Powell's Testimony, Evergrande, White Square, Brent - What's Moving Markets

© Reuters.

By Peter Nurse

Investing.com -- Fed chief Jerome Powell heads to Capitol Hill, a hedge fund that took on GameStop's army of retail investors is set to close, and Evergrande, China's biggest property developer, faces funding difficulties. Meanwhile, crude oil and stocks consolidate after recent gains. Here's what's moving markets on Tuesday, June 22nd.

1. Powell heads to the Hill

Federal Reserve Chair Jerome Powell heads to Capitol Hill later Tuesday to provide U.S. lawmakers an update on the central bank's support for the economy through the pandemic.

The central bank head is expected to point to a sustained improvement in the economy, mentioning the likelihood of further job gains in the coming months, but it’s the recent sharp gains in inflation, prompting last week’s hawkish turn by the FOMC members, which is likely to provoke the most discussion.

“Inflation has increased notably in recent months,” Powell is expected to say, according to written remarks prepared for his testimony, citing rising commodities prices and increases in spending as the U.S. economy re-opens.

“As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal,” he added.

These comments would be very familiar, and would raise questions as to why Fed officials surprised investors last week by bringing forward their expectations of when the central bank will need to increase interest rates to stop the U.S. economy overheating.

In total, 13 of the 18 FOMC officials now favor at least one rate increase by the end of 2023, versus seven in March, according to projections unveiled at the conclusion of the central bank’s latest meeting on Wednesday.

“It seems as if chair Powell is already running for the hills in the average inflation targeting relationship. A few months of vastly overshooting actual inflation and Powell and the FOMC aborts the AIT-regime,” said analysts at Nordea, in a note.

2. Stocks consolidate ahead of Fed chief

U.S. stocks are seen opening marginally lower Tuesday, handing back some of Monday’s sharp gains in muted trading ahead of Fed Chair Jerome Powell’s testimony to Congress.

By 6:20 AM ET (1020 GMT), Dow Jones futures were down 5 points, less than 0.1%, S&P 500 futures were 0.1% lower and Nasdaq 100 futures dropped 0.1%.

The main equity indices bounced strongly Monday, recouping some of last week’s Fed-inspired losses, with the blue-chip Dow Jones Industrial Average gaining nearly 600 points, or 1.8%, the broad-based S&P 500 rising 1.4% and the tech-heavy Nasdaq Composite 0.8%.

Trading on Wall Street is likely to be range bound Tuesday, as investors await comments from Powell, starting at 2 PM ET, as he provides U.S. lawmakers on Capitol Hill with an update on the central bank's support for the economy through the pandemic, particularly after last week’s hawkish turn by the central bank.

Ahead of his appearance, investors will study the latest existing home sales data, while the Federal Reserve Bank of Philadelphia will release its non-manufacturing business data and the Federal Reserve Bank of Richmond its monthly manufacturing survey.

The earnings season is coming to an end, but Plug Power (NASDAQ:PLUG) is due to report later Tuesday. The hydrogen fuel cell maker is expected to report a loss of 8 cents a share on revenue of $72.16 million. 

3. White Square set to close

One of the most common phrases used in investment circles is ‘never fight the Fed’, meaning investors should align their choices with the actions of the Federal Reserve. However, hedge funds have also found to their cost the power of the retail investor.

The Financial Times reported Tuesday that White Square Capital, a hedge fund based in London, is closing down after suffering hefty losses betting against troubled U.S. video game retailer GameStop (NYSE:GME).

GameStop was the original meme stock - companies that were battered during the pandemic, yet have seen their stock prices bid up sharply by retail investors, coordinated on online forums, often to the detriment of short-selling hedge funds.

The retailer’s stock dropped over 6% Monday, but is still up nearly 1000% year-to-date, having climbed from around $20 at the start of the year to over $200.

Gains in these meme stocks, which also include the likes of AMC Entertainment (NYSE:AMC), Blackberry (TSX:BB), Bed Bath & Beyond (NASDAQ:BBBY) and Koss Corporation (NASDAQ:KOSS), have caused severe damage to other hedge funds betting against them, such as Melvin Capital and Light Street Capital, but these managed to stay in business. Unlike White Square Capital. 

4. Chinese bank restrict Evergrande credit

Funding difficulties are not the sole preserve of the hedge fund community, with Evergrande Group, a highly indebted property developer in China, also seen struggling.

Several large Chinese banks are restricting credit to the company, according to Bloomberg, amid mounting concerns about the developer’s financial health.

Concerns about Evergrande’s access to funding have been rising as the developer has struggled to meet recent tighter regulatory borrowing limits as Chinese authorities worry about the potential for it to destabilise the country’s financial system given the large amount it owes.

Evergrande and its subsidiaries have outstanding bonds worth $28.1 billion, according to Refinitiv data.

Evergrande has responded by selling assets, including more than half of its stake in smaller peer Calxon for just under $400 million, in an attempt to  enhance its cashflow.

Additionally, the property developer plans to repay its $1.47 billion offshore bond maturing next Monday this week, ahead of schedule, Reuters reported Monday.

5. Crude consolidates after Brent breaks $75 a barrel

Crude oil prices consolidated Tuesday, after climbing to new highs earlier Tuesday, with the international benchmark Brent rising above $75 a barrel for the first time since April 2019.

By 6:20 AM ET, U.S. crude was up 0.7% at $72.58 a barrel, after surging 2.8% on Monday, while Brent was up 0.6% at $74.45.

With the possibility of Iranian oil hitting the market now on the back burner, with the nuclear talks adjourned after the election of a new president in the Persian Gulf country, traders are turning their attention to the global economic recovery, and thus rising demand for crude.

The number of Americans flying hit a post-pandemic high of 2.1 million people on Sunday, and the seven-day rolling average has climbed above 1.9 million, as the traveling season ramps up ahead of the July 4th national holiday.

Additionally, Europe is opening up traffic to a number of countries, including the U.S., in order to allow visitors to vacation on the continent, boosting the local economies.

This surge in demand as travel reopens could prompt oil to reach $100 a barrel next year, Bank of America (NYSE:BAC) analysts stated, in a note, on Monday, with global oil consumption continuing to outstrip supply. This would be the first time crude has reached triple digits since 2014.

Both crude benchmarks have posted strong gains this year, with the U.S. WTI contract over 50% year-to-date and Brent 44% higher, as successful vaccination programs have resulted in a lot of the high energy-consuming countries reopening their economies.

However, the sharp rise in crude prices will heap pressure on the Organization of the Petroleum Exporting Countries and allies, a group known as OPEC+, to consider adding more supply to the global market when it meets next week.

In fact, Russia is considering proposing that OPEC+ raises its oil output at next week’s meeting because it sees a supply deficit in the market, Bloomberg reported Tuesday, citing officials.

Additionally, the American Petroleum Institute is due later Tuesday to release its latest estimates of U.S. crude oil supply data.