De Gaetano Andrea Analista indipendente BondWorld

BondWorld : Evergrande, scapegoat for correction

BondWorld : Evergrande, scapegoat for correction, decisive week for central banks

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Andrea De Gaetano – Independent Analyst

BondWorld – All rights reserved

Evergrande, the Chinese real estate giant on the brink of default, is catalysing investors‘ attention in central bank week. More than USD 300 billion in debt could create a domino effect on other real estate players and banks.

Spectrum of a real estate ‚Chinese Lehman‘.

Evergrande’s implosion appears to be in its final throes, with capitalisation down more than 90% from its July 2020 highs, when the stock was trading at 25 in Hong Kong, now at 2.28. Capitalisation reduced to 30.2 billion Hong Kong dollars (about 3.8 billion US dollars).

Evergrande’s downward spiral has accelerated in recent days.  The company looks like it will fail to honour interest payments on two bonds: $83.5m in interest on 23 September on the 8.25% March 2022 bond and $47.5m in interest on 29 September for the 9.50% bond due 2024.

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After a year of struggling to reduce its liabilities as property sales fall, Evergrande has publicly stated that it may not be able to repay its debts. Major rating agencies have downgraded Evergrande to near default.

It will be seen whether and how China’s central bank and state will intervene to buffer the situation, taking into account the ‚grace period‘ of 30 days from the date of interest payments on the bonds.

The sell-off on Evergrande comes in a crucial week for central banks.

The Fed and Bank of England are in the spotlight, but other central banks are looking at how to deal with rising inflation without spooking markets.

Swedish Central Bank 20-21 September, interest rates at 0%, inflation 2.1%, inflation target 2%.  

Central Bank of Japan 21-22 September, interest rates -0.1%, inflation -.3%, inflation target 2%, 

Central Bank of Brazil 21-22 September, rates 5.25%, inflation 9.68%, inflation target 4.5% -+2%. 

Federal Reserve 21-22 September, rates 0-0.25%, inflation target 2%, inflation 5.3%   

Swiss Central Bank 23 September, interest rates -0.75%, inflation 0.9%, inflation target <=% 2%.

Norwegian Central Bank 23 September, interest rates 0%, inflation 3.4%, inflation target 2.5%. 

Turkish Central Bank September 23, rates at 19%, inflation 19.25%, inflation target 5%. 

British Central Bank 23 September, rates at 0.1%, inflation 3.2%, inflation target 2%.

The latest data on US inflation comes as the FED argues for „temporary“ inflation. Excluding the more volatile components of food and energy, US inflation rose by 0.1% in August compared to the previous month, less than expected by 0.3%, to 4% (core inflation) and 5.3% (headline inflation) on an annual basis.

The uncertainty surrounding the Evergrande affair, already weighing on sentiment, could give central banks another reason not to rush to reduce liquidity.

After the first leg of correction in equity markets, the central banks‘ communication will determine whether a rebound begins or the correction accelerates.

Market tops take time to be confirmed, especially when the rally is supported by strong corporate earnings as well as liquidity. After the almost uninterrupted rally that began in March 2020, a correction in equities was physiological. First, China and central banks, then the upcoming corporate quarterly season will make it clear whether this is a correction or the start of something more serious.

For now, it’s risk-off. Dollar strengthening. Vix rising. Flight to quality, with T-Note and Bund in the money.

Let’s wait calmly.

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