Morning Reads

Morning Reads

Todays Open Interest Change



Contagion risk

The world's second-largest economy is in a predicament and the property market stands at the heart of its troubles. Construction accounts for as much as a quarter of China's gross domestic product, but real estate reverberations are shaking up confidence and many are afraid about knock-on effects on the overall economy. Housing sales, prices and investment are falling, while a deflationary spiral threatens to fuel an even bigger disaster for a country that just experienced three years of strict zero-COVID controls.

The latest: The world's most indebted property developer, China Evergrande (OTC:EGRNF), just filed for protection under Chapter 15 of the U.S. bankruptcy code, which shields non-U.S. companies that are undergoing restructuring from creditors. Evergrande already slipped into a liquidity crisis in 2021 following government efforts to curb speculation in the sector, and currently has around $300B in liabilities. Another Chinese developer, Country Garden (OTCPK:CTRYF), has also been in the spotlight after missing dollar-denominated debt payments, but the bigger fear here is that the property crisis may be expanding from the private sector to companies with state backing.

Meanwhile, China's central bank has stepped up to defend its currency following the latest series of weak economic data releases. The midpoint on the onshore yuan was set at 7.2006 against the dollar overnight, while the Hang Seng benchmark index (HSI) closed in bear market territory, more than 20% below its last highs in January. Problems in China might also be leading to flight-to-safety trades, with the yield on the benchmark 10-year U.S. Treasury this week surging to its highest level since 2007.

Lost decade? The People's Bank of China has been cutting interest rates - and there has been talk about tax breaks and incentives - but many of those stimulus measures helped fuel China's rapid expansion and the real estate bubble in the first place. There are also structural issues at play, such as slowing urbanization and a shrinking population, meaning policymakers might have to prepare for an extended period of weaker growth. A "go big or go home" strategy might be the only way out of the cycle, with the government absorbing soured assets, but that could also be a challenge given deflationary risks and whether it would go far enough to restore investor confidence. (7 comments)

Borrowing costs

30-year fixed-rate mortgages topped 7% this week, according to the Freddie Mac Primary Mortgage Survey, marking the highest level seen in more than 20 years. "The economy continues to do better than expected and the 10-year Treasury yield (US10Y) has moved up, causing mortgage rates to climb," said Sam Khater, chief economist at Freddie Mac. "Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales." Bankrate's Jeff Ostrowski also noted that home sales have fallen sharply since 2021, with many homeowners who have already locked into super-low mortgage rates deciding to stay put. (21 comments)

Rowdy guests

A new crackdown from Airbnb (ABNB) has led to a comprehensive list of ground rules that aim to ensure travelers treat hosts and their homes with respect. While Airbnb said the majority of guests are already considerate, the guidance aims to help guests make use of their hosts' constructive feedback and avoid serious issues in the future. Analysts previously suggested that Airbnb should sharpen its anti-party policies to attract more home rental supply. SA analyst Bradley Guichard in March highlighted that the largest hurdle to hosting is fear of damage, which could scare off hosts and cost Airbnb dearly. (21 comments)

Retail wrap

Investors digested a slew of big-box retailer earnings this week, capped off by industry heavyweight Walmart (WMT). Despite a set of strong results, shares of the latter declined as U.S. comparable store sales growth slowed and management struck a cautious tone on consumer spending. On the other hand, Target (TGT) and Home Depot (HD) advanced following profit beats, but both retailers expressed caution about continued weakness in big-ticket items. “The warnings by corporate executives are well placed,” said Lawrence Werther, chief U.S. economist at Daiwa Capital, given pressures on shoppers' wallets including student loan payment resumption and tightening lending standards. The biggest stock jump this week was recorded at discount retail chain TJX (TJX), which witnessed increased customer traffic as shoppers hunt for better deals. (6 comments)

Today's Markets

In Asia, Japan -0.6%. Hong Kong -2.1%. China -1%. India -0.3%.
In Europe, at midday, London -0.8%. Paris -0.8%. Frankfurt -0.7%.
Futures at 7:00, Dow -0.2%. S&P -0.2%. Nasdaq -0.4%. Crude -0.1% to $79.80. Gold +0.4% to $1,923.50. Bitcoin -7.2% to $26,440.
Ten-year Treasury Yield -8 bps to 4.23%.

Today's Economic Calendar

10:00 Quarterly Services Survey
1:00 PM Baker Hughes Rig Count

Companies reporting earnings today »

What else is happening...

U.S. to impose tariffs on tin mill steel imports from three countries.

Credit card delinquencies climb to prepandemic levels in July.

CVS Health (CVS) says no near-term impact from PBM contract loss.

After two years of losses, Elon Musk's SpaceX finally turns a profit.

Warren Buffett donates $27M in Berkshire (BRK.B) shares to charity.

Microsoft (MSFT) will close Xbox 360's online store in July 2024.

Hawaiian Electric (HE) knew of wildfire threat, but waited years to act.

Applied Materials (AMAT) jumps as results, outlook blow past estimates.

Grocery delivery firm Instacart (ICART) eyes IPO as soon as next month.

U.S. Steel (X): Union can't block deal that may result from strategic review.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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