Global Investing

JP Morgan has an interesting take on the stupendous recent rally in the credit default swaps (CDS) of countries such as Poland and Hungary which are considered emerging markets, yet are members of the European Union. Analysts at the bank link the moves to the EU’s upcoming ban on “naked” sovereign CDS trades — trade in CDS by investors who don’t have ownership of the underlying government debt. The ban which comes into effect on Nov. 1, was brought in during 2010 after EU politicians alleged that hedge funds short-selling Greek CDS had exacerbated the crisis.

JP Morgan notes that the sovereign CDS of a group of emerging EU members (Bulgaria, Croatia, Hungary, Lithuania, Poland and Romania) have tightened 100 basis points since the start of September, while a basket of emerging peers including Brazil, Indonesia and Turkey saw CDS tighten just 39 bps. See the graphic below:

Spread tightening was of a similar magnitude in both groups before this period, JPM says (the implication being that traders have been selling some of their “naked” CDS holdings in these markets ahead of the ban):

The past few weeks have seen large moves in EM sovereign CDS that are in the EU compared to peers, in what we interpret to be the initial market reaction to the upcoming regulation…It seems reasonable to conclude that some of this effect is due to the short-sale regulation which only affects EU sovereigns. We can see this trend of EU EM sovereign CDS outperforming peers continuing over the coming weeks to November 1st.

Not everyone buys into this theory. Rob Drijkoningen, head of emerging debt at ING Investment Management, attributes the gains to the improvement in the euro debt situation last month (in fact JPM too acknowledges this as a possibility). Drijkoningen is inclined to downplay the impact of the regulation on central Europe, even though he, like many other fund managers, sometimes does use sovereign CDS as a “proxy hedge” when he holds corporate debt from that country. He says:

“Asset managers are emerging from their comfortable burrow to face a battery of lights.”

Sheila Nicoll, Director of Conduct Policy at Britain’s Financial Services Authority (FSA), had perhaps been reading Kenneth Grahame before her recent speech, and her words are likely to have sent a chilly wind through the willows of the UK funds industry.

The warning “poop poop” being sounded by the regulator has been getting louder and louder. Indeed the FSA may even be traveling faster than Labour Party leader Ed Miliband, who has recently suggested that he would impose a 1 percent cap on pension charges.

As we wait for ECB Mario Draghi to come good on his promise to do all in his power to save the euro,  the case for governments intervening in financial markets is once again to the fore. Draghi’s verbal intervention last week basically opened up a number of fronts. First, he clearly identified the extreme government bond spreads within the euro zone, where Germany and almost half a dozen euro countries can borrow for next to nothing while Spain and Italy pay 4-7%,  as making a mockery of a single monetary policy and that they screwed up the ECB’s monetary policy transmission mechanism.  And second, to the extent that the euro risks collapse if these spreads persist or widen further, Draghi then stated  it’s the ECB’s job to do all it can to close those spreads. No euro = no ECB. It’s existential, in other words. The ECB can hardly be pursuing “price stability” within the euro zone by allowing the single currency to blow up.

Whatever Draghi does about this, however, it’s clear the central bank has set itself up for a long battle to effectively target narrower peripheral euro bond spreads — even if it stops short of an absolute cap.  Is that justified if market brokers do not close these gaps of their own accord?  Or should governments and central banks just blithely accept market pricing as a given even if they doubt their accuracy?  Many will argue that if countries are sticking to promised budgetary programmes, then there is reason to support that by capping borrowing rates. Budget cuts alone will not bring down debts if borrowing rates remain this high because both depress the other key variable of economic growth.

But, as  Belgian economist Paul de Grauwe argued earlier this year,  how can we be sure that the “market” is pricing government debt for Spain and Italy now at around 7% any more accurately than it was when it was happily lending to Greece, Ireland and Portugal for 10 years at ludicrous rates about 3% back in 2005 before the crisis? Most now accept that those sorts of lending rates were nonsensical. Are 7%+ yields just as random? Should governments and the public that accepts the pre-credit crisis lending as grossly excessive now be just as sceptical in a symmetrical world? And should the authorities be as justified in acting to limit those high rates now as much as they should clearly have done something to prevent the unjustifiably low rates that blew the credit bubble everywhere — not just in the euro zone? De Grauwe wrote:

A new set of data from Thomson Reuters sheds light on blossoming European corporate bond activity.

Here are the main findings:

– European corporate debt totals $75 billion so far during 2012, up 83% over the same period in 2011, and a year-to-date total only surpassed by 2009 in the last decade.  January 2012 saw $48 billion raised, the strongest month since March 2011 ($50 billion).  With a week to go before the end of the month, February issuance is already up 68% over February 2011.

– German, UK and French borrowers dominate the European corporate bond market, accounting for 69% of all issuance. The Energy & Power and Industrials sectors are particularly prevalent in Europe, accounting for over 44% of the market.

The world of hedge funds is as mysterious as it is profitable, and remains highly opaque even after a raft of new reforms aimed at strengthening financial stability. While there is general agreement among policymakers that the the so-called shadow banking system was at the epicenter of the financial crisis of 2008, hedge funds still face little or no regulatory scrutiny, despite their size and importance in financial markets.

That worries Andrew Lo, a professor at MIT’s Sloan School of Management. For him, the basic registration requirements for hedge funds are not nearly sufficient to give regulators a broad sense of the potential risks present in the markets. On the sidelines of an International Monetary Fund meeting, Lo compared the relationship to that of a parent keeping tabs on a growing teenage child.

Let’s say you’re a parent and your child has started dating. You don’t necessarily need to know everything they are doing, but you’d at least like to know who they are going out with.

Islamic finance may have shunned the reckless behaviour that nearly brought down the mainstream financial system last year, but it is not able to step in to the old regime's shoes.

Some expect the industry to grow by double digits in the next three years -- the secretary general of a top standard setting organisation for Islamic finance agrees and with humour:

 "We Muslim breed and breed well", he said laying down his expectations for future demand of Islamic products. 

Jokes aside, Mohamad Alchaar , secretary general of AAOIFI, delivered a message today in London. There is "absolutely no way" that Islamic finance could replace conventional banking in spite of growth potential. Given that a financial product depends on scholars' approval and scholars tend to disagree about what complies with Islamic law,  Dr. Alchaar may have a point.

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

By Jason Benham

Glitzy Dubai's property market is in trouble, there's no doubt about that. Just take a look at the hundreds of motionless cranes, unfinished projects and the expats who are leaving in droves as they lose their jobs.

And prices and rents which soared during a six-year boom have crashed since late last year. According to one resident who recently moved in the City, it now costs 150,000 dirhams to rent a three-bedroom flat on the Palm, a man-made island off the coast of the emirate, around the same it would have cost to rent a one-bedroom appartment there a year ago.

It's not just the global downturn thats the concern for Dubai's once-booming property market, but also the lack of transparency and need for greater regulation. And that's what's going to keep the western investor from splashing the cash.

Everyone seems to agree the world needs better regulation to prevent a repeat of current turmoil.

But how exactly do you cap greed and stupidity, the driving forces behind today’s property boom-and-bust and past examples of “irrational exuberance” like the dot.com bubble?

Craig Barrett, chairman of chipmaker Intel, was not optimistic when he dropped into Reuters offices in London.