It is exactly a month since Evergrande was the only thing anybody could talk about.
Hence, it is a good time to recap market dynamics since Sep 20.
Where is the contagion sticking, and where have we recovered (many places, but not all)
THREAD
First, the Chines currency has substantially OUTPERFORMED over the past month. While the EUR and the JPY are down 2-4% vs the USD, the CNY is up around 1% against the USD.
This fits with how they want their currency to behave 'reserve currency like'.
Second, while a crisis normally generates yield declines in major markets, this has NOT been the case in China. Chinese 10Y rates are UP over the past month, as expectations for mon easing has been disappointed (and in sympathy with the global trend).
Third, the equity market that was hardest hit around Sep 20, was the Hong Kong market. But even the Hong Kong market is back to where it started, and global equity markets are generally up 1-3% since Sep 1 when contagion effects started (see top table)
Fourth, the area with direct impact of the real-estate tension is in the HY (USD) credit market. Here yields spiked for several weeks, to peak around 20% (yup, that is high!) last week.
(but this index has a very high weight to real estate, it should be noted)
In China (IG) credit, the trends have been much more boring. Yields have generally followed the trend in risk free rates (us swaps shown for reference)
Spreads are 10bp wider since Sep 10, and 5bp wider since Sep 20 (moving just a few bp more than the US CDX IG index, see table)
Firth, even the local real estate (equity) index has bounced, although the trend is much more mixed than global equity
Sixth, Chinese Financials (an obvious place to look for systemic contagion) have bounced back too, recovering all their losses from early September.
This is important for thinking about the credit channel going forward
And finally commodities, the metals that many view as 'China-linked' (iron ore, copper) have been mixed.
Iron ore is down a lot in recent months, but after a crazy run higher in the spring.
And copper is actually back at the highs...
certainly not a broad-based collapse!
All told, global contagion effects (such as to global banks) only lasted a few days, and global equity markets are looking at other stuff now. You really have to zoom in on real-estate specific credit to see dramatic effects. Many other markets have healed over the last month.
China is not like other countries. And its real estate crisis will be handled differently to (including a different role for state banks).
Investors are currently looking elsewhere. In general, it makes sense to focus on real-transmission, as opposed to run-way financial market contagion effects (in a state controlled financial system, why would they allow that?).
I will leave it at that. Contagion is a complex thing, and markets are highly non-linear. What seemed crucial a month ago, now seems irrelevant to many. The truth is probably in between. END.
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There is a lot of debate about these various measures of inflation expectations. And it is worth thinking hard about their signaling value, including what is the process behind generating the forecasts
It seems to me, that the key point is, that there may be a break in the process for making such forecasts.
- From simply using the target as the anchor, as opposed to a model.
- To having your econ view potentially override the target
Around the world, we are seeing (economist) inflation forecast starting to really break higher. But mostly for 2021 and 2022, while in G10 (they are still anchored in 2023).
There used to be many arguments why the dollar was NEGATIVELY correlated to oil
1/ The US is more energy intensive 2/ Petro-dollar flow supports other currencies 3/ Other central banks are more sensitive to headline inflation (=energy) than the Fed
And this is how it looked like pre-GFC, EURUSD and oil prices looked nearly identical on the chart (I have admittedly picked the most extreme period, around 2007).
In other words, the USD used to be strongly negatively correlated to oil prices.
Is it a coincidence that bitcoin has broken $50K at the same time as the news media is full of stories about a potential US default as a function of failure to raise the debt ceiling in October?
The chart shows that $BTC (white) spiked exactly as US T-bill yields (yellow) spiked
That is, bitcoin prices moved sharply higher exactly at the same time as short-dated T-bill yields (those maturing after October 18, when Yellen has said Treasury funds will run out) spiked, and embedding a 'default premium'
We cannot prove anything statistically in a sample of one, and if we look at how the dollar is trading, we do not have a global USD decline (the dollar has generally been firm in recent weeks), so it is not a slam-dunk conclusion.
First, I am not a person who always worry about inflation. I have been observing how central banks in the period 2008-2019 persistently OVERestimated inflation. Hence, I am always skeptical when I see a confidently aggressive inflation forecast.
Second, the link between money supply and inflation is very far from simple, even if some textbooks (and many observers) pretend it is simple. It is not the money supply growth that is fundamentally new in 2021.