Despite the turmoil in global markets last week, all three major U.S. equity indexes ended positive on the week, albeit fractionally. Investors largely shook off volatility concerns stemming from the Fed’s policy announcement to begin a stimulus pullback “soon” (likely to be announced in November), contagion risks associated with China’s distressed Evergrande Group and Beijing’s smackdown on cryptocurrencies.
All eyes remain on Washington to see if a deal can be struck on a massive spending bill which would include significant changes to the tax code.
Here's what we are reading this week:
- BlackRock are staying tactically pro-risk amid the broadening economic restart, with negative real rates supporting risk assets – as per their "new nominal theme."
- The Fed signaled it will start to taper around the year-end. Its reluctance to confirm inflation is meeting its new objective also supports their new nominal theme.
- U.S. personal income and consumption data will be in focus, while purchasing managers’ index data could shed light on the restart amid the delta spread.
Evergrande Explained -- Kraneshares
Investors worldwide have been eyeing the difficulties China’s second largest property developer, Evergrande, is having paying its debts. The fallout from the company’s restructuring, the specifics of which are still in the works, has had a broad impact on global commodities, equities, and bonds. Some points of note:
- China real estate mega developer Evergrande sparked cries of “China’s Lehman Moment” in the Western media when it postponed a scheduled debt repayment.
- Neither a disorderly default nor a complete government bailout are likely. The most likely outcome is a government-facilitated debt restructuring, which appears to already be underway
- Evergrande’s story is intertwined with the story of China’s ongoing economic transformation and shift away from real estate investment towards investment in growth industries such as technology and consumer products.
- The Evergrande moment may present an attractive entry point into the Asia high yield bond market because risk controls are tightening at the same time yields have been driven up.
As we enter the next phase of the expansion, the focus will shift from metrics aimed at the initial recovery to metrics the Federal Reserve is looking at to gauge the health of the economy. Cetera Investment Management has launched their Fed Monitor which attempts to weigh the measuring points the Federal Reserve may use in adjusting rates and accommodative policy.