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Contagion Fears Squeeze Pre-Market Futures

Monday, September 20, 2021

We wake up to start a new trading week faced with clear and present challenges: markets are down across the board on more negative investing news from China. A real estate developer there called Evergrande looks to be on the brink of insolvency, with a debt payment due in the coming days now expected to be missed. This hit the company’s stock -15%, but more importantly took down the Hang Seng index as much as -4%. Shanghai’s market was closed for holiday Monday.

The contagion was immediate, hitting the European markets from -1.7% (British FTSE 100) to -2.4% (German DAX 30). This brings us to the Dow, which had been down around 675 points, more than 2% from already depleted levels of late, with the S&P 500 and Nasdaq also down near -2%. A half-hour before the opening bell, the sell-off fever has cooled somewhat, but still around -1.9% on the Dow.

Worse, there look to be very few places to hide: both Bitcoin and Ethereum had sold off -10%, though these also have abated 100-120 basis points, while WTI crude oil prices lost -2% in today’s pre-market thus far as well. Only gold investment — that historic safe harbor for investment — was up +0.5% in today’s pre-market. U.S. equities have dropped -3% for companies as vast as Goldman Sachs GS and Caterpillar CAT.

The Chinese government has made many tightening advances within their financial markets, going back more than a year to when Alibaba’s BABA Jack Ma was publicly reprimanded. China’s cracking down on risk-taking in general has led us to our current point, which is where the government is expected to let Evergrande, one of the biggest real estate companies in the world, to fail. It’s rattling global market investment confidence.

The good news? That’s ALL this appears to be. Should we be heavily invested in Chinese stocks and companies heavily reliant on China remaining an open market to the rest of the world, yes — there is real cause for concern. But while post-Covid economies elsewhere continue to bounce back and begin to sift through our supply-demand challenges, there has to be a floor to this sell-off (but where?). The overall global economy is just too strong right now.

Speaking of post-Covid, this morning brought positive news from Pfizer PFE and BioNTech BNTX, which demonstrated its Covid vaccine is “safe and well-tolerated” among children aged 5-11. This should go a long way to assuaging fears of parents with younger kids in school. Emergency use authorization is being sought as soon as possible. And overall vaccination rates in the U.S. are rising on public and private company mandates.

So far, buying the September dips have not paid off. Obviously. However, as we had been reaching new closing highs repeatedly through much of late summer trading, our current market does look like it’s holding a widespread sale. It’s difficult to know what’s going on in the minds of the Chinese market authorities, but for those great American companies less reliant on the Chinese economy, it may be a good time to bring out our wish-list.

Of course, if things like the debt ceiling and infrastructure package here at home hit snags, this will add to the wall of worry China has already constructed for us. These would amount to unforced errors — the U.S. has a real opportunity right now to strengthen our relationships with our global trading partners while China takes stock of its own affairs.

But let’s not confuse such things with ”contagion.” Unlike Covid, present economic difficulties related to China do not need to inevitably spread worldwide to the same extent.

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