Rearranging the ISINs on the Titanic

We are one day away from Argentina’s second default this century. Drama or farce?

Farce. For all the confusion that was on show in Judge Griesa’s hearing last week, about whether Argentina’s restructured local-law bonds should join the foreign-law debt within the pile of paper at risk…

At least holders of these bonds will be OK after all on Wednesday.

Only just this once, though. And they were let off for a reason which underlines tensions we’ve been noting in the pari passu saga between enhanced powers to enforce sovereign debt, and the complexity of international finance. Read more

Markets Live: Tuesday, 29th July, 2014

Live markets commentary from FT.com 

Default settings in China

Or, how far is market pricing of credit risk catching on in China, after all?

Here’s your default-risk adjusted corporate bond yields in China from Nomura (our emphasis):

Liquidity injections and targeted easing so far this year has had a material impact on corporate bond yields. Corporate bond yields have dropped across the rating spectrum, while a similar narrowing of spreads can be seen relative to Chinese government bonds. Data provided by the China Government Securities Depository Trust & Clearing Co Ltd (chinabond.com.cn) shows that both 1yr and 5yr AA-rated bond yields have fallen, from highs of 7.22% and 7.63%, respectively, at the start of the year to 5.38% and 6.53% today.

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The (early) Lunch Wrap

GKN earnings and dividend up || Renault hit by Russian weakness || Morrison boardroom changes || Next profits up || UK mortgage approvals higher than expected || Markets softer Read more

Further reading

Elsewhere on Tuesday,

- Nilometers and the language of finance.

- Where are the time-traveling arbitrageurs?

- Another gave women in the audience a tip for pitching VCs: “Wear a wedding ring.”

- Why not link the maximum wage to the minimum wage?  Read more

The 6am London Cut

Markets: “Asian stocks rose, sending the benchmark regional index to a six-year high, while bonds followed U.S. Treasuries lower before the Federal Reserve starts meeting today. Oil fell while gold climbed.” (BloombergRead more

The Closer

FURTHER FURTHER READING

- Three faces of low inflation: US, Japan, and the Euro area. Read more

“Another two weeks and we’ll take out the 1929 instance”

That’s permabear John Hussman, who simply refuses to capitulate. Some extracts from his latest letter…

Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000. The median price/revenue ratio of S&P 500 components is already far above the 2000 level, and the average across S&P 500 components is nearly the same as in 2000. The extent of this bubble is also partially obscured by record high profit margins that make P/E ratios on single-year measures seem less extreme (though the forward operating P/E of the S&P 500 is already beyond its 2007 peak even without accounting for margins). Read more

The need for investment-led recovery for Europe

This is a guest post, co-authored by Giovanni Cozzi, economic advisor at the Foundation of Progressive European Studies (FEPS) and Stephany Griffith-Jones, financial markets director, Initiative Policy Dialogue (IPD), Columbia University, in which they are argue that more investment could lead to a significant decline in the government debt ratio of southern Europe.

There is growing consensus that it will prove impossible to restore growth on a sustained basis in the EU without stimulating investment.

The European Council of Heads of Government firmly asserted that the Union needs to take bold steps to increase investments and create jobs. They called for immediate mobilization of the right mix of private and public funding. Read more

Of obseen Libor manipulation

Lloyds gets a $383.2m fine for Libor manipulation — split between US and UK regulators and including a fine of £70m and some £7.76 million in compensation to the BoE for manipulating the Special Liquidity Scheme (yup, the same scheme set up to help struggling banks) — and we get to relive the glory days of Libor manipulation transcripts.

Some plain vanilla from the FCA:

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Yukos — Putin’s loose lips

Was Rosneft an arm of the Russian state in 2004?

For anyone looking at its shareholder list — or the background of Igor Sechin, chairman of the board of directors at the time — back then, it might hardly seem a taxing question. But it’s not the question the arbitration tribunal saw as important in Monday’s Yukos ruling.

This was whether Rosneft was specifically acting on behalf of the state when it played its part in the dismemberment of Yukos in 2004. (State responsibility in international law is a tricky subject.)

In an astonishing passage, the tribunal is sceptical that there is evidence of Rosneft acting in this way — until it notices the reflections of the man in the Kremlin from the time… Read more

Temporisation watch

That uneasy feeling when everything is going well. Is it deserved? Can it last? Should you cash in and go paint watercolours in that studio on the Pembrokeshire coast?

Strategists are not immune, with a summer bout of the temporaries upon us. Goldman is the latest, downgrading its view of stocks over the weekend but without really committing to it:

We also downgrade equities to neutral over 3 months. We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then.

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Yukos — the interest-ing bit

Another excerpt from Monday’s ruling by an arbitration tribunal, awarding $50bn to be paid by Russia to Yukos ex-shareholders…

As part of the damages from Russia’s expropriation of Yukos’ assets — the tribunal also had to work out interest. This is an important part of any arbitration case looking at financial losses incurred years ago. Although actually, there is surprisingly little guidance on what rate to choose. And the rate used by the tribunal here is (excuse the pun) interesting. Read more

Markets Live: Monday, 28th July, 2014

Live markets commentary from FT.com 

War and markets

Amid all the debate about why geopolitics isn’t hurting stock markets, a nice table from JP Morgan Asset Management:

All figures show war-zone countries as a percentage of the world, with our emphasis:

  • 11.7 per cent population
  • 9 per cent oil production
  • 3.8 per cent foreign direct investment
  • 3 per cent GDP

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The (early) Lunch Wrap

Former Yukos shareholders awarded $50bn damages against Russia || GSK opens issue of spinning off consumer division || Reckitt pushes ahead with spin-off of pharmaceuticals arm || Argentina braces for sovereign debt default || Aberdeen falls on £4bn mandate withdrawal || Markets Read more

A small and significant problem

A small squall or a broad based pall? BCA Research have spotted that small capitalisation stocks have been under pressure all around the world, in the US, Europe, Japan Asia and even, say they, the UK.

The reason, BCA suggests, is wage costs. Read more

Redemption is, a mutual fund story

Summary of stuff you probably know up top, newer stuff on whether big mutual funds are in fact systemically important nearer the bottom.

Last week the SEC finally got around to publishing new rules for money market funds which forces certain, arguably riskier, funds to switch to a floating share price instead of the current fixed $1-a-share cost. They have two years to comply.

Now, as Matt Levine says, you can largely ignore the changes if you’re a (coddled) human rather than a corporation as funds targeted at retail investors will be exempt from the floating share price, but still, from the FTRead more

Yukos — the $50bn award

Here’s how the tribunal of the Permanent Court of Arbitration worked out the figure, after finding in favour of former Yukos shareholders on Monday…

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Further reading

Elsewhere on Monday,

- Benchmark blues.

- The bastard love-child of snooping and high-level mathematical theory.

- Judge Griesa, very much in the soup.

- And the #GrieFault trade. Read more

The 6am London Cut

Markets: “Asian stocks rose, with a gauge of Chinese shares in Hong Kong heading toward a bull market, while Treasuries and oil slipped as investors await data on U.S. services before the Federal Reserve meets this week. Soybeans and corn rallied… U.S. reports on services activity and pending home sales are due before the Fed meets to discuss monetary policy, while Goldman Sachs said last week rising yields may spur a retreat in global stocks and bonds over the next three months.” (Bloomberg)

And have a weekly calendar of events (click to enlarge) for what Citi are calling “a volatile week in a boring month”: Read more

How not to introduce official e-money?

We’ve argued enthusiastically for the introduction of state e-money before.

But we overlooked the likelihood that it might first be adopted by countries like Ecuador as a means of getting out of their dollar bind (via Bloomberg):

Ecuador’s congress approved a new law today that allows the government to create its own parallel currency for use in local transactions as the government struggles to meet spending commitments.

Congress voted 91-22 to approve President Rafael Correa’s proposal to change the South American nation’s monetary and financial laws, allowing payments in “electronic money” and giving presidential appointees the power to decide who gets loans and how lenders invest their reserves.

The bill now goes to Correa for his signature or veto. As a current-account deficit drains dollars from the economy, making it harder for Correa to fund a burgeoning budget gap, a new currency could be used to meet government payments, said Jaime Carrera, a former deputy finance minister and director of the Quito-based Fiscal Policy Observatory. It could also lose its value quickly if not backed by the central bank, he said.

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RBS — the bank that outperformed

From Lex Live at noon on Friday…

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Dealmaking from an Indian jail apparently not so easy

Sahara’s incarcerated “managing worker” Subrata Roy — who is in a scrap with regulators over $4bn worth of convertible bonds sold, oft to impoverished farmers, in 2008 — is after a dealroom at Delhi’s Tihar jail.

Can you blame him?

If you were sitting in jail waiting for a (roughly) $1.6bn bail to be posted while being given some 6hrs leave a day to negotiate the sale of of three trophy hotels, including the Grosvenor in London, the proceeds of which would go towards meeting that bail… wouldn’t you try to hunt down a little extra calm and negotiating space? Read more

Geopolitical central banking

What happens when you raise rates by 2.5 percentage points, within a period of six months, for an economy that might only grow 0.2 per cent this year?

We’re not sure. Read more

The British economic recovery in 13 charts

So the UK economy grew 0.8 per cent in the second quarter of 2014, leaving output on this preliminary estimate at just about the previous peak set in Q1 2008, over six years ago. For an economy that produces almost £400bn a quarter in gross domestic product, exceeding the previous peak by £752m is really small beer, as our first chart below the break shows.

This has been the slowest recovery from recession since the 1920s, although be warned, the ONS has form on revising up its estimates. Joe Grice, its chief economist is already hinting at such a move, commenting today that the ONS “may yet modify our view of how slow the UK’s recovery has been”.

This post will examine how the economy has changed over the past six years in charts even though output is now again at the same level. Read more

Markets Live: Friday, 25th July, 2014

Live markets commentary from FT.com 

The (early) Lunch Wrap

RBS shares jump on better-than-expected trading update || BSkyB to pay up to £7.4bn to acquire European sister companies || Pearson sticks to profit targets || Lloyds to pay up to £300m Libor fines || Air Algerie airliner wreckage found in Mali || Heathrow records growth and looks for more via a third runway || Goldman bankers to Babble on their own chatroom || Amazon dives after losses blow out || Markets Read more

Further reading

Elsewhere on Friday,

- Andolfatto interviews Woodford.

- Barc’s dark pool rebuttal: technical and nit-picky, but persuasive.

- In other words, to continue offering high yields, Yu’E Bao has started to display classic signs of maturity mismatch.

- Hazlitt, Keynes and the glazier’s fallacy. Read more

The 6am London Cut

Markets: Asian markets were generally higher following a decent Wall Street session buoyed by corporate earnings, with Japanese stocks brushing off figures showing a fall in inflation. The attraction of haven assets dimmed as the S&P 500 notched yet another record high close in New York, gaining 0.1 per cent to 1,987.9 as generally well-received earnings reports outweighed lingering geopolitical worries. (FT’s Global Markets OverviewRead more