At the time of writing, the tech-heavy Nasdaq 100 index was seen slightly below the critical 50-day moving average (15,190 USD). Closing below that level could change the short-term outlook to bearish.
Evergrande sends ripples through the financial world
The Chinese real estate giant Evergrande will likely default this week, possibly causing some tremors in the financial markets as several US banks have significant exposure against Evergrande and the whole sector in China.
The company is scheduled to pay 83.5 million USD of interest on September 23 for its offshore March 2022 bond. Then, it has another 47.5 million USD interest payment due on September 29 for March 2024 bonds.
However, Evergrande is scheduled to pay interest on bank loans Monday, with a one-day grace period. In other words, should it fail to arrange an extension of today’s payments, it could be in technical default as soon as Tuesday.
Nevertheless, Evergrande should not cause another Lehman effect, even if it goes to bankruptcy. The company has more than 300 billion USD in debt, but the systemic risk should be limited. The fall of Evergrande may also affect the business’ ability to finance and issue bonds, thus bringing further chaos to China’s real estate market and another “Lehman storm.”
“However, unlike the US market in 2007 to 2008, China’s does not have too many complicated financial products that can affect housing market operations and Beijing’s ability to control and monitor the market is better than the United States,”
There are no macro data on the agenda later in the session. Thus the current bearish sentiment might persist throughout the day.
Typically, when the market is in decline, several FOMC members start delivering speeches to calm investors. We expect similar behavior during this week if sentiment does not improve soon. Especially as the Fed decides about monetary policy this week, with the results known on late Wednesday.
Bulls need to make a move right now
The index is currently testing the key support area – the 50-day average converged with previous highs near 15,170 USD. If the price drops below 15,170 USD and closes there on a daily basis, it could mean a notable reversal in the current medium-term trend.
In such a case, stop-losses of long positions will be hit, possibly dragging the index further lower. As a result, the next target for bears is expected at August lows near 14,800 USD.
Alternatively, if bulls reappear, they need to push the index above the short-term downtrend line, which is currently near 15,400 USD, to cancel the immediate bearish momentum. Until that happens, the short-term outlook appears bearish.