China Evergrande Changes the Game on Wall Street By TipRanks
Debt-ridden China Evergrande’s (EGRNF) woes are changing the game on Wall Street this week from “buy the dips” to “sell the peaks,” which usually marks the begging of a bear market.
China’s real estate giant, Evergrande, warned it that it could be the subject of hostile media attacks. The campaign would have an impact on September sales and lead to large-scale sell-offs in bonds maturing in 2024.
The sell-off reached other Chinese property and real estate companies by Friday, and things got worse. (See EGRNF stock charts on TipRanks)
Then, there was a Globaltimes editorial over the weekend saying that Evergrande’s prospects for easing its liquidity crisis remain gloomy. The editorial stated that “China Evergrande Group has begun to repay its wealth management products via properties, but industry observers believe the prospects for Evergrande’s ability to weather the current liquidity crisis remain bleak.”
It went on to describe the causes of Evergrande’s troubles. The previous credit bubble that led to Evergrande’s expansion in multiple sectors is thought to be the root of Evergrande’s liquidity problems. However, the capital chain of Evergrande has been strained by liquidity since the regulators increased supervision and rules over financing channels in an effort to curb irregularities.
The editorial did not indicate whether China has plans to provide liquidity in order to rescue the real estate firm. The possibility of contagion if Evergrande fails to pay its short-term obligations raised by this editorial.
This sounds like China’s Lehman moment to Wall Streeters who have known Wall Street for a while. The roll of Chinese property share sell-offs into Monday’s Trading and the spread of this sell-off to every risky asset worldwide, including Wall Street, is an example of China’s Lehman moment.
Evergrande’s negative sentiment is exacerbated by the worsening of US-China relations due to tensions in South China Sea.
Wall Street is also anxious about the FOMC meeting scheduled for Wednesday. Fed observers expect that the central bank will begin to reduce its purchases of U.S. Treasuries, mortgage-backed securities and other assets. Wall Street was particularly hard hit by financial and material shares, along with companies that have large amounts of debt.
There was still a positive side to this market sell-off. U.S. Treasury bond rallies, because investors typically view this asset as a safety net during periods of turmoil around the world. That’s a significant change from the previous days, when U.S. Treasury bonds were selling off in response to strong inflation numbers.
Disclosure: Panos Moudoukoutas had no position at the time this article was published.
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