Posted on by The Daily Shot Editor: Lev Borodovsky

Evergrande is not China’s “Lehman moment”

The Daily Shot: 21-Sep-21
• China
• Emerging Markets
• Cryptocurrency
• Commodities
• Energy
• Equities
• Credit
• Rates
• The United States
• Canada
• The Eurozone
• Food for Thought

 

China

1. Debt of leveraged property companies remains under pressure.
 
• Evergrande:
 

 
• Sinic Holdings:
 

 
However, analysts doubt that the property debt crunch is China’s “Lehman moment.”
 
Source: Barclays Research  
 
Yes, residential property sales have been struggling this quarter.
 
Source: China Beige Book  
 
And banks see an increase in bad property loans.
 
Source: @WSJ   Read full article  
 
But these trends will not freeze the nation’s credit flows or send the economy into a recession. Some of these property developers will be restructured, with bond investors taking a hit. The impact on the banking system will be limited.

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2. China’s economy has been moderating due to trends not directly related to property markets. One reason is the slowdown in fiscal stimulus this year.
 
Source: Variant Perception  
 
Industrial production and retail sales growth have both weakened.
 
Source: Gavekal Research  
 
Source: @PkZweifel  
 
Growth in real retail sales has been slowing for years.
 
Source: Yardeni Research  

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3. China’s stocks have been underperforming other EM shares.
 

 
And yet, China’s growth stocks are not cheap.
 
Source: BCA Research  
 
• The Hang Seng Index is down again today, although the property index appears to have stabilized.
 

 
The Hang Seng is testing long-term support.
 
h/t @IshikaMookerjee   Read full article  

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4. Employment at state-owned firms has been falling for a couple of decades.
 
Source: Alpine Macro  

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Emerging Markets

1. Mexico’s manufacturing activity has lagged behind regional peers.
 
Source: Mizuho Securities USA  
 
2. Colombia’s economy is back at the pre-COVID trend.
 

 
Business sentiment has been strong.
 

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3. Russian households’ real disposable incomes have not recovered from the 2014/15 oil market crash (which sent the ruble tumbling).
 
Source: @markets   Read full article  
 
4. Israel’s consumer sentiment has been deteriorating as COVID cases surge.
 

 
5. Inflation expectations in Turkey keep grinding higher.
 

 
6. Hedge funds have been buying EM currencies in recent weeks.
 
Source: BofA Global Research  

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Cryptocurrency

1. Cryptocurrencies are in the red over the past week, although bitcoin is outperforming.
 
Source: FinViz  
 
• Here is the relative performance over the past month.
 

 
• Bitcoin held support at $40k.
 

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2. Using cryptos to diversify risk-asset portfolios proved ineffective in the latest selloff.
 
Source: Bloomberg   Read full article  
 
Bitcoin-equity correlations jumped.
 

 
Source: @TheTerminal, Bloomberg Finance L.P.  

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3. Bitcoin miners have been in accumulation mode over the past six months.
 
Source: Glassnode  
 
4. DeFi tokens are fairly correlated with each other, but the correlation with ETH is relatively weak.
 
Source: Delphi Digital   Read full article  
 
5. Digital asset investment products registered their fifth consecutive week of inflows.
 
Source: CoinShares   Read full article  

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Commodities

1. Platinum is down sharply in recent weeks.
 

 
2. Global corn production is expected to hit a record high this year.
 
Source: @markets   Read full article  
 
3. Meat prices have outpaced other food categories.
 
Source: @abhabhattarai   Read full article  
 
4. PVC costs have been surging.
 
Source: Bloomberg   Read full article  

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Energy

1. Brent held long-term resistance as equities sold off.
 

 
Despite a pullback in prices, Brent backwardation (inverted curve) held up well – an indication of tightness in the market.
 
Source: @HFI_Research  
 
Global inventories of crude oil and products are now below pre-COVID levels.
 
Source: Goldman Sachs; @HFI_Research  

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2. Energy shares continue to underperform oil.
 

 
3. Jet fuel prices have mostly recovered from last year’s lows.
 
Source: Fitch Solutions Macro Research  
 
However, jet fuel production (and consumption) is still well below pre-pandemic levels.
 
Source: Fitch Solutions Macro Research  

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4. European natural gas prices continue to surge to new records.
 

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Equities

1. There are plenty of risks to consider for US stock investors. China’s property developers are not one of them. The sector’s credit crunch should have a moderate impact on China’s growth. Economic expansion has been slowing for other reasons (see the China section).
 
Yes, companies with substantial sales in China will likely see slower earnings growth.
 

 
But it’s the US and global fiscal drag that is more likely to impact profits (3 charts).
 
Source: Bloomberg   Read full article  
 
Source: Alpine Macro  
 
Source: Variant Perception  
 
Other US domestic issues also pose risks, including tech regulation and a potential surprise from the Fed (perhaps due to more persistent inflation). Here are a couple of additional concerns.
 
• Corporate and capital gains tax hikes:
 
Source: @PredictIt  
 
• The debt ceiling:
 
Source: Reuters   Read full article  

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2. US stocks have stabilized after a sharp selloff.
 

 
From a technical perspective, the S&P 500 broke through the 50-day moving average and the lower Bollinger band. According to Cormac Mullen of Bloomberg, the next key support level would be the 200-day moving average.
 

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3. High-dividend/dividend growth stocks have been underperforming.
 

 
• The Dow has sharply underperformed the S&P 500.
 

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4. Retail trader activity peaked early this year but remains elevated.
 
Source: Deutsche Bank Research  
 
5. This chart shows sector return dispersion since the end of April.
 
Source: @ISABELNET_SA, @JPMorganAM  
 
6. The relative performance of small caps has been tracking the changes in the US Treasury term premium.
 
Source: Variant Perception  
 
7. Thematic fund launches have surged in recent years.
 
Source: Morgan Stanley Research; @Callum_Thomas  

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Credit

1. Leveraged loans saw a similar drawdown to high-yield bonds last year but a much more limited upside since then.
 

 
2. This map shows the potential impact of climate change on sovereign credit ratings.
 
Source: Bruegel   Read full article  

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Rates

1. The 10yr Treasury yield has been holding resistance near 1.38%.
 

 
2. Net-short investor positioning in Treasuries appears stretched.
 
Source: Nordea Markets  
 
3. The US Treasury will withdraw a substantial amount of dollar liquidity later this year (by parking cash at the Fed) once it can sell debt again.
 
Source: Nordea Markets  

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The United States

1. Let’s begin with the housing market.
 
• Homebuilder optimism ticked higher.
 

 
• Consumers’ views on buying conditions for homes continue to deteriorate, according to the latest U. Michigan survey.
 

 
• Housing starts face downside risks.
 
Source: Pantheon Macroeconomics  

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2. There are now 72 container ships waiting to unload at the port of LA/Long Beach, a new high.
 
Source: MarineTraffic  
 
• The sales-to-inventories ratio for automobiles continues to fall.
 
Source: @WSJ   Read full article  
 
• Manufacturers expect disruptions to ease within the next six months.
 
Source: Piper Sandler   

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3. There are almost two million more retirees than would be expected based on the pre-COVID trend.
 
Source: Deutsche Bank Research  

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Canada

1. The loonie took a hit on Monday.
 

 
The currency appears to be undervalued relative to USD.
 
Source: ING  

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2. Consumer confidence continues to retreat.
 

 
3. How many seats did the Liberals win (according to the betting markets)?
 
Source: @PredictIt  

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The Eurozone

1. Germany’s producer prices continue to surge.
 

 
2. Consumption in the Eurozone tends to follow household net worth, implying further upside. 
 
Source: Longview Economics  
 
3. Inventories are at unprecedented levels in the euro area. 
 
Source: Longview Economics  
 
4. Equity implied volatility rose sharply on Monday.
 

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Food for Thought

1. Nuclear-powered submarine fleets:
 
Source: @divyachowdhury, @ReutersGMF   Read full article  
 
2. Americans’ views on moving extra forces from the Middle East to counter China:
 
Source: Echelon Insights  
 
3. Armed conflicts in 2021:
 
Source: Statista  
 
4. Countries with temporary internet or social media blockages:
 
Source: @axios   Read full article  
 
5. Mortality rates among COVID hospital patients:
 
Source: BNN Bloomberg   Read full article  
 
6. Belief in the lab leak theory:
 
Source: Morning Consult  
 
7. Cigarette smoking in the US:
 
Source: Gallup   Read full article  
 
8. Construction spending on religious facilities:
 
Source: @axios   Read full article  
 
9. US international trade in services:
 
Source: Federal Reserve Bank of St. Louis   Read full article  
 
10. Professional photographers using camera phones:
 
Source: Statista  
 
11. All the dice in the figure below are perfect squares.
 
Source: BrainDen.com   

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