Chinese debt: All going wrong.
April 19, 2016
George “Giddy” Osborne was on the warpath yesterday, as he puts it stepping away from the rhetoric and setting out the facts. Britain would be permanently poorer by £4300 per household he claims. Another interesting fact is this figure is £39,000 less than the cost of the bank bailout per household.
The polls still have the remain campaign marginally ahead of the Leave camp as David Cameron’s leaflet hits homes across the UK. Recent polls suggest that the motivation to vote to remain is increasing and turnout levels for this camp are increasing, closing the gap from the leave voters, who are already queuing around the block.
From the Eurozone, despite unprecedented levels of monetary easing to boost the euro-area and stimulate it into action and despite Mario Draghi’s comments over the weekend that they will not try to impact the rate of the euro. It looks pretty likely that Mr Draghi will take action, with 47 of Bloomberg’s ECB analysts believing he is not yet done. The September meeting is the hot favourite for policy action, with further QE and negative rates both taking the limelight but don’t exclude the possibility of direct injections of cash into government coffers or the public’s pocket.
The demise of the freeze plan is still rippling through markets globally, fingers are being pointed with Saudi Arabia refusing to take action without the commitment of Iran. A note from Commerzbank stated “Saudi Arabia intentionally torpedoed the agreement and was willing to accept its failure. This has severely damaged the credibility of oil producers in general and of OPEC in particular.” It is looking likely that OPEC’s next moves will be a hike in oil production in order to offset the US and Kuwait slump and to prevent Russia and Iran from achieving any new market share gains.
In China, it is all going wrong. The $3 trillion corporate market is beginning to unravel, spooked by another fresh wave of defaults at state owned enterprises. Investors in China’s yuan denominated company notes have driven up yields for the past 9 out of 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have been cancelling auctions, S&P are slashing rating in an unprecedented fashion. All signs point to even more pain ahead, listed firms ability to service their debt has dropped to the lowest level since 1992 and profit forecasts are lower levels than before the financial crisis. More worryingly analysts are predicting that the spreading of credit risk is only at its early stage.
Today’s data releases are again pretty light, with Eurozone sentiment taking the main stage. However, as always there is still plenty to worry about.
Have a great day.