Evergrande

Evergrande is said to be considering repaying offshore bondholders with cash instalments.

As part of the proposal, Evergrande is said to consider repaying offshore creditors the principal and interest on the debt by converting it into new bonds. The new bonds will then be repaid in instalments over a 7 to 10-year period. For context, Evergrande owes approximately $19 billion to its offshore public bondholders. Evergrande is also expected to complete the proposal by July and sign agreements with investors by December.

That’s a lot of talking, but it’s unclear how they’ll come up with the funds to carry out this repayment plan.

Equities

European equities open slightly higher

Risk remains stable to begin the session

Eurostoxx +0.1 percent, Germany DAX +0.5 percent, France CAC 40 +0.2 percent, UK FTSE flat & Spain IBEX +0.3 percent

As the week begins, we expect steady tones and equities to finish with a more moderate showing. S&P 500 futures are flat, Nasdaq futures are down 0.1 percent, and Dow futures are also flat on the day.

Dollar

• The dollar is not a sure bet on recession risks this time • Historically, the dollar gains on a flight to safety.
• However, the caveat this time is that the dollar has already gained significantly on rate hike bets. And one could argue that with the recent drop in Treasury yields, we have already priced in the Fed’s maximum hawkishness – at least for the time being.
• This is also evident in markets, which see a lower and earlier terminal rate compared to a week ago. As rate hike bets cool, the dollar appears to be cooling this week as well.
• There is also a valid argument that the greenback is overdue for a technical retracement. However, it is no coincidence that it coincides with declining bets on further Fed hawkishness.
• Given that inflationary pressures remain high and supply chain issues persist, there is widespread concern about recession (and stagflation) risks brewing around the world. The United States will not be immune to this, and economic data in the coming months, particularly later in the third quarter, will reveal whether they will follow suit.
• If this is the case, it suggests that the Fed’s window for tightening is closing.
• And all you have to do at this point is look at how the market perceives the BOE to get a sense of what the reaction might be.
• Broader recession fears could spark a wave of risk aversion across equities, causing safety to flow into the dollar and bonds. However, if this coincides with the market exiting bets on Fed rate hikes, the dollar may face outflows as well.
• Fed fund rate futures already have roughly 88 percent odds of the Fed hiking to above 2.50 percent by year’s end. If this trend continues, the typical dollar bet on recession risks will not be as simple as it appears.

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