Pre-market stocks: fears about China’s Evergrande spilled over to global markets

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What’s happening: Shares in Europe fell Monday morning after Hong Kong’s Hang Seng fell 3.3%, suffering its worst drop in nearly two months. Chinese banks, insurers and other real estate companies have been criticized. US futures are also significantly lower.
Actions of Evergrande Group (EGRNF) fell 10% in Hong Kong, hitting just 2.28 Hong Kong dollars ($ 0.29) per share. The title has lost 84% so far this year.

Take a step back: fear is growing about how the Evergrande crisis will impact the financial system. In recent weeks, China’s most indebted developer – who has more than $ 300 billion in liabilities – has warned investors of cash flow issues, saying it could default if it wasn’t. unable to raise funds quickly.

Evergrande now faces critical deadlines. He was supposed to repay interest on some bank loans on Monday, according to Bloomberg. The outlet recently reported that Chinese authorities have told major banks that they will not receive these payments.

Overview: The company owns around 6.5% of the total debt held by the Chinese real estate sector, according to an estimate from UBS.

This is fueling fears that Evergrande could trigger the “Lehman moment” in China, in which the collapse of a single entity triggers panic in financial markets, as did the downfall of Lehman Brothers in 2008.

“As a systemically important developer, a bankruptcy of Evergrande would cause problems for the entire real estate industry, which has been a major source of economic growth and jobs in China,” wrote Ed Yardeni, chairman of Yardeni Research, in a note to clients on Monday.

Yardeni thinks a better comparison than Lehman is the explosion of Long-Term Capital Management in 1998. In this case, the US Federal Reserve stepped in to orchestrate a bailout, limiting the damage to financial markets.

“We expect the Chinese government to restructure Evergrande, possibly dividing its activities among other real estate developers,” Yardeni said.

But Beijing’s response remains a major source of uncertainty that could weigh on investor morale in the coming days, especially in the face of inflationary concerns, the US debt ceiling debate and supply chain issues.

In a note released Sunday, Goldman Sachs strategists warned that the Chinese government must “carefully handle” the potential default or restructuring of Evergrande, while delivering a clear message to help “build confidence and stop the crisis. ‘training effect”.

Look at this space: The CNN Corporate Fear and Greed Index, which follows the mood of the market, is in “fear” territory. The VIX, an indicator of potential volatility in the U.S. stock market, jumped 20% on Monday, reaching its highest level since May.

Natural gas prices skyrocket with winter around the corner

The price of natural gas is skyrocketing around the world, raising fears of a shortage of supply during the winter.

The latest: An increase in demand for historically inexpensive fuel in the wake of the coronavirus, along with unusual weather conditions, have depleted stocks, causing prices to spike ahead of the colder months, when more gas natural gas is needed for electricity and to power heating systems.

In Europe, the price of immediate delivery natural gas has reached record levels.

“We’ve seen unprecedented price increases this year,” Graham Freedman, analyst at Wood Mackenzie, told me.

In the United States, natural gas futures are at their highest level since 2014, when temperatures dropped across much of the country.

One problem: China and other countries are using more natural gas as they try to switch to cleaner energy sources. But it increases competition for limited supplies.

A reprieve may not come in time for the winter, forcing governments to quickly debate whether and how to intervene, especially as consumers begin to feel the pain.

“What’s worrying this year is the steadily rising prices throughout the summer months, which is typically the cheap time the industry sources its supplies ahead of the high demand winter season,” Henning Gloystein, director of the energy, climate and resources practice. at Eurasia Group, said in a recent research note, noting that Spain intervened last week to cap energy prices for consumers.

Investor Perspective: Expect to hear more about the rise in natural gas prices as economists and policymakers watch inflation and debate whether economic growth could slow.

“Gas prices could push inflation higher [the] 2% [target] longer, ”Bank of America analysts said in a note to clients on Friday.

This billionaire investor ignores inflation

There are a lot of people on Wall Street wringing their hands over the risks of persistently high inflation. David Rubenstein, co-founder of private equity giant Carlyle Group, is not one of them.

“There are bigger things to fear than the monthly inflation rate,” Rubenstein told my CNN Business colleague Matt Egan in an exclusive interview.

The investor and philanthropist, whose Forbes net worth is $ 4.3 billion, said he was confident inflation would subside from the high levels seen over the summer, although he acknowledged that it could stay above the Fed’s target of average inflation of around 2%.

“I don’t think the world will collapse if we have 3% or 4% inflation. We just got used to low inflation,” he said.

Rubenstein pointed out that countries like Japan have tried and failed to generate price increases. And inflation should allow the Federal Reserve to raise interest rates to their lowest levels, giving the central bank the opportunity to lower them again in the next recession.

“This will take us out of the artificially low interest rate environment we are experiencing now,” he said.

Following

The NAHB Housing Market Index for September arrives at 10 a.m. ET.

Coming tomorrow: Automatic zone (AZO), Adobe (ADBE), FedEx (FDX) and Point correction (SFIX) earnings.


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