Rising inflation remains an important determinant of market reaction this year, as rising yields continue to challenge lofty equity market valuations, especially in the technology sector.
Expectations for the second half of 2021 remain positive for a continued global recovery despite the threat of inflation. The headwinds remain the threat from COVID variants, the patchy global vaccination rollouts and the smoothing out of the bottlenecks in global supply chains.
The report here from Asia Markets says that Evergrande will be restructured into three separate entities in a deal that will allow the Chinese government to take control of the firm, with state-owned enterprises underpinning the restructure.
The think tank attributes the downgrade this year to supply chain disruptions for the most part, slowing down the recovery from the pandemic. Adding that:
“The strong recovery from the coronavirus crisis, originally expected for the summer, is further postponed. Industrial production is currently shrinking as a result of supply bottlenecks for important intermediate goods. At the same time, service providers are recovering strongly from the coronavirus crisis. The biggest risks causing uncertainty for the outlook are the increased number of coronavirus infections and significant delivery and production bottlenecks which are particularly affecting German industry.”
The main focus in the market continues to be on China in general but there are many opinions flowing through that Evergrande isn’t going to be the next Lehman Brothers.
There are plenty of valid points in that regard and I don’t expect China to risk any major collapse of its financial system but that doesn’t mean that local authorities are going to put a stop to the whole saga come tomorrow.
Evergrande is on the brink and it is clear that the company is being made an example as China looks to “clean up” key sectors in the economy. The issue with Evergrande is debt and what began with leverage problems will end with a sale of assets in all likelihood.
State players may intervene to try and smoothen the process and clear some of the bad dealings but the whole Evergrande episode is going to be a long and drawn out one, so don’t expect a quick fix to the turbulence in Chinese markets.
Adding to that is the government also cracking down heavily on other key sectors besides property/construction and that makes for plenty of volatility and risks to go around.
Contagion may not play out in the most obvious spots but best be wary in case it does start to put a drag on market sentiment globally if the reverberations are loud enough – such as the episode that we saw in trading yesterday.
China will do what it can to keep domestic markets comforted by providing sufficient liquidity (watch for the PBOC tomorrow) but don’t expect any direct responses in putting a halt to all the fear and anxiety.
The market will have to eventually realise that China has shifted to a new paradigm, and it is one that we will all have to learn to trade around in the years to come.
Chip lead time is the gap between ordering a semiconductor and taking delivery. That’s what rose in August, from already record-long wait times (Bloomberg citing data from Susquehanna Financial Group since the firm began tracking the data in 2017).
I posted yesterday on woes at Honda plants:
And its not just this one manufacturer.
via an interview with Reuters
