The Coming Default Wave Is Shaping Up to Be Among Most Painful
(MENAFN- ProactiveInvestors - UK) Fuller Treacy Money 09:02
The Coming Default Wave Is Shaping Up to Be Among Most Painful
Here is the opening of this informative article from Bloomberg:
When the next corporate default wave comes it could hurt investors more than they expect.
Losses on bonds from defaulted companies are likely to be higher than in previous cycles because U.S. issuers have more debt relative to their assets according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates the proceeds have to cover more liabilities.
"We've had more corporate debt than ever and more leverage than ever which increases the potential for greater pain" said Edwin Tai a senior portfolio manager for distressed investments at Newfleet Asset Management.
Loss rates have already been rising. The potential for them to climb further may mean that in general junk bonds are not compensating investors enough for the risk they are taking said Michael Contopoulos high yield credit strategist at Bank of America Merrill Lynch. The average yield on a U.S. junk bond is now around 8.45 percent according to Bank of America Merrill Lynch indexes about the mean of the last 10 years.
In bad times corporate bond investors on average lose about 70 cents on the dollar when a borrower goes bust. In this cycle that figure could be closer to the mid-80s Bank of America strategists said.
David Fuller's view
Investors in risky corporate debt were given a slight reprieve when Janet Yellen postponed a potential rate hike for this month but should assume that there is likely to be at least one more quarter-point hike in the Federal Funds Rate this year.
Which stock market will sectors are likely to be vulnerable?
How Laundered Money Shapes London Property Market
Here is the opening of this informative article from the Financial Times:
For three-quarters of Londoners under 35 owning a home in the capital remains out of reach. But according to the leaked Panama Papers buying property in London presented little problem for associates of Bashar al-Assad the Syrian president; for a convicted embezzler who is also the son of a former Egyptian president; or for a Nigerian senator facing corruption charges.
The leaks from the Panamanian law firm Mossack Fonseca have brought back into focus the ownership of London property via offshore companies by people suspected of corruption overseas a phenomenon that has helped to shape the capital's housing market where prices are up 50 per cent since 2007.
'We think it very likely that the influx of corrupt money into the housing market has pushed up prices' said Rachel Davies senior advocacy manager at Transparency International. Donald Toon head of the National Crime Agency has gone further saying last year that 'the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK'.
Since 2004 180m of UK property has been subject to criminal investigation as suspected proceeds of corruption according to Transparency International data from 2015. Yet this probably represented 'only a small proportion of the total' added the campaign group.
Most of these properties were bought using anonymous shell companies based in offshore tax havens such as the British Virgin Islands. Overseas companies own 100000 properties in England and Wales Land Registry data show.
Owning property through a company can present tax advantages but depending where that company is based it can also offer anonymity. According to Transparency International figures almost one in 10 properties in the London borough of Kensington & Chelsea is owned through a 'secrecy jurisdiction' such as the British Virgin Islands Jersey or the Isle of Man.
'UK property can be acquired anonymously anti-money-laundering checks can be bypassed with relative ease and if you invest in luxury property in London you know your investment is safe. All that comes from the flaws in the UK anti-money-laundering system' said Ms Davies.
David Fuller's view
This explains a lot (pun intended). Now we know more about why London property has been largely immune from downturns experienced in most other cities.
The evidence of so many empty houses in the quiet residential streets of Kensington & Chelsea and Westminster has long provided evidence that many property owners would not or more likely could not live here. Nevertheless the numbers are shocking if you look at the UK's graphic: 'Where purchasing companies were incorporated'.
Email of the day
More on the EU:
Hello David I am sorry to peck your head always on this subject but I just wanted to make a couple of points re your comment on the EU this morning:
1/ the Euro is one of the reasons but not the main reason for perpetually weak gdp growth. Poor governance increasing budget deficits lack of reforms partisan interests have been the main problem all more obvious as devaluation of national currencies were not possible anymore and a fact most people especially in the so called periphery are acutely aware of.
2/ the EU is not an unelected bureaucracy. One can be critical of the effectiveness of EU institutions but there is the European council to represent each state and an elected European parliament.
3/ no country in Europe has thousands of years of history. In fact most of them have spent a significant amount of time under a common rule which has created that common denominator at the basis of the idea of Europe itself.
4/ it is true that many people are disaffected and cynical about Europe; however especially for young people the idea of not being an EU citizen is unimaginable and undesirable.
Said that Portuguese and Greek government bonds again show signs of weakness Italian banks continue to trend lower and a UK departure would indeed represent a significant and maybe fatal set back.
As an investor I am underweight Europe (all of it) and will remain so at least until after the UK referendum.
David Fuller's view
I feel neither head pecked nor henpecked by your email but I certainly do appreciate informative comments on the EU at this challenging time so many thanks.
Re your point 1: I agree with all these comments but the serious economic decline set in after the launch of the Euro in 1999 and their declared objective to form a 'United States of Europe'. I disagree with your second point. There are democratic talking shops in Brussels but the real power is wielded by Germany and France carried out on a day to day basis by the unelected bureaucracy. Re 3: the late hour got to me; I meant to say hundreds of years of history and corrected the copy earlier today. Thanks for pointing it out. Inevitably there was some 'common rule' but what historians have mainly written about as I recall were the many wars. Re 4: Euroland's idealistic youth have been badly let down by the scandalous unemployment which is eroding Europe's potential. The region was far better off pre-Euro as the European Common Market.
Europe today has a wonderfully diversified cultural background developed over centuries. Many of its citizens are highly educated. Sadly the EU is not helping them to fulfil their potential.
David Fuller's view
Iain Little guest speaker Charles Elliott and I look forward to discussing these interesting and challenging markets with subscribers and their friends.
Here is the current brochure.
Bridgewater Daily Observations
Thanks to a subscriber for this educative report which in the early portion discusses the success the UK had with deleveraging following WWII and how that may offer a template for the deleveraging the Fed is facing over the next decade. Here is a quote from Janet Yellen and the subsequent paragraph:
So I want to make clear that our inflation objective is two percent and we're projecting a move back to two percent. And we are not trying to engineer an overshoot of inflation not to compensate for past undershootswith a continuing improvement in the labor market I think we'll see upward pressure on inflation. And in that context the committee sees it appropriate to if things unfold in that way to have some further increases in the federal funds rate. March 16 2016
Tightening to prevent inflation from reaching or surpassing 2% has the risk of hindering the continuation of the beautiful deleveraging. Containing inflation creates the risk of rising real yields in a low-rate environment and reduces the ability to work through the debt overhand. And if such moves were more significant than current pricing the hit to asset prices would also create a risk of a renewed downturn that is difficult to manage. As the chart below shows the current Fed forecast implies further tightening before the end of the year and continued tightening in the years following at a rate faster than what is currently expected by the market. Were the fed to tighten in line with their median forecast assets prices would fall as discount rates increased and the wealth of holders would take a hit. As we've discussed in previous Observations this would be particularly dangerous as there is limited ability to ease if the resulting tightening pushes the economy into self-reinforcing contraction.
Eoin Treacy's view
The Fed printed a lot of Dollars to soak up the issuance of Treasuries and mortgage bonds that resulted from the bailout from the credit crisis. Having ceased purchasing bonds quite what it is going to do with its holdings when they mature is still very much an open question. Since early 2015 the Fed has been rolling over its holdings as they mature but last year had very few maturities.
Rolling over is likely to be a greater challenge in the years ahead because they need to manage the maturity of over $200 billion this year a little less than that in 2017 but over $350 billion in 2018 and over $300 billion in 2019. That's a big question because the funding cost for the interest on that debt is going to rise if the Fed is simultaneously raising interest rates.
The currency war is over says HSBC
This article by Joseph Adinolfi for Market Watch may be of interest to subscribers. Here is a section:
With the dollar clocking significant declines against the euro and yen since the beginning of the year it appears that the European Central Bank and the Bank of Japanwho along with the Fed comprise the primary antagonistshave run out of ammunition for driving their currencies lower according to a team of currency strategists at HSBC.
Investors should welcome this development. The only beneficiaries of the strong dollar were the BOJ and ECB. The strength in the greenback exacerbated global woes by causing emerging-markets currencies and oil prices CLK6 +5.10% to plungea one-two punch for oil-exporting developing economies.
A currency war occurs when central banks take turns using monetary policy to deliberately weaken their currencies in a scramble to gain an advantage. The resulting race to the bottom can prove counterproductive.
And
In Europe the ECB has opted to shift the emphasis to expanding credit by introducing targeted longer-term refinancing operations and by authorizing the purchase of some corporate debt.
The Bank of Japan tried switching to negative interest rates to weaken the currency because the number of Japanese government bonds available for purchase has dwindled.
'I think it's generally acknowledged that [those central banks] welcomed a weaker currency' said Daragh Maher HSBC's U.S. head of currency strategy and one of the report's authors.
It's good for other central banks who can stop chasing the BOJ and ECB he said.
Eoin Treacy's view
The Fed's decision to end its quantitative easing program has reduced pressure on other central banks to persist with their own operations and leaves them with greater leeway to pursue other strategies. The ECB is buying both sovereign and corporate bonds and deployed negative interest deposit rates but is not actively leaning on the currency. The Bank of Japan is following a similar strategy. This has allowed both the Euro and the Yen to appreciate.
The bin-Salman Interview What Does It Mean?
Thanks to a subscriber for this report from DNB which may be of interest. Here is a section:
The announcement of this meeting has been very supportive for the oil price as it led to a large short covering by financial players since a deal to freeze production should limit the potential downside in oil prices. Now with the statements by MBS in the Bloomberg interview last week the outcome of this freeze deal is much more uncertain. In the interview MBS said that Saudi Arabia will only freeze output if Iran and other major producers do so. If all countries agree to freeze production we're ready" MBS said . "If there is anyone that decides to raise their production then we will not reject any opportunity that knocks on our door.' This stands in contrast to prior statements from the Saudi Oil Ministry and from Russia which had suggested that a freeze deal could happen without any commitment from Iran. The market took this statement very negatively for the oil market because Iran has made no indications that they will join the freeze deal and even if they did most analysts would probably doubt that production from Iran would be frozen anyway.
If Saudi Arabia indeed see any chance that a freeze deal cannot be accomplished then it is relevant to ask the purpose of even arranging the meeting. If a meeting is held and Saudi does not accept a deal without Iran participating then we believe a deal will not happen and if a meeting is held without a successful deal then the oil price may drop quite significantly on that kind of news. Would that be in Saudi Arabia's interest. Would MBS like to see a lower price again to inflict even more pain on the other global oil producers and hence set the stage for higher prices later? It seems odd that MBS is not coordinated with the oil ministry in this issue but could his statement have been meant for domestic politics? And is it not very strange if MBS in the last minute should undermine the Russian effort to achieve this now famous freeze deal? Is this a negotiating trick to achieve something in return from the Russians vs Iran in Syria or other places?
The problem with this statement from MBS is that he outranks everyone else in Saudi when it comes to economic policy as he heads the newly formed Economic Council. This implies that if he actually means what he is saying here there will be no production freeze deal in Doha because we are confident that Iran will not take part in any production freeze deal. Before this statement by MBS we were 90% certain that there would be a production freeze deal coming out of the Doha meeting because why hold this meeting if a freeze is not already agreed? It would as described above send the oil price in tailspin if a meeting was arranged and ended up with no agreement. After the MBS statements we see the chances for a freeze deal meaningfully reduced maybe down to 50%.
If the meeting to hold the freeze deal in Doha is cancelled or if it is held without a successful outcome we would reduce our short term (3-month) price target for Brent which is currently 45 $/b. We would however not do anything with out 6-month target of 55 $/b and our 12-month target for 65 $/b. Our 24-month target (currently 70 $/b) on the other hand may be adjusted slightly higher due to the extra damage that may be inflicted to the supply side of a potential revisit to 25-35 dollar oil prices.
On Monday this week the Russian Energy Minister Alexander Novak however stated that 'Russia can conduct extra talks with Saudi Arabia on oil output freeze before the meeting in Doha on April 17th'. Novak also stated that he is confident that an agreement will take place. This suggests that maybe the statements from MBS in the Bloomberg interview last week may have been meant for his domestic audience. Also the Kuwait OPEC governor Nawal Al-Fuzaia said on April 5 that there are indications that oil producing countries in both OPEC and non-OPEC are poised to agree on a production freeze to January levels. This statement seemed to give the market some restated confidence that there could still be a freeze deal in the Doha meeting on April 17th. But nonetheless the MBS interview last week has added a lot more uncertainty to the April 17th meeting than what the oil market would prefer.
Eoin Treacy's view
A link to the full report is posted in the Subscriber's Area.
Brent crude prices firmed today on positive inventory data but the result of the April 17th meeting between major OPEC and non-OPEC producers is a major consideration for traders.
Saudi Arabia is fighting wars on three fronts and higher oil prices would certainly help with affording this adventurism as well as its highly accommodative domestic social programs. While Iran remains its greatest competitor for regional hegemony and the administration will not wish to give it any advantage economic factors will probably take precedence.
Fuller Treacy Money