Daily Comment (September 24, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equity futures are signaling a lower open this morning. Today’s report begins with an Evergrande (EGRNF, USD, 0.3550) update and international news roundup. Next, we cover U.S. economics and policy developments. China news follows, and we end with our pandemic coverage.

Evergrande update: U.S. markets closed higher yesterday as investors shrugged off concerns of an imminent Evergrande collapse. On Thursday, Evergrande failed to make an interest payment of $83.5 million on a $2 billion offshore bond and didn’t provide clarity as to when it was going to make a payment or whether it planned to do so. It has been speculated that the market’s reaction may have been related to a debt covenant that gave the company an additional 30-day grace period. Hence, the company likely has more time to make the payment than investors may have originally realized. Although this could be good news for markets now, Evergrande may not be out of the woods yet. It still has a $47.5 million interest payment due next week and it is unclear whether it will be able to make that payment.  That being said, we suspect the possibility of an international market contagion may be less severe than reports suggest. At $20 billion, its international debt burden is relatively small and thus may not be enough to collapse international markets. However, its $300 billion in total liabilities due largely to creditors and businesses in mainland China could be dangerous for the country. As a result, we suspect that if Evergrande and other similar firms collapse, it could be the beginning of the end of investment-led growth in China.

International news: 

  • North Korea rejected South Korea’s request to formally end the Korean War. The two sides never agreed to a peace treaty after signing a ceasefire in 1953. Pyongyang insisted that the U.S. must end its hostility toward the country before it can agree to formally ending the war.
  • The upcoming German elections have wealthy individuals on edge as it is widely believed that the next administration will be left-leaning. A new left-leaning parliament could result in the reintroduction of a wealth and inheritance tax. As a result, wealthy individuals have decided to move their assets into Switzerland.

Economics and policy:

  • House Speaker Nancy Pelosi announced that Congress will not allow government funding to expire next week. The statement came hours after the Biden administration announced that it was preparing contingency plans in case of a partial government shutdown. Her remarks have been viewed as a signal that Democrats could decouple the government spending bill from the debt ceiling. A vote on the debt ceiling is expected to take place on Monday and Republicans are expected to vote against it. At this time, we are confident that the debt ceiling will be raised before the deadline because Democrats, who hold the majority in both houses, would have the most to lose in the event that it does not get lifted. However, we expect the debt ceiling to be lifted at the very last minute as the two sides continue to haggle.
    • Additionally, Nancy Pelosi and Senate Majority Leader Chuck Schumer announced an agreement for “a framework” of options to pay for the social spending ambitions in the $3.5 trillion government spending bill. The revelation has led to confusion among Democrats who claimed to have not been briefed on the framework. Although last minute changes to controversial bills are not unusual, the lack of transparency may make it harder for Democrats to rally around the bill.
  • Treasury yields rose sharply due to a sell-off in bonds on Thursday. The increase in yields appears to be in response to tightening credit conditions. This week, the Federal Reserve and the Bank of England signaled that they could tighten monetary policy.
  • U.S. household net worth rose to an all-time high in the second quarter bolstered by high equity prices and increases in home values.
  • The White House is mulling over whether to invoke a cold-war era national security law that forces companies to provide information on the inventory and sale of semiconductors. This is the latest attempt by the Biden administration to address the semiconductor shortage.
  • Higher oil prices have made it easier for private and small companies to enter the market. It is expected that these companies will account for more than half of total output growth next year.


COVID-19:  The number of reported cases is 230,663,767 with 4,729,308 fatalities.  In the U.S., there are 42,672,241 confirmed cases with 684,349 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 462,561,625 doses of the vaccine have been distributed with 387,821,704 doses injected.  The number receiving at least one dose is 212,564,346, while the number receiving second doses, which would grant the highest level of immunity, is 182,587,334.  The FT has a page on global vaccine distribution.

  • An advisory panel for the Centers for Disease Control and Prevention have recommended that the Pfizer vaccine be limited to seniors, nursing home residents, and certain adults with underlying conditions. The recommendation for such a small group of people will likely hinder efforts from the Biden administration as it attempts to halt the spread of the delta variant through vaccinations.

  View PDF