Stocks claw back, markets await Fed and Evergrande updates, bitcoin lower

Stocks

The first wave of dip-buying appears is over as investors await clarity over Fed tapering and the fallout from Evergrande’s missed loan payments.  Also providing a boost for sentiment was a rebound in housing starts and strong earnings results from Autozone, which provide some optimism that consumer spending habits were strong last quarter.  The auto parts retailer had strong beats with earnings, revenue, and comparable sales.  Investors however remain nervous that persistent supply chain issues and a labor market shortage will continue to eat at growth over the coming quarters.

No one knows what will happen with Evergrande but many traders were surprised with S&P comments that they don’t expect China’s government to provide support for Evergrande.  S&P noted that the Chinese banking sector could handle a default with no significant disruptions.  Financial markets have Evergrande as the top story and will enter wait-and-see mode until a meaningful update from the Chinese government.  The Evergrande story won’t lead to contagion in the US but there are so many questions about who will be protected once China says ‘enough’ and swoops in.  Will the government only provide support to protect the real estate sector and not foreign investors exposed to the debt default.  The clock is ticking for the government as the embattled Chinese property developer reportedly missed loan payments on Monday and has USD 83.5 million in bond interest due on Thursday.

Fed conducting ethics review

The Fed began their two-day policy meeting, but all the focus is not on tapering of its asset purchases.  Better Markets and Fed Up are two advocacy groups calling for Dallas Fed leader Kaplan and Boston Fed President Rosengren to lose their jobs over all the trading they have done while on the job.  Fed Chair Powell will address concerns over what are the trading/investment guidelines for Fed members.  If the Fed struggles to deal with intensifying scrutiny after their ethics review, the FOMC could lose two of its hawkish members.

This should be an easy FOMC meeting as the delta variant has triggered a soft patch of economic data that will allow the Fed to affirm that tapering will have happen later this year.  Expectations are for the Fed to make a formal taper announcement in November, possibly starting in December at a pace of USD 15 billion per month.  The Fed has constantly been stating that tapering does not start the countdown for rate hikes and they will try to make that clear again.  Rate hike expectations could come as early as November 2022, but the second half of 2023 seems more likely.

Bitcoin

After defending the USD 40,000 level, bitcoin saw selling pressure resume after the Pyth Network oracle’s BTC/USD price had a flash crash that sent prices to USD 5,400.  The Solana-based oracle solution provider’s  bitcoin price feed was disrupted for almost two minutes but once again draws scrutiny and concerns for many traders.  The price crash triggered a wave of stop-loss and has created chaos for one of the smaller crypto platforms.

Despite stabilization across many risky assets such as stocks and commodities, cryptocurrencies are still under pressure for a plethora of reasons.  The biggest cause for concern bitcoin is that the cryptoverse is stuck in a regulatory state of mind.  Sentiment has been deteriorating for Tether and USD coin, both stablecoins that could soon fresh regulation from the Treasury, SEC, and Congress.

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