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Market Update

Macro Monday, tensions continue to rise in the Middle East, a court in Hong Kong issue Evergrande with a liquidation order, and looking towards the week ahead.

Macro Monday

Global GDP exceeded 100 trillion dollars for the first time in 2022 and is set to reach 109 trillion this year. Since the turn of the century, the total value of all finished goods and services produced worldwide has increased by 200%, from $34 trillion!

Tensions Escalate in the Middle East

Geopolitical instability in the Middle East continued to climb over the weekend following three US troops being killed in an American base in Jordan, close to the Syria border. President Joe Biden indicated that the attack was carried out by Iranian backed militants in Syria and declared that the US “shall respond” to the latest incident.

Thus far, the US have been conducting limited strikes in Iraq and Syria in the aftermath of the 7 October attacks, however the latest developments raise the prospect that Washington may increase their activity in the region. Indeed, in the wake of the lethal drone attack which also injured 34 others on the Tower 22 base, South Carolina Senator Lindsey Graham argued that the US should “Hit Iran now”. As the BBC’s Hugo Bachega writes however, “a large military reaction, which could have unpredictable consequences, is something President Biden wants to avoid at all costs.”

Oil prices have risen for their fourth consecutive session on this morning’s open as geo-political tensions raise supply side fears. For example, WTI crude futures rose close to $79 dollars per barrel this morning, appreciating to the highest level in three months. This comes as investors continue to weigh up developments in the Red Sea, a pinch point for global oil markets given that 1/10 of world supplies travel through area. In the last few days for example, a Transfigura-operated fuel tanker caught fire following a Houthi missile strike on the vessel.

All eyes now centre on President Biden’s next move, as headlines around the world consider what the week ahead may have in store for the region.

Evergrande receives Liquidation Order

Evergrande received a liquidation order from a court in Hong Kong over the weekend, kickstarting the wind-down of the second largest property firm in China and stoking fears of wider fragility in the sector.

This followed shares in the company slumping 21% on Friday before trading ceased – leaving Evergrande’s market capitalisation at just $275m (99% down from its all-time highs).

Two years ago, the firm – which had liabilities of $300bn to its name – defaulted on loan repayments, just weeks after two officers were dismissed having been found to have misused some $2bn in loans.

The default, acted as the latest catalyst for a risk-off move which was estimated at the time to have wiped over $1tn off the Chinese property sector.

With 70% of household wealth across China being held in property, markets are assessing the latest developments and weighing up the wider impact that the liquidation process may have on the property sector and economy at large.

One particular area of concern is the extent to which it may feed into problems at China’s largest private property developer, Country Garden which dominated headlines last summer when a number of companies expressed concern that they had not received debt service payments.

With the world’s second largest economy continuing to face major economic headwinds, the crisis could exacerbate Beijing’s troubles, not least because that the property sector accounts for between 1/4 and 1/3 of China’s GDP.

Looking Ahead

With today being light on the new data front, attention is turning to the main releases this week. This includes Eurozone GDP (Q4) tomorrow at 10:00 ahead of US Consumer Confidence at 1500. On Wednesday, markets will be looking at the US ADP Employment Change figures which will be seen as a litmus test for the string of US labour market data released on Friday which includes Nonfarm’s, unemployment numbers and hourly earnings. This week will also see the Fed and BoE interest rate decisions on Wednesday and Thursday, respectively. While the market consensus is pointing to a hold from both central banks, investors will be looking for some forward guidance as they weigh up the extent to which they will loosen monetary policy this year. 

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