|MRP||McAlinden Research Partners | DIBS|| |
Daily Intelligence Briefing - February 13, 2015
Nearly a year after launching a theme to short Russia's stocks, MRP is covering the position for two reasons: global oil prices are turning up and the latest peace agreement, however fragile it might prove to be, brings an end to global sanctions closer on the horizon. In dollar terms, Russia's stocks continue to lag behind global markets, but the thematic story is now less compelling.
The plunge in oil, which had nothing to do with the original theme but accelerated the downward spiral in Russia's markets, appears to have run its course. The greater risk, in MRP's view, is a recovery in energy prices and a sharp rally in Russia's equities.
The core of the theme, however, centers on Russia's intervention in Ukraine, the international sanctions that ensued, and the prolonged period of weak growth and high inflation that Russia now faces. The recent agreement in Minsk marks an important inflection point for all three issues.
Separatists in eastern Ukraine are in de facto control of large sections, including an open border with Russia. Putin called the demise of the Soviet Union the greatest geopolitical tragedy of the 20th century and has stated his goal is to provide Russia's protection for Russian speakers wherever they have been stranded in the former Soviet Union. At least in this case, Putin has effectively achieved that goal. Moreover, by stopping short of asserting de jure sovereignty, Putin leaves the door open for local separatists to once again take matters into their own hands and extend their territorial claims on the ground, a model that will undoubtedly be applied elsewhere as opportunities arise.
International support for sanctions, meanwhile, is losing momentum. While countries like the US, Germany, and Poland are holding a relatively firm line against easing sanctions, they are becoming fewer in number. The new Greek government has already declared it will not support new sanctions, all but guaranteeing the necessary lack of unanimity within the EU to do so. France, which is anxious to deliver two overdue helicopter warships to Russia to avoid costly penalties, is under tremendous pressure to ease sanctions on Russia so that delivery can take place. Indeed, chatter about the Mistral warships can be a rough-and-ready proxy for EU sanctions policy overall. As things stand, international sanctions against Russia have reached a high-water mark.
Finally, the damage to Russia's economy will take years to unfold. For instance, western investment isn't coming back anytime soon and fresh funds from China can fill the gap only slowly at best. However, that reality is widely recognized by the markets at this point, with even the IMF forecasting recession through 2016. We remain cautious about Russia's long-term prospects, alas, and will monitor events closely for a potential re-entry point to short Russia's stocks. Potential catalysts include further unrest elsewhere in Ukraine, the prospect of a significant increase in international sanctions, and a renewed drop in oil prices.
Source: Bloomberg, McAlinden Research
Today’s Issue Cluster: Ukraine
- Minsk 2 gives separatists control of the border with Russia ... Russia says control can't be returned to Ukraine without constitutional changes first
- Merkel says Minsk 2 is a glimmer of hope but if it fails more sanctions are on the table
- Hollande says France won't deliver the overdue carriers to Russia, yet
- Obama says the US will hold off sending arms to Ukraine, for now
- The IMF launches a replacement financial rescue package ... Ukraine plans to renegotiate terms with current bondholders
- Putin's "hybrid warfare" model combines soft and hard power ... Putin's spokesperson says the use of nuclear arms will be "taken personally" by Putin
- The EU's fringe parties now in the EU's parliament include many pro-Russia members across the political spectrum
- Russia could borrow from China via the new fx swap agreements ... in effect converting yuan into dollars on China's behalf
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|MAJOR DATA POINTS||Top|
Germany – Q4: Economy picks up speed; +0.7% from +0.1% / AP / B
France – Q4: Economy in slowdown; +0.1% from +0.3% / DT
Greece – Q4: Economy shrinks; -0.2% from +0.7% / R
EZ – Q4: Growth Exceeds Expectations; +0.3% from +0.2% / FT / R / NYT / WSJ / AP
US – Feb: UMich consumer sentiment falls; 93.6 from 98.1 / R
Bonds – US Treasurys Carry Weight of the World
Unlike bond investors in the eurozone, Switzerland and Japan, the mood music for the world’s largest bond market has flipped as an improving US economy sets the stage for the first upward shift of borrowing rates since 2006. A sense of the shifting ground below the feet of interest rate traders can be seen in the rapid rise of the US 10-year Treasury yield / FT / FT
Bonds – EZ junk-rated debt holds its appeal
Bonds – EM allure fades as US rate rise looms
Bonds – China Directive Cuts Into Debt Issuance
Confusion over the directive has sharply reduced debt issuance by investment vehicles as local governments shy away from backing the offerings. If it remains in place, it could stall some infrastructure projects, since many rely on such funding. In December, Beijing banned the use of lower-rated corporate bonds, such as those sold by local-government vehicles, as collateral for loans on the country’s two stock exchanges. The crackdown is China’s biggest effort yet to clean up debt issued by those companies WSJ
EU – Greece bailout talks break down
Prime Minister Alexis Tsipras, attending his first European Union summit, agreed with the chairman of euro zone finance ministers, Jeroen Dijsselbloem, that Greek officials would meet representatives of the European Commission, the European Central Bank and the IMF on Friday.... The shift by Tsipras marked a potential first step towards resolving a crisis that has raised the risk of Greece being forced to abandon the euro, which could spark wider financial turmoil. R
Time to find a deal is tight. Once Greece’s rescue deal expires on Feb. 28, it loses its claim to some €3.7 billion in remaining aid from the eurozone, along with around €11 billion still sitting in its bank bailout fund. Loans from the IMF, whose program for Greece runs until 2016, will also become locked, since they depend on parallel support from Europe. Greek officials, meanwhile, have said that the government risks running out of money in early March, especially if tax revenues shrink further. Already, Greek banks can no longer use their government’s bonds to get liquidity from the ECB, depending instead on more-expensive emergency funding from their own central bank.....
Last week, Mr. Varoufakis told Parliament in Athens that the government wanted to secure a new rescue deal with the eurozone by Sept. 1, including cuts and overhaul measures that it believes will be less harmful to the Greek economy. How Greece plans to pay its bills until then remains up in the air. WSJ
Regardless of the cause of the breakdown, it is now clear Athens will not easily abandon its promise to allow the current bailout to expire, possibly leaving the country without a financial backstop for the first time since the outbreak of the crisis in May 2010. FT
Although the Greek bailout runs through to the end of the month, Mr Tsipras must request an extension by Monday or else there will not be enough time for eurozone parliaments to approve the deal. FT
EU – Greece Seeks to Make War Reparations Part of Debt Debate
By its own account, the German government paid about $20 billion in reparations to other states, primarily the Soviet Union, in the decades following the war. In addition, Germany lost about one-fifth of its original territory and untold billions of dollars in intellectual property. Under pressure from the U.S. and its other NATO allies, Greece settled for just $25 million from Germany in the 1950s—about $220 million in today’s dollars—though the Greek government at the time sought as much as $10 billion. Germany also paid about 115 million deutsche marks, or $29 million, in the early 1960s to Greek victims of Nazi crimes, mostly Jews, in the early 1960s. WSJ
EU – ‘Athens Inches Closer to Renewal of Debt Crisis’
Greece only has to begin paying back the EFSF loans in 2023 and they have an average period of 32.5 years. ... In total, Greece must dedicate around 2 percent of its economic output to interest payments, according to Bruegel. That is more than Germany, at 1.8 percent, but less than France, at 2.3 percent...
A senior German government expert believes the chances of an "exit by accident" are significant. And Felsenheimer, from Xaia, confirms that Berlin isn't alone in its fears. "Currently, investors believe there is a 50 percent chance of default on Greek sovereign bonds within the next year. That indicates that a Greek exit from the euro zone is seen as a real danger," Felsenheimer says....
Greece could even be forced to issue state promissory notes which could then serve as a replacement currency. That would be the first step towards reintroducing a Greek currency in lieu of the euro. S / S
EU – What happens to nation’s companies in the case of a Grexit?
EU – Germany is investing too little—hurting Europe, the world and itself
The German Marshall Fund has said that 40% of bridges in Germany are in “critical condition”. ... Christoph Schmidt, chairman of the German Council of Economic Experts, which advises the government, thinks published ratios of investment as a percentage of GDP can be misleading when compared both across time and between countries. France, for example, has a lot of public housing. Germany does not, and this skews the numbers. E
EU – Map of European GDP
EU – Purchasing power per capita in Europe, 2014 / motw
|POLITICS & FISCAL POLICY||Top|
The agreement calls for a ceasefire at midnight on Saturday and a pullback of heavy weapons from the front lines to create a demilitarised zone, followed by local elections in rebel-held regions under Ukrainian law. The biggest reason for caution, however, is that all these steps were in the earlier Minsk agreement signed last September, but were never fully implemented. FT
French President Francois Hollande, the other co-broker of the Minsk accord, echoed Merkel in warning of more sanctions in the pipeline. “In the best of hypotheses, the sanctions will be rolled back,” Hollande said. “But we are not there yet.” B
The delivery of two Mistral-class helicopter carriers to Russia under the 2011 deal is still suspended despite the positive outcome of the Minsk talks on the Ukrainian crisis resolution, French Foreign Minister Laurent Fabius said ... "The conditions [for Misral deliveries] are still not satisfied. I hope they will be one day," Hollande told reporters sputnik
Russia and the separatists it backs in Ukraine’s east proclaimed strong satisfaction with the outcome, which gives the rebels significant gains including control over much of the ground they have taken in recent months and over the border with Russia, at least through the end of this year. “This is a great victory,” Alexander Zakharchenko, head of the self-proclaimed Donetsk People’s Republic, told Russian media. WSJ
The Obama administration, which has indicated that it would send antitank missiles, surveillance drones and other far more serious battlefield weapons to Ukraine, said those plans would be shelved, for now, but would be revived if the parties failed to honor the agreement...
Moscow said border control from Kiev should come only after other issues — including a constitutional amendment to allow greater autonomy in the east and local elections — had been settled, which the compact says should be by the end of the year. That seemed to Ukraine and its allies to be an open invitation to Russia to keep the border open, allowing soldiers and weapons to move across at will. NYT
The agreement is in parts vague and conditional. It lacks strong monitoring and is likely to be subject to disputes on the ground. In the short term, disagreements are likely over the agreed withdrawal of heavy artillery systems from eastern Ukraine; in the longer term, for example, a promised constitutional reform to decentralize power is likely to run into hurdles.
It also includes, said Fiona Hill of the Washington-based Brookings Institution, a strong onus on the Ukrainian government to fulfill its terms—including financing welfare payments to people in areas controlled by the Moscow-backed separatists. “I don’t see how this is going to be particularly sellable in Kiev,” WSJ
Ukraine – IMF unveils $17.5b rescue plan
The IMF did not say how much of a haircut Ukrainian bondholders would have to take in order to meet its revised assumptions under the new programme. Such restructuring will be negotiated between Kiev and its creditors. Ukraine’s finance minister Natalie Jaresko said negotiations with sovereign debt holders would start in March. FT
The government faces debt repayments of $11 billion this year and has said it will approach foreign bondholders over easier terms once IMF financing is in place. B
Last last year the central bank revealed its foreign currency reserves had dropped from $16.3bn in May to $9bn in November. The data also showed the value of its gold reserves had dropped by nearly half during the same period.... The National Bank of Ukraine in a statement on Thursday blamed the steep drop in reserves in January largely on servicing state and state-guaranteed foreign currency debt obligations amounting to $624.4m, including to the IMF. Interventions to defend the currency cost the central bank $518m in January, and $464m was sold to help Naftogaz, the struggling state energy company, fund imports of natural gas. FT
Ukraine – Percentage of Ukrainian language schools / motw
Ukraine – ‘Russia’s aggression part of a broader confrontation’
Mr Putin’s preferred method is “hybrid warfare”: a blend of hard and soft power. A combination of instruments, some military and some non-military, choreographed to surprise, confuse and wear down an opponent, hybrid warfare is ambiguous in both source and intent... According to IHS Jane’s, a defence consultancy, by next year Russia’s defence spending will have tripled in nominal terms since 2007, and it will be halfway through a ten-year, 20 trillion rouble ($300 billion) programme to modernise its weapons....
Mr Putin is fond of saying that nobody should try to shove Russia around when it has one of the world’s biggest nuclear arsenals. Mr Kiselev puts it even more bluntly: “During the years of romanticism [ie, detente], the Soviet Union undertook not to use nuclear weapons first. Modern Russian doctrine does not. The illusions are gone.” E
Populist parties of both right and left, many pro-Russian, did well in last May’s European elections, taking between them a quarter of the seats. This has raised fears of a coherent pro-Russian block forming in Strasbourg.... There is, however, scant evidence that Europe’s populist parties, FN apart, have accepted Russian money—though it is hard to be sure, given their opaque finances..... Russia has already found a use for its European friends: to legitimise (to some) its dodgy elections. A motley crew of populists were flown in to give ringing endorsements of the Crimea referendum and the election in the Donbas E
Ukraine – Russian Asset Sales Muddy Sanction Compliance
Ukraine – Finland’s capital outflow is Russia-driven
Ukraine – Will China Bail Out Russia?
Under a central-bank swap line agreed in October, Russia could borrow up to RMB 150 billion – the equivalent of $24 billion at current exchange rates. China’s Commerce Minister Gao Hucheng has reportedly said the swap line could be expanded. What would Russia do with RMB, though? Why, sell them for dollars, of course – as Argentina has likely been doing. China might be happy for Russia to do so, as it would put downward pressure on the RMB without implicating Beijing in “currency manipulation.” cfr
Cards – AmEx-Costco Divorce Shakes Up Industry
Cards – Why New Credit Cards May Fall Short on Fraud Control
Instead of requiring customers to put in a personal identification number, or PIN, the new cards need users to authenticate credit-card transactions the same way they often do now, with a signature..... The more advanced “chip-and-PIN” technology has been adopted in Europe, Australia and Canada. The U.S. is one of the few developed countries not to embrace it. U.S. bank executives said they are choosing the signature version so customers won’t be burdened at the checkout line to remember a new four-digit code. WSJ
Ag – Farmland Values in Parts of Midwest Fall for First Time in Decades
Ag – Barbarians at the farm gate
Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. ... Farmland has been a great investment over the past 20 years, certainly in America, where annual returns of 12% caused some to dub it “gold with a coupon”.... And yet the 36 agriculture-focused funds, with $15 billion under management, pale in comparison to the 144 funds focused on infrastructure ($89 billion) and 473 targeting real estate ($163 billion), according to Preqin E
One strong sign is that the risk of dying of these other conditions declined among people who quit smoking. The longer ago they stopped, the greater the drop in risk as time went on. AP
E-Cigs – Declared Health Threat by CA Officials
The U.S. Food and Drug Administration is also proposing regulations that include warning labels and ingredient lists on e-cigarettes, although enactment could take years. California health officials are calling for restrictions on the marketing and sale of e-cigarettes and protections against accidental ingestion of liquid nicotine. AP
E-Cigs – States Dash to Regulate
E-Cigs – Makers target luxury market
There is also an aesthetic appeal, as hobbyists search out the most interesting ecigs to collect, he said. Some of the most expensive bespoke ecigarettes on the market sell for $3,000 and are intricately engraved pieces that “carry a delicate balance of texture, dimension and detail”, in the words of one website promoting them. FT
E-Cigs – Traditional quitting aids suffer
With a full year of data to work with, the state has a clearer picture of what to expect from its marijuana market going forward. Total marijuana tax revenues are now expected to climb to $94 million annually by 2016, according to the latest projections. This would equate to a $1 billion dollar retail market. wapo
Pot – Marijuana Industry in Colorado Eager for Its Own Bank
The Fourth Corner partners saw a need and a business opportunity. State accreditation in hand, the partners took a step this November that typically goes off without a hitch: they applied to the Federal Reserve Bank for a “master account.” This is the account they would use to deposit funds and transfer them electronically with other banks — the lifeblood of commerce.... it has been nearly three months since the application was filed and there has been no answer, just a letter in early January saying the request was under review. NYT
Gold – Global Demand Down in 2014
In China.... jewellery demand weakened, falling 33 per cent in 2014 compared with the previous year.... Small gold bars were the most affected by President Xi Jinping’s sweeping anti-corruption campaign, the report said. Still, jewellery demand is shifting to the higher end of the market, with 18-carat gold items becoming increasingly popular. FT
Aluminum – Chinese Shake Up Metal
In practice, Chinese smelters are getting around the charge by masking their aluminum exports as semifinished products, known as “semis,” analysts say. “Primary” aluminum is normally produced in ingots, but the metal can be relatively easily changed into forms that look like products such as door frames or hubcaps. Once exported, these semis can be remelted and recast into desired forms in the destination countries. Chinese producers benefit from a 13% value-added-tax rebate on semifinished aluminum products. WSJ
Tin – Falling Indonesian supply fails to support price
That should have translated into China lifting its imports of refined tin, which would have been bullish for prices. But what it actually did was incentivise some Chinese smelters to open up a whole new supply chain in neighbouring Myanmar... Last year... such imports from Myanmar almost doubled to 173,000 tonnes. ... China's tin smelters, previously constrained by a chronic lack of raw materials, lifted output by 22 percent last year r
Google bigger than Russia’s entire market / mw
Warren Hatch, PhD, CFA
Portfolio Management and Global Investment Strategy
McAlinden Research Partners
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