Risk tone for APAC, a win-win scenario in USD, bad for the AUD
The open could start the week risk-free as struggling Chinese developer Evergrande is on the brink of default.
The potential fallout from Evergrande could have contagion implications that extend beyond the borders of Chinese financial markets, particularly for commodities markets.
Here’s just how serious his problems are and what lies ahead for investors:
The world’s most indebted real estate developer Evergrande is now under growing $ 300 billion in debt, with more to come this month, the developer said last week. Sales have dried up.
Banks will no longer lend to the real estate giant, a conglomerate that has wide-ranging integration with global financial markets. Rating agencies have repeatedly downgraded the company’s rating, citing its liquidity problems and the company’s share price has fallen sharply this year.
Overall, Evergrande’s stock has fallen almost 90% from its all-time highs, and more than 80% since the start of this year. The price of the company’s dollar bond also fell more than 70%. However, bonds from Evergrande’s real estate counterparts are also down sharply and signal a potential crash.
The Evergrande bailout in perspective?
The major risk to the markets may not be what the company owes the banks, because the company is considered too big to fail; It is difficult to apply the normal logic of the free market to the failure of a business in a market that is in fact entirely under government control. The government should bail out the company, albeit indirectly, and order a change in management. Therefore, this news may only have a short-term impact on risk appetite this week.
However, there are still some $ 158 billion in accounts payable to domestic and global suppliers of overdue materials and resources. Many businesses could go bankrupt if they don’t get paid. Therefore, contagion risk is what will be of concern to investors and may well position themselves accordingly, bracing for the impact as markets open this week.
In an announcement on Wednesday, China’s Housing Ministry confirmed that Evergrande will not pay interest to banks scheduled for Monday. It will also increase the uncomfortable possibility that Evergrande’s woes will spill over into China’s banking system this week, with potentially significant consequences.
Overall, uncertainty will be the driving force and Evergrande’s debt situation may have bigger implications than we can anticipate at this time. What is very clear is that no matter whether the Chinese government intervenes, directly or indirectly, the Chinese economy will suffer the ramifications.
There are some 1,300 projects at risk in more than 280 cities, which equates to $ 310 billion in debt from a company responsible for more than 123,000 direct employees, which does not include many construction workers. freelancers who are hired for each of their projects.
Moreover, it is evident that Evergrande is not the only Chinese developer at risk.
1/3 While the collective world thinks that Evergrande is the only Chinese developer at risk, they are wrong – that is, that Evergrande is not unique and neither is it the first. That is, looking at the 10 Chinese developers below, interestingly, combined, the names (each default or significant … pic.twitter.com/WKylM2Nwj7
– Gordon Johnson (@ GordonJohnson19) September 14, 2021
2/3 … stress) represent more than half a trillion dollars in total liabilities. Liabilities are not just debts, but payments to vendors, employees, remaining construction costs, etc. The entire ecosystem is on the brink. Evergrande is trading down -4.45% in today’s session, but …
– Gordon Johnson (@ GordonJohnson19) September 14, 2021
AUD could be the hardest hit
Looking further, Australia is the first nation that comes to mind considering the amount of iron ore trade that takes place between the two nations and not to mention how much the Chinese are invested in the Australian real estate market. .
As by far the world’s largest importer of iron ore by a huge margin, any significant reduction in Chinese demand would have significant ramifications for Australia’s economic revenues from iron ore mining and for the federal budget. (Every US $ 10 the price of iron ore goes down, nominal GDP declines by $ 6.5 billion, and budget coffers are emptied by $ 1.3 billion, that is, according to budget federal 2021-2022).
Meanwhile, the Australian real estate market is also reportedly feeling the heat. If Chinese investors who own Australian real estate are forced to liquidate their assets in order to cover bad debts, some suburbs with high proportions of Chinese ownership could see a significant increase in the number of properties on the market.
In a scenario where a protracted crisis unfolds in China’s real estate sector, the Australian economy, which is already struggling due to covid lockdowns, will come under further scrutiny from investors. All in all, this will cause even more problems for the Reserve Bank of Australia.
Investors will be worried about the APAC market, which could mean greater confidence in the United States as a safe haven. For forex traders, that probably means a weaker Aussie and a stronger US dollar for the opening.
AUD / USD and AUD / JPY could be heavily impacted during the opening sessions and longer depending on the determination of the Chinese Communist Party leadership. The Global Times, a media outlet that directly reflects the position, position and opinion of the Chinese government, said Evergrande was “not too big to fail.” A messy default on Evergrande bonds could spell disaster for global markets and have a direct impact on the downside of the AUD for longer.
AUD / USD daily chart, the bearish playbook
AUD / USD closed on a critical market structure on Friday and left a Doji candle. However, with such news there is an outlook for a stronger US dollar which could tip the AUD / USD price above the edge, extending the current bearish momentum.
A break of support near 0.7260 opens the risk of a downward extension. A rest from this current support while resistance going forward could prevent initial attempts to break up. Therefore, this resistance could potentially lead to the pair falling further towards the 0.71 figure and below.
AUD / JPY daily chart
Price has already corrected a significant portion of the previous daily bearish momentum. Therefore, it is already ready for further decline: