The next shoe drops as the liquidity issues of the Evergrande default create shock waves around the world.  The dip buyers on Friday will feel considerable pain this morning due to the weekend reversal, and the technical damage to the index charts signals tremendous uncertainty ahead. Finally, with an FOMC meeting just around the corner, will bulls defend the or will the bears continue to push lower at the open of today trading? 

Asian markets traded mixed overnight, with the Hong Kong plunging 3.30% and ASX dropping 2.10%. Additionally, this morning, European markets are decidedly bearish, with the DAX, CAC, and FTSE indexes down more than 2%. Finally, U.S. futures point to a mean and punishing weekend reversal, with the Dow signaling a gapping down more than 500 points. So get ready for a wild ride. 

Economic Calendar

Earnings Calendar

To kick off the new trading week, we have 17 companies listed on the earnings calendar, but many of them are unconfirmed. So the only notable report today would be from LEN.

News & Technicals’

Evergrande, the Shenzhen-based company, faces a default on its debt burden of roughly $300 billion. The crisis has echoes of the Lehman Brothers bankruptcy, which marked its 13-year anniversary last week, a development that at the time sent shockwaves through global markets. So the question is it a so-called too big to fail, and the government comes in to save the business? In addition, the U.S. is tiring to smooth the tensions with France after they recalled its ambassadors, creating another geopolitical crisis.  On Sunday, Treasury Secretary Janet Yellen asked Congress to raise the federal debt ceiling as the risk of default draws near.  Remarkably as the debt ceiling looms, the U.S. dollar is on the rise this morning due to the liquidity crisis in China.  As a result, bonds are falling hard this morning, with the 10-year dropping to 1.3633% and the 30-year falling to 19030%.

It would seem the liquidity issues of the Evergande default did make its way into the U.S. markets with a big over the weekend reversal.  This morning, traders will wake to the SPY well below its 50-day average and the QQQ gapping down to test its 50-day as support.  In one fell swoop, the DIA will wipe out nearly two months of gains, and the IWM will gap below its 200-day average.  Ouch!  The question is, will the bulls defend, or will the bears continue to push the indexes lower.  If that were enough uncertainty to deal with, we have an FOMC meeting and the possibility of tapering easy money policies on the lips of the committee.  With so much uncertainty, price volatility is likely to become very challenging.  Experienced day traders will likely have the edge, and the buy the Friday dip buyers get severely punished.  So fasten your seatbelt tightly; it’s likely to be a very bumpy ride today.

Trade Wisely,

Doug