From BofAML’s Hartnett and team:
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The first round of Brazil’s presidential elections takes place on Sunday. This guest post is from Jorge Mariscal, emerging markets chief investment officer at UBS Wealth Management…
From a market perspective, Latin American economies can be divided into the good, the bad, and the ugly. Reforming economies like Mexico are good. Crisis-ridden Argentina and Venezuela are ugly. In the middle lies Brazil – slow to reform, but not entirely hostile to investors. Economically, Brazil’s elections are a crossroads: the winner must decide either to join Mexico on the path to reform and long-term prosperity, or remain attached to an approach that threatens eventual bankruptcy. Fortunately for the markets, the electorate seems to be pushing the candidates towards the former approach. Read more
If you take the blue pill, the story ends. You wake up in your bed and believe exactly what the statistics tell you to believe. You take the red pill — you stay in Wonderland and I show you what the statistics just can’t see.
What we’re talking about is hidden debt. The debt that’s out there but which we can’t currently see or assess. That is, dark debt which as yet hasn’t been factored in or priced into asset prices that influence our financially abstracted version of reality.
We have of course been here before. During the subprime crisis unexpected sums of dark debt emerged from off-balance sheet bank liabilities, SIVs and such the like. The impact, as we all now know, was immense.
But there’s a very good reason to suspect that “dark debt” hasn’t gone away entirely. It may, as it turns out, still be lurking out there somewhere. Still skewing our perception of reality as it always did. Read more
By the FT’s Joe Leahy and Arash Massoudi
Try to buy something on the internet in Brazil – tools, car seats for babies, cellphone covers – and one of the first sites to pop up will inevitably be Mercado Livre. Read more
Net profit at Spain’s Santander, the eurozone’s biggest bank by market capitalisation, fell 35 per cent last year to €5.35bn from €8.18bn in 2010 as the Spanish property market collapse and the eurozone debt crisis continued to erode earnings, the FT reports. Santander released results on Tuesday showing it barely made a profit in the final quarter of last year – net profit was €47m compared to €2.10bn a year earlier – after it set aside a €1.81bn fourth-quarter gross charge to clean up bad property loans in Spain. Over the year as a whole, the bank made total net extraordinary provisions of €3.18bn, largely because it is anticipating new provisioning rules likely to be announced on Friday by the centre-right government that took power in Spain in December. Bloomberg reports that the bank previously said it had about €1.5bn in gains from sales of insurance and auto loans unit stakes in the Americas to bolster its balance sheet. Santander has used those funds to partly offset the one-time provisions.
Brazil’s central bank has cut interest rates for the fourth time running as the government seeks to revive an economy that stalled in the second half of last year, says the FT. The 50-basis point cut in the central bank’s benchmark Selic rate to 10.5 per cent comes as Brazil’s development bank, which has a balance sheet four times the size of that of the World Bank, announced a reduction in lending last year in a move that should also aid efforts to ease rates. “The monetary policy committee understands that to mitigate in a timely way the effects coming from a more restrictive global environment, a moderate adjustment in interest rates is consistent with the convergence of inflation to the target in 2012,” the central bank said. The central bank abruptly ended a tightening cycle in August after Latin America’s largest economy began slowing on the back of tighter monetary and fiscal conditions, the negative impact of a strong currency on manufacturing and the eurozone crisis.
Three of Europe’s biggest oil companies are set to vie for Anadarko Petroleum’s Brazilian business, valued at more than $3bn, the FT reports, citing people with knowledge of the talks. France’s Total, the Norwegian state-controlled energy group Statoil and Denmark’s Maersk Oil are expected to bid in the first round of the US independent oil explorer’s auction later this month. All three as well as Anadarko declined to comment. There had also initially been interest from Asian oil companies, one of the people said, but it is unclear whether any bids from that region will materialise. Bids are likely to value the Brazilian business at $3bn-$4bn.
Brazil’s federal prosecutors have filed suit against Chevron and Transocean for R$20bn ($10.6bn) in damages and demanded that both companies shut their operations in the country, in the strongest response yet to an oil spill off the coast of Rio de Janeiro last month, reports the FT. At around 3,000 barrels, the spill in Rio’s Campos basin was relatively small and has been plugged, but Brazilian officials have sought to make an example out of the US oil companies as a warning to other foreign companies looking to profit from the region’s lucrative new-found reserves.
Brazil’s economy stalled in the third quarter of this year, demonstrating the vulnerability of the world’s emerging market growth engines to the eurozone crisis and the slowdown in the developed world, reports the FT. Gross domestic product contracted 0.04 per cent in the three months ending on September 30 compared with the previous quarter as weakness in the industrial sector spread to Brazil’s once vibrant consumer. The country’s financial markets reacted calmly on Tuesday to the report, says the NYT, reflecting a belief that the government still has various policy tools at its disposal to stimulate growth.
The Brazilian government has ordered Chevron to shut one of its 11 production wells in an important offshore field where the company suffered an oil leak last month, says the FT. Chevron said the decision by the Brazilian regulator, the National Petroleum Agency, followed a safety audit last week of its Frade offshore oil platform amid reports the authorities were unhappy that the company did not report the presence of hydrogen sulphide in crude at the facility. Chevron said the well in question accounted for less than a tenth of the platform’s outputs. Chevron was banned from drilling in Brazilian waters last month after about 2,400 of barrels of oil leaked from the Frade project in the Campos basin, 230 miles north-east of Rio, when workers encountered unexpected pressure while drilling. Ibama, Brazil’s environmental regulator, fined Chevron R$50m ($28m) – an amount that could at least triple, and Rio’s government said it could impose additional fines for damage to the local environment.
Benchmark Italian bond yields fell decisively below 7 per cent as Spain and France both executed successful bond auctions, offering the first signs that a co-ordinated move by central banks to boost global liquidity was improving the ability of peripheral eurozone countries to borrow, reports the FT. The euro was once again rallying on the back of the successful auctions, now up 0.4 per cent at $1.3495. Asian stock markets had earlier surged, with Hong Kong’s Hang Seng index up nearly 6 per cent on Thursday as European markets opened stronger. But the mood was more contemplative than jubilant as investors reflected on the co-ordinated central bank action to ease a liquidity crunch in the financial system. In a move with other central banks, the US Federal Reserve slashed the penalty rate that it charges them on dollar liquidity from 100 to 50 basis points. Earlier, China made a decisive shift towards easier monetary policy and Brazil last night cut its benchmark Selic interest rate by 50 basis points for the third time since August, citing adverse global economic conditions. While global equities are currently on track for their best week since early 2009, there is no shortage of naysayers warning that Wednesday’s central bank action is little more than a stopgap. “These actions are addressing a symptom of the European debt crisis, not the actual crisis itself,” says Stanley Sun, an analyst at Nomura. “We still need a backstop for eurozone sovereigns and until then, banks remain in dangerous territory.”
The Brazilian government has suspended Chevron’s drilling rights in Brazil until it clarifies the causes of an offshore oil spill, reports Reuters. Brazil’s National Petroleum Agency said it decided to halt Chevron’s drilling rights after determining that there was evidence that the company had been “negligent” in its study of data needed to drill and in contingency planning for abandoning the well in the event of accident.The second-largest US oil company has already been fined $28m by Brazil’s environmental agency for the spill, and is expected to pay larger sums in fines from the petroleum agency and Rio’s state government. Chevron had halted all of its local drilling operations after the leak occurred, before ANP’s announced suspension.
It seems like more or less anything can be deemed an asset class these days.
Here’s the latest one from Citigroup analysts: ‘Carbs’. No that’s not McDonalds and Coca Cola, but Canada, Australia, Russia, Brazil and South Africa, i.e. the world’s top commodity players. Read more
Sinopec, China’s biggest oil refiner by amount of oil refined, has signed a $5.2bn deal that will give it a 30 per cent stake in the Brazilian assets of Galp Energia, the FT says. The state-owned company will pay $3.5bn for the stake, in addition to $1.6bn of capital expenditure. The deal is Sinopec’s latest move into Brazil since buying a stake in Repsol for $7bn last year, Reuters reports. Chinese investment will help Galp to push further into developing Brazil’s vast and mostly untapped “subsalt” offshore oil reserves.
Sinopec agreed to pay $3.54bn for a 30 per cent stake in Galp Energia’s Brazilian unit, reports Bloomberg, in China’s largest overseas energy acquisition this year. China’s biggest refiner will subscribe for new shares to be issued by Galp and assume shareholder loans, the Beijing-based company said. Galp, which has a share in the western hemisphere’s biggest oil discovery since 1976, said this year it would seek to raise €2bn ($2.7bn) through the sale of part of its Brazilian unit. Sinopec said the transaction, which requires approval from the Chinese government, would allow the state-owned group to obtain 21,300 barrels of oil equivalent a day of equity output in 2015, climbing to a peak of 112,500 barrels oil equivalent a day in 2024, the WSJ says.
China Petrochemical Corp is in talks to buy a stake in the Brazilian unit of Portugal’s biggest oil company, Galp Energia, Bloomberg reports, citing people with knowledge of the matter. Galp, Portugal’s biggest oil company, is negotiating with Sinopec, Asia’s biggest refiner, and at least one other party ahead of a deadline for final bids this month, one of the sources told the news agency. Galp earlier this year said it would seek to raise €2bn through the sale of part of its Brazilian unit. Sinopec is also interested in Marathon Oil’s Angolan operations, the report says.
If you were expecting widespread easing of policy rates across the emerging world, think again.
Since the end of August three EM central banks have cut rates — Brazil, Israel and Indonesia – but don’t go expecting much more monetary easing, Citi has cautioned in a recent report. Read more
Investors are making tentative steps back to emerging market equities.
Last week EM equity funds reported positive flows, on aggregate, for the first time in three months — fund flow data from EPFR Global showed a net inflow of $667m for the week to Wednesday October 19. This follows outflows of $904m in the previous week and $13.5bn in September. Read more
ING is selling its stake in Brazil’s insurance group SulAmerica in a deal that is likely to be worth at least $1bn, sparking a fierce bidding war in the fast-growing Brazilian market, the FT says, citing people close to the transaction. French insurer Axa and Japan’s Tokio Marine have so far emerged as the top bidders for ING’s 36 per cent stake in SulAmerica, Brazil’s biggest standalone insurance group, said one of the people. ING declined to discuss details of the deal but said the sale of its Brazilian assets was in line with its plan to divest the group’s insurance operations by 2013. Axa and SulAmerica declined to comment and Japan’s Tokio Marine could not be reached for comment. ING’s stake in SulAmerica, which is worth about R$1.5bn ($833m) but has already fetched bids at a premium, would also give the buyer a 45 per cent stake in Sulaspar, the controlling group, mostly made up of the powerful Larragoiti family.
Anadarko Petroleum has asked advisers to sound out potential buyers for a collection of its Brazilian oil assets in a deal that could be worth up to $5bn, in the latest attempt by oil and gas explorers in the region to attract investment, the FT reports, citing people familiar with the situation.The US independent oil and gas explorer, which is one of the world’s largest, has instructed bankers including Citigroup, Morgan Stanley and Scotia Waterous to find buyers for a portfolio of oilfields, which could be valued between $3bn-$5bn, the sources said. While the marketing process is still in its early stages, some of the people said the sale would likely attract interest from oil majors and Asian national oil companies.
Brazil’s central bank has taken the unexpected decision to cut interest rates, bringing its seven-month tightening cycle to an end as the country prepares for slower growth and a sharp deterioration in global markets, the FT says. Brazil’s central bank slashed its key interest rate to 12 percent from 12.5 percent on Wednesday in a shock decision, Reuters reports. All 20 analysts in a Reuters survey had expected the central bank to keep the Selic rate unchanged. “The government and the central bank are reacting in a coordinated manner to the global slowdown through a preemptive tight fiscal/loose monetary stance,” Barclays Capital analysts wrote in a note, adding that the decision is “unexpected and unprecedented.”.
Brazil’s BTG Pactual is in talks to merge with Chilean brokerage Celfín Capital to create Latin America’s largest investment bank, its boldest move yet to consolidate its position in the region and become a global force, the FT reports. Pactual manages $64.5bn of assets to Celfin’s $5bn, with the acquisition set to fulfil the aim of its billionaire owner, Andre Esteves, to dominate the region, Bloomberg says. Pactual has had a hand in several high-profile Brazilian M&A deals recently while Celfin has operations in Peru and Colombia, FT Tilt notes.
Brazil has announced a harsh tax on currency derivatives, sending the Real tumbling against the dollar from its 12-year high, the FT reports. The government’s 1 per cent transactions tax could be increased to up to 25 per cent and carry requirements for both registration of over the counter trades and minimum trading margins, according to a new law being put forward. While the measures affect all market participants, the government may still make concessions on exemption for currency hedging, Reuters says.
Representatives of leading emerging market countries at the International Monetary Fund have warned the fund’s management against pouring more large sums of money into another Greek bail-out with uncertain prospects, the FT says. The officials said that – several days after a new financing plan from the eurozone authorities – its details were unclear and a proposed reduction in private sector holdings of Greek debt appeared to be inadequate. Interviews with the FT, including the Brazilian and Indian representatives, along with private conversations with other representatives from non-European economies, reveal several governments unwilling to risk financial contagion by curtailing IMF lending to Greece, but alarmed at the risks the fund was taking. Concerns among countries on the fund’s executive board pose a challenge to IMF managing director Christine Lagarde, who soon must decide how much more money she recommends is lent to Athens.
The Brazilian real tumbled on Wednesday after the country introduced measures to curb foreign exchange speculation in a bid to bring down the currency from a 12-year high against the dollar and protect its manufacturers, reports the FT. The government imposed a 1 per cent transactions tax on currency derivatives, laid down new legislation whereby the tax could be increased to up to 25 per cent, demanded the registration of “over-the-counter” currency trades and threatened further measures such as raising minimum trading margins.
Fresh foreign investment in Brazilian stocks plunged 70 per cent in the first half of 2011, reversing fortunes for the country’s markets, the FT reports. While foreign direct investment has flooded into Brazil, cross-border portfolio investment in the country’s stock market during the first six months of this year dropped to $2.89bn from $9.74bn in the same period of 2010, according to central bank data. The Bovespa has fallen 13.5 per cent in the year to date, on a combination of fears over high inflation and political interference in bulwark companies such as Petrobras or Vale.