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Thu, 30th March 2017

Anirudh Sethi Report

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Archives of “Bond” Tag

David Stockman Offers “More Proof Of Janet Yellen’s Idiocy”

During the last 129 months, the Fed has held 86 meetings. On 83 of those occasions it either cut rates or left them unchanged.

So you can perhaps understand why Wednesday’s completely expected (for the last three weeks!) 25 bips left the day traders nonplussed. The Dow rallied over 100 points that day.

Traders understandably believe that this monetary farce can continue indefinitely, and that our Keynesian school marm’s post-meeting presser was evidence that the Fed is still their friend.

No it isn’t!

Our monetary politburo has expanded its balance sheet by a lunatic 22X during the last three decades and in the process has systematically falsified financial asset prices and birthed a mutant debt-fueled of simulacrum of prosperity.

But once it begins to withdraw substantial amounts of cash from the canyons of Wall Street as per its newly reaffirmed “normalization” policy, the whole house of cards is destined to collapse.

There will be a stock market implosion soon, and that will in turn generate panic in the C-suites as the value of stock options vanish. Like in the fall of 2008 — except on an even more sweeping and long-lasting scale — corporate America will desperately unload inventories, workers and assets to appease the robo-machines of Wall Street.

But there is nothing left to brake the casino’s fall.

Norway’s oil fund up 6.9% in 2016

The world’s largest sovereign wealth fund overcame sluggish markets at the start of last year to deliver a return of 6.9 per cent in 2016.

Norway’s $905bn oil fund was boosted by strong stock markets in the second half of the year with equity investments returning 8.7 per cent. Fixed income returned 4.3 per cent in 2016.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, the manager of the fund, said:

The fund had 62.5 per cent of assets invested in equities at the end of the year but is expected this spring to be given permission to increase that to 70 per cent. Fixed income assets accounted for 34.3 per cent and real estate 3.2 per cent.

Greece : Banks worry over sudden bad loan spike in January

Nonperforming loans last month posted a major spike of almost 1 billion euros, reversing the downward course set in the last few months of 2016. This has generated major concerns among local lenders regarding the achievement of targets for reducing bad loans, as agreed with the Single Supervisory Mechanism (SSM) of the European Central Bank for the first quarter of this year.

Bank sources say that after several months of stabilization and of a negative growth rate in new nonperforming exposure,the picture deteriorated rapidly in January, as new bad loans estimated at 800 million euros in total were created.

This increase in a period of just one month is considered particularly high, and is a trend that appears to be continuing this month as well. Bank officials attribute the phenomenon to uncertainty from the government’s inability to complete the second bailout review, fears for a rekindling of the crisis and mainly the expectations of borrowers for extrajudicial settlements of bad loans.

Senior bank officials note that a large number of borrowers will not cooperate with their lenders in reaching an agreement for the restructuring of their debts, in the hope that the introduction by the government of the extrajudicial compromise could lead to better terms and possibly even to a debt haircut

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

Deutsche Bank Takes Out Full-Page Ad To Apologize For Its Market-Rigging Misconduct

Deutsche Bank took out full-page ads in Germany’s Frankfurter Allgemeine Zeitung and Sueddeutsche Zeitung on Saturday, in which the country’s biggest lender apologized for (getting caught) engaging in market manipulation and misconduct that has cost the company billions. In the ad, signed by CEO John Cryan on behalf of the bank’s top management,the bank said its past conduct “not only cost us money, but also our reputation and trust.

The ad said “we in the management committee and bank leadership as a whole will do everything in our power to keep such cases from happening again.”

Apple readies to sell up to $8bn in new bonds

Apple was finalising plans to borrow between $6bn and $8bn on Thursday after the iPhone maker reported a rebound in revenue growth in its latest quarter, according to two investors and a banker with knowledge of the bond sale.

The funds will be used for general corporate purposes, including share buybacks and the issuance of dividends, according to a filing with US securities regulators

Apple, which has $246bn of cash on its balance sheet, has turned to debt markets to finance an expanding shareholder return programme. More than 90 per cent of its cash is held overseas by foreign subsidiaries, as it seeks to avoid taxes tied to repatriating that money to the US.

The company was planning to offer notes across nine tenors, including three floating rate notes that mature in 2019, 2020 and 2022. The fixed rate notes span two- to 30-year maturities. Initial price talk on the company’s new 10-year bonds was set at 110 basis points above Treasuries, for a yield of roughly 3.56 per cent.

Apple’s 2026 maturing notes, which it sold last year with a yield of 2.48 per cent, traded hands with a yield of 3.29 per cent on Thursday.

Deutsche Bank, Goldman Sachs and JPMorgan led the offering.

SEBI asks brokers to liquidate all futures and options positions of Vijay Mallya

Markets regulator Sebi has directed brokers to square off all existing open positions in the equity derivatives segment they hold for Vijay Mallya and the six former officials of United Spirits who were banned from the market last week.

The fresh directive by the capital market regulator has been made through an e-mail to stock exchanges yesterday.

“The trading members are advised to square off existing open positions in the futures and options segment, if any, for the persons/entities mentioned in the above order and also ensure that no fresh positions are created for the said persons/entities,” an NSE circular said quoting the Sebi directive.

However, the regulator has not given them a time-line to do so.

Sebi had last week through an interim order, barred Mallya and six former officials of USL from entering the market, after the CBI charge-sheeted them in a money laundering case involving a loan IDBI Bank.

The CBI also charge-sheeted and arrested eight IDBI Bank officials, including its former chairman Yogesh Aggrawal in the case for their role in bypassing lending norms to extend Mallya Rs 950 crore loan in 2010.

India : Asset quality worry for MFIs

Rating agency Icra has expressed concerns over the deterioration in asset quality of non-bank microfinance institutions in the wake of demonetisation.

The agency in a report said an inadequate supply of currency and a disruption in borrowers’ cash flows have led to a sharp decline in collection efficiencies.

The share of overdue loans in a total loan portfolio of around Rs 57,000 crore was less than 1 per cent as on September 30, 2016. But, this has increased to around 19 per cent as on December 31, 2016, Icra said.

 Factors such as over-leveraging, shortage of currency and the possibility of the borrowed amount being used for consumption rather than income generation is affecting credit recovery even as the RBI provided a special dispensation in classification of loans of microfinance institutions.

“While the RBI’s additional 90-day dispensation to classify accounts as non-performing will provide a temporary relief in asset classification, Icra believes it would be difficult for microfinance institutions to recover multiple instalments from borrowers together,” Rohit Inamdar, senior vice-president and group head – financial sector ratings – Icra.

“Over-leveraging among borrowers coupled with the shortage of currency and the impact of demonetisation on borrowers’ earnings will adversely impact the asset quality of microfinance institutions,” he added.

“The pace of replenishment of cash supply in the system, the medium- to long-term impact of demonetisation on borrowers and the quality of customer engagement by the microfinance institutions will be the key determinants of asset quality in the future,” the Icra official said.

“Also, the extent of credit costs that microfinance institutions have to incur will depend on its share of affected portfolio, capital structure as well as loss-sharing arrangements,” he added.

Taking into account the expected increase in both credit costs and operating expenses, Icra has revised its profitability projections to sub-10 per cent for 2017-18 from 13-15 per cent estimated earlier.

Daiwa to launch ‘Trump-related’ mutual fund

Daiwa Asset Management is set to start operating a mutual fund that invests in stocks related to U.S. President-elect Donald Trump’s infrastructure investment policy. Daiwa will launch the product on Tuesday.

The open-end mutual fund — the first of its kind in Japan since Trump’s election victory in November 2016 — is likely to be made available to retail investors by the end of the month.

 The U.S. infrastructure builder equity fund, which invests in U.S. companies, will quantify how much each stock will benefit from Trump’s infrastructure policy, based on criteria such as sales ratio in the U.S. and the degree of obsolescence of the target infrastructure. The details of the portfolio will be determined by how much share prices are undervalued and how competitive the companies are.

The portfolio, comprising 30-50 companies — mostly in the construction, transport and materials sectors — will be adjusted as appropriate as Trump’s policy takes form.

Trump has pledged to spend $1 trillion to overhaul the country’s aging infrastructure over the next decade.

Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion

While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.

Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.

“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000. 

Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.