Sentiment took a turn for the worse in the US session as the S&P 500 broke below the 4350 support level to close over a percentage point lower on the day. All sectors were in the red and only 8% of the index constituents were higher on the day. HY spreads widened too and govt debt yields were lower as Treasuries were bid. The 10Y was back at 1.5% with the curve flattening overall. The US dollar was softer with JPY and CHF gaining on the day in more signs of risk aversion. The volume of reserves parked in overnight repos hit another all-time high at USD 1.6tn as liquidity in the system remained high into the quarter-end. Commodities belied the dip in risk appetite with the entire precious metals complex was in the green - Gold broke above the 1750 level once again. Crypto was bid too with Bitcoin and Ethereum gaining over 5% on the session.
The mood in Asia and Europe earlier was far more positive. Owing to the PBoC injecting another CNY 40 bn into the banking system to help ease liquidity concerns into quarter-end. This helped reverse the prior day's 100 bps move higher in China's 7D repo rate by 73 bps - indicative of smoother functioning of funding markets. Evergrande continues to remain top of mind for investors with the state still limiting itself to behind-the-scenes encouragement for the banking sector to support the distressed real estate names. Evergrande did use part of the proceeds from its asset sales to pay back some of the money owed on its wealth management products marketed to the retail base in China. China and HK are closed today for National Day, with China opening up again only next Friday (8 Oct).The US brinksmanship around the debt ceiling got pushed out down the road as Biden signed a bill ensuring no govt shutdown until Dec 3. Warnings continue from both sides about a default with Yellen and Powell weighing in on the matter too. A vote on the USD 550bn infra bill may happen as soon as today in the House - where the opposition is coming from the progressive wing of the Dems, on concerns that the bill doesn't go far enough. They would like to USD 3.5tn budget to be cleared by the Reps first, for which there is very limited appetite. Given this is a landmark legislation for Biden's term so far, an intraparty compromise is most likely here. Ahead today, we also have Manufacturing PMIs around the globe as we kick off a new month (with the US ISM headlining) and inflation data out of Europe
October 1, 2021
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