Five Things You Need to Know to Start Your Day - Bloomberg

Biden says the U.S. will offer “safe haven” for Hong Kong residents. S&P slashes Evergrande’s debt ratings to one of the lowest levels of junk. And delta is wreaking havoc around the world. Here’s what you need to know this Friday morning.

President Joe Biden said Hong Kong residents in the U.S. can remain in the country for as long as 18 months, citing Beijing’s crackdown on political freedoms in the territory. It wasn’t immediately clear how many people Biden’s order would affect. The vast majority of Hong Kong residents in the U.S. are expected to be eligible for relief, with only narrow legal exceptions. Meanwhile in Hong Kong, the vast majority of the city’s elderly residents have yet to be vaccinated against Covid, hampering efforts to reopen borders and spur economic recovery. An unlikely source of their hesitancy has emerged — their doctors.

Asian stocks look set to follow U.S. equities higher after earnings helped Wall Street to a record close. Futures rose in Japan and Hong Kong and were steady in Australia. U.S. contracts fluctuated after the S&P 500 and Nasdaq 100 reached new peaks. Treasuries retreated and a gauge of the dollar declined. The pound held an advance after the Bank of England signaled concerns about inflation.

S&P Global Ratings slashed China Evergrande Group’s debt ratings to one of the lowest levels of junk amid a crisis of confidence by investors and lenders that the credit grader said could squeeze the developer’s access to funding. The firm cut Evergrande’s rankings by two levels to CCC, just four notches above the firm’s designation for defaulted borrowers. Meanwhile, four months after Huarong shocked bondholders by failing to announce its 2020 results, the bad-debt manager may finally be on the cusp of unveiling its financial statements. At stake is whether the company is able to survive on its own or whether it will require debt restructuring or recapitalization.

There are growing signs the delta variant risks slowing the pace of the U.S. economic recovery, with events being cancelled and consumers forced to change their habits. And it’s chaos on Wall Street as delta upends return to work plans. In Australia about two-thirds of the population is back in lockdown, with authorities in Melbourne enforcing stay-at-home orders for the sixth time since the pandemic began. Elsewhere, Tokyo case numbers hit a record of over 5,000 in a single day; Hong Kong 58-day Covid-free streak ended with a mysterious case; and China is   imposing new restrictions on travel in a bid to slow their outbreak.

China’s surprise ban on pineapple imports from Taiwan five months ago was widely viewed as an attempt to undermine President Tsai Ing-wen’s standing with a political constituency. But new trade data show the move has backfired, as sympathetic Japanese shoppers stepped in to provide support. Japan has now replaced China as the major overseas destination for Taiwan’s pineapples, with shipments surging more than eightfold to 16,556 tons in the four months through June from a year ago. The humble tropical fruit has become an unlikely symbol of defiance in the region’s geopolitical intrigues.

What We’ve Been Reading

This is what’s caught our eye over the past 24 hours:

And finally, here’s what Tracy’s interested in today

Here's my vote for one of the craziest charts of the year. It shows shares of Perennial Energy — a Hong Kong-listed coal miner based in China's Guizhou province — basically falling off a cliff. The stock had gone up by almost 450% in a year, which was enough to propel it into the MSCI China Index as part of the benchmark index provider's quarterly rebalancing. As soon as the stock was included, however, it fell sharply and as you can see, it's never really recovered.

The power wielded by benchmark index providers has long been a fascination of mine (and here I should note that Bloomberg also provides such indices). So it's not necessarily surprising that there are instances where traders might try to take advantage of their influence by pumping a single stock until it's big enough to be included in major indices, and then dump it on passive investors who now find themselves forced to buy it in order to “hug” their benchmark. The question is whether a similar dynamic can exist for a whole market. The weighting of China stocks has doubled over the past decade to about 35% of MSCI's Emerging Markets Index, meaning anyone tracking exposure to a basket of developing countries is actually taking on a large amount of stocks from the Middle Kingdom and all the regulatory risk that now entails.

You can follow Tracy Alloway on Twitter at  @tracyalloway.

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Five Things You Need to Know to Start Your Day - Bloomberg
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