We warned in the Monday email that a “nasty sell off” awaited investors on the ASX yesterday, but it was nastier than forecast and perhaps overdone in places.
The ASX lost 2.1% or 155.5 points yesterday as reality finally caught up with all those dreamers about iron ore.
But that in turn saw the solid copper, nickel, lithium, led and zinc sectors torn down as well as investors simply forgot the continuing strength of renewables and sold everything.
The current strong demand for these commodities will continue despite the slide in the price of iron ore shares and skittishness of investors.
The ASX 200 finished at 7248.2 after all sectors except utilities spent the day in the red and utilities only rose because of the $A9 billion plus agreed non-binding bid for AusNet by Brookfield, a big Canadian/US fund manager.
The materials sector lost 3.7% for the session as the country’s biggest miners struggled.
Readers of ShareCafe have been kept abreast of the slump in iron ore prices since June and especially since August. It is not new news and prices will no doubt fall back under $US100 a tonne for benchmark 62% Fe Fines which is where the price spent most of the past few years (except for a spurt upwards in 2019 after the second Brazilian dam disaster in January of that year.
The price jumped to record levels in March and then slowly retreated until the selling grew more pronounced in August and became a rout last week.
Much of the commentary in Australia on Monday gave the impression the weakness in iron ore prices was somehow new news. It isn’t.
And why? The reasons have been around for a while. There’s the overbought and not too transparent market for iron ore as iron ore supplies slowly pick up. Then there’s attempt by the Chinese government to force down iron ore prices, and prices of other metals and oil which has backfired, as has the campaign to cut carbon emissions ahead of the Glasgow climate change meeting in November and then the Winter Olympics next February.
Both measures have crashed demand and production of steel, aluminium and other metals and the sales out of its strategic reserve have been swallowed up with little impact on prices.
The latest data from China shows the economy is drifting in a slight contraction as production growth slows and retail sales and investment remains sluggish.
Then there’s the slow collapse of Evergrande, China’s biggest property company with a reported $US305 billion in debt.
Evergrande shares fell to an all-time low of $HK2.06 on Monday morning but struggled back to around $HK 2.23 in late afternoon dealings. The Hong Kong market was down 3.5% but the Shanghai market was up 0.2%, helped by some strategic buying, according to western brokers,
European markets were down and early futures trading on Wall Street showed a lot of red.
That has drawn attention to the weakening property sector and falling steel consumption – there is simply too many unfilled apartment blocks or blocks uncompleted by developers.
BHP finished the session 4.2% lower to $37.53 while Fortescue extended its losses from Friday to finish down 3.7% to $14.70 and Rio Tinto ended 3.6% lower to $95.24.
Last Friday, Fortescue shares fell 11.5% for the session while Rio Tinto finished the day 4.7% lower and BHP lost 3.4%.
For last week BHP shares were down 5%, Rio shares lost 7%, Fortescue shares shed a huge 16% and shares in the big Brazilian shipper.
All of which means that the Fed’s post-meeting statement early Thursday morning Sydney time and post-meeting forecasts and interest rate Dot Plot have suddenly taken on vastly more significance.
Traders, economists, media and lots of others pore over the statement to see what changes have been made and what they mean for US monetary policy, especially now as it is clear the central bank is starting to think harder about some slight tightening.
The Dot Plot – which shows where fed members think rates will be in the near and medium term – is examined to see if there’s a “rate rise looms” line between the dots. Sometime there is; mostly (lately) there isn’t.
Normally the Fed would expect a bond market taper tantrum if it reveals changes to the wording of when it might start reining in its quantitative easing, or the so-called dot plot issued after the meeting and whether the latest economic forecasts are a sign the Fed’s policy members have brought forward their first rate rise forecast to 2022.
But with stricken Chinese property developer Evergrande tottering after another sell off in Hong Kong, taking with it the share prices of other China property companies and bank stocks – and helping rattle the ASX in Australia on Monday with a 155-point slump – it’s not an exaggeration to say the Fed holds the fate of Evergrande, along much of the Chinese financial system, in its hands this week.
If the Fed was to hint at a change in monetary policy, that will see a slide in markets, jump in interest rates, a bit of crazed chaos for a while and probably trigger a slump in the Hong Kong and Chinese stockmarkets on Thursday in an imitation of the collapse of Lehman Brothers in September 2008.
A Fed statement hinting at higher interest rates – even if it is next year – or suggesting the QE bond buying will start being wound back at the end of this year, all of which have been confidently forecast by many in US and other markets, could cut Evergrande off from any sort of cheap cash or an orderly bailout and running down of its assets by the Chinese government.
If the wording of the Fed’s statement did trigger a selloff, however brief, it would allow China’s President Xi Jinping off the hook – after all he has been widely reported as wanting to ‘punish’ indebted companies and their investors and creditors.
If the Fed signals changes and Evergrande tips over, Xi Jinping will blame the Fed and blame the Biden administration – he doesn’t want to show any understanding of differences in the way US monetary policy is run independent of the government, unlike in China. It doesn’t suit President Xi to show any understanding and would allow him to escape any blame (of which there is a lot in China to go around for allowing the Evergrande debacle to get to where it is now) for any crisis.
Figures reported by Bloomberg and Reuters show that Evergrande’s financial position is worse than previously thought.
Bloomberg reported that Evergrande was due to pay interest on bank loans Monday, with a one-day grace period.
Seeing yesterday and today are public holidays in China, that could give the company an extra day or three, taking the repayments to Thursday when the $US83.5 million interest payment is due. There is a 30-day grace period, according to Bloomberg, so that could kick the can into October when millions more in interest payments are due.
Bloomberg said that Evergrande needs to pay a 232-million-yuan ($US36 million) interest repayment on an onshore bond on Thursday as well.
In total, Bloomberg estimates Evergrande has $US669 million in coupon payments coming due through the end of this year. Some $US615 million of that is on dollar bonds,
Fitch Ratings flagged the increased chance of a payment failure this month when it slashed the firm’s credit grade even deeper into junk territory, citing the risk of “probable” default.