Evergrande and the coal crisis will they weigh on Chinese growth?

Evergrande and the coal crisis will they weigh on Chinese growth?

China’s growth figures can often seem like a sure thing, but recent tensions in the country’s energy and real estate sectors have added a substantial element of uncertainty to Monday’s gross domestic product figures.

The troubles of Evergrande, the world’s most indebted real estate developer, have turned into a real crisis for the Chinese real estate industry as the number of defaults continues to rise. Supply shortages have pushed Chinese coal prices to successive record highs, while policymakers are also grappling with power outages brought about in large part by the aggressive implementation by local governments of targets. reduction of emissions.

The weight of these disruptions on this week’s third quarter data depends on who you ask: Forecasts from economists polled by Bloomberg range from a high of 5.8% year-on-year to a low of 4.5. %. This follows a meteoric rise of 7.9% in the second quarter.

On a quarterly basis, economists at Oxford Economics forecast an increase of just 0.3%. They expect the recent sluggishness of the economy to continue through the end of the year despite anticipation of a shift to more favorable policies on the part of Beijing.

“Evergrande’s difficulties are likely to amplify the slowdown in China’s residential real estate sector, as Covid cautiousness, power shortages and production cuts weigh on activity,” said Louis Kujis, manager of the Asian economy from Oxford Economics. “While the growth support measures will have some impact in the fourth quarter, the majority of the impact is only just beginning. [the first quarter of next year]. ” Hudson Lockett

How could higher inflation affect gilt and pound yields?

Investors are bracing for another rise in Britain’s inflation rate after hitting its highest level since 2012 in August at 3.2%. September figures expected on Wednesday should show a slight acceleration to 3.3%, according to economists’ forecasts compiled by Bloomberg.

Recent signals from the Bank of England – which at its last policy meeting surprised investors by saying it could raise interest rates even before its bond buying program runs out at the end of the year – raised the stakes for the markets. A rate hike to 0.25%, from 0.1% currently, is already fully integrated by December.

“Any surprise on the upside will add to the already widespread speculation of a hike before the end of the year,” said John Wraith, head of UK rate strategy at UBS.

The BoE’s hawkish turn last month triggered a sharp drop in UK government debt prices that quickly spilled over to other major bond markets. Ten-year gilt yields climbed to 1.21% last week before falling back to 1.08%. Any sign of increasing inflationary pressures could prompt a resumption of this liquidation, Wraith believes.

The implications for the pound are muddier. The pound fell to its lowest level of the year against the dollar following last month’s BoE meeting, not benefiting from the expectation of an interest rate hike, although ‘it has since rebounded to a four-week high.

“The vast majority of this inflation comes from import prices and global supply chain issues,” Wraith said. “These are not things the BoE can influence by raising rates in the UK, so it is possible that the markets will see a hike this year as a mistake and sell the pound sterling.” Tommy stubbington

How have supply chain cutbacks affected business activity?

Global supply chain issues that have caused massive backlogs of orders among manufacturers, growing congestion at major ports, and shortages of goods at many retailers show little sign of abating.

Delays and shortages in the supply of goods and materials will continue to be the focus of concern when IHS Markit releases the results of its monthly survey of companies in the eurozone, UK and US on Friday.

The rise of global container transport seems to have worsened recently. Kuehne + Nagel, one of the world’s largest freight forwarders, said last week that 584 container ships were stranded outside ports, nearly double the number at the start of the year.

In addition to existing bottlenecks in the supply chain, the purchasing manager indices for October will also provide insight into the impact of the recent rise in gas and electricity prices on businesses.

The global PMI rebounded slightly in September, after five consecutive monthly declines. Since then, however, general sentiment on economic conditions has deteriorated over fears that supply problems and rising inflation will dampen growth.

“Overall, global GDP still appears to be growing at a rate above trend, but growth in several major economies appears to have slowed as global industry has continued to stagnate,” said economists from Capital Economics in a note to customers. Martin arnold

What future for the price of gold as inflationary pressures intensify?

Gold prices rose 1.4% last week, testing $ 1,800 per troy ounce, as a global energy crisis adds to mounting inflationary pressures.

In theory, gold should benefit if the global economy enters a “stagflationary” period of lower growth and higher inflation. Still, investors don’t seem to fully subscribe to the thesis, with gold still down 9% this year, raising questions about its appeal.

The precious metal suffers from an expectation that central banks will raise rates to stem the inflationary shock resulting from the end of pandemic lockdowns. Rising bond yields are bad news for gold, making it less attractive to own a non-interest bearing asset.

Additionally, gold is once again facing competition from cryptocurrencies such as bitcoin, according to JPMorgan.

“The prospect of a prolonged period of higher inflation supports precious metals, especially in the context of the current energy crisis, but market prices for Fed hikes are still preventing gold prices from rising soaring, ”said Bart Melek of TD Securities.

Most notably, silver continues to flow out of gold-backed exchange-traded funds, according to the World Gold Council, with net outflows of $ 830 million in September. Buying gold ETFs was key to rising gold to an all-time high above $ 2,000 per troy ounce last year.

A return of investor money in ETFs will be critical to watch, especially if bond yields remain negative in real terms. ANZ analysts estimate gold is undervalued by around $ 150 an ounce and that “negative real yields and inflation expectations should support investment demand.” Henri sanderson