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Hang Seng Index Tanks on Evergrande Contagion Fears, Central Banks Ahead. Will Risk Assets Go Lower?

Hang Seng Index Tanks on Evergrande Contagion Fears, Central Banks Ahead. Will Risk Assets Go Lower?

Daniel McCarthy, Strategist

Hang Seng Index, ASX 200, Commodities, AUD/JPY, NZD/JPY - Talking Points

  • Hang Seng Index (HSI) tumbles on Evergrande news amid thin liquidity
  • APAC equity marketsthat were open went south amid growing uncertainty
  • Commodity and growth vulnerability give central banks more to muse this week
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The Hang Seng Index of Hong Kong stocks traded aggressively lower on a day of holiday closures for the Chinese mainland and Japan that may exasperated volatility. Commodity prices were generally lower in the Asian session, with iron ore continuing the march lower. Risk-sensitive equity markets came under pressure.

The Hang Seng property sector sub-index visited levels not seen since 2016 as the collapse of real estate giant Evergrande appears to be presenting some potential systemic risk. A large bond coupon for the company is due to be paid on Thursday. There is a perception in the market that the Chinese government is probably going to step in at some stage to manage the default. Debt holders may not get all of their investment back but regulators are likely to do what they can to avoid any spill-over effects given the amount of intervention we have seen this year.

As a result of Evergrande’s issues, Asian high yield spreads moved wider. A weaker property sector will also decrease demand for steel production. Iron ore prices, already under pressure, visited their lowest price since August last year.

Energy commodities softened on growth concerns and the commodity-linked currencies – AUD, CAD, NOK and NZD – are weaker on the day. The Australian economic connection to Chinese growth saw the ASX 200 hit hard as well, alongside the risk-sensitive AUD/JPY and NZD/JPYcurrency crosses.

Ahead, there is the Canadian election today and the German election next weekend. Aside from the all-important FOMC meeting this week, the Bank of Japan, Bank of England and Swiss National Bank are also due for official meetings in the coming days . S&P 500 futures are indicating Wall Street will open lower than where it left off on Friday.

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NZD/JPY Technical Analysis

NZD/JPY is continuing to move lower in a descending trend channel. Looking at the long-term simple moving averages (SMAs), the currency pair hesitated around the 100-day line but has since run lower, which could be a bearish indicator.

The 200-day SMA, currently at 76.94, may be the next level of support for NZD/JPY. A clean move below that might suggest that bearish momentum is building.

The broad trading range sees potential support at a previous low at 74.57 and a negative-sloping trend line at 74.45. On the topside, resistance could be at the 100-day SMA at 77.93 and then at a previous high at 78.77.

Chart created in TradingView

--- Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

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