Morning Bid: Shutdown, oil, auctions and China rankle

The U.S. Capitol Building in Washington is pictured on August 31, 2023. After a challenging week on Wall Street, three key issues continue to exert pressure on the markets: the possibility of a U.S. government shutdown, rising oil prices, and a heavy schedule of Treasury debt sales. Prior to the opening of U.S. markets on Monday, China’s ongoing property crisis added to the uncertainty in stock markets. Shares of China Evergrande (3333.HK) plummeted 21.8% after the company announced that it was unable to issue new debt due to an ongoing investigation into one of its subsidiaries. This setback dealt a blow to the company’s restructuring plans. Country Garden (2007.HK) also fell more than 7% as investors anxiously awaited its upcoming dollar bond coupon payment. Concerns about the real estate problem in China caused China’s main bourses (.CSI300) to decline by 0.6%, while Hong Kong’s Hang Seng (.HSI) plunged 1.8%. Foreign investors were also concerned about the fate of Nomura’s head of China investment banking, Charles Wang Zhonghe, as Chinese authorities ordered him not to leave the mainland. In addition to these challenges, world markets were still reeling from the hawkish statements made by the U.S. Federal Reserve last week. MSCI’s all-country index reached its lowest level since June 2 and experienced its longest losing streak in over a year. The outlook for Wall Street was not optimistic, with the S&P500 hitting a three-month low on Friday and futures continuing to decline on Monday. Apart from the Fed’s actions, there were several domestic issues causing concern, including the possibility of a government shutdown next weekend. Congress has yet to pass any of the 12 regular spending bills to fund federal agency programs for the upcoming fiscal year. If an agreement is not reached by October 1, the government will run out of money to operate fully. House of Representatives Speaker Kevin McCarthy plans to push for approval of four large bills, including military and homeland security funding, in an effort to win support from far-right Republicans for a stop-gap spending bill. While economists believe that a short-term shutdown will not have a lasting impact on overall growth, some banks, such as Morgan Stanley, believe that the timing could affect fourth-quarter data enough to prevent the Fed from implementing the final rate hike of 2023. The inflation picture has also been complicated by the sharp increase in oil prices this month. U.S. crude prices have maintained most of September’s gains, resulting in a 15% year-on-year price increase, the highest annual pace of the year so far. Against the backdrop of a potential government shutdown and rising energy prices, the U.S. Treasury is set to hold a series of debt auctions, starting with a 2-year note sale on Tuesday, followed by a 3-year note auction and seven-year auctions on Wednesday. U.S. 10-year Treasury yields are approaching 16-year highs above 4.5%. On a positive note, Hollywood’s writers union reached a preliminary labor agreement with major studios, potentially ending one of the strikes that have halted film and television production. In the tech sector, Amazon.com (AMZN.O) announced a cash investment of up to $4 billion in the startup Anthropic as part of its efforts to compete in artificial intelligence. Later in the day, key developments such as the Dallas Fed manufacturing survey, speeches by Neel Kashkari and Christine Lagarde, and U.S. Treasury auctions will provide further direction to the markets.