The famed hedge fund short-seller Carson Block's is betting against Standard Chartered, the UK-based, emerging market-focused bank. According to Euromoney, Mr. Block said in mid-May that “deteriorating loan quality” makes Standard Chartered a prime target for a bearish punt, expressed by shorting its five-year CDS. Read the whole story. But wait a minute: shouldn't he rather be buying five-year CDS, given his outlook?
(*) Sid Verma: "Carson Block misfires on Bearish Standard Chartered bet", Euromoney, 31 May 2013.
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Saturday, June 8, 2013
CREDIT MARKETS WATCH...
- Corporate bonds. According to the WSJ, the price of Apple bonds has sunk to 90% of face value: "The loss from the high point to the low is around three years' worht of coupon income — a big hit". Corporate bond prices have fallen slightly more than ultra-safe Treasury bonds. Not good from a discount rate perspective! A good source for corporate bonds: KDP High Yield Daily Index.
. Credit Default Swaps. Speaking of discount rates, the iTraxx Europe Crossover Index trades again above 400bps. You can track this very important index on page 28 of the WSJ. See also the Markit website.
. Brazil rating outlook. From Bloomberg: "S&P lowered yesterday the outlook on Brazil’s BBB rating, which is two levels above junk, saying it was concerned by the country’s sluggish economic growth, weakening fiscal accounts and loss of credibility with investors. S&P also cut the rating outlook for state-controlled companies Petroleo Brasileiro SA and Centrais Eletricas Brasileiras SA. The nation’s $2.2 billion of bonds due 2023 fell 0.19 cent to 92.40 cents on the dollar, the lowest price on a closing basis since the notes were issued in September, according to data compiled by Bloomberg. Yields rose 3 basis points, or 0.03 percentage point, to 3.57 percent" (*). Note how closely corporate rating changes follow on the heels of a change in sovereign ratings.
(*) Katia Porzecanski & Blake Schmidt: "Brazilian Dollar Bond Slump Deepens as S&P Lowers Rating Outlook", Bloomberg, 7 June 2013.
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. Credit Default Swaps. Speaking of discount rates, the iTraxx Europe Crossover Index trades again above 400bps. You can track this very important index on page 28 of the WSJ. See also the Markit website.
. Brazil rating outlook. From Bloomberg: "S&P lowered yesterday the outlook on Brazil’s BBB rating, which is two levels above junk, saying it was concerned by the country’s sluggish economic growth, weakening fiscal accounts and loss of credibility with investors. S&P also cut the rating outlook for state-controlled companies Petroleo Brasileiro SA and Centrais Eletricas Brasileiras SA. The nation’s $2.2 billion of bonds due 2023 fell 0.19 cent to 92.40 cents on the dollar, the lowest price on a closing basis since the notes were issued in September, according to data compiled by Bloomberg. Yields rose 3 basis points, or 0.03 percentage point, to 3.57 percent" (*). Note how closely corporate rating changes follow on the heels of a change in sovereign ratings.
(*) Katia Porzecanski & Blake Schmidt: "Brazilian Dollar Bond Slump Deepens as S&P Lowers Rating Outlook", Bloomberg, 7 June 2013.
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ECB MEETING OF GOVERNING COUNCIL: NO CHANGES, AS EXPECTED
The official communiqué: "6 June 2013 - Monetary policy decisions. At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.50%, 1.00% and 0.00% respectively. The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today". Text of press conference: see.
Two things to note: (1) subdued inflation expectations: "The underlying price pressure in the euro area is expected to remain subdued"; (2) the progress made in terms of fragmentation of credit markets within the Eurozone:
It is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
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Two things to note: (1) subdued inflation expectations: "The underlying price pressure in the euro area is expected to remain subdued"; (2) the progress made in terms of fragmentation of credit markets within the Eurozone:
It is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
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AN IMPORTANT PAPER!
George Magnus, the UBS advisor, has published an important paper about the so-called 'middle-income trap' (*). The idea is simple enough: developing countries that hit the $12,000/$15,000 level (in terms of GDP per capita) will find it difficult to grow beyond that level if they fail to improve governance:
The appetiser to this discussion is the recent slowdown in growth in China, India, Brazil and elsewhere since 2011, notwithstanding signs of stabilisation in recent months. The cyclical issues are well understood, including weak Western demand. [To escape the middle-income trap, countries must] built trust, rules, good macro, corporate and social governance, and property rights and the rule of law, into national institutions … High levels of prosperity, which are ultimately about investment and innovation, rest on important political foundations, namely strong central government, and inclusive economic, social and political institutions, political checks and balances.
Political checks and balances! I like the idea! In fact, I have cooked up my own Checks and Balances Index [see, in Spanish].
(*) “Hitting a BRIC Wall: the risk of the middle income trap”, UBS Investment Research, 21 January 2013. See also the article: "China can yet avoid a middle-income trap", Financial Times, June 2011: "Richer, more complex economies need high-quality institutions, especially in the legal arena, to sustain human development. This is far more important than national output, steel production or any other metric".
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YUAN APPRECIATION
From the WSJ: "Since the January 2011 visit of Mr. Hu, the yuan has appreciated 11.9% against thge dollar when accounting for inflation, according to Brookings Institution researcher Karim Foda, including a 1.8% increase since the beginning of this year. The appreciation has come at a tough time for China's exporters, giving Mr. Xi a strong argument the U.S. should ease criticism of China's currency policies" (*).
Good point. In any country where the cost of capital is high, currency appreciation can be a letal recipe — high cost of capital and high cost of labor. But is the cost of capital that high in China? How do we know? We'll know when the bond market becomes more relevant, replacing bank credit as the main source of funding for Chinese companies.
(*) Bob Davis: "China, U.S. Growth: Tables Have Turned", Wall Street Journal, June 7-9, 2013.
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Good point. In any country where the cost of capital is high, currency appreciation can be a letal recipe — high cost of capital and high cost of labor. But is the cost of capital that high in China? How do we know? We'll know when the bond market becomes more relevant, replacing bank credit as the main source of funding for Chinese companies.
(*) Bob Davis: "China, U.S. Growth: Tables Have Turned", Wall Street Journal, June 7-9, 2013.
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