Relief rally on Evergrande, but China continues to worry

After a sharp fall at the beginning of last week, the S&P 500 and most other stock indices recovered on Thursday and Friday 23-24 September. Global stock markets rebounded following news on Wednesday 22 September that Evergrande had settled with investors over one of the company's bond loans. Support from the Chinese central bank of 110 billion yuan helped, of course. Since Evergrande is China's second-largest property developer, renegotiations on other loans are likely to follow.

Since the stock market turmoil started on 6 September, the S&P500 index fell by a maximum of 4.0 percent. By Friday, more than half of that decline had been recovered as the S&P500 was 1.8 percent lower than on 6 September. The German DAX index and the Swedish OMX30 index were at their lowest, down 5.0 and 5.6 percent respectively, before recovering to minus 2.5 and minus 3.9 percent on Friday 24 September from their peak on 6 September.  The Shanghai stock exchange, on the other hand, where the Evergrande problem obviously received more attention in the past, peaked a week later than the Western stock exchanges, on 13 September, and is now 2.8 percent lower than that.

Two conclusions can be drawn from this. First, that European (DAX and OMX30) stock indices, through their companies' relatively larger sales exposure to Asia, are somewhat more sensitive to a credit crisis in China than the New York Stock Exchange. Secondly, that European and US investors became aware of the situation for Evergrande surprisingly late. Reports from China in the financial markets are not fully in line with the country's economic strength today.

Over three months, the S&P 500 has risen by 4.1 percent, the OMX30 by 2.3 percent and the SSEC (Shanghai) by 0.2 percent. The DAX, on the other hand, is 0.66 percent lower than it was a quarter ago. For now, this can be seen as a minor rebound in equity markets. But the negative impact on other more speculative financial instruments like Bitcoin has been greater, as we show later. So risk appetite may have been slightly dented by what happened.

One level left to the previous top in S&P 500

From a technical point of view, S&P 500 closed Friday’s trading back above MA50 as well as a short falling trendline. Those are clear positive signs. The next level on the upside is MA20, just below the 4 475-level. In case of a break, the outlook is good for the previous top to be tested.

S&P 500, February 22d to September 24th, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly five-year graph below, one can see how the index was down below MA20 but bounced nicely to close to its weekly high above EMA9:

S&P 500, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Nasdaq closed the gap

Nasdaq recovered the short rising trend-channel as well as MA50 and EMA9. The gap can be considered closed with little margin. MA20, just above 15 440, is again the next level on the upside before the previous top can be tested.

Nasdaq 100, graph from February 22d to September 24th, 2021

Source: Refinitiv Eikon and Carlsquare

Below is the five-year weekly graph. MA20 held after being tested as well as the index closed above EMA9. The negative divergence between the index and MACD remains:

Nasdaq, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

OMXS30 still trading in a short falling trend

Swedish OMXS30 did not manage to trade up and recover MA20, nor the short falling trendline. However, the US trading was strong during the last trading hours on Friday. Perhaps there is some catch-up to be done.

OMXS30, graph from February 22d to September 24th, 2021

Source: Refinitiv Eikon and Carlsquare

Scary signs can be seen in the five-year weekly graph as the index did not manage to recover MA20, nor the rising trendline. A doji was created implying a high uncertainty. Again, some catch-up may be in the cards given the strong last trading hours on Friday 24 September in the US.

OMXS30, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

High gap risk in DAX

The trading in DAX has been choppy with high realized gap risk. As shown in the graph below, DAX did not manage to recover MA20 nor the short falling trend or MA100. Momentum is falling as shown by MACD.

DAX, February 22d to September 24th, 2021

Source: Refinitiv Eikon and Carlsquare

Even though MACD is positive, one can see the declining momentum even in the five-year weekly graph below. EMA9 and MA20 is falling:

DAX, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

In summary, there may be some catch-up to be done in the European stock indices. The technical looks much better in the US stock market.

Last week we listened to a presentation on the Swedish housing and villa market. The speaker, representing a real estate brokerage firm, evaluated the firm's forecasts and concluded that they had got it right on all but one of the seven property price drivers such as demographics, new construction, etc., and that was the interest rate level. They could not have imagined that interest rates could stay this low for so long and at the same time as the economy is booming.

The trend towards a lower interest rate level is illustrated by the graph below of the 10-year US Treasury bond yield. The prolonged decline in interest rates has resulted in the P/E ratio for the S&P500-index now standing at 20.8x. This is 27 percent higher than the 10-year average P/E of 16.4x.

US 10y Government Bond Yield, 20-years graph

Source: Refinitiv Eikon and Carlsquare

It is not surprising that loan growth increases for individuals, companies, and governments alike under such conditions. But it is also not surprising that the risk of credit crunches is increasing in the wake of strong loan growth. It is also perhaps, if one is allowed to be conspiratorial, the most important reason for central banks to try to keep interest rates low for as long as possible - to reduce the risk of credit losses for banks to the fullest extent possible.

Acquisition-intensive companies with the business idea of expanding through purchase of companies at low p/e multiples and then arbitraging against low interest costs on the loan have often performed very strongly on the stock market in recent years. A key component for this to work is continued low interest rates. It has also become increasingly difficult to buy companies cheaply enough, due to the prolonged low interest rate environment. The arbitrage gap has simply narrowed.

US 6-month and 5-year Treasury yields are currently traded at 0.1 and 0.9 percent. Even if one accepts the central banks' thesis that today's inflation rate is transitory and instead takes an annual average of the inflation rate over the period August 2020 to August 2021 which lands at 2.9 percent, this means that the US currently has a negative real interest rate of 2.0 to 2.5 percent. The prospects for continued rising asset prices in such an environment are of course excellent.

US inflation rate each month on an annual basis, from August 2020 to August 2021

Source: Statista.

Low interest rates are good for the current value of growth, Tesla is an example

A low interest lowers the WACC (Weighted Average Cost of Capital) or discount rate used in various valuation cash flow models. Changes to the discount rate will affect growth companies to a larger extent than mature companies. Tesla is an example that is largely affected by changes in interest rate. Falling interest rates would be good news, rising would be bad news.

As shown in the graph below, the Tesla share finished last week strong rising 2.8 percent on Friday 24 September. Resistance can be found at this level. In case of a break to the upside, the ceiling of the rising trend channel may be next.

Tesla, February 22d to September 24th, 2021

Source: Refinitiv Eikon and Carlsquare

Another resistance around 780 USD can be found in the weekly five-year graph below. Note how MACD is rising:

Tesla, weekly five-year share price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Microsoft is less exposed to changes in interest rates

Even though Microsoft is expected to grow strongly, a larger part of the value of the company is ascribed to the few upcoming years. This means that Microsoft is less sensitive to changes in interest rates than Tesla where most of the current value is attributed to expectation in the far future.

As shown in the graph below, the Microsoft stock managed to bounce of MA50 during last week. However, it did not manage to retake MA20. This under falling momentum since the end of August as illustrated by MACD:

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, Microsoft still looks strong as it is trading above rising EMA9 and MA20. However, note how MACD is close to generating a weak sell signal:

Microsoft, weekly five-year share sprice graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Bitcoin price falls after banning from China, but also linked to Evergrande

China's government continues to influence capital markets with its regulations. On Friday 24 September the People’s Bank of China said in a Q&A session that the use of Bitcoin was illegal and so was Bitcoin on foreign exchanges. The country's financial institutions and payment companies will be monitored in this regard.

The Bitcoin price fell 5 percent on the news. Producing Bitcoin through mining is an energy-intensive process. As a result, companies involved in this process have moved their equipment overseas. But as in the case of decreasing debt leverage for domestic property companies thereby affecting Evergrande, the Chinese government's crackdown on Bitcoin has been going on for a while. Bans on the use of Bitcoin have already been handed out to individual companies. In July there was a case when a software company was forced to shut down. The price of Bitcoin has fallen about 20 percent since Evergrande came on the news radar for US and European investors on September 6.

From a technical point of view, Bitcoin has managed to bounce from MA100 but seems to be struggling with retaking Fibonacci 50. This along with a cluster of moving averages need to be broken before Fibonacci 61.8 can be tested. Risk seems to be on the downside, as a break below MA100 opens up for further downside to levels right above the 36 000-level:

Bitcoin, Price graph from February 22d to September 24th, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, Microsoft still looks strong as it is trading above rising EMA9 and MA20. However, note how MACD is close to generating a weak sell signal:

Bitcoin, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

EUR/USD under pressure close to a support

The currency pair EUR/USD is under pressure partially explained by the USD serving as an asset of a safe haven in the wake of the credit crisis for Evergrande. MACD is also negative and falling.

EUR/USD, Graph from February 22d to September 24th, 2021

Source: Refinitiv Eikon and Carlsquare

Support can also be found in the weekly graph:

EUR/USD, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Full name for abbreviations used in previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MACD: Moving average convergence divergence