Daily Comment (October 26, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with developments touching on two of the biggest concerns that investors have these days, China’s debt crisis and high prices for commodities and other goods.  We next provide an update to the U.S. fiscal policy negotiations and review a number of news items from overseas that could affect the financial markets today.  We close with the latest developments on the coronavirus pandemic.

Chinese Debt Crisis:  Developer Modern Land (1107.HK, HKD, 0.38) has become the latest Chinese real estate firm to miss an international bond payment.  After a request to delay the maturity of a $250 million bond earlier this month, which it later withdrew, the firm failed to pay principal and interest on the bond yesterday, blaming “unexpected liquidity issues arising from the adverse impact of several factors including the macroeconomic environment, the real estate industry environment, and the COVID-19 pandemic.”

  • Despite the fact that major developer Evergrande (EGRNY, USD, 8.63) was barely able to skirt a formal default on its dollar bonds last weekend, the Modern Land default is a reminder that the broad real estate sector in China is at risk as the government clamps down after years of debt-fueled growth.
  • China’s real estate sector has been a crucial engine for growth and rising living standards, but it has also become a key reason for the country’s excess growth in private debt.  Now that the government is trying to rein in the sector and get control over its debt growth, Chinese real estate firms face increasing regulatory risks, and some aren’t managing the situation well.
  • Along with the risks arising from the U.S.-China geopolitical rivalry and the Chinese government’s broader crackdown on the private sector, the real estate debt crisis is adding to investor caution regarding the outlook for the Chinese economy and the investability of Chinese assets.

South American Drought:  In our recent discussions of surging natural gas prices around the world, we’ve mentioned that one reason is a drought in South America that has reduced hydroelectricity generation and forced a greater reliance on gas.  The Wall Street Journal today has an article that shows the impact of the drought is even broader than that, from reduced river navigation keeping soybeans from the market to lower yields on-farm production.  In any case, the drought will likely add to global price inflation in the coming months.

U.S. Fiscal Policy:  As Democrats in Congress continue negotiating over their social-policy and climate bill, which would complement the $1.0-trillion “hard” infrastructure bill already passed by the Senate, Majority Leader Schumer said that there are now just three to four open issues.

  • Lawmakers and aides said major policy areas that remain unresolved include the tax increases to pay for the package, Medicare and Medicaid provisions, and a paid leave program.  The bill is now expected to cost between $1.5 trillion and $2 trillion.
  • Top Democrats want to secure an agreement by Friday in order to score a win on climate legislation before President Biden heads to a meeting with a group of 20 leaders in Rome this weekend and a climate summit in Glasgow, Scotland, next week.

Japan:  In the runup to Sunday’s parliamentary elections, Prime Minister Kishida today directed a government economic policy panel to compile “urgent proposals” by early November to flesh out his signature “New Capitalism” vision.  In addition to the hundreds of billions of dollars in new spending that Kishida has promised to help the economy recover from the coronavirus pandemic, his New Capitalism proposals will include expanding the middle-class through wage hikes and improved working conditions for non-regular employees and freelancers, promoting the development of advanced technology for digitalization and decarbonization, and economic security issues including securing semiconductor supplies.

Russia-Europe:  Amos Hochstein, a senior advisor for global energy security at the U.S. State Department, warned Europe against bowing to Russian pressure and waiving the lengthy process needed to approve Nord Stream 2, the controversial Baltic Sea natural gas pipeline from Russia to Germany.  According to Hochstein, if Russia has more gas to ship to Europe to ease the continent’s supply crunch, it should do so through existing export pipeline infrastructure, including the ones that transit Ukraine.

Russia-Afghanistan:  Last week, Russia held another series of joint exercises with its Central Asian neighbors near Tajikistan’s border with Afghanistan.  The military drills highlight its continued concern about social unrest or terrorism spreading across the region as Islamic State challenges the Taliban’s control over Afghanistan.  Involving over 4,000 troops using artillery, tanks, and assault aircraft, the drills sought to signal that any infiltration from Afghan territory into Tajikistan would be met by force, Russian military officials said.

Turkey:  President Erdogan has backed down from his threat to expel ten Western ambassadors over their call for the release of a jailed Turkish philanthropist, which we described in our Comment yesterday.  Although Erdogan viewed the ambassadors’ call as an insult to Turkey, he was reportedly convinced to back down to avoid worsening Turkey’s already-strained relationship with Western countries.  The lira has therefore regained much of the ground it lost at the beginning of the week.

Space Tourism:  In another sign that private space travel is likely to be a growth industry into the future, Blue Origin LLC said it would help build a privately owned and operated space station.  The planned facility will aim to generate revenue from government agencies and private-sector customers, including entertainment companies and manufacturers.

COVID-19:  Official data show confirmed cases have risen to 244,210,069 worldwide, with 4,959,112 deaths.  In the United States, confirmed cases rose to 45,546,609, with 737,371 deaths.  Vaccine doses delivered in the U.S. now total 503,418,475, while the number of people who have received at least their first shot totals 220,519,217.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • According to the latest CDC data, 66.4% of the U.S. population has now received at least one dose of a vaccine, and 57.4% of the population is fully vaccinated.
  • An FDA advisory panel composed of outside experts will meet today to consider the effectiveness and risks of injecting children aged 5 to 11 with the vaccine developed by Pfizer (PFE, USD,  43.15) and BioNTech (BNTX, USD, 294.92).  Since the U.S. has approximately 28 million children in that age group, vaccinating a substantial number of them could have a big impact on boosting the country’s overall vaccination rate.
  • Meanwhile, Moderna (MRNA, USD, 349.56) said a clinical trial showed its vaccine to be safe and effective in children aged 6 to 11.  The company only released interim results, and the full study hasn’t yet been peer-reviewed.  Nevertheless, Moderna said it expects to submit the results to health regulators in the U.S., Europe, and elsewhere in seeking authorization to widen the use of its shots to include this younger age group.
  • Providing more details on its plan to allow foreigners to fly into the U.S. starting November 8, if they have received a WHO-approved vaccine, the Biden administration said the vaccination requirement would not apply to:
    • Children under 18
    • People in certain vaccine clinical trials
    • Individuals with medical contraindications to the vaccines
    • People who are traveling for emergency or humanitarian reasons, and
    • People traveling on non-tourist visas from countries that the Centers for Disease Control and Prevention have determined to have low vaccine availability
  • In China, officials have set strict health protocols for the Winter Olympic Games in Beijing next February.  These include a requirement that almost all participants be vaccinated against COVID-19 or face a 21-day quarantine that would effectively shred their competitive hopes.  The requirements are significantly tighter than those imposed by the Tokyo organizers of the delayed Olympic Games held this summer.

 Economic and Financial Market Impacts

  • As major banks rolled out their third-quarter earnings reports over the last week, one theme is that they are seeing evidence pointing to renewed credit card borrowing.
    • For example, JPMorgan Chase (JPM, USD, 170.94) said credit card users who were most likely to carry balances before the pandemic are now reducing their deposits, which had been boosted by pandemic stimulus payments and debt forbearance programs, at a faster clip than other customers.
    • The bank believes that as customers spend down their excess deposits, credit card borrowing should start to grow faster, providing a boost to both the banking industry and the overall economy.

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