5 Things

Evergrande fears linger, China outlaws crypto transactions, and a busy political weekend.

Preparing the ground The People’s Bank of China has pumped a net 460 billion yuan ($71 billion) of short-term cash into the banking system in the past five working days as policymakers seek to avoid contagion from China Evergrande Group’s problems. The indebted developer’s stock and bonds fell again, following a rally yesterday, as investors wait for any sign of a payment of the interest due yesterday. The company has a 30-day grace period before a default would be declared. While authorities in China are trying to contain any possible fallout, this morning European Central Bank President Christine Lagarde echoed comments from Federal Reserve Chair Jerome Powell

Illegal
Cryptocurrencies are dropping this morning after China’s central bank posted an announcement on its website saying all crypto-related transactions are illegal. The nation’s economic planning agency said that it is an urgent task to root out crypto mining and the crackdown is important to meet the country’s climate goals. Bitcoin fell about 4% to $42,900 by 5:50 a.m. Eastern Time in the wake of the announcement, with more severe losses in other coins as Ether, EOS, Litecoin and Dash all dropping more than 7%.

Busy times Lawmakers in Congress are coming under increasing time pressure as they try to both resolve both the imminent halt to funding for the federal government and progress on President Joe Biden’s economic agenda. With deadlines approaching, House Democrats penciled in a rare Saturday committee meeting to prepare the ground for a possible vote next week on the $3.5 trillion package. Lawmakers, meanwhile, have until Sept. 30 to reach a deal to avert a government shutdown. Things are also heating up on the other side of the Atlantic, with German politicians making their last pitches to voters ahead of Sunday’s election which will see the end of Angela Merkel’s 16-year term as Chancellor.

Markets slip Evergrande’s apparent failure to make yesterday’s bond payment is hurting sentiment in Asia, and a bond selloff in Europe and the U.S. is reducing risk appetite there. Overnight the MSCI Asia Pacific Index added 0.4%, with that gain almost entirely attributable to a strong rally in Japan where the Topix index closed 2.3% higher. Europe’s Stoxx 600 Index was 0.8% lower at 5:50 a.m. after disappointing German survey data added to growth concerns in the region. S&P 500 futures pointed to a drop at the open, the 10-year Treasury yield was at 1.413%, oil held over $73 a barrel and gold rose.

Coming up... U.S. new homes sales numbers for August are at 10:00 a.m. The latest Baker Hughes rig count is at 1:00 p.m. There is a flurry of Fed speakers today with Cleveland Fed President Loretta Mester, Kansas City Fed President Esther George and Atlanta Fed President Raphael Bostic all speaking at separate events, while Fed Chair Jerome Powell, Governor Michelle W. Bowman and Vice Chair Richard H. Clarida host a “Fed listens” event. Carnival Corp is among the companies reporting results.

What we've been reading Here's what caught our eye over the last 24 hours.

Trumpworld gets a red-carpet welcome in Bolsonaro’s Brazil. The burner phone that dialed up a French insider-trading probe. Traders go all in on BOE winning rate-hike race versus Fed… ...while the ECB’s ultra-stimulative path is looking lonelier.
The energy future needs cleaner batteries. Billionaire row condo board sues over 1,500 building defects. Apophis: The asteroid we thought might hit us. And finally, here’s what Katie’s interested in this morning There are few things more delightful than the intersection of the crypto universe with fixed-income. Luckily, Joseph Abate from Barclays seems equally as charmed. He argued in June that perhaps tokenization could improve repo settlement; he’s explored the financial stability risks stablecoins might pose; and just this week, Abate posed the question in a research note: “Securities lenders, dealers, and banks have plenty of experience repo’ing traditional assets, but what about crypto assets?”

Yes, I cried, what about crypto assets? Banks and dealers would be a natural home for crypto repo, Abate writes, given that there’s “little conceptual difference” between the custody of traditional assets and a digital wallet. And there’s clearly demand -- a sort of decentralized repo market for crypto has sprung up outside the realm of bank intermediation, where an ecosystem of asset financing, lending and deposit taking is developing without brokers or exchanges.

However, Abate notes that banks and dealers have been reluctant to enter the financing market for digital assets. There are several good reasons for that: for instance, legal documentation and enforcement mechanisms are limited and counterparty and data risks are a concern.

But beyond that, there’s also the issue that crypto repo can be astronomically balance-sheet intensive for dealers. As Abate lays out, the Basel Committee on Bank Supervision proposed two classifications for crypto assets as they relate to banks’ exposure: one group includes tokenized versions of traditional securities and stablecoins, and the other contains everything else. For the latter group, the risk weighting of capital requirements would be as high as 1250%. In addition, minimum repo haircuts would be 25%.

That’s a strong incentive to stay away -- maybe too strong. If the BCBS’s proposed treatment makes it prohibitively expensive for banks to offer crypto repo, participants may instead turn to the developing decentralized networks to meet their needs.

That could create another headache, Abate writes: ``While this would protect banks from crypto asset risks, shifting all this activity outside the regulated sector makes it harder to monitor, and this could create other challenges to financial stability.''

Follow Bloomberg's Katie Greifeld on Twitter at @kgreifeld

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