The price of Venezuelan government bonds has nosedived to a record low as the tumbling oil price heaps further pressure on the country’s already awful finances.
Oil accounts for over 95 per cent of the government’s revenues, but the tumble since the summer has worsened the situation for the country’s budget – already in a dire state – and untenable currency regime.
Venezuela was the most ardent campaigner for Opec to cut production to support prices, but it suffered a defeat at last week’s meeting in Vienna, worsening the rout for crude oil.
As a result, investors are increasingly concerned about the country’s solvency. Venezuela was able to beat fears over a default earlier this autumn and repaid two big international bonds on time, but replicating that feat will be much harder in the coming years, unless oil prices stage a stunning comeback.
The price of Venezuela’s big $4bn bond due in 2027 has slumped to a record low of just 52.4 cents on the dollar today, equal to an annualised yield of 19.5 per cent – a level that indicates a significant likelihood of default and restructuring (see below for a chart of the bond versus crude oil prices).
The price of the next Venezuelan international bond to mature – a €1bn security due in March – fell to just under 95 cents on the euro, for an annualised yield of 24.8 per cent.
Sandra Heidmann of SEB, a Swedish bank, wrote (fastFT’s emphasis below):
While Russia is actually making more money on oil as the currency is weakening, Venezuela, with their fixed, multiple-tier exchange rate system that vastly undervalues the USD, is hurting tremendously.
Oil accounts for over 95 per cent of Venezuelan government revenues and foreign currency reserves have been largely depleted over the last 12 months. Furthermore, the country is suffering from hyperinflation (above 60 per cent) and basic goods like cooking oil, rice, coffee, sugar and toilet paper have become scarce.
According to BAML, the USD is now worth 1700 per cent more on the black market in Caracas than the price the government charges those fortunate enough to obtain it legally. Without a miraculous recovery of oil prices or a dramatic reversal of course by the government, the downward spiral will most likely continue.
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On the GOP side the populist impulse will look to pass an Audit the Fed bill which would mandate greater scrutiny of the Fed and its decision making process. From the hard left side Elizabeth Warren and her disciples will push hard on the topic of regulatory failures which they believe led to the financial crisis in 2008 and 2009.
The bottom line is that the new Congress will bring new criticism of the Fed at a time when many in the market believe it will be engaged in the tricky process of normalizing rates.
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The eurozone’s already anemic manufacturing expansion ground to a halt in November as activity in each of its three-largest economies declined for the first time since mid 2013, increasing pressure on the European Central Bank to step up its stimulus campaign.
The headline measure from data firm Markit’s monthly survey of purchasing managers of around 3,000 manufacturers fell to 50.1 from 50.4 in October, having been reduced from a preliminary estimate of 50.4. A reading above 50.0 for the index indicates an expansion in activity, while a reading below that level signals a contraction.
Renewed weakness in the sector was driven by Germany, the eurozone’s largest economy. Its PMI fell to 49.5, the lowest in 17 months. Activity in the French and Italian manufacturing sectors had already begun to decline before November.
“There is a risk that renewed rot is spreading across the region from the core,” said Chris Williamson, Markit’s chief economist.
The survey suggests that a recovery in manufacturing activity is unlikely in coming months, with new orders dropping at the fastest pace since April 2013. In particular, Markit said export orders were “subdued” despite the depreciation of the euro since May, which policy makers had hoped would aid the sector.
Of direct concern to the ECB, manufacturers cut their prices for the third straight month, an indication he eurozone won’t soon emerge from a period of very low inflation that has entered its second year. Figures released Friday showed consumer prices rose by just 0.3% in the 12 months to November, well below the ECB’s target of just under 2.0%.
However, while manufacturing activity the eurozone’s “core” declined, it picked up in Spain and the Netherlands, while continuing to grow most rapidly in Ireland.
“The worry is that these countries will, like Greece and Austria, struggle to continue to expand unless demand picks up in the region’s largest member states,” said Mr. Williamson.
The ECB’s governing council meets Thursday, most analysts expect central bank policy makers to wait until early 2015 before deciding to purchase large amounts of government bonds to raise the money supply and further depress borrowing costs, following a route taken by central banks in the U.K., U.S., and Japan.
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Prices of Treasury coupon securities are on balance posting small losses when compared to levels which prevailed at the close of business in New York on Wednesday. That is an reasonably impressive feat because with the 10 year note yielding just inside of 2.17 it is approaching yields which wreaked havoc on the day of the Great Squeeze, October 15. That was the day when the collective throbbing of Mr Market’s limbic node drove yields to 1.85 at which point they did a volte face and closed around 2.13 percent.
The yield on the 5 year note was actually unchanged at 1.484. The yield on the 7 year note edged up to 1.889 from 1.885. The yield on the benchmark 10 year note is a tad higher at 2.169 versus 2.168 at the close. The yield on the Long Bond has edged higher to 2.898 from 2.894. The 5s 10s spread widened to 68.5 from 68.4. The 5s 30s spread widened to 141.4 from 141. The 10s 30s spread widened to 72.9 from 72.6. The belly of various flys performs well. The 5s 10s 30s spread is -4.4 and I have not observed that spread that rich since late August.When I clocked the spread at that level in late August the yield on the 10 year note was 2.35. So the spread looks cheap currently when viewed against the level of yields at 2.17 ish. The 2s 5s 10s spread also continues to improve as it trades at 31.9 this morning. That spread was 41 one week ago at this crazy hour of the day. The richening of those spreads informs me that investors are comfortable with the idea that the collapse of oil and other commodity prices will induce the FOMC to delay rate hikes or make them process a very protracted one.
There was quite a bit of news to digest overnight. Post Thanksgiving shopping in the US was on the weak side. In China PMI measures of manufacturing slipped. Moody’s took Japan’s rating down one notch. In Europe the various measure of manufacturing were a tad weaker.
In Europe market participants continue to anticipate some action on the sovereign bond front from the ECB. The Spanish 10 year trades at 1.88 this morning and 10 year Italy has glided through 2 percent and trades at 1.99 percent.
If one takes a longer term big picture we can observe that 10s traveled from 3 percent in September 2013 to 1.85 on October 15 2014. The market then retraced nearly 50 percent of that move with a trade to 2.40 ( I think 2.42 would have been the exact level). We bounced off 2.40 and if we want some symmetry then a move to 2.13 would be a 50 percent retrace of the move from 1.85 to 2.40. I think all the ingredients are in place for that and then possible a break down towards 2 percent. This FOMC has extremely dovish DNA and I will be very surprised if the Committee as a whole or individual speakers ( Vice Chair Fischer today and Dudley today) do not make some nod to the collapse in commodity prices as something very fundamental which will reduce inflation and market expectations of future inflation.
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Moody’s has downgraded Japan from AA3 to A1. According to the FT, the credit rating honchos cited uncertainty over the county’s deficit reduction goals.
Moody’s has docked Japan’s credit rating by one notch, noting “heightened uncertainty” over the government’s deficit reduction goals in the wake of Shinzo Abe’s decision to push back a sales tax increase.
The downgrade on Monday from Aa3 to A1 – the same as Estonia and the Czech Republic – represents the first reaction by a major credit rating agency to the decision last month by Mr Abe, prime minister, to call a snap election. The Liberal Democratic party leader is expected to secure a new mandate from the Japanese people to delay a scheduled increase in consumption taxes next October, after the first increase – effective in April – was blamed for tipping the world’s third-largest economy into a technical recession in the six months to September
Analysts said the downgrade by Moody’s was unlikely to spark turmoil in Japan’s government bond market, the largest in the world in relation to gross domestic product, where yields have been kept low and stable by ultra-aggressive monetary easing by the Bank of Japan.
Yet it underscores the difficulty of meeting Japan’s longstanding pledge to halve its primary deficit as a percentage of GDP by the 2015 fiscal year, and to cut it altogether by 2020.
Japan’s benchmark 10-year bond yield closed on Monday at 0.428 per cent, the lowest in the world after Switzerland, at 0.287 per cent.
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Pimco has accounted for half of the 10 funds with the biggest outflows so far this year – bleeding more than $100bn – as rivals snatched market share from the world’s largest bond manager while it struggled to contain management infighting.
Five of the 10 funds with the heaviest customer redemptions so far this year are run by the California company, and several more have suffered multibillion-dollar outflows.
The data highlight how Pimco’s weak performance began before the resignation in September of founder Bill Gross and extends beyond the funds that he personally managed.
Mr Gross’s former Total Return and Unconstrained Bond funds top the list of biggest redemptions in 2014 so far, with Pimco funds investing in high-yield bonds, leveraged loans and equities also suffering heavy withdrawals.
The league table of US fund flows, by research group Morningstar, paints a stark picture of how savers have shifted money to other managers, led by Vanguard, MetWest and Goldman Sachs.
It also reveals how longer-term trends in the mutual fund industry have continued to play out in 2014, including the vast asset accumulation of tracker funds from Vanguard, the low-cost market leader, and the decline of traditional active management funds by Fidelity and Capital Group’s American Funds.
Mr Gross quit as chief investment officer at Pimco as other executives plotted to oust him. Institutional clients, financial advisers and individual savers began questioning their relationship with the firm earlier in the year, after a period of poor performance by its main funds and amid mounting headlines about internal discontent.
The Pimco Total Return fund has shed $75bn because of client withdrawals this year, according to Morningstar, whose data run to the end of October. Five Pimco funds – four previously managed by Mr Gross – are in the bottom 10 performers in terms of outflows so far this year.
Other Pimco funds not run by Mr Gross that have suffered redemptions of more than $1bn this year include its High Yield fund, which suffered withdrawals of $5.1bn, and its EqS Pathfinder value investing fund, whose clients redeemed about $1.6bn. Pimco’s Floating Income fund has suffered withdrawals of $1.5bn, or 61 per cent of its assets at the start of the year.
Pimco said outflows had slowed dramatically since their peak after Mr Gross’s resignation: “The performance of our flagship Total Return fund is among the best of its peers in November and, longer-term, we’ve delivered alpha in the majority of our US mutual fund assets over the last three years.”
Vanguard’s index tracker funds dominate the rankings for most inflows this year, in part because they include contributions to the firm’s popular multi-asset retirement funds. Its Total Stock Market Index Fund, which overtook Pimco Total Return Bond fund last year to become the largest mutual fund in the world, took in $30bn.
The most popular US actively managed funds of 2014 are all bond funds, confounding expectations at the start of the year for a “great rotation” of investor assets out of fixed income and into equities, in anticipation of rising interest rates, which hurt the value of bonds.
The single biggest beneficiary of the rebound in active fixed income flows and the turmoil at Pimco has been the MetWest Total Return bond fund, run by Tad Rivelle and Laird Landmann, which had inflows of $14bn in the first 10 months of the year. However, with $40.5bn in assets, it remains less than a quarter the size of the Pimco Total Return Bond fund.
The non-Pimco fund suffering the largest redemptions this year was the Thornburg International Value equity fund, which reshuffled its portfolio management team amid poor returns. Clients have withdrawn the equivalent of 44 per cent of its assets at the start of the year.
Post-Thanksgiving Spending Tumbles 11% as Shoppers Stay Home (2)
2014-11-30 21:52:50.439 GMT
(Updates with online spending in seventh paragraph.)
By Lauren Coleman-Lochner
Nov. 30 (Bloomberg) — The holiday shopping season got off
to a slow start in the U.S. this weekend, with consumers cutting
spending by an estimated 11 percent and far fewer bargain
hunters hitting stores than predicted.
Consumer spending fell to $50.9 billion over the past four
days, down from $57.4 billion in 2013, the National Retail
Federation said today in a statement. It was the second year in
a row that sales declined during the post-Thanksgiving Black
Friday weekend, which had long been famous for long lines and
frenzied crowds.
Consumers this year were unmoved by retailers’ aggressive
discounts and longer Thanksgiving hours, raising concern that
the industry won’t be able to pull out of a slump. The NRF had
predicted a 4.1 percent sales gain for November and December —
the best performance since 2011. Still, the group cast the
latest numbers in a positive light, saying it showed shoppers
were confident enough to skip the initial rush for discounts.
“The holiday season and the weekend are a marathon, not a
sprint,” NRF Chief Executive Officer Matthew Shay said on a
conference call. “This is going to continue to be a very
competitive season.”
The Washington-based NRF had predicted that 140.1 million
shoppers would visit retailers this weekend, a small decline
from last year’s 140.3 million. Instead, only 133.7 million
showed up — despite many stores extending their hours during
Thanksgiving to boost sales.
Cyber Monday
The slower foot traffic puts pressure on retailers to wring
more money from consumers in December, including during
tomorrow’s Cyber Monday e-commerce blitz. Holiday shopping is
key for retailers — with sales in November and December
accounting for about 19 percent of annual revenue, according to
the NRF — and more of that is shifting online.
The Web may not be a savior for traditional retail, though.
While e-commerce orders are growing, they’re still dwarfed by
brick-and-mortar sales. The novelty of Cyber Monday also is
dimming: The number of shoppers participating in the event is
projected to decline tomorrow.
So far, holiday shoppers have spent $22.7 billion online
this season, up 15 percent from a year earlier, according to
ComScore Inc. That includes more than $1.5 billion on Black
Friday.
The e-commerce growth means shopping malls have to work
harder to get people in the door. The University Town Center —
a brand-new mall in Sarasota, Florida — was only moderately
busy on Saturday evening, with more customers in the corridors
than in the stores.
Not Enticed
Ariana Bravo, a 16-year-old student from Lakewood Ranch,
said she used her employee discount at Pacific Sunwear to buy a
couple small items, but wasn’t lured by any promotions.
“It seems like they’re the normal sales that they already
have, just all in one day,” she said.
Even as an improving job market and lower gas prices have
sent consumer sentiment to its highest level since the
recession, many Americans are keeping a lid on Christmas
shopping. Another customer at the Florida mall, Jotasia Walker,
said her family draws names and gets one gift per person, rather
than buying presents for everyone. The 21-year-old, who was
visiting the mall with three sisters, two cousins, a niece and a
nephew, said they came out more to spend time together than to
shop.
Lower Average
The average shopper spent an estimated $380.95 over the
weekend, a 6.4 percent drop, according to an NRF-commissioned
survey of more than 4,600 people by Prosper Insights &
Analytics.
The industry’s focus now shifts to Cyber Monday, when e-
commerce sites release another wave of discounts. Almost 127
million Americans will shop online tomorrow, Prosper predicts,
down from 131.6 million a year earlier. That lends evidence to
the notion that Americans are less enticed by one-day sales
events.
Many consumers also don’t feel like the economy has
recovered from the recession yet, Shay said. That makes it
difficult to gauge how much they plan to spend.
“The challenge is looking for a new equilibrium, and we
just haven’t found it,” he said.
Retail chains have spruced up their websites in recent
years, though they’ve struggled to keep pace with Amazon.com
Inc. Sales at Amazon, the world’s largest online retailer,
jumped 46 percent yesterday and 24 percent on Black Friday,
according to ChannelAdvisor Corp. That exceeded total e-commerce
growth on those days, the research firm found.
Fuel Costs
Cheaper gasoline prices, meanwhile, are working in the
retail industry’s favor. The average cost of a gallon of regular
gasoline was $2.81 last week, the lowest in four years,
according to the automobile group AAA. That’s leaving more money
in shoppers’ wallets — and making it less expensive to take a
trip to the mall.
For many shoppers, though, the excitement of Black Friday
sales may have simply worn off. Consumers know they can get
discounts throughout the holiday season and are adjusting their
shopping accordingly, said Simeon Siegel, a New York-based
analyst at Nomura Holdings Inc.
“You can’t outsmart the consumer anymore,” he said. “You
need to pander to where the consumer wants to shop and when.”
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New regulations motivate (force) banks to buy Treasuries. The Heard on the Street column at the WSJ has an interesting article on banks craving Treasuries.
Via the WSJ:
Banks Drink Deep From Uncle Sam’s Debt Fountain
New Liquidity Rules Send Banks Scrambling for U.S. Debt
By
John Carney
America’s banks are gobbling up U.S. government debt.
Bank holdings of Treasurys rose by $71 billion in the third quarter, to $345 billion, according to last week’s quarterly banking profile from the Federal Deposit Insurance Corp. That 26% upswing from the previous quarter marked the fourth consecutive quarter of double-digit-percentage growth in bank Treasury portfolios. What’s more, Treasurys now comprise a larger portion of total bank assets than at any point in this century. This is a tectonic shiftand, because yields on Treasurys are so low, it is one that likely will weigh on earnings.
The downward pressure is exacerbated by the fact the change appears to be the result of a move away from higher-yielding assets in banks’ securities portfolios. And those portfolios have become increasingly central to banks in recent years, now making up over 20% of their total assets.
So why have banks developed such a voracious appetite for low-yielding U.S. government debt? The most likely catalyst is the need to begin complying with a new type of bank liquidity rules. This will require the biggest U.S. banks to hold a portfolio of assets that could be easily sold to make up for cash outflows in a stress period that lasted 30 days. The rule will start phasing in early next year.
Alongside the Federal Reserve’s stress-test capital-planning program, the liquidity requirement is one of the most novel innovations in postcrisis bank supervision. The idea is to force banks to self-insure against liquidity stress instead of relying on emergency lending from the Fed.
To account for the fact that some assets are more easily sold in a liquidity crunch than others, regulators impose haircuts on assets banks can use to meet the new requirements. Corporate bonds, for example, get a 50% haircut, so that a $1 billion bond would make up for just $500 million of assumed cash outflows.
Banks only get full credit for holding obligations backed by the full faith and credit of the U.S. That is pretty much limited to Treasurys and Ginnie Mae mortgage securities.
Perhaps even more important, these have to make up at least 60% of the liquidity portfolio. That combination is what is fueling the banks’ demand for Treasurys.
One silver lining: Additional liquidity should make banks less vulnerable to downturns. That means that on a risk-adjusted basis, any decline in returns on assets may not be as severe as it first appears.
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Daniel Yergin is the preeminent historian on the oil and energy market. Many years ago he wrote a book entitled “The Prize” and it is a fascinating and exhaustive chronicle of the forces which have governed the oil markets over the lat 150 years. I highly recommend the book for context on the current cycle.
Mr Yergin has penned an Op Ed piece for the Journal which comments on the current machinations in the energy markets. He credits the fracking revolution in the US and miscalculations by OPEC.
Via the WSJ:
The Global Shakeout From Plunging Oil
New supply—rather than demand—is dominating the market, and OPEC has been caught by surprise.
By
Daniel Yergin
The decision by members of the Organization of the Petroleum Exporting Countrieson Thursday not to cut production reflects a profound shift in the world oil market. The demand for oil—by China and other emerging economies—is no longer the dominant factor. Instead, the surge in U.S. oil production, bolstered by additional new supply from Canada, is decisive. This surge is on a scale that most oil exporters had not anticipated. The turmoil in prices, with spasmodic plunges over the past few days, will likely continue.
Since 2008—when fear of “peak oil,” after which global output would supposedly decline, was the dominant motif—U.S. oil production has risen 80%, to nine million barrels daily. The U.S. increase alone is greater than the output of every OPEC country except Saudi Arabia.
The world has experienced sudden supply gushers before. In the early 1930s, a flood of oil from East Texas drove prices down to 10 cents a barrel—and desperate gas station owners offered chickens as premiums to bring in customers. In the late 1950s, the rapidly swelling flow of Mideast oil led to price cuts that triggered the formation of OPEC.
And in the first half of the 1980s, a surge in oil from the North Sea, Alaska’s North Slope and Mexico caused prices to plunge to $10 a barrel. That posed a much greater crisis for OPEC than today: Over those same years, global demand fell by more than two million barrels a day owing to a deep recession, greater conservation and the switch to coal from oil for electricity generation. This time world oil demand is still growing, but weakly.
For the past three years, oil prices hovered around $100 a barrel as disruptions in Libya, South Sudan and elsewhere, and sanctions on Iranian exports, eerily balanced out the production increases from the U.S. and Canada. But the slower global economic growth that became apparent a few months ago was accompanied by weaker demand for oil, just when Libya suddenly quadrupled output to almost a million barrels a day. The result: Prices weakened in September and then tumbled.
OPEC’s decision last week reflects the conviction of its “have” nations—the Persian Gulf countries, with very large financial reserves—that cutting output would mean losing market share, particularly to Iran and to what they see as Iran-dominated Iraq. Instead, they have adopted a strategy of leaving it to the market for now; OPEC is waiting, in the words of Saudi Oil Minister Ali al-Naimi, for the oil market “to stabilize itself eventually.”
It is now clear that the new U.S. production is more resilient than anticipated. There has been a widespread view that at around $85 or $90 a barrel extracting “tight” oil from shale would no longer be economical. However, a new IHS analysis based on individual well data finds that 80% of new tight-oil production in 2015 would be economic between $50 and $69 a barrel. And companies will continue to improve technology and drive down costs.
True, with prices now near or below $70 a barrel, U.S. companies are looking hard at their investment plans—where and how much to cut or postpone. But it will take time for these decisions to affect supply. U.S. oil output will continue to rise in 2015.
The OPEC members in big trouble are the “have-nots”—those with small financial reserves and high government budgets. No country clamored more loudly for OPEC production cuts than Venezuela. Once an oil powerhouse, Venezuela depends on oil revenues for up to 65% of government spending. But its production has fallen by a third since 2000. Owing to gross mismanagement, Venezuela’s economy is already in chaos, its political system in crisis and unrest is mounting. And Venezuela would be the No. 1 loser if the Keystone XL pipeline is built, as production from Canadian oil sands would displace Venezuelan heavy oil from its largest single market, the U.S. Gulf Coast refineries.
Iran also clamored loudly for a production cut. High prices earlier this year give Tehran some budget cushion, but the government has little leeway for the next fiscal year. Iran depends on oil for half of its budget, and the country is already suffering from sanctions, which have cut its oil exports almost in half. Lower prices will prolong Iran’s recession.
A few days ago President Vladimir Putin said that Russia, the world’s largest oil producer and not a member of OPEC, is preparing for lower, even “catastrophic” oil prices. Oil provides over 40% of the Russian budget, but Mr. Putin has built up foreign exchange reserves worth a few hundred billion dollars, in part to cope with an oil-price collapse. Still, in an economy that is heavily dependent on imports of food and consumer goods, the falling value of the ruble means rising prices for imports, in effect slashing the incomes of consumers. Combined with the effect of sanctions from the Ukraine crisis, this means Russia is headed for recession.
The biggest impact of lower oil prices on future output may well be not in North America, where many people are looking for it, but in the rest of the world. Even before the collapse in prices, major oil and natural-gas companies had become preoccupied with the continually rising costs of developing new supply and were heeding the call from investors for “capital discipline.”
This price decline will turn this preoccupation into an obsession. The result will be a slowdown and reduction in major new investments around the world. The losers will be the nations trying to woo investment for new oil and natural-gas projects. Countries in Africa, Asia and Latin America are already finding that fewer companies are showing up to bid for new opportunities, and such bids that are proffered will be lower, perhaps much lower, than governments were expecting. The days are past when these countries can insist on very tough terms in taxes, royalties and other requirements that drive up costs and cause delay.
The drama is far from over. If prices remain close to their current level, OPEC members will likely come together again to reassess the market, especially as the stronger winter demand fades with the approach of spring. But a pickup in world economic growth, or new disruptions or geopolitical crises in the Middle East or North Africa or elsewhere, could send prices up again.
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Forbes magazine has a post in which Art Garfunkel speaks of the recording of Sounds of Silence which is the song which placed Simon and Garfunkel prominently on the 1960s music map. Garfunkel notes the work of Columbia Records producer, Tom Wilson, who produced their acoustic work ( and commercial failure) Wednesday Morning , 300AM.
The late Pete Fornatale was a New York based disk jockey and rock historian who worked at the legendary WNEW FM. I heard him speak at a concert by the folk duo Aztec Two Step on Long Island in 2009 at which Aztec Two Step sang their covers of about twenty five Simon Garfunkel songs. Fornatale related the amazing story that Tom Wilson had been the producer of Dylan Like a Rolling Stone and following the completion of that legendary track he requested that the musicians hang around for a bit. He pulled the tape of Simon and Garfunkel’s acoustic version of Sounds of Silence and he overdubbed the electric guitar and drums. As Pete Fornatale related when I heard him recount this story the rest is history.
One sidebar to the story is that Tom Wilson was African American. That is germane in the eyes of Mr Fornatale because in 1965 there were very few blacks producing records at any of the major record houses.
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