Evergrande and US inflation fears sink US stocks

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Update: Evergrande officially defaults despite reports of meeting some of its debt repayment liabilities.  

Following a hotter-than-expected US Consumer Price Index for October and news that Evergrande has missed a 30-day grace period to pay its debts have sunk US stocks on Wall Street. The S&P 500 index is down 0.7% at the time of writing, but the move might have just got started according to the technical analysis below. 

Firstly, CPI has jumped 0.9% after climbing 0.4% in September, the Labor Department said. This was the largest gain in four months boosted the index’s annual increase to 6.2%. It was also the biggest year-on-year rise since November 1990 and followed a 5.4% leap in September.

Therefore, markets are noting that inflation and the persistence of elevated inflation are much more than what policymakers had expected and are posting accordingly. This is hurting US stocks and sending the US dollar on a tear on Wednesday. 

To top it off, risk-off is accelerating on the news that the cash-strapped China Evergrande Group has missed coupon payments by the end of a 30-day grace period, pushing the developer again to the edge of default.

Update: In more recent trade, the headlines are now stating that the company has met at least one of its deadlines for repayments, but there are reports that bankruptcy proceedings are still underway. 

Market implications

This is spelling contagion risks for investors because the failure to pay will inevitably result in a formal default by the company, thus triggering cross-default provisions for other Evergrande dollar bonds, exacerbating a debt crisis looming over the world’s second-largest economy. Evergrande, the world’s most indebted developer has been grappling with more than $300 billion in liabilities, $19 billion of which are international market bonds.

Consequently, US stocks are reeling in the fear of contagion risks:

The S&P 500 chart shows that the daily price action has hit a 38.2% Fibonacci retracement of the latest bullish rally. A break below there opens risk all the way back to the Oct highs and beyond.