Evergrande is FX Risk

Evergrande is not a direct threat to the U.S. financial markets. This won't be a systemic financial crisis outside of China because the financial system is almost as walled-off as the Internet.

The handling of Evergande is a threat to global currency markets, and by extension, global financial markets and the global economy. The risk is small in percentage terms, but the "expected value" is high because if the Chinese credit bubble pops it's the end of a 40-yesr trend. Probably more than one of them...

In the past, China easily papered over these events. Sometimes they had to let the yuan depreciate enough to spread the pain globally.

The larger question for all markets is whether the post-2008 economy still exists or if something changed in March 2020. Charts such as USDCNY (and copper) argue they have not. USDCNY touches the violet line in 2014 (taper started), April 2018 (Fed reducding balance sheet) and June 2021 (global stimulus running out).

The Korean won is already sinking in expectation of what is coming.

>Evergrande could be a very complex bankruptcy or bailout, but for the markets its a simple calculation. Does the forex market care? If yes, does it cause contagion into the U.S. Dollar Index? If the U.S. Dollar Index raillies 0.7 percent, that'll be a minor breakout. More bearishness for stocks ahead, but maybe not a major crisis. If there's a major crisis, USDCNY is going to run past 7.00 on its way higher, perhaps much higher. At which point the odds of a "surprise" devaluation in the yuan start accelerating towards 100 percent. Until something happens in FX land, Evergrande is a spooky ghost haunting a U.S. stock market worried about the sustainability of the current rally. I cannot argue against those who say Evergrande will be a non-event, but if you do, be sure you won't get caught whistling past the graveyard in October.