Evergrande’s debt crisis has a ripple effect on financial and mining markets

Posted on September 21, 2021September 23, 2021 by Vrasidas Neofytou

Global financial markets posted one of their worst trading days since the beginning of the year on Monday as the growing worries over a possible financial contagion that could arise if China’s second largest property developer Evergrande defaults under its massive debts, spurred a steep sell-off across global equities and commodities.

What is Evergrande?

The indebted China Evergrande, a Shenzhen-based conglomerate group, has been mainly developing huge property projects in Hong Kong and other major cities onto mainland China. In addition, it has also invested in the tourism industry, theme parks, electric vehicles, sports, athletics stadiums, while it owns many foods and beverages companies across the country.

However, the company which has more than 200,000 employees, has an astronomical debt of nearly $300 billion (in worth liabilities), a sum roughly equivalent to the public debt of Greece or Portugal.

The highly leveraged Chinese developer has warned investors of major liquidity problems and is unable to pay its debt interest rates obligations to banks and bondholders. The company is scheduled to pay $83.5 million of interest on Sept. 23 for its offshore March 2022 bond, and then has another $47.5 million interest payment due on Sept. 29 for March 2024.

Hang Seng index crashes:

Evergrande credit stresses had rapidly spread into Chinese stock markets, with the broader Hang Seng index plunging almost 3,5% on Monday, hitting the lowest level since November 2020.

Hang Seng property index crashed more than 6% on Monday, its biggest drop since 2020 to the lowest level since 2016, as other local property development peers (who have also massive debts) posted significant losses in the same period.

The prices of iron ore and copper have dropped nearly 60% and 20% from their high points in May respectively, due to a slowdown in the Chinese property and construction sectors, while the rally in Aluminium price has lost some steam since the beginning of the Evergrande debt crisis last week.

Evergrande shares which are listed in Hong Kong’s stock exchange plummeted 10% on Monday, while they have lost nearly 90% of their value this year so far.

Market reaction:

US stock indices fell nearly 2% yesterday, with Dow Jones recovering losses of more than 950 points or almost 3% after dip-buyers took the opportunity to buy the unexpected market lows at the end of the session.

Commodity-linked currencies hit hard as well, with Australia and Canadian dollars falling to monthly lows as major commodities from crude oil, iron ore until copper plunged yesterday.

On the flip side, Gold, Treasury yields, and safe-haven currencies such as the US dollar, Swiss Franc, and Japanese Yen rose across the board as investors looked for protection from the stock market sell-off.

Sell-off in construction raw materials:

Contagion has moved beyond the financial sector, and hammered commodities prices across the board, especially construction raw materials, with Iron Ore and Copper losing 4% yesterday.

Evergrande default could hit hard China’s property market which accounts for about 30% of the country’s steel and other base metals consumption.

Facing an energy crisis ahead of winter heating season

Posted on September 15, 2021September 17, 2021 by Vrasidas Neofytou

Energy prices have become a hot topic of discussion the last few weeks, as investors worry about a possible energy crisis and high electricity bills ahead of the winter heating season in the Northern Hemisphere.

Natural gas and crude oil are the most important heating fuels and are responsible for more than 50% of power generation in modern societies, such as the United States, Europe, and Asia.

Crude oil prices trade above 70 dollars per barrel, gaining more than 40% this year so far, after the historic production cuts from OPEC and its allies, some unexpected supply disruptions, and on the back of recovering demand after the pandemic.

Natural gas prices have gained more than 100% this year, breaking above 5 dollars per million BTU (British thermal units), for the first time since 2014, on falling production, record LNG exports, and lower-than-expected gas stockpiles.

The combination of falling supply and growing demand have resulted in tighter gas inventories. As a result, the Northern Hemisphere is facing a new energy crisis since natural gas in storage is 15% below the five-year average, increasing the worries for a shortage of gas supply ahead of the winter heating season.

High energy prices naturally have a negative effect on electricity prices, which impact all of society, especially households and businesses, with many already under financial pressure due to the prolonged effects of the pandemic.

Households have suddenly found themselves paying roughly 40% more than they did last year, to heat and light their homes.

The energy crisis is currently experienced more in Europe, driven by fewer gas supplies from Russia, and the unexpected, lower-than-normal electricity production generated from wind turbines, due to the warm and less windy European summer.

Does monetary policy impact commodity prices?

Posted on September 15, 2021September 17, 2021 by George Kessarios

The chart below depicts the price of sugar. As you can see, prices today are lower than what they have been in many instances from 1970. And why are sugar prices so low? Because the people who produce sugar have become more productive at it, thus the unit cost of production has fallen, and producers can still make money.

So why has all the monetary stimulus not pushed up the price of sugar much higher, as is conventional thinking? The answer is because commodity prices are supply and demand driven.

When we look at gold, which is supposed to be a hedge against inflation and monetary expansion, it is where it was about 10 years ago. And if we look at platinum, it is less than half of where it was a little over a decade ago.

In fact, monetary expansion has been going on for many years now, and it has not affected inflation by much. In Japan where QE and other central banking tricks were invented, the problem has almost always been deflation, not inflation.

What all this means is yes, we might get persistent inflation, and many inflation components might not be transitory (wadges for example), but at the end of the day prices for commodities are supply side driven and not driven by monetary policy.

So, if one wants to play in the commodity space, analyzing supply and demand metrics for each commodity separately is warranted. Speculation also plays a role, but speculation almost always drives prices short term and not long term. Lumber is a recent example.

The bottom line is that commodities are affected very little, if at all, from central bank policies. At the end of the day, it is supply and demand metrics that shape pricing.

Insofar as financial assets, yes, they are affected by monetary policy. However please note that in this case it is the intent of central bank to try to affect financial assets. This because this category of assets has a direct impact on financial conditions and the economy.

Supporting Young Adults with Autism

Posted on September 14, 2021 by Exclusive Capital Team

In the year 2020 in the framework of the project “Creation of Housing / Supported Living Programs” which focuses on the creation of new supported housing where people with disabilities can enjoy a safe and quality living, two new houses “Agapi” and “Athena” were provided for people with autism in Limassol. At the moment house “Athena” is accommodated by two brothers, and house “Agapi” by two young friends with autism.

In conversation with Exclusive Capital the director of the supported living house “Agapi” mentioned that an appropriate housing environment is a crucial part of the wellbeing of the people on the autism spectrum. The goal is to give the young adults a chance to have the ability to live independently, be fully integrated into society, and also to assure their parents and family members that their children will be in a supportive and safe environment when they are no longer around.

Unfortunately, the above-mentioned project does not cover all the expenses related to the purchase of housing equipment, constructional and technical adaption, and adjustments needed accordingly to the specific needs of people with autism. Therefore, there is additional financial support necessary in order to make the living arrangements suitable.

Exclusive Capital’s team is happy to provide one of the required everyday items for the house “Agapi” – a TV, as visual stimulation can be a source of comfort and joy for autistic people, at the same time using technology can help them build knowledge and skills that can be used in everyday life.

Natural Gas breaks above $5 on tight supplies and higher weather-driven demand

Posted on September 13, 2021 by Vrasidas Neofytou

The surprisingly bullish upward trend in global natural gas prices showed no sign of subsiding at the beginning of this week, with benchmark U.S.-based Henry Hub gas contracts breaking above $5 per MMBtu, hitting the highest level since February 2014 amid tight supplies and a surging gas demand ahead of winter heating season in North Hemisphere.

Natural gas, which is used mainly for electric power generation as well as home cooking and heating, usually receives higher demand during the winter seasons since the low temperatures boost the consumption of heating-led electricity.

Tight supplies:

Energy traders have turned bullish on Natural Gas since the beginning of the year as the global gas market remains undersupplied.

The supply levels continue to be much lower than they were at this time of the season in both 2019 and 2020, thanks to high U.S. export levels, low storage gas levels, and no production growth over the last several months.

Utilities in Europe and Asia demanded U.S. exports of liquefied natural gas (LNG) because of expected or unexpected supply constraints on both continents, and warmer-than-expected summer months.

Furthermore, Ida, a Category 4 hurricane has disrupted nearly 75% of the 1,7 Bcf per day natural gas production in the Gulf of Mexico since the end of August.

Low storage levels ahead of winter heating season:

Market participants have been very concerned lately as the weather-sensitive gas market is entering the Northern Hemisphere’s winter heating season with gas inventories down nearly 20% from 2020’s levels and almost 10% from the five-year average.

The current storage levels stand to near 2,900 Bcf in U.S-based Henry Hub, which is well below the year-earlier level of 3,515 Bcf and the five-year average of 3,158 Bcf.

According to data, the European gas storage inventory is also at the lowest level for this time of year than we’ve seen in recent history, and the time to restock for the winter is rapidly running out. This is the main reason why LNG prices in Europe hit record highs multiple times this summer, even surpassing Asian prices.

Bullish weather patterns:

Gas prices had received unexpected high cooling demand during summer months due to the warmer-than-normal temperatures around the world. Hence, an extended warm weather forecasts through much of September could add further upward pressure on prices in the weeks ahead.

Analysts at both Goldman Sachs and Morgan Stanley said in recent reports that, should the winter prove colder than average, Henry Hub prices could soar to $10 per MMBtu amid low inventory levels relative to last year and historic averages.

EUR/USD rises to $1,185 after ECB announced a “modest taper” of its PEPP program

Posted on September 10, 2021September 13, 2021 by Vrasidas Neofytou

Euro bounces back to the $1,185 mark following Thursday’s ECB-European Central Bank’s monetary policy meeting; where it announced the start of trimming its emergency asset purchases under the PEPP program over the coming quarters, due to the elevating inflation and recovering economic growth.

Frankfurt-based Eurozone’s central bank said that the pace of net asset purchases of about €80 billion ($95 billion) per month (in the last two quarters) under the Pandemic Emergency Purchase Program (PEPP) would be “moderately lower” without specifying by how much.

Markets participants expect that the ECB would lower the number of monthly asset purchases under PEPP to between €60-€70 billion until March 2022.

The PEPP- Pandemic Emergency Purchase Programme was implemented in March 2020 to support the euro zone economy through the Covid-19 crisis and is due to end in March 2022 at a potential total value of 1.85 trillion euros ($2.19 trillion).

After March 2022, the ECB’s balance would be level “at least” until the end of 2023, before the “roll-off” of those bonds might begin. The roll-off means that bonds mature and roll off the balance sheet when they’re redeemed and would not be replaced with new purchases. This has the effect of reducing the bond portfolio over time as bonds mature.

Furthermore, the central bank maintained its interest rates unchanged until inflation stabilized at 2% over the medium term, with ECB’s main refinancing operations staying at 0%, the marginal lending facility at 0.25%, and the deposit facility at -0.5%.

Euro zone inflation climbed to 3% in August, hitting a 10-year record, exceeding economist expectations of 2%, while the bloc’s GDP surged 2% in Q2, 2021.

‘The lady isn’t tapering’

However, ECB President Christine Lagarde denied at the press conference yesterday that tapering was tapering and stressed that tapering was instead a “recalibration” of QE.

Lagarde paraphrased former British Prime Minister Margaret Thatcher to assure the market that “the lady isn’t tapering”, adding that ECB is recalibrating, just as it did back in December and back in March.