Evergrande Bankruptcy Renews Footsie Bear Market Risk

China Evergrande's bankruptcy filing in the US renews contagion worries to markets beyond China as the company seeks to organize its payments. UK’s Footsie global presence makes the index one of the most vulnerable.

Chinese Property Market A Wake-Up Call for Global Markets

Over the weekend, the yuan fell to a 16-year low against the dollar, prompting another round of intervention from Chinese officials to stabilize the currency. But once again, the actions taken to support the economy were seen as insufficient by market analysts and ended up disappointing for not being aggressive enough. The Yuan continued to slide even as it was reported that Chinese state-owned banks were selling dollars to prop up the Chinese currency.

Investors are wary of the Chinese property market, which until recently was seen as the pillar of the economy. The government is pivoting away from this sector in favour of higher growth tech industries, which might explain the government's reluctance to provide as much support for the industry where even major state-backed developers are warning they will post significant losses for this year. Evergrande's filing for bankruptcy comes in the midst of another major property developer, Country Garden, still not making its late payments on loans. Both events were billed as China's "Lehman moment", but so far, the market has avoided a major crash.

Substantial Exposure Beyond China Goes to UK’s Footsie

As the property crisis unfolds amid growing geopolitical tensions, foreign investors are holding back. China reported that total cumulative FDI in July fell by 4% in the first seven months of the year, which in practical effects implies more outflows than inflows. Investment in China fell to a 25-year low in July, the worst performance since the Asian financial crisis. With the world's second-largest economy under increasing pressure, the natural question is where could the largest contagion impact be felt.

Two major indices with a lot of exposure to China are Germany's DAX and the UK's FTSE 100. Both have their risks and insulation, however. China is Germany's largest export market, and it would be natural to presume German companies would be in trouble if China's economy slowed. But German firms mainly export high-tech products, including manufacturing equipment, not those used by China's housing market. And China continues to support the tech sector. The FTSE-100 also is exposed to China, with the large-cap HSBC at risk if the housing market drags down the banking sector. Other major components at risk for a slowing in the Chinese economy include major crude producers such as Shell and BP. Minters such as Anglo-American, Glencore and Antofagasta could also be impacted if China's imports continue to slide. But a weaker yuan could end up supporting other components, such as Unilever, Tesco and Sainsbury's. Overall, however, if the world's second-largest economy were to fall into the doldrums, then the FTSE 100's large global presence could make it one of the most vulnerable.

Footise Triple Bottom at Risk of Breaking

As the index is flirting with 2023 lows, the door to the 7k handle is opening up, exposing 2022 lows at 6700 next. If the triple-bottom formation turns out solid (typically triple-bottoms break),  recapturing 7400 could be a one-way ticket to reclaiming record levels. In between, 7720 and 7930 will play a critical role in achieving this.

Source: SpreadEx / UK 100