There were no ugly surprises over the weekend, either from the German federal elections or, more importantly, the Evergrande saga in China. Nor has the surge in oil prices on Friday, which has continued unabated today in Asia, dented equity investors enthusiasm, with Asian stock markets off to a rollicking start to the week.
The German elections have reached an inconclusive result, to the surprise of no one. The ruling Christian Democrats (CDU) are narrowly trailing the Social Democrats (SPD). Both leaders are claiming a mandate to start coalition negotiations which on the mathematics, will require three parties coming together. That means that CDU incumbent, outgoing Chancellor Angela Merkel, and her government remains in power until a coalition is formed. With an outcome possibly months away, that probably explains why EUR/USD is sharply unchanged at 1.1720.
Markets seem to be rapidly pricing in Evergrande as a fully controllable outcome that won’t spill over China’s borders into the wider financial universe. Evergrande has not made its USD 85.0 million US dollar coupon payment due last week, and it has another USD 47.5 million coupon due this week. It appears that the 30-day grace period will be used to its fullest. News that its Electric Vehicle subsidiary is facing severe liquidity problems sent those Hong Kong-listed shares down 25.0% in early trading today but seems not to have mattered a jolt. China stocks are on fire today, helped along by another CNY 100 bio liquidity injection by the PBOC, and I suspect, China’s “national team” “smoothing” stock markets.
That is given more credence by news outlets running stories all weekend and about electricity-intensive sectors and factories being forced to shut down temporarily to meet emission targets and to cap the rise in energy prices. That won’t be good news for value chains anywhere in the world or inflationary input anywhere in the world. Once again though, markets are unconcerned.
US spending bill hits bump
In the US, the House of Representatives pushed back the USD 1.2 trillion infrastructure bill vote. Progressives, seemingly intent on destroying the Democrats’ mid-term election chances next year as quickly as possible, want the bill tied to the USD 3.5 trillion build-back-better plan, something moderate Democrats have pushed back on due to cost. The US debt ceiling is fast approaching as well with Republicans indicating the Democrats will have to pass a vote to raise it on their own, instead of the usual bi-partisan vote. Once again, a mess like this should weigh on market sentiment but is being complacently ignored. Nike’s announcement on Friday that supply chain issues could affect stock levels into the crucial shopping season had a greater dampening effect on Wall Street.
Even the sight of petrol pumps running dry over Britain this weekend, as panic buying took hold amidst a truck-driver crunch and skyrocketing energy prices hasn’t dented sterling this morning, again sharply unchanged at 1.3665. That said, plans to draft the army in to deliver petrol, and a government backtrack on foreign drive visas hasn’t move sterling either.
Japan’s LDP will select a new prime minister to replace PM Suga on Wednesday. Japan’s equity markets have outperformed over the last month as investors there expect whoever is chosen to reopen the fiscal pork barrel. The four-way race appears to be wide open, and nothing can diminish Japan’s fiscal stimulus myopia, not even surging oil prices.
On that note, nerves about energy shortages continue to add momentum to oil’s price rally. Notably, natural gas is now trading at nearly twice the per barrel equivalent of oil. Thanks to some ill-informed headline-grabbing by the UK press, Britons were panic buying petrol over the weekend. Natural gas storage is also below seasonal levels in Europe with Norway’s Equinor promise of more gas ignored by markets. China is forcing parts of key industries to temporarily close, and oil is 1.50% higher in Asia, a most unusual move as Asian markets prefer to buy dips and not chase prices. All of Asia is basically reliant on energy imports and thus, surging energy prices should be weighing on regional equity markets.
I learned long ago that markets can remain irrational longer than you or I can stay solvent, and it appears that is how Asia is choosing to start the week. Financial markets never let the facts get in the way of a good story and I’m not sure a set of shocking China PMIs, due on Thursday, will change the stimulus forever, Evergrande is contained, winter of energy discontent, US political-economic self-harming will shake the FOMO-TINA dip-buyers. It seems the no news or bad news is good news. To quote Gordon Gekko, “Greed, for lack of a better word, is good.” I will observe the migrating herds with interest this week from the safety of my safari vehicle.
