Thread by @jnordvig

Just a few more observations on Evergrande/China Contagion.

Last week, saw the Evergrande tension spreading through the real estate sector (but not much beyond, except Iron ore)

This week, there is already broader based pain...

1/ Today, we have seen Chinese financials are under pressure (in stock space, down >4%

Regional banks down >5% on the day (not shown in table)

https://twitter.com/jnordvig/status/1439889466861178880

2/ global spill-overs are accelerating

Iron ore down another 5%
Aussie stocks down >2%, with materials leading the move down (-3.7%, given the china link there)

3/ The Chinese currency is down a touch, but less than 0.2%. How is this possible? It often happens for 'reserve currencies' and China badly wants to create one. It fits a pattern that was also in motion in early 2020 (CNY outperforming AUD and other Asian currencies).

(the FX issue will have to be a thread on its own soon, as it is interesting, and often misunderstood)

4/ global yields are shifting down, and they are supposed to on risk aversion. But it is an open question if Chinese yields will follow. There is not the same link between asset price weakness and policy support (mon pol easing) in China as in the US and G10.

5/ More generally, market participants will be watching for signs that policy makers are about to step in, to attempt to calm the situation. But the issue is that they want deleveraging in the real estate sector. So when to step in? Nothing new to observe on this front yet.

As I commented in a thread yesterday, the underlying structural issue is very BIG. Hence, we have to watch market moves carefully as the type of contagion we observe evolves; and what the policy responses, if any, are.

https://twitter.com/jnordvig/status/1439562727798853633

This story will not be over any time soon.

END.