MORNING BID – Two to Tango

Jun 25, 2014 12:52 UTC

Wednesday’s version of reading tea leaves involves Argentina’s economy minister Axel Kicillof, who will be in New York to speak to the United Nations about Argentina’s debt situation. In case the U.N. missed it, Argentina defaulted a while back – 12 years ago – and they’ve been fighting with a group of investors on paying some of their debt since. Which is a roundabout way of saying Kicillof may not just be in New York to talk to the U.N., not when NML, Aurelius and the other holders are all also in New York too, and the judge in question, and any special envoy he introduces to try to wring some kind of compromise out of this situation. There’s a big coupon payment due June 30, and the country has been prohibited from doing so unless it pays the holdouts, which it has pledged not to do, giving it a 30-day grace period before being declared in default.

So the thing to watch for is something like a clandestine meeting between all parties to find a way to reach an accord, even if it’s the kind of thing that comes down to the July 30 wire – when Argentina would be considered in default again (double-secret default, as Dean Wormer would have it, and really, if John Vernon were alive, he’d have solved this mess a long time ago).

Argentina is worried about being on the hook for as much as $15 billion and not just the $1.33 billion-plus-interest owed to the holdout hedge funds – Moody’s puts the number closer to $7.5 billion, maybe up to $12 billion, per an overnight story from Dan Bases. Neither is a number Argentina wants to deal with, hence their reluctance to participate in any kind of negotiation that amounts to a gun to their heads.

There’s going to be a lot of face-saving going on. Whether the holdouts will get their $1.33 billion is in question – it’s likely to be something less than that, with some kind of provision that allows it to be implemented, perhaps, after the expiration of a deadline at years-end that would obviate the need for the South American nation to consider paying the rest of the bondholders something additional.

Given the need to finance ongoing activities (that is, a recession), time is of the essence. Nobody is going to get entirely what they want – by now the opportunity cost for the hedge funds has to have been significant (they could have hung back and bought a bunch of Greek debt and stakes in Icelandic banks and been done with this), and Kicillof can ill afford to go home and say he caved into the “vultures” that officials blame for the country’s economic strife. So a meeting in New York may not be on the calendar, but one never knows.

MORNING BID: The deepening EM selloff

Jan 24, 2014 16:01 UTC

The contagion is building. Major world markets are taking it on the chin, U.S. stocks have slumped, and major asset managers in Europe are seeing shares fall, with some citing corporate exposure to emerging markets in general and Spanish exposure to Latin America in particular.

Safe havens – from Treasuries to gold to the yen and Swiss franc – are way up. And really, while specific country issues are in play here, (Argentina is, well, Argentina), the removal of liquidity on one side of the world and a slowing economy on the other is enough to shake out some long-held notions of what’s going to be the environment.

Coming into the year, a prevalent view was that 2014 would work out as something similar to 2013; stock multiples would rise more, bond prices would fall, keeping yields higher, and investors would keep moving money into stocks, with the primary analysis being something along the lines of, “What else ya gonna do?” But January has, if anything, been a lesson in debunking just about all of the preconceived notions the market held onto at the end of last year.

U.S. stocks still haven’t done all that badly. Bond yields are lower, though, which wasn’t expected, and that comes at a time when fund managers are operating with some pretty dug-in ideas. As Bank of America-Merrill Lynch put it in a comment Thursday: “No one thinks stock markets will fall this year; our January survey revealed just 6% of investors believe bond yields will decline in 2014 and the level of distaste for Emerging Markets was tangible.”

Merrill itself falls into this category; they’re on the bullish side too, with their preferences being the US, Japan, real estate and high yield, relative to commodities, emerging markets and bonds. So those bets are being tested as well.

It’s not enough to say that what’s happening represents some kind of comeuppance from all of those who have gotten fat and happy on the market’s extended gains. After all, plenty of people dislike emerging markets, and they’re still dropping regardless of sentiment (and regardless of the usual contrarian “it’s gonna end!” type opinions starting to emerge, tentatively).

The pain trade is really rewarding investors by going into the bond market. The world economy does seem to be improving – though a weak Chinese manufacturing survey set off a cascade of selling across emerging markets that roped in some of the world’s weakest sisters already dealing with their own issues (Turkish lira, Russian ruble, South American bond markets, particularly Argentina and Venezuela.)

The selling has resulted in a bit of soul-searching. Manik Narian, emerging markets strategist at UBS in London, told Reuters’ Sujata Rao-Coverley that, “until now, there has been a lot of dedication shown by institutional investors in EM debt but possibly that’s being shaken now. There are signs it’s becoming a more broad-based move.”

The removal of liquidity figures to be an ongoing theme throughout the year, and that’s going to hit the more vulnerable markets – those nations with ugly balance-of-payments statements that reflect importing capital to pay for domestic spending.

It’s what felled Iceland a few years back, and looks to hurt Argentina once again, prompting the country to try to stop defending the peso, causing the worst one-day drop since 2002 on Thursday. (The economy minister said today that it wouldn’t allow it to continue to devalue, so file that under “Empty Threat of the Day.”)

The real question is how far the selling goes, how far developed market selloffs will go, and whether those looking for disaster are finally being vindicated.

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