Key points to remember:
- Fed announcement takes center stage as Evergrande fears subside
- Key technical levels could make life difficult for bulls
- Despite the news of Evergrande, real estate is strengthening
Stocks look set to open higher on Wednesday ahead of the Fed’s announcement. However, interest rates are not expected to change. Instead, investors will likely be looking for signals of a delay in reduction plans. Currently, the feeling is that the risk of Evergrande becoming a “Lehman-type event” for China is unlikely and will not affect the Fed’s plans.
Evergrande assured investors on Wednesday that he would pay the interest on time. Although the Wall Street Journal reported that the company is still expected to miss a separate payment due to international investors. Investors seem to expect the Chinese government to step in to avoid any negative ripple effects that the Evergrande situation may cause.
The United States has its own problems with government funding. The U.S. House of Representatives passed a bill to raise the debt ceiling that would fund the government until December 3. However, it is not clear whether the bill will go through the Senate. Republicans have their own plan to fund the government without raising the debt ceiling, but it fails to make its way outside the minority party. Democrats don’t need Republicans to pass the bill because of their majority. The problem is, the progressive wing of the Democratic Party does not want to pass the bill without passing the infrastructure bill that moderate Democrats have blocked.
After today’s Fed meeting, Evergrande and the debit cap will give investors something to “look forward to”. Unfortunately, it will likely be with conflicting information.
America’s tech companies certainly don’t need government help buying real estate, because they are overflowing with money. Despite the expectation of a hybrid workspace where workers can split their time between office and home, Alphabet (GOOGL) Google
First in business in the world
General Mills Cereal Maker
After the market opens, investors will have the opportunity to digest existing home sales and crude oil inventories. Crude Oil (/ CL) climbed nearly 1.5% overnight before the report. The real estate industry will also hear from home builder KB Homes
Tuesday also saw a handful of news from all markets. DraftKings (DKNG) has made a $ 20 billion cash and stock offer to buy global competitor Entain (GMVHF). DraftKings is the number one gaming site in the United States and Entain is the number one in Europe. The merger could create a huge online gaming site.
In the income news, a few common themes emerge, Lennar
In the battle against COVID, Johnson & Johnson
Resumption Tuesday? : Tuesday started in the positive but was pulled down as buyers appeared to run out. Turnaround Tuesday refers to an observation made by the Bespoke Investment Group which revealed that Tuesday after a Monday selloff tended to return 1.02% for the S&P 500. Between 2009 and 2019, they found that the week after a massive sell-off on Monday returned an average of 3.16% 17 out of 18 times.
However, a lot is weighing on stocks including what some analysts say is a long overdue correction, uncertainty surrounding China’s central planning guidelines, the potential Fed cut, higher inflation, and more. The S&P 500 may need one or more Tuesdays to effect the rally.
Become real: While Chinese real estate is struggling, US real estate appears to be holding up. While stocks sold on Monday, the Real Estate Select Sector Index (IXRE) performed relatively well relative to other sectors, trading just over 1% below. In fact, it was only outperformed by benchmark defensive utilities. At the same time, the sector has shown relative strength against the S&P 500 over the past six months. Only the technology sector was higher.
Elsewhere in real estate, home builders appear to be doing well despite a recent massive sell-off. The S&P Homebuilders Select Industry Index ($ SPSIHO) is only 6% off its all-time high and reported a slight increase in building permits in August. It was largely collective housing. According to MarketWatch, home builders have focused on higher margin homes like multi-family homes and luxury homes. With the high cost of building materials stemming from the disruption of the supply chain, the change makes sense, even if it may leave future middle-class homeowners in dire straits.
Chinese puzzle box: China is becoming a bigger headache for many investors. The country has produced stocks that have performed well over the years, but many of them appear to have come out of the best. Recently, the Chinese government has looked into various sectors including education, technology, gaming, gambling and now real estate. Because real estate is a much larger part of the Chinese economy, recent developments are of particular interest to investors.
The Washington Post recently reported that Chinese President Xi Jinping recently focused on “common prosperity” as he struggled to figure out what to do with the growing wealth gap between Chinese billionaires and the Chinese people. The rising cost of food and shelter is likely to make it difficult for low-income people in China. Yet increased regulation, taxes and shared benefits could slow economic growth.
As you can see, there is a lot to be discovered as China faces its growing pains.
TD Ameritrade® commentary for educational purposes only. SIPC member.