Wall of worry time
The UK received worrying economic news on multiple fronts last week, with several utility companies going under and the prospect of steep rises in winter heating costs, petrol stations running out of fuel, gaps on supermarket shelves, and the Bank of England signalling it may raise rates as early as December of this year. Globally, the news flow was not much better, with economic data confirming slowing rates of growth, and the imminent demise of China’s largest property developer, causing journalists to cast their minds back to the Global Financial Crisis. If that was not disturbing enough, the US Federal Reserve (Fed) announced it will likely begin tapering its COVID-induced asset purchase programme (QE) before the end of the year, and then rapidly drive down future purchases to zero by the middle of 2022.
Evergrande, challenge to Chinese leadership not Lehman’s moment
Evergrande’s ‘riches to rags’ story seems to be reaching its final chapter. The Chinese developer was the most valuable property company in the world a few years ago; now it is on the brink of bankruptcy. Its Hong Kong-listed shares have sunk more than 80% this year, and the sell-off shows no signs of letting up. Another sharp drop on Monday left the company’s shares at their lowest since 2010, while its borrowing rates have shot in the other direction. Evergrande is likely to default on some of its bond payments imminently, putting a big question mark over its USD 300 billion worth of liabilities. There are doubts over Evergrande’s ability to honour its interest payments due this month, let alone the USD 669 million in coupon payments for the rest of the year.
US debt ceiling – an unwelcome evergreen
Political brinkmanship can be rather unpleasant for investors – and indeed the public. In the UK, we got a taste of it many times during Brexit. , but in the US, it is a part of the political fabric. Due to America’s peculiar fiscal set-up, policymakers in Washington are required to vote to raise the country’s debt ceiling – which puts a hard limit on Federal government spending, regardless that this spending was already given legislative approval through the annual budget. The perennial back and forth over spending measures is often a cause for concern for investors, and it is that time of year again.