Heading Up: Wall Street Up Early as Fed and Question of Tapering Pushes Aside Fears of Evergrande’s Default

Fears of Evergrande sparking bigger problems have subsided while investors focus on the Fed. Real estate continues to be a strong economic driver as Google plans to buy another New York office building. REITs continue to exhibit relative strength, but homebuilders are struggling with supply line issues.

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Key Takeaways

  • The Fed announcement is in focus as Evergrande fears subside  
  • Key technical levels could make life hard on the bulls 

  • Despite the news on Evergrande, real estate is showing strength

(Wednesday Market Open) Stocks appear set to open higher on Wednesday ahead of the Fed announcement. However, there’s no expectation that interest rates will change. Instead, investors will likelybe looking for any signals of a delay in tapering plans. Currently the feeling is that the risk of Evergrande becoming a “Lehman-type event” for China is unlikely and won’t affect the Fed’s plans.

Evergrande assured investors on Wednesday that it would make an interest payment on time. Although the Wall Street Journal reported that the company is still expected to miss a separate payment due to international investors. Investors appear to have an expectation that the Chinese government will step in to stave off any negative ripple effects that the Evergrande situation could cause.

The U.S. has its own government funding issues. The U.S. House of Representatives passed a bill to raise the debt ceiling that would fund the government until December 3. However, it’s unclear if the bill will make it through the Senate. Republicans have their own plan to fund the government without raising the debt ceiling, but it’s failing to make traction outside of the minority party. Democrats don’t need Republicans to pass the bill because of their majority. The problem is that the progressive wing of the Democrat party doesn’t want to pass the bill without passing the infrastructure bill that moderate Democrats have stalled.

 After today’s Fed meeting, Evergrande and the debt ceiling will give investors something to “look forward” to.  Unfortunately, it will likely be with contradictory information.

 U.S. tech companies certainly don’t need government help to buy real estate because they’re flush with cash. Despite the expectation for a hybrid workspace where workers may split time between the office and home, Alphabet’s (GOOGL) Google announced plans to buy $2.1 billion office building in New York city. This is just the latest in the trend by tech companies buying up office space. Google is among the biggest property buyers that include Amazon (AMZN), Facebook (FB), Apple (AAPL), Microsoft (MSFT) per the Wall Street Journal.  

First in Business Worldwide

Cereal maker General Mills (GIS) announced better than expected earnings ahead of the market open. Pet food and cooking from home continue to show strength. GIS also reiterated issues with the supply chain that other companies have reported. While education technology company Skillsoft (SKIL) missed wide on earnings reporting a loss for the quarter and lower than expected revenue.

After the market open, investors will have an opportunity digest the existing home sales and crude oil inventories. Crude oil (/CL) climbed nearly 1.5% overnight ahead of the report. The real estate sector will also hear from homebuilder KB Homes (KBH) after the market close.

Tuesday also saw a smattering of news from all around the markets. DraftKings (DKNG) made a $20 billion cash and stock offer to buy global competitor Entain (GMVHF). DraftKings is the top gambling site in the U.S. and Entain is the top in Europe. The merger could create an enormous online gaming site.

In earnings news a few common themes appear, Lennar (LEN) reported after the close on Monday that its earnings were hurt by supply chain challenges and that there was little hope of change in the near future. The stock traded 3% lower in after-hours trading but was able to trim much of the losses during Tuesday’s trading session.

FedEx (FDX) announced plans to drastically hike shipping rates before its earnings announcement after the close. The earnings announcement revealed a lower outlook for the due to a tight labor market and rising expenses. The stock fell 4% in after-hours trading.

Walt Disney (DIS) fell more than 3% after CEO Bob Chapek warned that Disney+ subscriber growth may slow due to issues with COVID-related production delays.  

In the battle against COVID, Johnson & Johnson (JNJ) revealed a new study that found that trial participants in America that had two doses of their vaccine eight weeks apart had 94% protection against the illness. The effectiveness was lower at 75% when including results from other countries. These findings could make the JNJ vaccine more competitive with leading vaccines from Moderna (MRNA) and Pfizer (PFE).   

treasury yields bounce off support

CHART OF THE DAY:FEELING CONGESTED Looking at an intraday chart of the previous 90 days of the S&P 500 (SPX—candlestick) an area of congestion between the 4390 and 4425 levels has formed. The bulls have some work to do if they want to move higher in the short-term. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Turnaround Tuesday?: Tuesday started in the positive but was pulled lower as buyers appeared to burn themselves out. Turnaround Tuesday refers to an observation made by the Bespoke Investment Group that found that the Tuesday after a large Monday selloff, tended to return 1.02% for the S&P 500. Between 2009 and 2019, they found that the week after a Monday selloff returned an average of 3.16% 17 out of 18 times.

However, there’s a lot weighing on stocks including what some analysts say is a long overdue correction, uncertainty around Chinese central planning directives, potential Fed tapering, higher inflation, and so forth. The S&P 500 may need one or more Tuesdays to make the turnaround.  

Getting Real: While Chinese real estate is in trouble, real estate in the U.S. appears to be holding strong. As stocks sold off on Monday, the Real Estate Select Sector Index ($IXRE) performed relatively well compared to other sectors by trading a little more than 1% lower. In fact, it was only outperformed by the defensive bellwether utilities. At the same time, the sector has exhibited relative strength compared to the S&P 500 over the last six months. Only the tech sector has been higher.  

Elsewhere in real estate, homebuilders appear to be doing well despite a recent selloff. The S&P Homebuilders Select Industry Index ($SPSIHO) is only 6% off of its all-time high and reported an uptick in August building permits. Much of this was in multi-family housing. According to MarketWatch, homebuilders have switched focus on higher margin homes like multi-family and luxury homes. With the high cost of building materials from the broken supply chain, the shift make sense, although it may leave middle class would-be homeowners in the lurch.

Chinese Puzzle Box: China iss becoming a bigger puzzle for many investors. The country has produced some that have performed well over the years but many of them seem to have fallen well out of the top performers. Recently, the Chinese government has come down on various sectors including education, technology, gaming, gambling, and now real estate. Because real estate is much bigger part of the Chinese economy, the recent developments are of particular interest for investors.

The Washington Post recently reported that the Chinese President Xi Jinping has recently emphasized “common prosperity” as it tries to figure out what to do with increasing wealth gap among Chinese billionaires and the Chinese people. The rising cost of food and housing is likely making it harder on China’s lower income people. Yet, increased regulation, taxes, and shared profits could slow economic growth.

As you can see, there’s a lot to figure out as China deals with its growing pains. 

Good Trading, 

JJ

@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • The Fed announcement is in focus as Evergrande fears subside  
  • Key technical levels could make life hard on the bulls 

  • Despite the news on Evergrande, real estate is showing strength

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