By Michael Every of Rabobank
US markets were closed yesterday. However, there was no lack of action out East. Indeed, Monday was a real zāo gāo (too bad; how terrible; what bad luck) day in China: the kind of trading that even worries the many Banana Splits among market analysts (“Tra la la; Tra la la la”).
Evergrande contagion continued to spread. If you cut off funding to a highly leveraged sector, and it sees sales collapse too, bad things tend to happen to liquidity. Specifically, Evergrande once again did not pay interest on US dollar debt due on Monday, while two more small Chinese developers pushed their debt repayment date and offered only 5% of the principal required. Generally, junk bond yields surged. The FTSE Chinese High-Yield index has now tumbled to 275.4, the lowest since late 2015, when back in May it was at 375.4, and looks like a falling knife. Chinese government bond yields didn’t benefit, rising slightly, and more so down the curve.
The Wall Street Journal is stressing details of a CCP action I flagged when launched, and which Wall Street originally snoozed through: the Central Commission for Discipline Inspection investigation into banks. The WSJ summary: “Inspections aim to ensure full Communist Party control over what is seen as the lifeblood of the economy, say people familiar with the plan.” Specifically, “zeroing in on the ties that China’s state banks and other financial stalwarts have developed with big private-sector players, expanding [the] push to curb capitalist forces in the economy…[to]…focus on whether state-owned banks, investment funds, and financial regulators have become too chummy with private firms.” In other words, for the “Tra la la” gang, just what Marxist theory stresses: state capital will be channelled into ‘productive’ rather than ‘unproductive’ or ‘fictitious’ areas. Is that good for high-yield bonds or for Chinese bank stocks? And where will the private sector get capital from - foreigners with a penchant for falling knives? There is certainly no shortage of them: how else does one split a banana?
Chinese coal prices soared due to both demand and supply issues. Iron ore prices are also up 50% all of a sudden too – just as demand for steel for property construction is uncertain to say the least. The broader implications for what PPI inflation will do from here due to coal prices are deeply concerning. So is the thought of that all being passed on to CPI – which naturally won’t be allowed to happen. Yet someone else is then swallowing the margin compression or outright losses instead. Can I get a ‘Tra la la’?
The Global Times is also doing its usual job, but this time threatening war with India again (“New Delhi needs to be clear about one thing: it will not get the border the way it wants. If it starts a war, it will definitely lose. Any political manoeuvring and pressure will be ignored by China.”) PLA tank exercises were reportedly held last night. Of course, one would logically presume there are more than enough fish for China to fry on the domestic and another geographic front….so ’Tra la la?’
Notably, sabre-rattling, the property sector, and ‘common prosperity’ aside --given the West has shown no *serious* sign of a policy shift away from asset-bubbles and towards redistribution or financial regulation-- these are global market problems. In particular, oil prices continue to move higher, holding above $80 per barrel, and if Chinese coal prices continue to rise at the rate they are now, it suggests risks of a second wind to the spike in gas prices in Europe now off recent peaks. (Far more so if Moscow decides to show the EU who heats it in winter.)
The US has its own specific problems, of course. SouthWest cancelled 1,800 flights yesterday, which the airline says had nothing at all to do with ‘sickouts’ by Covid vaccine holdouts. If that is the case, “air traffic control problems” and “weather disruption” means things should go back to normal from today. If not, the market might start worrying about how contagious ‘sickouts’ might prove to be: imagine if they hit already-strained ports, or trains, or trucks, for example.
Meanwhile, the DC-insider school magazine, Politico.com, bewails: “Dems thought giving voters cash was the key to success. So what happened?”, upending yet another mean-reversion hedging tactic for markets and politicians against a backdrop of structural change; and it adds: “‘The president’s decline is alarming’: Biden trapped in coronavirus malaise”, suggesting years of lame-duckery if things don’t turn-around soon in Congress. Or on supply chains.
Yet that is small beer compared to the Washington Post op-ed proclaiming “Our constitutional crisis is already here”, stressing “a reasonable chance over the next three to four years of incidents of mass violence, a breakdown of federal authority, and the division of the country into warring red and blue enclaves.” Zāo Gāo-y Wow-y! #NeverTrump seems to have started very early this electoral cycle and appears to be prepared to throw the steering wheel out the window well in advance. Expect associated political risk to rise as we get closer to 2024 – but for now interstate rivalry is on the football field, and there is more than enough to worry about everywhere else.
That the US Dollar is still on the front foot, apart from against the is-it-pegged-again-and-they-forgot-to-tell-us? CNY must imply a great deal about the general zāo gāo everywhere else; or that the Fed is about to make an historic error; or both.