21 assets for 2021

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.

Inflation has not been a major problem for investors since the 1980s, averaging 3.0% in the US since 1990 and 1.3% in the Eurozone since 1999.

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.

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There were four big hints in Asia that Evergrande’s restructuring is a done deal

PBOC is talking with other central banks

RBA Debelle
Phones have undoubtedly been ringing at the PBOC with other global central bankers on the line. They all have contacts at the PBOC and all global central banks coordinate and share information.
In a system like China’s where the PBOC isn’t independent, they would be on top of government plans. In a situation like Evergrande, they would be in every briefing and at the heart of the decision-making.
I strongly suspect that decisions have now been made and the need-to-know parts of those decisions have been communicated to other central bankers. Here’s why:
First of all, we saw that Evergrande today made an announcement about making an interest payment on domestic debt after negotiations with bond holders. The company is obviously done but that’s a sign that some kind of plan has been decided on’ and it’s not a disorderly collapse.
The second clue was a net 110 billion yuan in 7/14-day reverse repos. That’s the biggest injection since January and it’s a sign the PBOC is adding liquidity as a buffer because there will be some pain from the restructuring.
The third clue was in comments from the RBA’s Debelle earlier.


China government to take control of Evergrande?

There’s a report going around saying a deal could be announced within days


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.

Essentially, that will prevent any major collapse by company itself as it will instead be converted into a government-controlled entity. In turn, that will limit contagion risks.
Just something to keep an eye out for in the days ahead.

Ifo institute cuts Germany 2021 GDP growth forecast to 2.5% from 3.3% previously

Ifo reveals their latest projections on the German economy

  • Lifts 2022 GDP growth forecast to 5.1% from 4.4% previously

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.”

It needs to be said that the upgrade to 2022 may also be called into question in the months ahead if global supply chain disruptions continue to persist to year-end, which it will.

Fed day sees renewed focus on the bond market

Can a more hawkish Fed spur an upside break in Treasury yields?

The bond market has been rather unimaginative since mid-July trading and as the range since then continues to trap price action, it isn’t giving traders much to work with in terms of identifying a clear trend in the market right now.
There are so many key variables at play such as COVID-19 risks, global supply chain problems weighing on growth prospects, inflation, China worries, and not least Fed taper expectations as we look towards the FOMC meeting later today.
The market will be looking for any taper hints by the Fed at today’s meeting and if the Fed delivers, the dollar and yields could find a catalyst for a more meaningful break higher – especially if 10-year yields crack open resistance near 1.38%.
The technical play in itself could lend a tailwind for yen pairs to surge higher as well.
That said, a more disappointing message by the Fed has the potential to put a drag on yields and keep this lackluster range play out for much longer.
In such an event, expect the magnitude of the move in yields to be more noteworthy as some yen pairs are keeping close to the brink. The 109.00 level in USD/JPY will be one to watch in this regard as well as the vulnerabilities in CAD/JPY.

Fed focus to dim China worries but plenty more twists and turns still to come

Expect more testing times to follow with regards to China

The market looks to be breathing a sigh of relief on the day as the Evergrande episode has not gotten much worse this week, as the company is said to make coupon payments for its onshore bonds due tomorrow.
The Shanghai Composite has pared earlier losses to turn positive now as US futures also pull slightly higher on the day, up between 0.3% to 0.4%.
Given prevailing sentiment, the focus in the day ahead will turn towards the Fed next but don’t expect this to be the end of China worries. As mentioned yesterday:

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.


Bloomberg update on the global semiconductor chip shortage – getting worse

Bloomberg say wait times stretched even further in August, up by 6 days to 21 weeks.


  • indicating the shortages that have crippled auto production and held back growth in the electronics industry are getting worse.

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:


  • Honda says domestic production to be at 40% of capacity in August – September


And its not just this one manufacturer.

Bloomberg say wait times stretched even further in August, up by 6 days to 21 weeks. 

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