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Volatility Returns on Wall Street: Pre-Markets in Red

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Light on new economic data this morning, we nevertheless see a reversal of fortune in market indexes. After flipping a rough start into positive or near-positive gains for the week by Thursday’s close, pre-market futures are back in the red on this final day of trading before the weekend. Almost as if the trading week has been perfectly bookended, the culprit behind the selloff once again appears to be China.

The next step the Chinese government has made in cracking down on financial risk-taking has to do with the cryptocurrency market. Beijing has generated a list of what it now considers “illegal crypto activity,” including exchanging legal tender for crypto and cryptocurrencies exchanged for each other. No explicit ban on crypto ownership is part of this new policy, only if you actively do something with your cryptocurrency might you run afoul of new Chinese law.

This, of course, follows the news on Monday that China’s second-largest real estate developer, Evergrande, was likely to default on a payment this week without the government stepping in to assist the corporation. Evergrande’s interest payment alone came to $83 million, which passed Thursday’s due date and has yet gone unpaid. Subsequent reports this week have explained that Chinese finance officials will bail out the real estate company, which has another 30 days before default.

Important as China is — the second-largest economy in the world — to global markets, investors here at home are now recalibrating scenarios by which China continues to a) lock down its economy from outside interests, b) feel a broad hit to internal growth, of which its real estate market is just one of many leveraged extensively, or c) both. In short, whatever moves the Red Dragon makes in the near term, they’re bound to force U.S. markets to account for them.

New Home Sales for August are due after today’s open, with seasonally adjusted, annualized units expected to continue its bounce off June lows of 701K. It was 708K in its last read, and this morning’s tally is estimated at 720K. As of January 2021, we were still seeing close to a million new homes sold; this hit a major snag when supply of lumber, copper, etc. became scarce due to pandemic conditions, caused input prices to spike, and finished homes were left unsold at vastly higher prices.

Existing Home Sales, released earlier this week, showed results in-line with estimates. From spring through summer, we’ve seen existing home sales pingpong around cycle lows, with August -2% month over month to 5.88 million. Early this year, before supply constraints, etc. we were seeing more than 6.6 million existing homes sold.

With pandemic conditions winding down (in certain regions, usually those with high vaccination rates) and commodity availability improving, sales numbers may adjust higher in the months ahead. We’ll see if New Home Sales last month have already begun to get there or not.