Markets rally as Evergrande nearing default: It is like 'old-fashioned glue-sniffing'

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China's property giant Evergrande has not really done anything to fix its debt problems but financial markets do not seem to care
Why are investors so relaxed at the moment?

On Monday last week, Australia's share market suffered its worst trading day since February.

There were fears that Chinese property giant Evergrande would explode ,with debts totalling more than $400 billion, and cause an economic crisis in the world's second-biggest economy.

However, by Friday, the market had recovered most of its losses.

It did not seem to matter that Evergrande had not fixed its debt problems, nor that it had missed a coupon payment to bond holders on Thursday.

Markets even rallied on Thursday.

So what's going on?

The great reflation!

Michael Every, Rabobank's global strategist, wondered the same thing on Friday.

In his daily note, he put the Evergrande situation on a long list of other events that you would think would be damaging optimism, but which are not.

Apparently, the momentum of the "reflation trade" — that's been driving global stockmarkets higher ever since 2020's lockdowns ended — is still too powerful.

Property prices are soaring globally. Supply chains are under intense pressure. Labour markets are not in the healthiest condition. The virus is still laying waste to some economies.

But stock markets are still bubbling.

"As we all know, markets can remain irrational longer than you can stay solvent, and they are encouraged to do so when monetary and fiscal authorities encourage them to sniff solvent," Mr Every wrote on Friday.

"However, yesterday's 'reflation!' trade appears to be old-fashioned glue-sniffing without any help from the central banks or governments."

He said that, when a bunch of central banks are starting to talk about gradually lifting interest rates and reducing their bond-buying, the People's Bank of China (PBOC) was playing the "usual game" last week with net liquidity injections as the Wall Street Journal reported that local Chinese governments were being told to prepare for Evergrande to fail.

Should that news have been enough to scare investors?…
Gareth Hutchens
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