Goldman Sachs Purchases Chinese Property Debt. On Monday a member of Goldman’s portfolio-management team, Angus Bell, announced Goldman Sachs Asset Management is actively buying Chinese real estate debt. As many investors have avoided one of the world’s most distressed assets, Goldman Sachs has been buying a “modest amount of risk” in the form of high yield Chinese property developer bonds. They believe the market is overemphasizing the risk and that “Ultimately, the property sector has been the key driver of Chinese growth over the past two decades”, he said. Furthermore, “It’s unlikely the government will tolerate the impact on growth that would come about if it were to allow such a large number of developers to fail.
The breadth of distress that the market is now pricing, it’s starting to look significantly out of alignment with the true extent of distress.” Chinese Evergrande Group, the world’s most indebted property developer, has never been closer to defaulting and must pay further interest payments totalling $148mn this week alone. Goldman Sachs also hasn’t been put off by the many Chinese property developers that began to miss similar interest repayments and entered a 30-day grace period last month, including Sinic, Fantasia and Modern Land. The Fed’s twice-yearly Financial stability report released Monday is a stark contrast to Goldman’s views and believe the risks are definitely a concern and “could strain global financial markets” and “pose risks to global economic growth”.
China’s PPI Has its Biggest Jump Since 1995. China’s Producer Price Index rose by 13.5% from October 2020, the fastest pace in 26 years. The figure has greatly increased from 10.7% in the previous month and exceeded analysts’ expectations of 12.3%. The rise in producer prices comes from the global commodity price rally and the output restraints caused by the power crunch, in particular the climbing coal prices china is fighting from flooding in its mining regions which has surged to 103.7% since last year.
The escalating PPI combined with China’s decreasing manufacturing activity has raised concerns of stagflation, which will impede President Xi Jinping’s sweeping reforms. Citigroup analysts said concerns should ease as they believe PPI is nearing a peak and will not remain high. Senior China economist at Capital Economics, Julian Evans-Pritchard also suspects this and said, "Factory gate inflation is probably close to a peak,” because, the increasing energy costs should be reined in from coal miners’ recent agreement to reduce prices.
Despite this, inflation should still remain a concern for the People's Bank of China who should be cautious of adding more monetary stimulus too quickly. CPI is lagging behind but catching up through manufacturers offloading higher costs to consumers and supply problems are driving food prices up.
Russian Troops Accumulate at Ukrainian Border. The U.S. has alerted European Union allies that Russia may be planning a potential invasion on Ukraine. Western intelligence shows a build-up of around 100,000 Russian troops on the border. U.S. secretary of state, Antony Blinken, said the US is “very concerned about the irregular movements of forces” and “It would be a serious mistake for Russia to engage in a repeat of what it did in 2014”.
Kremlin spokesman, Dmitry Peskov, dismissed the matter on Friday, saying the report is “empty and unfounded efforts to exacerbate tensions” and that Russia was “not a threat to anyone”. Instead, Russia is accusing the U.S. of aggravating and encroaching on their country by sailing warships in the Black Sea.
The troop build-up comes following rising tensions over energy supplies and the Poland and Belarus border crisis. Russian ally Belarus faces Western sanctions over what appears to be a manufactured migration crisis. Furthermore, Putin’s agreement to ramp up gas supplies for Europe to help with the energy crunch is starting to look hollow. The most likely reason for the threat is the latest pressure on European regulators to approve the Nord Stream 2 gas pipeline. The proposed pipeline from Russia to Germany under the Baltic Sea is strongly disputed by the U.S. and Ukraine for being a security risk.
Following the news, the Russian ruble fell 0.5% against the dollar and ruble bonds fell causing the 10-year yield to rise by three basis points to 8.07%.
Economic Calendar 15th November – 19th November
Data: China Industrial Production, Japan GDP
Events: BoE Haskel Speech, BCB Focus Market Readout
Data: UK Average Earnings Index and Claimant Count Change, US Core Retail Sales (Oct), EU GDP
Events: RBA Meeting Minutes & Governor Lowe Speech, IEA Monthly Report
Data: UK CPI (Oct), EU CPI (Oct), US Building Permits, Canada CPI, US Crude Oil Inventories
Events: EU Financial Stability Review, FOMC Members Williams, Bowman and Bostic Speech
Data: Philadelphia FED Manufacturing Index (Nov), US Initial Jobless Claims
Events: RBA Member Speech
Data: UK Retail Sales (Oct), Canada Core Retail Sales
Events: ECB’s President Lagarde Speech, FOMC Member Speech
With inflation remaining in the spotlight as the US inflation surged to a 30-year high, the UK’s Consumer Price Index data will be closely monitor by many investors this week. The current market expectations are around the 3.9% mark, the highest level since December 2011. Furthermore, the UK’s economic calendar will shine some light on the declining trend in unemployment and an expected rebound in retail sales after 5 straight months of declines.
ECB Lagarde’s Speech
The European Central Bank’s president, Christine Lagarde, will speak on Friday, giving details on the ECB’s current view on the euro block’s economic outlook, but investors will monitor any furfure hints about their monetary policy plan. Markets are extremely sensitive to ECB’s forward guidance, especially in an inflation-driven stage of the economic rebound from the coronavirus crisis. The key aspects to look for are possible interest rate hikes, the final estimate of the third quarter GDP figure and the trade balance. An optimistic outlook from the president’s speech will generate a risk-on sentiment into the markets, being interpreted as a positive sign for European equities and the Euro currency.
Thank you to Cameron Barker, George Fol and Mihai Golumbeanu for your in-depth analysis!