bloomberg. "Foreign investors will be concerned if administrative matters in China will lead to a price cap, more stringent purchasing limits, or some tax-payment proof is required in order to pay for buying a flat.”

“The price action across several asset classes in Asia today is horrendous due to rising fears over Evergrande and a few other issues, but it could be an overreaction due to all of the market closures in the region,” Brian Quartarolo, portfolio manager at Pilgrim Partners Asia, says. (4 comments)

IPO arrivals

FTSE Russell has added a record 62 recent IPOs to its popular Russell 2000 index, which could boost stocks like Krispy Kreme (NASDAQ:DNUT) and Flywire (NASDAQ:FLYW) as early as Monday because index funds will have to buy some shares.

“A rising tide lifts all boats, so it's not surprising that the continued influx of capital into the stock market has pushed up valuations for IPO companies, lifting more of them into the index at an earlier stage,” said Donovan Jones, a Seeking Alpha contributor who follows initial public offerings.

The Russell 2000 tracks 2,000 of the market’s small-cap stocks, making it the basis for popular small-cap index funds like the iShares Russell 2000 ETF (NYSEARCA:IWM). Because small-cap stocks are typically more volatile and riskier than large-cap stocks, investors expect bigger rewards from them. As a result, IWM frequently outperforms the large-cap SPDR S&P (NYSEARCA:SPY), as has happened over the past year. (1 comment)

Streaming pause

Streaming's share of television viewing, inching forward steadily in recent months, has taken a pause to go back to school. Three months of growth in streaming share turned flat in August, according to "The Gauge" from Nielsen, its monthly macro look at TV delivery platforms.

And there's a definitive back-to-school effect, as streaming share was flat at 28% but with a more pronounced drop in viewership among children aged 6-17 (down 7.5% from July).

Broadcast, which had bounced back from steady declines last month to touch 24% (with the help of live sports timing), was also flat, as was cable (which had taken a step back last month to land at 38%, still the leading option but in secular decline). (6 comments)

Dot plot coming

The Federal Reserve meets on Tuesday and Wednesday this week to discuss monetary policy. The central bank has already said they're not planning to start reducing asset purchases yet - the much-discussed taper. In addition, Fed Chairman Jerome Powell has explicitly said the Fed won't raise rates until well after tapering of its asset purchases starts.

Still, investors will be looking for hints of when the central bank will ease off the gas that it's been providing since the start of the pandemic. Economists surveyed by Bloomberg expect the Fed to make a formal announcement on reducing its purchases of Treasurys and mortgage-backed securities at the end of the November meeting.

Two-thirds of the 52 economists surveyed expect a November announcement, with more than half expecting the Fed to start the taper in December. As a reminder, the Fed is currently purchasing $80B of Treasurys and $40B of MBS per month.

At least five of the 12 Fed district bank presidents expect tapering to start this year, in comments they've publicly made starting in late August. Earlier this month, Atlanta Fed President Raphael Bostic said he expects the Fed to reduce its pace of asset purchases this year, but not this month. (36 comments)

Monster reallocation

Cash poured into equities this past week and out of money market funds. Capital outflows from money market funds were $45.3B, the biggest of the year according to Refinitiv Lipper.

The market is seeing a "monster reallocation cash-to-stocks as tax redistribution threat recedes & Fed expected to remain Wall St-friendly (liquidity easiest since Jul’07)," Michael Hartnett, BofA chief investment strategist, wrote in the "Flow Show" note on Friday.

There was the largest inflow into U.S. large-cap funds ever at $28.3B. U.S. growth funds saw inflows of $6.9B, small-cap funds had inflows of $4.2B, with $1.6B to U.S. value. Among large-caps, tech had its 12th week of inflows and the most since March. (18 comments)

Today's Markets

In Asia, Japan Closed. Hong Kong -3.4%. China Closed. India -0.4%.
In Europe, at midday, London -1.4%. Paris -2.1%. Frankfurt -2.1%.
Futures at 6:20, Dow -1.4%. S&P -1.2%. Nasdaq -1.4%. Crude -1.8% at $70.55. Gold +0.3% at $1756. Bitcoin -6.6% at $45077.
Ten-year Treasury Yield -3.6 bps to 1.334%

Today's Economic Calendar

10:00 NAHB Housing Market Index

Companies reporting earnings today »

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