Evergrande and Energy Crisis Purge Remnants of Optimists

12 oct 2021

Last week's Senate vote on US government debt ceilings boosted the mood in financial markets. In principle, today one more injection of positive from the House of Representatives is not ruled out (we must also vote on this). But what's next?

And then you have to look around. And around now everything is not very good.

Evergrande skipped the third round of bond payments yesterday. This time for $ 150 million. That is, all the hopes of investors that it will dissipate by itself are not justified by the word at all. The situation is getting worse every day, and most importantly, the infection has begun.

Last week, another Chinese developer, Fantasia, defaulted on its obligations. This week, a couple more developers from China's Modern Land and Sinic will join the growing roster of default lovers. As a result, the bonds of these companies are sold at 20-30 cents per dollar. It would seem like a wonderful opportunity for optimists to earn 100-200% profitability. But no one is in a hurry to buy this garbage. On the contrary, they sell out at almost any price that is offered.

The energy crisis has not gone anywhere either. In oil equivalent, gas is now traded at $ 200 + per barrel, which is absolutely outrageous (with live oil trading at $ 83). In Lebanon at the weekend, the light was turned off throughout the country for 24 hours, recalling how all this could end. For example, blackouts in China and production cuts are a blow to all tech companies in the world. Automakers that are already suspending production due to a shortage of chips will get even bigger problems. And then the harvest season in China can be greatly complicated by power outages.

In general, everything is pretty gloomy. And most importantly, there is room for deterioration. Yesterday, for example, the head of the Bank of England announced that the rate, apparently, would have to be raised earlier than we would like, because of inflation. This means that the next in line will be the Fed.

In general, if we abstract from today's vote in the House of Representatives, on the horizon, the US stock market has the last hope for a bright future - the reporting season. Formally, it should be one of the best in the last 10+ years. Profit growth is projected at 27% year-on-year. But will this be enough for the markets? What if they decide to look at the same figure, but quarter to quarter? What if companies are actively talking about rising costs due to rising wages, raw materials and energy prices? Or problems in global supply chains and rising logistics costs? And one should not forget about the consequences of the latest wave of the pandemic.

In general, the balance of benefits / threats, in our opinion, is very strongly biased towards threats. So selling in the US stock market remains our basic trading idea.