Welcome back to Weekend Reading.
This week has seen serious conversations about debt ceilings, a potential Evergrande takeover, and a new Premier stepping in for NSW.
Despite all the potentially market-rocking news that we have been inundated with, markets quietly shuffled higher this week, mumbling quiet apologies around the volatility and sell-offs we saw throughout September. We remain sceptical of how genuine they are.
Let’s look back on the week.
Back in Black
OPEC and friends announced a 400,000 barrel per day supply hike for November 2021 – and despite this being flagged as part of a longer-term plan, crude oil reacted violently and traded to its highest levels in almost seven years.
Oil now joins the energy rally with natural gas and coal.
Part of the reason for the aggressive jump was market speculation that OPEC+ were going to release a 800,000 barrel per day “temporary boost” in November – however OPEC+ are choosing to “wait until later this year to adopt a bolder supply approach”.
As a partial result of the multi-year high trading levels of crude oil, Saudi Arabia’s oil revenue has reached levels not seen since 2018.
Not quite Evergrande
The news headline “Chinese Property Developer Misses Debt Payment” is clear bait towards Evergrande, however don’t be fooled – there are other highly leveraged property giants looming across the ocean.
Fantasia Holdings Group failed to pay a $205.7 million USD bond maturity this week, as well as allegedly failing to pay fellow developed Country Garden a $108 million USD loan. The term “default is probable” is being thrown around, which seems a gentle diagnosis given the climate.
Fantasia’s USD-denominated bonds have slid gradually since May 2021, before dropping off a cliff in the last few months, now trading between 20-40c on the dollar.
Granted this story has had a much lower profile than Evergrande, given Fantasia only has $12.9bn USD liabilities compared to Evergrande’s $304.5 billion, however the compounded negative sentiment continues to wreak havoc in markets well beyond that of high-yield emerging market credit.
*All numbers in USD from BofA Securities
Equities: $13.0bn into equities
Bonds: $3.9bn into bonds
Precious Metals: $0,1bn from bonds
Cash: $14.9bn into cash
Flows to Know
Smallest inflow into IG bonds since June 2021 ($2.1bn)
Inflows into energy trading higher
Largest outflow from healthcare since June 2020 ($1.5bn)
Largest inflow to Japan since April 2019 ($4.3bn)
Saudi stocks some of the world’s best performers YTD
Inflows to energy trading higher
Commodities outperform during inflation
Incidentally, please see my favourite inflation anecdote of the week:
A World in Debt
Global debt levels will reach around 260% by the end of 2021 according to S&P – at this point we likely owe money to Elon’s secret Mars colony.
The global ratings agency noted that low rates are helping in global serviceability of government debt, however higher leverage and weakened balanced sheets will likely increase defaults throughout the world.
This comes on the back of Treasury Secretary Janet Yellen opposing a $1 trillion-dollar “coin for debt”, being a U.S. minted platinum coin valued at $1 trillion USD, being a gimmick. Who would have thought a trillion dollar coin would be novel?
A global focus at the moment is the debate around the U.S debt ceiling, with the Biden administration insisting that the ceiling must be raised by October 18th through bipartisan action to avoid further issues relating to Federal debt.
Multiple government and Federal Reserve members have come out to warn that the U.S government is rapidly depleting its options to remain within the legal limit of their debt.
Racism Verdict for Tesla
Speaking of Elon…
Tesla has lost a landmark case against a former employee, an African-American elevator operator, who sued the company for turning a blind eye to racial taunts and offensive graffiti levelled at the gentleman during his contract working at Tesla’s Fremont plant.
The whopping $137 million USD judgement came after several years of allegedly hushed up controversy, and a lesser known $1 million USD judgement to another black former employee in a similar situation.
It’s worth noting that there is a growing number of activist shareholders in Tesla’s registry who have been pushing the board for some time to “adopt more transparency about its diversity goals and use of arbitration to resolve complaints regarding sexual harassment and racial discrimination”.
There has been recent evidence from overseas studies suggesting that vaccine efficacy against COVID-19 transmission wanes over time, prompting a louder call for the use of booster shots. This does not, however, include protection against severe and fatal infections, which remain high over time.
Israeli studies this week have caused concern after it became apparent that COVID-19 immunity provided by the second dose weakens significantly within a few months.
Men are more susceptible to this weakening than women, according to the study which supports the use of booster shots to offset this effect.
The study involved 5,000 Israeli health workers and has been published in the New England Journal of Medicine, for those with an aptitude for academic reading.
The findings showed that protection fell from 77.5% in the first month after the second dose, to just 20% in months 5-7 after the second dose – this did not, as noted, have much of an impact on the prevention of severe and fatal infections, only protection against catching the disease itself.
This finding suggests that we may experience more “break through” cases in the future, but not necessarily a corresponding spike in COVID-19 related deaths as a result.
Our morning calls continue, please do tune in for a daily dose of market insights and access to some leading experts in the funds management field.
Tune in from 9:30-10:00am AEDT, Tuesdays and Thursdays.
Have a safe and enjoyable weekend.
– Max and the Mason Stevens team
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The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.