Charting European profits: hope vs evidence

European shares are in great demand, with cash pouring into mutual funds and ETFs following eurozone stocks, and Wall Street hungry for more.

There’s a pretty good story to tell: a weaker currency, an activist central bank and an improving economy. Unlike in the US, where corporate profit margins have been exceptionally high and look like they might have topped out, in Europe margins are depressed — suggesting to many buyers that profits are more likely to rise than fall. Even better, high operating leverage means if they do start rising, they could rise very quickly.

The reality so far is that eurozone (operating) profits over the past 12 months, as recorded by index compiler MSCI, have just fallen below the bottom reached after Lehman’s failure brought down the global economy. Read more

Just another case of the heebie-GGBies?

In this guest post, Gabriel Sterne, head of global macro research, Oxford Economics, looks at previous large drawdowns in Greek bond prices for clues about the future.

Greek Prime Minister George Papandreou “asked our partners to contribute decisively in order to give Greece a safe harbour” five years ago this week.

Since then, Greek government bond (GGB) prices have plunged by 37 per cent — or more! — four separate times, with one amazing long rally in between: Read more

The trouble with market-based financing… in China

The thing about market-based financing is that market-based financing isn’t always available the way you want it.

Which is why it’s big news in China on Friday, as the FT reports, that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer. The news comes by way of state media.

Now, the reason this is interesting is because last month when China’s finance ministry revealed its plan for provincial governments to refinance RMB1tn in debt, analysts were super cheery about its chances of lowering debt-servicing costs and extending maturities for provincial authorities. Read more

Markets Live: Friday, 24th April, 2015

Live markets commentary from 

The end of days, or yield, or whatever

From a hyperbolic Citi, a new normal stat du jour:

The end of the world as we know it is approaching. Very few market participants remember a bond market where the structural trend in yields wasn’t relentlessly lower.

We can continue to quibble about the scope for marginal performance in both rates and credit – and quibble we will over the coming months. But for all intents and purposes any € fixed income investor is now picking up pennies – if not outright paying for the privilege of taking someone else’s credit risk. The 30yr bull-run in fixed income is on its last legs.

One third of €-denominated bonds have negative yields. 82% now yields less than 1%

 Read more

Further reading

Elsewhere on Friday,

- “The interesting question in Libor manipulation is whether it caused a net harm…”

- Varoufakis on a “new deal for Greece”.

- Buffy the eurocrisis.

- Goldman has said “that a high-level position with the investment bank had attracted applications from every official in the United States Treasury Department.” Read more

FirstFT (the 6am Cut)

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A US drone strike killed two western hostages in an al-Qaeda compound in the Pakistan-Afghanistan border region, the White House has confirmed.

Warren Weinstein, an American held by al-Qaeda since 2011, and Giovanni Lo Porto, an Italian national who had been hostage since 2012, were killed accidentally in the counter-terrorism operation in January. The disclosure that two hostages were killed in a US strike will raise fresh questions about the limits of such operations, and whether imperfect intelligence unnecessarily risks civilian lives. (FT and NYT$)

In the news Read more

The great Bonar caper

Are you an EM fund manager?

Do you live in London or New York?

Were you by any chance offered some of the $1.4bn of Bonar 2024 bonds issued by Argentina on Wednesday, bought by Deutsche Bank and BBVA on Thursday, and settling this Friday? Or maybe you’d like to buy these bonds in the near future.

Then congratulations. You might well also be buying yourself a ticket to the next exciting stage of the pari passu saga.

PS: this may now involve the holdouts personally hunting you down. Read more

Dear SRA, a problem solved?

Last year we wondered if the Solicitors Regulation Authority had contingency plans in place for the failure of a high volume personal injury legal business. Our question was prompted by the bombed out stock price for listed UK law group Quindell, share sales by the founder, and the failure of the company to generate cash.

However the Australian law group Slater & Gordon will now buy almost all of Quindell, assuming the SRA and Financial Conduct Authority approve. The personal injury giant created will be twice the size of its nearest UK competitor.

We took a close look at Slater & Gordon’s business here, but one further thing to note: for a company of its size it operates with very little cash on hand. Read more

Markets Live: Thursday, 23rd April, 2015

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This is nuts, we’re watching the crash

Credit pricing, yeah?

From a rather good Bloomberg piece:

Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four — Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. — raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.

China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.

 Read more

Further reading

Elsewhere on Thursday,

- Greece, scripophily and the edge of the map.

- Can John Deere and its tractors destroy the very idea of ownership?

- Morons’ right to herd and why it’s “important to distinguish Sarao’s strategy from the ecology within which it was able to thrive.”

- And, why is spoofing bad exactly?

- “One implication of this is that scalping does not tend to cause prices to move one direction or the other. It is passive, and balances buys and sells.”  Read more

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A British futures trader who was arrested for allegedly contributing to the 2010 “flash crash” began his fight against extradition on Wednesday. Navinder Singh Sarao, a 36-year old British citizen who was operating through a company based at his parents’ house in a London suburb, was arrested at the request of US authorities and is accused of contributing to the crash. (FT)

He has been charged in Chicago with wire fraud, commodities fraud, commodities manipulation and “spoofing”, and will face trial if he is extradited. He was granted bail of £5m. (FT)


In the news Read more

Australia less bubbly than it looks?

Australia has a lot in common with other rich English-speaking countries, but unlike them, it basically missed the global financial crisis. Was that good luck, or a temporary postponement of the inevitable?

We’ve considered the case before, but we were struck by a recent speech by Glenn Stevens, the governor of the Reserve Bank of Australia, which spends considerable time on this question. Read more

Executing Trader Sarao

Craig Pirrong, Streetwise prof and futures trading expert, delves into the case of the Hounslow Spoofer, and like us, smells a rat.

For one thing, notes Pirrong, the official complaint doesn’t offer much in the way of detail on the execution strategy. It’s all very well alleging that Sarao spoofed the market with bogus orders, but none of this explains how he actually made money from the strategy. Especially given that the numbers presented don’t seem to add up. Read more

The benefits of naked shorting – Update

On the topic of supposedly malign market behaviour, remember how naked short selling was one of the bogey-people-things which nearly destroyed the financial system?

Dick Fuld gave naked short sellers (who sell stock without first borrowing it and so may “fail to deliver” the sold shares to the buyer) a share of the blame for the failure of Lehman Brothers on his watch in 2008, and the following year the Securities and Exchange cracked down on “abusive short sales”.

Well, here’s something to bookmark for the next crisis:

we do not find any evidence that Fail to Delivers caused price distortions or the failure of financial firms during the 2008 financial crisis.

 Read more

About that Wunderbund….

FT Alphaville would like to recall a post series entitled “Wunderbund,” which purported to follow the 10 year German sovereign benchmark bond all the way to a yield of zero.

We come out with our hands up. This was clearly the wrong call.

 Read more

Saving Trader Sarao

Picture the scene in the London borough of Hounslow on Tuesday lunchtime, as police moved in to arrest one Navinder Singh Sarao, holed up in a humble end-of-terrace post-war semi.

There’ll have been prior discussion of the possible need for a special forces sniper overwatch. Someone will have remarked on the security implications of having a man like this, with a Muslim-sounding name, apparently living so close to one of the world’s major transportation hubs, airliners passing just a few hundred feet overhead every 90 seconds or so on their way to Heathrow.

Because Sarao stands accused of declaring Jihad on the S&P Futures market, the Apple Pie of American finance. Read more

Markets Live: Wednesday, 22nd April, 2015

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SOE you’ve actually defaulted?

Alternatively: SOE, do we have credit pricing in China?

Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more

Further reading

Elsewhere on Wednesday,

- Ashoka Mody on the IMF’s big Greek mistake.

- Today in the political economy of Thomas the Tank Engine: The dysfunctions of Sodor Railways.

- And how, obvs, “the great trick of Sir Topham is to employ engines who essentially evoke the image of the New Soviet man in the service of a proto-capitalist, semi-feudal enterprise.

- Of course, it’s also “no wonder Sir Topham… made enough money to buy himself a peerage.”

- Krugman weighs in on John Taylor. Read more

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A British futures trader was arrested for allegedly contributing to the2010 “flash crash”, when the Dow Jones Industrial Average plunged more than 600 points in a matter of minutes. Navinder Singh Sarao, 37, had been operating out of a suburban house under the approach path to Heathrow airport. US authorities are trying to extradite him to stand trial in Illinois. (FT)

He was charged with one count of wire fraud, 10 counts of commodities fraud and one count of spoofing – a form of market manipulation that involves putting in an order and swiftly withdrawing it before the trade takes place in order to trick others into making the trade. Michael Mackenzie explains how futures trading crashed stocks back in 2010. (FT) Read more

The CFTC’s alleged flash crasher

Though note the causal chain in the CFTC’s press release for its complaint against trader Navinder Singh Sarao — of the Hounslow suburb, Heston…

The CFTC Complaint Alleges that Defendants’ Manipulative Conduct Contributed to the Market Conditions that Led to the May 6, 2010 Flash Crash Read more

FT Commodities Summit: No-one saw the oil slump coming

Some highlights from the FT Commodities Summit, which is taking place in Lausanne, Switzerland this Tuesday and Wednesday.

Oil production is becoming more of a manufacturing activity Read more

What is Slater & Gordon?

In 1935 Bill Slater and Hugh Gordon started a Melbourne law firm to serve local union members. Eighty years later the impetus is broadly the same, to offer decent legal services at an affordable price, but the ambition has changed. If regulators approve the takeover of Quindell professional services, Slater & Gordon will, by some distance, be the largest personal injury law group in both the UK and Australia.

When Andrew Grech took over as managing director in 2000 Slater & Gordon was still a partnership. It incorporated the following year, then listed in 2007, and he has bought more than 50 law firms to get to this point. “We’re not megalomaniacs; none of us set out to become bigger for its own purpose”, he told FT Alphaville. Rather, size is a means to offer specialist legal services to the greatest number of of clients at a reasonable price.

Still, industry roll-ups come with risks, the company is the only listed law group of size and legal accounting can be opaque. One way to assess the success of all the consolidation is to ask a question: what would happen if Slater & Gordon stopped buying law firms? Read more

China’s stalled catchup?

Some more sentences about China, this time from BNP Paribas’ Richard Iley:

It has been a near unshakeable axiom that China’s economy is on a pre-determined flight path to overtake the US and quite quickly become the world’s biggest economy. But China’s rapid nominal compression combined with the end of RMB appreciation vs. the USD and the solid c.4% nominal GDP growth in the US economy mean that, for the first time in a decade, China’s catch up with the US has stalled. Q1 GDP data is not yet available for the US economy but, assuming a cautious 2.5% annualised increase, helpful base effects would still leave nominal GDP at c.4.5% y/y. The US has therefore almost certainly grown faster than China’s in USD terms over the last year for the first time in well over a decade (Chart 5 & 6).

 Read more

FT Commodities Summit: US oil independence to bust dollar-pegs

The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.

As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more

Markets Live: Tuesday, 21st April, 2015

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Marketplace lenders and the Chinese path to a gift-card economy

Most of us know it as shadow banking. Others refer to it as non-bank lending. But a whole new nomenclature — “market-based financing” — is growing in popularity, making the whole thing sound a lot less shadowy, rightly or wrongly.

Nathan Sheets, Under Secretary for International Affairs at the Treasury, in any case urged us to call it that when he spoke about the phenomenon in a speech earlier this year, a sentiment that has also been echoed by the Financial Stability Board.

We refer to this because a similar rebranding effort is currently going on in the world of P2P lenders, many of whom now prefer to be described as operating in the sphere of “marketplace lending“. Furthermore, some analysts we’ve spoken to don’t consider P2P lenders to be shadow banking institutions at all. Some simply call this new source of financing “internet funds”. Read more

Of free floats and nutty markets in China

Today in sentences about China you might want to pay attention to, from Macquarie:

In our view, the real level of margin finance leverage in China’s markets is actually already much higher than all the historical examples that we can find (ie, for which the data is available to us).

 Read more