Novum Alpha - Daily Analysis 24 September 2021 (10-Minute Read)
Thursday came and went with nary a sound from China's second largest real estate developer by sales, Evergrande Group.
A terrific Friday to you as markets rebound sharply as concerns over a potential implosion of China's Evergrande Group subsides.
In brief (TL:DR)
In today's issue...
Thursday came and went with nary a sound from China's second largest real estate developer by sales, Evergrande Group.
Evergrande has yet to make a statement on a dollar-bond interest payment that was due yesterday, but global markets appear to have moved on from any concerns of contagion from the fallout of the world's most indebted developer.
In Asia, markets were a mixed bag in Friday's morning trading session, with Tokyo's Nikkei 225 (+1.78%) up, while Seoul's Kospi Index (-0.04%), Sydney’s ASX 200 (-0.36%) and Hong Kong's Hang Seng (-0.36%) were all down slightly.
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1. Evergrande's Debt Debacle is Only Just Beginning
The summer of serenity is effectively over in Asia’s booming debt markets.
As global economies were overcome with massive amounts of liquidity from unprecedented fiscal and monetary stimulus in the wake of the Covid-19 pandemic, investors hungry for yield fanned out into Asia’s lucrative high yield bond markets.
The narrative was seductive in its simplicity – forget that borrowers were sketchy, Asia was set to continue growing and that would put a lid on any potential default.
But like so many other emerging economies, Asia’s bond markets can be just as flaky as investors would expect them to be.
And deepening worries over Evergrande Group (-4.12%) have ignited a selloff in the US$428 billion Asian debt market, highlighting the risk of how a crisis at China’s second largest real estate developer could, just like Covid-19, spread from one company into the region, and then the whole world.
While Evergrande Group may have cleared its first (of many) onshore debt tests, its first offshore debt payment was due yesterday and was trading around US$0.28 on the dollar, a sign of substantial distress with traders pricing in the potential for Evergrande to miss payments.
As a result, yields on U.S. dollar-denominated bonds issued by Asia’s riskier borrowers have soared to almost 12% this week, the highest level since the early days of the pandemic, according to an ICE Data Services index.
And while a failure by Evergrande to make an interest payment on its offshore dollar-bonds on Thursday could trigger China’s biggest-ever debt restructuring, markets seem to be taking that prospect in their stride.
There are three main reasons for that, first of which has been the People’s Bank of China, China’s central bank, shoring up onshore lending with liquidity injections.
Because Evergrande wasn’t allowed to fail on Tuesday, there is widespread expectation that it will come to an amicable settlement with lenders on Thursday as well.
Had Beijing truly intended to let the chips lay where they fall, Evergrande Group would have collapsed by now.
The second reason is that offshore dollar-denominated debt makes up a very small portion of Evergrande Group’s overall borrowings.
Although the embattled property developer has some US$305 billion of liabilities, only an estimated US$20 billion of that is dollar-denominated offshore borrowings, according to data from Refinitiv.
While significant, let’s not forget that just recently Archegos Capital Management rippled some US$10 billion worth of losses throughout the financial system without even so much of a startle.
And finally, Evergrande’s predicament is of Beijing’s own making as part of a broader crackdown on borrowing by Chinese property developers.
But unlike the sudden regulatory curbs in sectors from afterschool education to technology, swift crackdowns in the property market could prove unpopular.
Beijing is treading a fine line between reigning in soaring property prices that have fueled resentment and increased inequality, and collapsing a sector that is responsible for 29% of GDP and constitutes as much as 40% of household wealth.
And because it’s Beijing that helped create the mess, all eyes will be on Communist Party apparatchiks to see how they intend to fix it.
For now, the calm in equity markets assumes that Beijing can and will fix the mess and contain any potential fallout, but even if Evergrande survives Thursday, there is no shortage of days in the coming weeks and months when other debt skeletons will come out of the closet.
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2. My Kingdom for a Job
It has been somewhat fortuitous that the U.S. Federal Reserve has not committed to a fixed schedule on the tapering of its US$120 billion-a-month asset purchases, because it might just need that flexibility.
While most analysts expect the Fed to start tapering in November, at the next Federal Open Market Committee meeting, U.S. Federal Reserve Chairman Jerome Powell made it clear that the window was still open on keeping up asset purchases for so long as the U.S. economy needed them.
And as unemployment numbers in some of America’s most populous states starts to spike, the Fed’s flexibility seems prescient.
U.S. Labor Department data revealed that last week saw a surge in claims for unemployment benefits, led by California and was well above economist estimates.
Overall unemployment claims in regular state programs soared to 351,000, against the 320,000 that a Bloomberg survey of economists had predicted.
While unemployment claims have broadly declined throughout the economic recovery, economic growth is slowing amid a pullback in stimulus spending, with the end of federal pandemic benefits and stimulus checks.
The Biden administration has so far made clear it will not extend jobless aid further, although states can use pandemic relief funds to provide additional assistance to unemployed workers.
As one of the key markers for the Fed’s continued intervention in the markets, the sudden spike in unemployment will be an important justification for maintaining the status quo.
With Asian markets roiled by the potential fallout of Evergrande’s debt crisis and China’s economy slowing against a backdrop of a more glacial pace of growth in the U.S., that the Fed has left the backdoor open to keeping the liquidity taps flowing has been calming markets for now.
3. Robinhood is Doubling Down on Cryptocurrencies
From the facilitators of the meme stock saga, Robinhood Markets (-2.01%), one of the world’s largest trading apps is now doubling down on cryptocurrencies.
Fresh off its IPO earlier this year, Robinhood earned US$233 million in revenue in its second quarter from cryptocurrencies, almost half of its US$565 million in earnings.
And with as many as 60% of all funded accounts on the trading platform having engaged in some form of cryptocurrency trading, Robinhood is understandably doubling down.
On Wednesday, Robinhood announced that it would begin offering cryptocurrency wallets on its platform, putting it in direct competition with incumbent U.S.-listed cryptocurrency exchange Coinbase Global (-1.80%).
Although Robinhood has enabled cryptocurrency trading for some time, it will now allow traders to deposit cryptocurrencies like Bitcoin and Ether directly into digital wallets with Robinhood.
Robinhood’s cryptocurrency wallets will also allow users to directly transfer cryptocurrencies off their wallet, which will enable spending and payments for goods and services.
Because Robinhood was always a mobile-first trading app, it already lives on the phones of most of its user base, bringing an added dimension to its cryptocurrency play.
Investors seem to agree, pushing shares of Robinhood 11% higher earlier in the week and lifting the trading app’s market cap to over US$40 billion.
Robinhood’s cryptocurrency assets under custody have also soared, hitting US$22.7 billion at the end of the second quarter of 2021, a whopping 29 times more than the same period last year.
Unprecedented fiscal and monetary stimulus in the wake of the coronavirus pandemic has seen more investors take an interest in Bitcoin as well as other cryptocurrencies, fueled by the narrative that fiat currencies like the dollar are at risk of debasement through inflation.
The transformative nature of blockchain technology, including such innovations as decentralized finance and non-fungible tokens is already threatening to disrupt legacy industries like financial services and the world of art and music.
In a recent presentation to retail investors, Robinhood stressed that its expansion into cryptocurrency trading would be the lynchpin of its internationalization strategy, as the trading app looks to other markets for growth.
But Robinhood’s doubling down on cryptocurrencies comes at a time when globally regulators are tightening the noose around the sector.
Coinbase Global (-1.80%) has been the most recent victim of the U.S. Securities and Exchange Commission’s regulatory exuberance, with the exchange backing down from a proposed cryptocurrency lending product that would have paid out interest on deposits.
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Sep 24, 2021
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