Pricing ‘new brooms’ at White House and Fed
With less than two weeks left to the U.S. presidential elections and all three televised debates done and dusted, investors are at last squaring up to the detailed financial market impact of the event itself and the column inches in newsprint and research reports lengthen by the day.
Barclays interest rate strategists are one of the first to stick hard numbers on likely market outcomes in a report late Tuesday that dug deep into both the well-documented “fiscal cliff” but also into the less discussed uncertainty surrounding the medium-term direction of the Federal Reserve and its leadership.
With news reports suggesting Fed chief Ben Bernanke will not now choose to stand again for a third term at the helm of the U.S. central bank in 2014, some may argue Fed risk from the election has been neutered. But with monetary policy still the only game in town policy-wise for many asset managers – at least on the stimulus side — then even the slightest risk to the Fed’s mandate remains a significant market factor.
Even though it figured almost nowhere in the big public debates, Republican challenger Mitt Romney has vowed that if elected he would not renominate Bernanke to a third term. Romney’s running mate Paul Ryan is an even harsher critic of the Fed, backing legislation that would open up the Fed’s monetary-policy decisions to congressional scrutiny and strip the central bank of its mission to seek full employment. Given that the longevity of the Fed’s third and current round of asset purchases is tied explicitly to cutting the jobless rate, that’s a particularly controversial stance going forward.
The Barlcays strategists, as a result, reckon that if Romney were elected, a more hawkish Fed over time would be more likely than under a re-elected administration of Democrat Barack Obama. And they said it’s possible that Fed funds futures market could see implied Fed interest rates for the end of 2015 jump by as much as 50bp in a knee-jerk reaction to a Romney win and drop 20bp on an Obama victory. (According to Reuters data, September 2015 Fed funds futures are currently implying a rate of 0.60% — compared to the current target of 0-0.25% range — and that has risen about 10bp since the first presidential debate on Oct 3 saw Romney’s opinion poll ratings rise to match and in some cases nudge ahead of Obama’s.)
Any new Fed chairman after January 2014 in a Romney presidency is likely to be more hawkish than under an Obama presidency. Still, changes would likely be gradual, as a new chair will still need the support of the FOMC, and the Fed is unlikely to change course drastically for fear of losing credibility.
Forgive and forget in emerging debt?
If you’re an emerging market borrower, it seems like it’s a great time for sorting out those old troublesome debts as pumped-up yield appetite in the fixed income universe encourages another bout of selective amnesia among creditors and bond investors.
Serial defaulter Ivory Coast met investors in London this week, next stop New York later today, to discuss a new schedule for missed coupons on its $2.3 billion bond due 2032.
The West African country defaulted on the bond early last year during political unrest which later broke into civil war. That bond was launched only in 2010 as a restructuring of previous debt on which Ivory Coast defaulted in 2000. If that isn’t confusing enough, the 2000 default was of U.S.-underwritten Brady debt, which itself was a repackaging…
Easy business trend in emerging Europe
Polish central bank governor Marek Belka doesn’t apportion a lot of importance to the fact that Poland can boast the second biggest improvement in the latest World Bank’s ease of doing business index, after Kosovo.
“This year we have improved, but I don’t care too much about it,” Belka said at a meeting in London today.
Others do see a significant trend emerging from the data around Poland which paints an optimistic picture for those wishing to start and do business in Europe, but not necessarily in the developed markets.
Baton passing to the emerging markets consumer
Is there a change of sector leadership underway within emerging markets?
For years, commodities and energy delivered world-beating returns to emerging market investors. Yet in recent years there are signs of a shift, says Todd Henry, equity portfolio specialist at T.Rowe Price.
With the China tailwind no longer as strong as before demand for oil and metals will not be as robust as in the past decade, Henry says. But in China as well as elsewhere, disposable incomes have risen as a result of the fast economic growth these countries experienced in the past decade.
Survival of the fattest?
Is there room only for the biggest, most aggressively-marketed funds in crisis-hit Europe?
Europe’s ten best-selling funds have attracted nearly a third of net sales across bonds, equity and mixed assets so far this year, as the grey bars show in the following chart from Thomson Reuters’ fund research firm Lipper.
The numbers — which exclude ETFs — are even more staggering if looking at at the concentration of sales into groups/companies, rather than at fund level.
Chaco signals warning for Argentina debt
A raft of Argentine provinces and municipalities suffered credit rating downgrades this week after one of their number, Chaco, in the north of the country, ran out of hard currency on the eve of a bond payment. Instead it paid creditors $260,000 in pesos. Now Chaco wants creditors to swap $30 million in dollar debt for peso bonds because it still cannot get its hands on any hard currency.
The episode is a frightening reminder of Argentina’s $100 billion debt default 10 years ago and unsurprisingly has triggered a surge in bond yields and credit default swaps (CDS). But broader questions also arise from it.
First, will debt “pesification” by some Argentine municipalities snowball to affect international bonds as well? And second, is municipal debt likely to become a problem for other emerging markets in coming months?
Ireland descends from risky debt heights
Good news for Europe as the cost for insuring sovereign debt against default fell in the third quarter of 2012, according to the CMA Global Sovereign Credit Risk report.
Ireland slipped out of the 10 most risky sovereigns for the first time since the first quarter of 2010 according to CMA, making space for Lebanon to enter the club of the world’s ten most risky sovereign debt issuers.
Although Irish 5-year credit default swap spreads tightened to 317 basis points from 554 basis points in the third quarter, there is still a 25 percent chance that Ireland will not be able to honour its debt or restructure it over the next five years.
Weekly Radar: Global PMIs; US/UK GDP; FOMC; Heavy earnings, inc Apple
Whoosh! The gloomy start to the final quarter seems to have been swept away again by the beginnings of a half decent earnings season stateside – at least against the backdrop of dire expectations – and a steady drip feed of economic data surprises from the United States and elsewhere. Moody’s not downgrading Spain to junk has helped enormously and the betting is now that the latter will now seek and get a precautionary credit line, which would not require any bailout monies up front but still unleash the ECB on its bonds should they ever even need to – and, given Thursday’s successful sale of 4.6 billion euros of 3-, 5- and 10-year Spanish government bonds, they clearly don’t at the moment (almost 90% of Spain’s original 2012 borrowing target has now been raised). What’s more, Greek euro exit forecasts have been put back or reduced meantime by big euro zone debt bears such as Citi and others, again helping ease tensions and defuse perceived near-term euro tail risks. Obama’s bounceback in the presidential polls after the latest debate may be helping too by rolling back speculation that a clean sweep rather than a more likely gridlock was a possible outcome from Nov 6 polls. China Q3 GDP came in as expected with a marginal slowdown to 7.4% and signs of growth troughing — all adding to the picture of relative calm.
So, in the absence of the world ending in a puff of smoke – and the latest week of data, earnings and reports suggests not – we’re left with a view of a hobbled but stabilising world economy aided by hyper-easy monetary policy that is bolting core interest rates to zero. Tactical investors then, at least, are being drawn into the considerable pricing anomalies/temptations across bond and credit markets as well as the giant equity risk premia and regional price skews.
The upshot has been a sharp bounceback of some 2.5% in world equities since last Wednesday, falling sovereign bond spreads in euroland and in credit and emerging markets, a higher euro and financial volatility gauges still rock bottom. Dax vol, for example, is at its lowest in well over a year. Year to date, developed market equities are now scaling 15-20%! Germany stands out with gains of some 25%, but the US too is homing in on 20%. These are extremely punchy numbers in any year, but are doubly remarkable in year of so much handringing about the future. So much so, you have to wonder if the remainder of the year will be remain so clement. That doesn’t mean another shock or run for the hills, but shaving off the extremes of that perhaps?
Record year for emerging corporate bonds
The past 24 hours have brought news of more fund launches targeting emerging corporate debt; Barings and HSBC have started a fund each while ING Investment Management said its fund launched late last year had crossed $100 million. We have written about the seemingly insatiable demand for corporate emerging bonds in recent months, with the asset class last month surpassing the $1 trillion mark. Data from Thomson Reuters shows today that a record $263 billion worth of EM corporate debt has already been underwritten this year by banks, more than a fifth higher than was issued in the same 2011 period (see graphic):
The biggest surge has come from Latin America, the data shows, with Brazilian companies accounting for one-fifth of the issuance. A $7 billion bond from Brazil’s state oil firm Petrobras was the second biggest global emerging market bond ever.
Emerging Policy-the big easing continues
The big easing continues. A major surprise today from the Bank of Thailand, which cut interest rates by 25 basis points to 2.75 percent. After repeated indications from Governor Prasarn Trairatvorakul that policy would stay unchanged for now, few had expected the bank to deliver its first rate cut since January. But given the decision was not unanimous, it appears that Prasarn was overruled. As in South Korea last week, the need to boost domestic demand dictated the BoT’s decision. The Thai central bank noted:
The majority of MPC members deemed that monetary policy easing was warranted to shore up domestic demand in the period ahead and ward off the potential negative impact from the global economy which remained weak and fragile.
Thailand expects GDP to grow 5.7 percent this year and Prasarn has cited robust credit demand as the reason to keep rates on hold. But there have been ominous signs of late — exports and factory output have now fallen for three months straight, which probably dictated today’s rate cut. Remember that exports, mainly of industrial goods, account for 60 percent of Thai GDP and the outlook is perilous — the BOT has already halved its export growth forecast for 2012 to 7 percent and has said it will cut this estimate further.
