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Global investors have been paying more and more attention to Evergrande, the sprawling Chinese real estate business on the brink. They’re increasingly worried about what they see.
What’s happening: Stocks in Europe tumbled Monday morning after Hong Kong’s Hang Seng dropped 3.3%, suffering its worst decline in nearly two months. Chinese banks, insurers and other real estate companies were slammed. US futures are also sharply lower.
Shares of Evergrande Group (EGRNF) plummeted 10% in Hong Kong, hitting just 2.28 Hong Kong dollars ($0.29) per share. The stock has shed 84% so far this year.
Step back: Fear is growing about how the crisis at Evergrande will reverberate through the financial system. Over the last few weeks, China’s most indebted developer — which has more than $300 billion in liabilities — has warned investors of cash flow issues, saying that it could default if it’s unable to raise money quickly.
Evergrande now faces critical deadlines. It was supposed to repay interest on some bank loans on Monday, according to Bloomberg. The news outlet recently reported that Chinese authorities have told major banks that they won’t receive those payments.
Big picture: The company holds about 6.5% of the total debt held by China’s property sector, according to an estimate by UBS.
That’s feeding fears that Evergrande could spark China’s “Lehman moment,” wherein the collapse of a single entity triggers panic across financial markets, as the fall of Lehman Brothers did in 2008.
“As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector, which has been an important source of economic growth and jobs in China,” Ed Yardeni, president of Yardeni Research, wrote in a note to clients Monday.
Yardeni thinks a better comparison than Lehman is the blow-up of Long-Term Capital Management in 1998. In that case, the US Federal Reserve stepped in to orchestrate a bailout, limiting the damage to financial markets.
“We expect that the Chinese government will restructure Evergrande, probably by splitting up its businesses among other property developers,” Yardeni said.
But the response from Beijing remains a major source of uncertainty that could weigh on investor sentiment in the coming days, especially in the face of inflation anxieties, debate over the US debt ceiling and supply chain problems.
In a note published Sunday, strategists at Goldman Sachs cautioned that the Chinese government needs to “carefully manage” Evergrande’s potential default or restructuring, while delivering a clear message to help “shore up confidence and to stop the spillover effect.”
Watch this space: The CNN Business Fear & Greed Index, which tracks the market mood, is in “fear” territory. The VIX, a gauge of potential US stock market volatility, shot up 20% on Monday, hitting its highest level since May.
Natural gas prices soar with winter around the corner
The price of natural gas is skyrocketing around the world, sparking fears of a supply crunch over the winter.
The latest: A spike in demand for the historically cheap fuel following the coronavirus, as well as unusual weather patterns, have depleted stocks, causing prices to pop ahead of the colder months when more natural gas is needed for electricity and to power heating systems.
In Europe, the price of natural gas scheduled for immediate delivery has hit record highs.
“We’ve seen unprecedented rises in prices this year,” Wood Mackenzie analyst Graham Freedman told me.
In the United States, natural gas futures are at their highest level since 2014, when temperatures plummeted across much of the country.
One problem: China, and other countries, are using more natural gas as they try to transition to cleaner energy sources. But that’s ramping up competition for limited supplies.
A reprieve may not come in time for the winter, forcing governments to quickly debate whether and how to intervene, especially as consumers start to feel the pain.
“What is worrisome this year is the steady surge in prices throughout the summer months, which is usually the cheap period during which industry stocks up ahead of the high-demand winter season,” Henning Gloystein, director of the energy, climate and resources practice at Eurasia Group, said in a recent research note, pointing out that Spain intervened last week to cap energy prices for consumers.
Investor insight: Expect to hear more about rising natural gas prices as economists and policymakers monitor inflation and debate whether economic growth could stall.
“Gas prices could push inflation further above [the] 2% [target] for longer,” Bank of America analysts said in a note to clients Friday.
This billionaire investor is shrugging off inflation
There are plenty of people on Wall Street wringing their hands about the risks of persistent high inflation. David Rubenstein, co-founder of the private equity giant Carlyle Group, isn’t one of them.
“There are bigger things to worry about than the monthly inflation rate,” Rubenstein told my CNN Business colleague Matt Egan in an exclusive interview.
The investor and philanthropist, whose net worth Forbes pegs at $4.3 billion, expressed confidence that inflation will ease from high levels logged over the summer, though he acknowledged it may stay above the Fed’s target of average inflation of about 2%.
“I don’t think the world will fall apart if we have 3% or 4% inflation. We’ve just gotten used to low inflation,” he said.
Rubenstein pointed out that countries like Japan have tried and failed to generate some price rises. And inflation should allow the Federal Reserve to lift interest rates from rock-bottom levels, giving the central bank room to drop them lower again during the next recession.
“It will get us out of this artificially low interest rate environment we have now,” he said.
Up next
The NAHB Housing Market Index for September arrives at 10 a.m. ET.
Coming tomorrow: AutoZone (AZO), Adobe (ADBE), FedEx (FDX) and Stitch Fix (SFIX) earnings.
