HOT AIR BALLOON FLIGHT

By Julia Horowitz • Wednesday, September 29

Good morning. In today's newsletter: Making sense of the sell-off in tech stocks. Plus, Evergrande is raising $1.5 billion, but its problems aren't over, and America's biggest bank is preparing for a potential catastrophe.

 

US stock futures are bouncing back after the S&P 500 logged its worst performance since May on Tuesday. Markets in Europe gained in early trading, while stocks in Asia slid as they played catch-up.

 

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MARKET FLASH

What's behind the tech stock sell-off? Inflation!

Technology stocks dropped sharply on Tuesday in a painful trading session that led the Nasdaq Composite to its worst day since March.

 

The biggest US companies logged major losses. Apple shed 2.4%, while Microsoft fell 3.6%, Amazon lost 2.6% and Facebook dipped 3.7%. Chipmakers Intel and Nvidia also took a beating.

 

Why? Inflation fears are back as bond yields rise and interest rate hikes loom.

Price hikes caused by supply chain bottlenecks and a resurgence in consumer demand have stalked markets all year, even as stocks reached record highs. But on Tuesday, Wall Street honed in on two recent developments.

 

Inflation expectations: Last week, the Federal Reserve raised its inflation forecasts for 2021, 2022 and 2023. It now expects the core personal consumption expenditure index, the central bank's preferred measure of tracking prices, to rise by 3.7% this year, compared to the 3% it predicted in June, as well as 2.3% next year, up from 2.1%. Core inflation could remain at 2.2% in 2023, still above the central bank's 2% target.

 

The Bank of England also said that while it still believes inflation will pass, it does not think it's peaked. Skyrocketing energy costs, which could make for a tough winter, have become a particularly worrisome factor. 

 

These developments make it more likely that central banks will start hiking interest rates from all-time lows sooner. In its most recent projection, the Fed indicated it could begin raising rates next year instead of in 2023. The rollback of bond-buying programs could also be more aggressive if there are signs inflation could get out of hand.

 

"[Tuesday's] interest rate-induced sell-off is a reminder of how impactful monetary stimulus has been, with the Fed signaling a swift removal of the emergency stimulus measures is coming soon," said Charlie Ripley, senior investment strategist for Allianz Investment Management.

 

Bond yields: The more immediate concern, however, is what's playing out in bond markets as a result of inflation fears. In the recent days, investors — factoring in looming action from central banks — have been selling government bonds, pushing yields higher.

 

That tends to hurt tech stocks. When yields on government bonds are extremely low, it boosts interest in riskier investments that offer better returns. The valuation of tech companies is also tied to future earnings, which look bleaker when inflation and higher rates come on the scene.

 

These days, as tech stocks go, so goes the market. In a note sent Tuesday, Goldman Sachs reminded clients that information tech and communication services now make up 40% of the combined market value of the S&P 500.

 

There's more: These aren't the only headwinds markets are trying to push through. There are also concerns about the US debt limit (more on that below), economic growth in China and a potential shakeup atop the Fed.

 

On Tuesday, Sen. Elizabeth Warren said she will oppose Chair Jerome Powell's renomination, calling him "a dangerous man."

 

"This has created some uncertainty, at least at the margin — and could not have come at a worse time for equities, in our view, given the existing pressures from the bond market and Capitol Hill," Wells Fargo equity strategist Christopher Harvey said in a note to clients Wednesday.

 

Looking ahead: Stocks in Europe are already rebounding, and US futures indicate shares could regain some lost ground. But analysts think volatility could continue to feed through the system in the coming days.

VOICES

Americans brace for home heating sticker shock

"If we get an early frost, it could get ugly. It could get ugly fast."

 

ROBERT YAWGER, MIZUHO SECURITIES DIRECTOR OF ENERGY FUTURES

 

Read more from CNN Business.

CHINA MONITOR

Evergrande is raising $1.5 billion. Its problems aren't over

Evergrande is set to raise much-needed cash with the help of Beijing. But the fate of the heavily-indebted Chinese real estate developer remains uncertain, posing an ongoing risk to the country's markets and the economy.

 

The latest: Evergrande has reached a deal to sell part of its stake in Shengjing Bank, a local lender, to the state-owned Shenyang Shengjing Finance Investment Group for nearly 10 billion yuan, or about $1.5 billion. Investors cheered the news, sending shares up nearly 16% in Hong Kong, my CNN Business colleague Michelle Toh reports.

 

Yet the company is still staring at a $300 billion mountain of liabilities. A bond interest payment of nearly $50 million is due Wednesday. Investors are waiting to hear whether the company will meet its obligations or slip closer to default.

 

Per the terms of the agreement, proceeds from the Shengjing Bank deal would be used to resolve "financial liabilities" between the two parties. This means Evergrande will likely not be able to use the money to cover its other debts. 

 

Step back: In recent days, the Chinese government has taken steps to preemptively protect markets and consumers, pumping cash into the financial system to help stabilize the situation and calm nerves.

 

Speculation has also mounted that Chinese officials may ask state-owned businesses to support Evergrande. Wednesday's sale supports this thesis — though it's still not clear exactly how Beijing plans to move forward.

 

"[Is] the government being prepared for Evergrande to default from all these bonds? That will create volatility in the market," said Iris Pang, ING's Greater China chief economist. "Or does the government want Evergrande to continue running and operating, and building and selling? ... We are still not sure."

UP NEXT

Shares of eyeglass brand Warby Parker are set to begin trading on the New York Stock Exchange.

 

Also today: Federal Reserve Chair Jerome Powell speaks at the ECB Forum on Central Banking at 11:45 a.m. ET.

 

Coming tomorrow: On Thursday, Sept. 30 at 12 p.m. ET, CNN Business presents "Foreseeable Future: Cryptomania."

 

Join CNN anchor and correspondent Julia Chatterley for a conversation with Galaxy Digital CEO Mike Novogratz, followed by a panel discussion with Guapcoin founder Tavonia Evans, SEC Commissioner Hester Peirce and Sydney Schaub, the chief legal officer at Gemini. To reserve a spot now, RSVP here.

WHAT WE'RE READING AND WATCHING

▸ Amazon's latest clash with employees, explained (CNN Business)
▸ Behind Ford's huge electric vehicle factory push (CNN Business)
▸ 131 US judges heard cases despite financial interests (WSJ)
▸ The people stranded by Britain's fuel crisis (CNN Business)
▸ Most United workers complied with vaccine mandate (CNN Business)
▸ Elon Musk on regulating crypto: 'Do nothing' (CNBC)

FINAL WORD

America's biggest bank preps for a US default

Jamie Dimon, the CEO of America's largest bank, is once again bracing for fallout from a potential US default. But he's making it very clear: He's not happy about it.

 

In an interview with Reuters Tuesday, Dimon said JPMorgan has started sketching out how a possible default would affect financial markets, capital ratios, client contracts and America's credit rating. The bank went through a similar process other times the country came close to bumping up against the debt ceiling.

 

Dimon said he expects Congress to ultimately come to terms, avoiding a "potentially catastrophic" event. Yet he's sick of the dysfunction.

 

"Every single time this comes up, it gets fixed, but we should never even get this close," Dimon said. "I just think this whole thing is mistaken and one day we should just have a bipartisan bill and get rid of the debt ceiling. It's all politics."

 

Tick tock: Treasury Secretary Janet Yellen told lawmakers Tuesday that the federal government wouldn't be able to pay its bills if action isn't taken by Oct. 18. 

 

"It is uncertain whether we could continue to meet all the nation's commitments after that date," Yellen wrote in a letter.

 

The warning came hours after Senate Republicans blocked a bill that would have suspended the debt limit, leaving both parties locked in a stalemate with no resolution in sight. Democrats want Republicans to join them in a bipartisan vote to suspend the debt limit, but Republicans are insisting they won't do that, and have called for Democrats to act alone. Expect the rest of the week to be tense.