By Ven Ram, Bloomberg Markets Live commentator
The timing of the Evergrande crisis and the market tumult is uncanny, coming as it does just before the Fed starts its policy review.
While the Fed statement is unlikely to make any explicit mention of the China saga, it is likely to persuade the less-certain members of the policy committee to sit on the fence on the taper time line and possibly cause them to be more circumspect about the growth outlook that may have an impact on the summary of economic projections. Given the massive implications of an adverse outcome surrounding Evergrande, and what that means for China’s growth and in turn the global economy, it’s only natural that there will be some recency bias at work -- even if only subconsciously.
While the markets are much calmer Tuesday, given there is not yet certainty on looming payments from the real-estate developer, it would be premature to conclude that the markets have put memories of Manic Monday behind them. After all, given how much global junk-bond spreads have narrowed in recent years thanks to a desperate reach for yields amid the ultra-loose monetary policies globally, there is only one way for the differentials to go -- and that is wider.
The point isn’t so much about whether it’s a Lehman moment for China or not. It’s that every major asset that can be traded is changing hands at lofty valuations, be it stocks, commodities, sovereign bonds or junk notes. That suggests that days like Monday will occur more and more frequently. Fairy tales have a great ending in story books. In markets, when the dream gets more and more alluring, there is usually a wake-up call -- and it’s never been known to end well.