How does that coal look now?
China’s decision to boycott Australian coal isn’t looking too wise at the moment as prices jump to skyhigh levels and China is threatened with power outages.
The RBA meeting is at 2330 GMT today and it will be a tricky on as the pandemic begins to clear out the Australian political scene. Thankfully vaccination progress is continuing but there’s a huge reserve of people in the country who haven’t been infected, meaning the early success there could mean a long-term drag.
The mood in equity markets is stable markets with S&P 500 futures down 18 points. But FX is often a leading indicator and the dollar is under some pressure, despite 10-year yields rising 2 bps.
On equities, I would note that 62% of stocks in the S&P 500 are down 10% from their 52-week highs and 16% are down 20%. The internals aren’t quite as solid as the index.
AUD/USD is up 32 pips and is having a look above Friday’s highs. That’s the best level since Sept 27.
JMMC recommends planned policy
Energy prices are roaring with WTI to $76.83 and Brent just above $80 per barrel.
In WTI the Sept high was $76.66 and the July high was $76.97.
In FX, USD/CAD is right at $1.2600.
A rocky start to the week for the risk mood
US futures are dragged lower once again, with S&P 500 futures now down 0.4%, Nasdaq futures down 0.6%, and Dow futures down 0.3% on the day.
It’s a bit of a messy and wishy-washy start to the week as the market continues to grapple with key issues weighing on sentiment in general. Some things to consider:
- Evergrande anxiety resurfaces as debt test looms and asset sales reported
- US debt ceiling remains unresolved but lawmakers are sanguine
- Supply bottlenecks continuing to pose a threat (key semiconductor firms to raise prices in Q4, h/t @ AvidCommentator)
- The energy crisis is still playing out ahead of winter
- Rising (and persistent) inflation a major headache for the recovery, central banks
Looking at FX, the dollar is sitting mixed and a touch lower but changes are rather minimal for the most part so we’ll see how things play out once the ranges start to extend.
Kishida succeeds Suga after winning the ruling party election last week
The announcement here is but a formality after his victory last week here. From last week:
Among his promises is more spending but to also steer away from neoliberalism in order to provide more support to the middle/working class. But if anything else, the once dubbed Abe heir apparent is not likely to bring about drastic change to the Japanese political and economic landscape.
In summary …
Is Evergrande considered too big to fail?
- Comparisons have been made with the collapse of US investment bank Lehman Brothers in 2008, which triggered the Global Financial Crisis. A major point of difference, however, is that Evergrande holds a large land bank as its major asset, estimated to be worth around US$220 billion (source: Bloomberg)
- The Chinese government has a lever that few Western governments have – it effectively owns the domestic banks, and non-state financial companies are largely controlled. And it also has control over the real estate industry where Evergrande operates. In fact, China’s housing regulator has already stepped in to protect funds earmarked for housing projects from being diverted to creditors.
- During China’s initial Covid-19 outbreak in 2020, the financial sector “sacrificed” around US$210 billion in profits (source: Bloomberg) to support the economy. Of course, this can be done again, if necessary.
- While still a significant systemic risk, most China-observing real estate analysts and economists don’t expect Evergrande to go bust. A restructuring could still occur where some banks roll over financing. Other creditors may also receive assets, such as property and land instead of cash. And bondholders could get some of their investment back.
So, a longer, drawn-out slump rather than the another GFC? Whether that is good or bad is a judgement I am sure you can make for yourselves individually.
OPEC+ is The Organization of the Petroleum Exporting Countries and its allies (led by Russia)
- JMMC is scheduled to start at 1400 Vienna time (1200 GMT)
- The Ministerial meeting then follows at 1500 (1300 GMT)
JMMC is the Joint Ministerial Monitoring Committee. JMMC tracks the compliance of Opec+ members with their production quotas.
Back in July the group agreed to boost output by 400,000 barrels per day every month until at least April 2022. This is a gradual phase-out of cuts agreed to in 2020.
Reuters reported last week
that four OPEC+ sources told them producers were considering adding more than that 400K. There were no details given on how much extra, or when supply would increase. It’d be November at the earliest most likely given the cuts in October were confirmed at the previous OPEC+ meeting.