Evergrande on the brink, OECD warns on inflation as Fed meeting starts, and Europe’s energy challenge.
Tick tock
S&P Global Ratings said China Evergrande Group is on the brink of default, pushing pushing further losses on the indebted conglomerate's bonds and equity. S&P said they believed that authorities in Beijing would only step in if the failure of Evergrande led to far-reaching contagion that threatened China’s economy. While yesterday’s global market selloff was certainly spurred by the possible default by the developer, the scale and timing of any collapse remains unclear. Thursday’s $83.5 million interest payment remains the focus for investors for now.
Inflation
While economists do not expect the Federal Reserve to announce the start of tapering until the November meeting, this month’s gathering of the FOMC, which begins today, will likely hint at that move to prepare investors. A report this morning from the OECD raised inflation forecasts for almost all Group of Seven countries for this year and next — and said that the near-term price risks are to the upside. The Bank of Japan, Norway’s central bank, the Bank of England and Brazil’s monetary authority also all make decisions this week.
Challenging
The energy crisis in the U.K. is set to become “quite challenging” over the next few days, according to Business Secretary Kwasi Kwarteng. The surge in gas and electricity prices is threatening the country’s distribution system built on many small suppliers, some of whom have already gone out of business. In Europe, the spike in natural gas prices ahead of peak winter demand is stoking fears among policymakers about a fresh spike in inflation. The world’s biggest gas traders and producers, currently meeting in Dubai, said that the crisis shows more investment in the industry is needed.
Markets mixed
After the Monday rout in U.S. and Europe, Asian markets reopen after a holiday. Overnight the MSCI Asia Pacific Index slipped 0.4% while Japan’s Topix index closed 1.7% lower. In Europe, the Stoxx 600 Index had gained 1.1% by 5:50 a.m. with every industry sector higher. S&P 500 futures pointed to a bounce at the open, the 10-year Treasury yield was at 1.334%, oil was back above $71 a barrel and gold rose.
Coming up...
U.S. housing starts and building permits data are at 8:30 a.m. The current-account balance for the second quarter is also at that time. President Joe Biden will address the UN General Assembly. The U.S. sells $24 billion 20-year bonds at 1:00 p.m. Adobe Inc., FedEx Corp. and AutoZone Inc. are among the companies reporting.
What we've been reading
Here's what caught our eye over the last 24 hours.
And finally, here’s what Joe’s interested in this morning
So far, all the commenters on Evergrande have insisted that the collapse of the Chinese real estate giant won't be some kind of "Lehman moment." But that just raises the question of what kind of moment it is, and what kind of linkages it will have for the rest of the world.
Yesterday we published an episode of the podcast with independent analyst Travis Lundy, walking through the various financial and economic ramifications. Reading through the transcript this morning, one thing that stands out is the connection between Evergrande's gigantic land sales and revenues for smaller cities, with the sale of real estate a major source of revenue for the latter.
If you look at real estate by itself, there are some SOEs, state-owned enterprises, who are in the real estate business. But there are a number which are private. Those which are private have always had to have political connections. How you actually get your hands on the land in the first place is a really good question. You know, you have a government sales process. Well, you know, government sales processes across the world are sometimes questioned for their fairness. And when one particular party ends up with a very big piece of that business, one wonders even more. So there are obviously all kinds of interesting problems about discussing what the opportunity set is for a private company when they're competing against state-owned enterprises.
And what generally private companies end up doing in China is they go find a niche, and they find a niche which state-owned enterprises aren't doing, or they find a niche which is politically supported enough that they get support by themselves from the local governments. You know, Evergrande is a company which does a lot of, they spend a lot of money, and they do a lot of stuff in second- and third-tier cities rather than first-tier cities. And that endears them to a large number of cities because they provide funding through the land sale process to a large number of cities. They are politically connected. They are a partner, as much as you can be: anybody who's that big and that important to the local economy is a partner.
Obviously it will take some time before we understand how this all plays out, but what the potential collapse of demand for land means to these cities is one potential area of fallout worth keeping an eye on.
Read the full transcript here.
Follow Bloomberg's Joe Weisenthal on Twitter at @TheStalwart
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