Conduit Bond Snapshot - 04 Oct 2021
Updated: Oct 19, 2021
Today's Market Snapshot from Conduit Securities Pte Ltd.
The bond market is stressing over the Evergrande’s US$ bonds, which have a total face value of around US$4.2bn. The story of a small regional bank exposes a far larger risk. Evergrande is alleged to have US$20 bn in “direct and indirect” loans to Shengjing Bank, a small local bank that in 2Q21 had stated equity of around US$12.6bn. The SOE Shenyang Shengjing Finance Investment Group was quick to jump in. This pushes local government funding structures to the fore. Local government funding vehicles have been used by successive CCP Presidents to boost GDP. From President Hu after the GFC to President Xi as Covid 19 hit. LGFV’s stood at around US$8.2 trillion as of the end of 2020, up from $2.47 trillion in 2013. Will this bubble of borrowing burst? Who knows, but with shrinking avenues for financing or re-financing due to the the crackdown on shadow banking there will be more stress in the sector. GDP is slowing once more. August retail sales, industrial production and FAI all surprised to the downside the current power outages and continued shutdowns will exacerbate the situation. Where will the authorities turn?
In Europe time inflation weighed on equities on Friday as Eurostat announced September Eurozone inflation rate at 3.4%, up from 3% last month and the highest level in 13 years. Core inflation surged to 1.9%, flirting with the ECB target of 2%. That all changed when news that a pill, Molnupiravir, produced by Merck significantly reduced the risk of serious Covid in trials. The road to getting this to the general population will be long, but markets jumped at the good news. The inflation story is not going to go away though. IG Metal, an ogre of old, is threatening strikes unless its demands for 4.5% wage increases is met. Being Europe’s biggest union others are bound to follow.
In this morning's news a regulatory filing with HKSE said that shares in Evergrande and Evergrande Property Services Group and all structured products relating to the company will be halted from trading. EVERRE 25's are priced around 24.00, while TIANHL are around 18.00.
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