Hong Kong Stocks Crash, Futures Slide As Markets Finally Freak Out About Evergrande Default Contagion
Well, as we warned, the Evergrande contagion has finally arrived and with China closed for holiday traders are getting out while they can and where they can, and on Monday morning in Asia that means Hong Kong, where Evergrande – which is about to default – has crashed by another 13% this morning and is on track to close at its lowest market cap ever (to be expected ahead of a bankruptcy that will wipe out the equity)…
… and with Evergrande property development peers such as New World Development & Sun Kung Kai Properties both down over 8%, and Sunac China and CK Asset plunging over 7%, the Hang Seng property index has crashed more than 6%, its biggest drop since 2020 to the lowest level since 2016…
… and the broader Hang Seng index is down 3.5% in early trading, to the lowest level since November 2020.
And with traders on edge about the rapidly spreading contagion (as we described earlier) even sectors supposedly immune to China’s property woes, such as the Hang Seng Tech Index are plunging, sliding as much as 2.7%.
And speaking of Evergrande’s imminent default, we noted earlier that while the company is scheduled to pay $83.5 million of interest on Sept. 23 for its offshore March 2022 bond, and then has another $47.5 million interest payment due on Sept. 29 for March 2024, the day of reckoning may come as soon as Tuesday: that’s because Evergrande is scheduled to pay interest on bank loans Monday, with a one-day grace period. In other words, should it fail to arrange an extension, it could be in technical default as soon as Tuesday (for a much more detailed analysis of next steps please see “This Is How Contagion From Evergrande’s Default Will Spread To The Rest Of The World“.) Spoiler alert: a default is coming because Chinese authorities have already told major lenders not to expect repayment.
Incidentally, as Bloomberg’s Mark Cranfield notes, Hong Kong stocks can’t blame low liquidity for the meltdown as “trading volumes on the Hang Seng and H shares indexes are running well above the 10-day average on Monday as both drop by ~4%.”
There’s more: junk-rated Chinese dollar bonds slid by as much as 2 cents, according to credit traders, pushing their yield to just shy of 15%, the highest since 2011.
Other sectors are also getting hammered, such as Ping An Insurance, China’s largest insurer by market value, which plunged 7.3% in Hong Kong.
“Investors may be concerned about highly-geared names and don’t care about valuation nowadays,” said Philip Tse, head of Hong Kong & China Property Research at Bocom International Holdings Co Ltd. “There will be further downside” unless the government gives a clear signal on Evergrande or eases up on its clampdown on the real estate sector, Tse said.
Meanwhile, pouring gasoline on the fire, Goldman’s China anlyst Hui Shan published a note (available for professional subs in the usual place) on Sunday in which it discussed the rising risks from the property market, writing that even without the Evergrande debacle “housing activity fell sharply in July and weakened further in August” largely in response to China’s structural reforms in the property sector (such as the “3 Red Lines”). At the same time, “concerns over Evergrande are rising and signs of financing difficulties spreading to other developers are emerging.”
In the note, Goldman also estimates the potential impact of the coming property market crash on Chinese growth under different scenarios, which can be described as bad, worse, and terrible, with the bank expecting a GDP hit anywhere from just over 1% to as much as 4.0%. Needless to say, such an outcome would be devastating not only for China but for the world.
Looking ahead, Goldman notes that while for now, its baseline remains that any potential default or restructuring of Evergrande would be carefully managed by the government with limited contagion effect in both financial and property markets “this would require a clear message from the government soon to shore up confidence and to stop the spillover effect, the absence of which we think poses notable downside risk to growth in Q4 and next year.”
In short, as we explained previously, it all depends on Beijing whether the current selloff accelerates, or if we see a furious surge as Beijing directly or indirectly injects another cool trillion or 10.
Meanwhile, as Bloomberg’s bloggers write echoing what we said yesterday while traders may have been hoping there would be some clarity on the road ahead for the company, given it has bond payments due this week, “the complexity of the case may be the reason for a lack of communication from the authorities. That compounds the uncertainty for investors, and with China on holiday, the momentum for lower Hong Kong stocks are picking up pace.”
So while contagion is clearly hammering Hong Kong in lieu of the shuttered China, it is also spreading to Australia where the Aussie dollar is mining stocks have slumped as iron ore prices continue to collapse, with the industry group falling 4%. Among the biggest movers,fell as much as 12.5% in early trade Monday, continuing a four-day losing streak while Fortescue Metals dipped as much as 7%, falling to the lowest price since July last year.
Contagion has also moved beyond merely stocks, with US equity futures trading as low as 4380..
… and is starting to impact FX, with the dismal mood lifting USD/HKD to the highest for September, and while USD/CNH is firmer, but for now, that is in line with broad dollar strength. Should EUR/CNH start trending higher, Bloomberg notes, “that would be a signal traders have become anxious about the health of the yuan amid the equities slump.”
Should the silence out of Beijing persist, it’s only a matter of time before the anxiety hits levels not seen since Sept 2008 as an outcome most traders thought impossible becomes all too probably.
Food prices & farm inputs getting hard to stomach
Thanksgiving is a time to appreciate the food on our tables, but that probably isn’t stopping a lot of people from grumbling about how expensive…
Thanksgiving is a time to appreciate the food on our tables, but that probably isn’t stopping a lot of people from grumbling about how expensive the turkey and all the fixings have become.
According to Statistics Canada, food prices are up 2.5% over the past year, but that may be underestimating the impact of inflation. New research from Dalhousie University’s Agri-Food Analytics Lab, quoted by BNN Bloomberg, shows that food inflation in Canada is closer to 5%, well above the normal 1-2%.
Among food categories, meat prices stand out as rising the most, with Stats Canada noting a 10% increase for these products over the past six months. Nearly half of Canadians, 49%, say they have reduced their purchases of Alberta meat, while a majority of consumers acknowledge cutting back on it since the start of the year. The higher number of vegetarians may be due to economic reasons as much as concerns over animal cruelty.
As for what is causing food prices to tick higher, the study by Agri-Food Analytics Lab cites unfavorable weather patterns in the northern hemisphere, i.e., droughts and storms, and logistical challenges owing to the covid-19 pandemic.
Corporate Knights expounds on the covid factor, mentioning several contributors to higher prices on grocery store shelves. These include labor shortages in both Canada and the US, rising freight costs, border waits, last year’s temporary closures of meat processing plants, and higher demand for food, as a revival of home cooking puts pressure on the prices of meat and feed grains such as soybeans and corn.
In fact climate change was affecting food production long before supply-chain problems due to covid.
A 2019 report by Environment Canada showed that Canada is warming at twice the global rate. Wildfires in California and British Columbia have damaged fruit and vegetable harvests. Droughts in the Prairies have led to smaller harvests of feed grains and produce, and water scarcity has forced famers to reduce the size of their herds, causing meat prices to spike. Tornadoes in Ontario and Quebec, and more active than normal hurricane seasons in the Atlantic, have also impacted the food supply chain, writes Corporate Knights.
In Manitoba this past summer, a severe drought drove up the price of feed grain, hay prices and costs for transporting feed, squeezing already tight margins.
“It’s terrible. Our pastures and field are withering. We don’t have enough feed for our cattle so we’re forced to buy it. But as hay and feed grain prices rise, it costs more and more to keep the cattle. It’s devastating,” says Ian Robson, a Manitoba farmer quoted on the National Farmers Union website.
The problem is exacerbated by the fact that cattle prices are falling due to farmers being forced to sell off part of their beef herds, meaning they will have to pay more and more for inputs, to keep cattle that are selling for less and less.
Scientists say that record heat waves lasting longer than a week, such as the “heat dome” that enveloped residents of western Canada and the United States this past summer, will be two to seven times more likely — creating the conditions that spark wildfires, cause water shortages, and increase the frequency of weather events like hurricanes and tornadoes that often ravage farmland and disrupt supply chains around the world, forcing food prices to rise year after year.
By June, drought had already scorched much of the US West, prompting California farmers to leave fields fallow and triggering water and energy rationing in several states.
In mid-September, the Southwestern United States reported precipitation at the lowest 20-month level since 1895. The drought in California and the “Four Corners” states of Arizona, Utah, Colorado and New Mexico started in early 2020 and has led to unprecedented water shortages in reservoirs across the region, while fueling devastating wildfires.
A report by the National Oceanic and Atmospheric Administration (NOAA) found that the unusually high temperatures coinciding with the Southwest’s historic, worst in a century dry spell, are symptomatic of climate change and have intensified the drought.
Quoting from the report, Reuters said, Above-normal heat helps dry up surface and soil moisture and reduces snowfall in winter, which in turn diminishes dry-season surface water storage from snow-melt runoff…
Low snowpack and parched soil can also create a “land-atmosphere feedback” that deepens a drought by helping raise ground temperatures while leaving less moisture available to evaporate for future precipitation…
Extremely high temperatures also sharply boost demand for water, further straining depleted reservoirs and rivers.
According to BNN Bloomberg, heat-related drops in crop yields affecting the supply of food could be with us for decades:
Yields of staple crops could decline by almost a third by 2050 unless emissions are drastically reduced in the next decade, according to a Chatham House report published [in September], while farmers will need to grow nearly 50 per cent more food to meet rising global demand during the same timeline.
It isn’t only retail food shoppers that are feeling the pinch of rising prices. Inflation is just as much a factor at the bottom of the food supply chain, the world of farmers and ranchers, as at the top, the shelves of brand-name grocery stores where most of us peruse items for our weekly shop.
One of the most important inputs that farmers rely on for growing food is fertilizer. Higher fertilizer prices must often be passed onto the end user, the buyer of fruits and vegetables, for the grower to preserve his profit margin. This is precisely what we see happening right now.
Recently the Green Markets North American Fertilizer Index hit a record high, rising 7.9% to US$996.32 per ton, and blasting past its 2008 peak. According to BNN Bloomberg, the fertilizer market has been smoked this year due to extreme weather, plant shutdowns and rising energy costs — in particular natural gas, the main feedstock for nitrogen fertilizer.
Nitrogen, which gets added to the soil to help plants grow, is also on a tear, with some US farmers saying it’s almost doubled in price since last spring. Several farmers are reportedly relying on other crops like winter wheat which consumes less nitrogen.
Green Markets says expensive fertilizer could push US corn farmers’ cost of production costs 16% higher.
The higher the cost of farming inputs, the more farmers will have to charge the consumer to make up for those payments. On a personal note, I see this happening on my hay farm. The price of custom fertilizer has doubled from about $500/t to $1,000/t, forcing hay farmers like myself to either absorb the higher cost, or make some tough decisions — like using less fertilizer or none at all, which obviously affects your grass yield. I also raise beef cattle, so the increased cost of fertilizer forces me to consider whether I can afford to carry my full herd. The price of herbicides has also gone up, so now I need to decide whether to spend a lot of money on weed control. When you factor in unpredictable weather conditions during growing season, such as dry spells, extreme wet and forest fires, it seems to be the start of an extremely vicious cycle that threatens to both drive farmers into bankruptcy, and ratchet up the price of food, all the way up the supply chain from farm to table.
According to the Food and Agriculture Organization’s global food index, food prices are already at a decade high, and increased fertilizer costs could lead to persistent food inflation well into 2022.
Beyond the headlines blaming covid, a deeper understanding of food inflation requires an appreciation for how the rising prices of farm inputs like fertilizer, feed grains, hay, etc., get passed on up the food chain and eventually end up as higher grocery bills. Food inflation in Canada is close to 5% and we can see this reflected in the higher costs of a number of grocery items.
Leading the price increases, in September fresh or frozen chicken gained 10.3%, pork was up 9.5%, seafood was 6.2% more expensive and butter was 6.3% more dear. Surprisingly, the prices of fresh vegetables were down 3.2%.
Statistics Canada says the cost of food rose 3.9% year over year in September compared to 2.7% in August. The agency notes the country’s annual rate of inflation reached its highest level since 2003, with the consumer price index (CPI) up 4.4% in September compared to a 4.1% year over year increase in August.
US inflation is even higher at 5.4%. The CPI increased 0.4% in September, with food and rent accounting for more than half of the rise. Food prices reportedly jumped 0.9% last month after increasing 0.4% in August, with the largest rise in food prices since April driven by a surge in the cost of meat.
Among US farm inputs, feed purchases, representing the highest percentage of farm production expenses, are this year outpacing 2020’s, according to the US Department of Agriculture graph below.
As for whether food inflation, and other kinds of inflation, are transitory, there is increasing evidence that rising prices are becoming stickier than previously thought.
Reuters reported on Thursday that industry leaders around the world believe prices are only going higher, with shortages of workers, fuel, container ships, semiconductors and building materials, as examples, keeping companies scrambling to keep a lid on costs.
“We expect inflation to be higher next year than this year,” the article quotes Graeme Pitkethly, finance chief at consumer products giant Unilever.
Some of the problems leading to higher prices are structural, including labor shortages, due to older employees leaving and fewer entering the workforce.
To this I would add climate change, which pre-dates covid-19 supply chain gum-ups. A planet that continues to warm (there is nothing we can do to stop the Earth’s natural climate cycles, the Earth will keep warming until it isn’t) will do more to raise the prices of crucial farm inputs like fertilizer, herbicides, feed grains and diesel fuel, than a bunch of refrigerated containers waiting for a cargo ship berth could ever do.
At minimum supply disruptions are likely to last until 2022 and there is every chance that next year’s growing season will see the same drought conditions as 2021’s, meaning no reprieve on the prices of many grocery items.
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The ‘Maestro’ Is Why Jay Powell Keeps Seeing (inflation) Ghosts
See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything….
See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything. Its purpose is to maintain a different sort of money illusion (the original relates to how workers focus on nominal rather than real levels of compensation). This other money illusion relates to the hidden nature of money itself.
We’re told central bankers are it, therefore everything must be related to central bank monetary policy. If the dollar’s falling, the Fed accommodated. If it’s rising, Fed tightening. Rates go down because, everyone says, Jay Powell bought bonds. Yields go up because of rate hikes after the bond buying is over.
You go to the bathroom in the middle of the night, the FOMC must’ve voted for it.
It all goes back to before Greenspan, though it was the “maestro” who most clearly articulated the gross illiteracy and unsupported conceits behind much of Economics.
CHAIRMAN GREENSPAN. It’s really quite important to make a judgment as to whether, in fact, yield spreads off riskless instruments—which is what we have essentially been talking about—are independent of the level of the riskless rates themselves. The answer, I’m certain, is that they are not independent.
Risky spreads are, according to this view, in a sense controllable from monetary policy even from only the short end. Why? Because all riskless rates, Greenspan also said, were nothing more than a “series of one-year forwards.”
It was, in theory, all so easy and neat; the Fed from its single position could conduct all the instruments in the symphony as it wished, however and whenever wished. Thus, maestro.
Why, then, all the constant “conundrums” and “inflation puzzles” ever since? Dear Alan said he was certain, and he’s certainly been wrong.
The yield curve is no series of one-year forwards, nor are risky spreads utterly dependent upon hapless Economists at the Fed (see: swap spreads, as a start). Those at the Fed instead have repeatedly shown they have no idea how even short run interest rates work (see: SOFR) which means they can’t be literate in money like economy.
What do they do?
Influence public opinion via financial media. To wit:
The unquestioned assumption embedded here is palpable anyway; nominal rates are rising (“worst year for fixed-income since 2005” BOND ROUT!!!!) because inflation is “hot enough.” Reported like its some foregone conclusion, this inflation certainty dictated to the bond market via a suddenly hawkish Federal Reserve.
This is, at best, incomplete; most often, just plain backward. Thanks, Maestro.
Had the yield curve behaved recently like it had earlier in this same year, this would be plausible. The yield curve, on the contrary, is performing very differently negating any chance for this to be the case.
Bond yields aren’t reacting to anything; they’ve helpfully sorted CPI’s for us all along. As I wrote earlier today, the yield curve has expertly, consistently interpreted the money Economists and central bankers can’t understand so as to accurately predict – for longer than a century – what is and will be inflation.
This often leads to conflict; central bankers say it’s one thing and bonds declare another, often the opposite. This differing viewpoint not just a post-2007 development, either, also noted today, bonds vs. Economists has been a one-way contest going back before 1929.
Our current case, therefore, very much like previous cases.
A flattening yield curve, conspicuously so, is the bond market recognizing: 1. It isn’t inflation, just transitory price factors, meaning lack of heat in the economy; 2. Policymakers repeatedly have shown they have no clue how or where to even begin figuring one way or the other; 3. Because they are clueless, they have likewise displayed a consistent tendency to make egregious forecast errors, such as 2018 or 2013; 4. Therefore, very much independent of the Fed, bond yields are instead disagreeing with Powell’s mistake by pricing a scandalously flattening yield curve with nominal rates already contradictorily low (tight money).
Bonds – not the Fed – have already sorted the inflation question. The problem is, as usual, the answer isn’t to the liking of mainstream Economics which can only interpret yields from the “certitude” of Greenspan. In that sense, inflation is a foregone conclusion. In the dream-world of media, the theme this year is solidly inflation. In monetary reality, unambiguously deflationary.
Just in time for Halloween, Jay Powell is back to seeing ghosts.
US stock close mixed on Powell’s hawkish remark
Dow Jones closed higher while S P 500 and Nasdaq drifted on Friday October 22 after Fed Chair Jerome Powell s tapering remarks weighed on investors…
Dow Jones closed higher, while S&P 500 and Nasdaq drifted on Friday, October 22, after Fed Chair, Jerome Powell’s tapering remarks weighed on investors’ sentiment. However, the optimism over the robust earnings has pushed the indices towards their third consecutive week of gains.
The S&P 500 was down 0.11% to 4,544.90. The Dow Jones Industrial Average increased by 0.21% to 35,677.02. The NASDAQ Composite Index fell 0.82% to 15,090.20, and the small-cap Russell 2000 was down 0.21% to 2,291.27.
On Friday, the Federal Reserve Chair, Jerome Powell said that the central bank should start dialing back its asset-buying program soon while suggesting that the interest rate shouldn’t be increased as of now. While the strong earnings results have lifted the investors’ confidence in recent weeks, the remarks from the Fed Chair raised concerns of the investors.
The Fed has reassured that the interest rate will be kept at the “near-zero” level until the economy returns to its expected employment and the inflation would come under the Fed’s expectation level of 2%. Meanwhile, the supply-chain disruptions and the rising costs of the raw materials indicated that inflation is likely to stay above the level for some time.
The financial and the real-estate sector topped the S&P 500 index on Friday, with communication services and consumer discretionary sectors as the bottom movers. Eight of the 11 critical sectors of the S&P 500 index stayed in the positive territory.
The stocks of Cleveland-Cliffs Inc. (CLF) gained 12.10% in intraday trading, after reporting better-than-expected quarterly earnings on Friday, before the bell. The company has reported record revenue of US$6 billion in Q3, FY21, while its net income came in at US$1.28 billion.
The shares of American Express Company (AXP) rose 5.50% after the company has reported strong quarterly earnings results as more people used their cards for traveling, dining, and other leisure activities. The total revenue of the company surged around 25% YoY to US$10.92 billion, while its net income was up 70% from the previous year’s same quarter to US$1.82 billion.
The stocks of Honeywell International Inc. (HON) plunged 2.90% after the company has lowered its full-year sales forecast due to the bottleneck supply constraints. The company’s sales rose 9% YoY to US$8.47 billion in Q3, FY21, while its EPS was up 68% YoY to US$1.80 apiece. However, the company has lowered its sales forecast to be between US$34.2 billion and US$34.6 billion from its previous forecast of US$34.6 billion and US$35.2 billion.
In the financial sector, JP Morgan Chase & Co. (JPM) increased by 1.15%, Bank of America Corporation (BAC) rose 1.27%, and Morgan Stanley (MS) surged 1.54%. Citigroup, Inc. (C) and Goldman Sachs Group, Inc. (GS) gained 1.28% and 1.65%, respectively.
In real-estate stocks, American Tower Corporation (AMT) advanced 1.86%, Equinix, Inc. (EQIX) jumped 1.52%, and Public Storage (PSA) soared 1.21%. Digital Realty Trust, Inc. (DLR) and SBA Communications Corporation (SBAC) ticked up 1.03% and 1.71%, respectively.
In the communication sector, Alphabet Inc. (GOOGL) decreased by 3.13%, Facebook, Inc. (FB) fell 5.91%, and Walt Disney Company (DIS) declined by 1.10%. Twitter Inc. (TWTR) and Snap Inc. (SNAP) plummeted 4.15% and 25.99%, respectively.
Futures & Commodities
Gold futures were up 0.71% to US$1,794.60 per ounce. Silver increased by 0.86% to US$24.378 per ounce, while copper fell 1.24% to US$4.5018.
Brent oil futures increased by 1.55% to US$85.92 per barrel and WTI crude was up 2.06% to US$84.20.
The 30-year Treasury bond yields was down 2.47% to 2.075, while the 10-year bond yields fell 1.91% to 1.643.
US Dollar Futures Index decreased by 0.17% to US$93.602.
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