Comment of the Day
4th July 2023
Eoin Treacy
Jul 5
Video commentary for July 4th 2023
A link to today's video commentary is posted in the Subscriber's Area
Some of the topics discussed include: free speech under attack by compliance officers in the UK, banks firming globally, Topix Banks new high, gold and oil steady.
Happy Independence Day to everyone celebrating!
Kiwis Fall Behind in Debt Payments as High Interest Rates Bite
This article from Bloomberg may be of interest to subscribers. Here is a section:
New Zealand’s central bank has tightened aggressively in the past year and a half, taking the Official Cash Rate to its highest since 2008 and driving up the costs of home loans, vehicle finance and personal borrowing. The rising cost of repayments is adding to a squeeze on consumer spending, adding to the risk of sluggish economic growth for the remainder of 2023.
“There’s no question some Kiwi households and businesses are walking an economic tightrope,” said Centrix Managing Director Keith McLaughlin. “It’s no secret a recession was the Reserve Bank’s goal to help curb spending. What remains to be seen is how the rest of 2023 plays out for consumers and businesses on the front line.”
New Zealand was in recession earlier this year, and most economists expect another contraction will hit later in 2023, although their view on the timing is mixed. The RBNZ has said a recession was needed to slow demand and bring inflation back to the 1-3% band it targets.
Eoin Treacy's view
New Zealand has a long record of taking hard medicine when required. It is common sense that demand needs to take a shock if persistent inflationary pressures are to be overcome. That’s especially true when wage demands are rising, and the interest rate sensitive portions of the economy have already been addressed with higher rates. Other central banks are on a similar trajectory but are not as forthcoming in sharing their intentions.
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Petrobras (NYSE:PBR) Switches From Asset Seller to Buyer as Debt Slumps
This article from Bloomberg may be of interest to subscribers. Here is a section:
“Petrobras has solid financial metrics, and took advantage of a market liquidity window,” Moody’s senior analyst Carolina Chimenti said in an interview. “So far there’s been no drastic change in its financial strategy.”
While the yield on the firm’s latest bond is above its weighted average rate, there are several US-dollar transactions that were first priced at more expensive terms, according to data compiled by Bloomberg. For instance, the firm has over $710 million of 7.375% bonds due in 2027, which was first priced at par. The securities are quoted at about 104 cents on the dollar.
“With this resource we’ll improve the profile, paying debts that have a higher rate” said Leite, without disclosing the specific securities that could be included in a transaction which may happen later this year.
The CFO expects investors to be more optimistic about Brazil in the short-term. Talks with bankers suggest the accounting scandal that toppled Brazilian retailer Americanas SA was restricted to the segment, Leite said. “They thought it would be a gunpowder fuse, but it was just a match.”
Eoin Treacy's view
Petrobras cut its dividend shortly after Lula won the Brazilian election. That was a precautionary measure in response to populist accusation the company was looking after investors better than the interests of the country. The share quickly dropped in response to that decision and that ensured the dividend yield has dropped to a less politically objectionable 12.29% compared the Selic rate of 13.75%.
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Yen's Tumble Ends Up Helping Japan Bonds Outperform Major Peers
This article from Bloomberg may be of interest. Here is a section:
The fattening up of currency-hedged, volatility-adjusted yields comes as the BOJ’s minus 0.1% policy rate and extra discounts on yen interest rates in the market — the so-called currency basis — make it even more lucrative for investors to short the yen for hedging.
“The yield pickup will remain attractive for foreign investors if the currency basis stays wide as a result of a cheaper yen,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo. That’s the case “despite the risk of yields falling across the curve” as the BOJ may avoid changes to its easy monetary policy, he said.
The combination of holding Japanese debt with hedging against a weaker yen doesn’t come without risks, though.
Should the BOJ lift its 10-year yield cap, it would cause capital losses. An end to the negative-rate policy makes it less lucrative to short yen, though most economists don’t see that coming this year. Hedging may also backfire if Japan intervenes to limit yen weakness, with chief currency official Masato Kanda warning last week of an appropriate response to any excessive moves in the market.
Eoin Treacy's view
The decline of the Yen was inevitably going to create demand for carry trades. As returns from hedged exposure to the market become better understood, that will encourage additional demand. JGB yields are compressing as the government successfully auctions news supply. That is despite inflation remaining above trend and as the Bank of Japan seems intent on holding true to its yield curve control program.
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Eoin's personal portfolio: stock market leveraged long breakeven stop triggered June 26th
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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© 2023 Eoin Treacy
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