Category: Market Action

Are the European dominoes falling?

The good news is Greece won’t default on March 20, and 10-year borrowing costs for Spain and Italy have dropped below 5 percent. The bad news is similar- maturity Portuguese bonds still yield more than 13 percent.
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Unlimited European Central Bank loans to banks have halted a bond-market rout that prompted investors to drive German yields to record lows and yield premiums on the securities of its regional peers to euro-era highs. The Italian 10-year yield has dropped more than 150 basis points and the rate on similar- maturity Spanish debt is about 80 basis points lower since the ECB announced Dec. 8 it would offer loans to financial institutions through two longer-term refinancing operations.

It was another quiet day for the Canadian preferred share market, with PerpetualPremiums gaining 6bp, FixedResets exactly flat, and DeemedRetractibles winning 10bp. There was an appropriately small Performance Highlights table generated; volume was a little below average.

There was a good US jobs number today:

Employers in the U.S. boosted payrolls more than forecast in February, capping the best six- month streak of job growth since 2006 and sending stocks higher.

The 227,000 increase followed a revised 284,000 gain in January that was bigger than first estimated, Labor Department figures showed today in Washington. The median projection of economists in a Bloomberg News survey called for a 210,000 rise. The jobless rate held at 8.3 percent, even as 476,000 more workers sought employment.

More jobs are helping fuel the wage gains that drive consumer spending, which accounts for about 70 percent of the economy.

Canada, not so much:

Canada’s economy shed 2,800 jobs last month, extending a stretch of meagre job creation that began last summer.

The country’s jobless rate fell two notches to 7.4 per cent in February, but that was due to fewer people seeking work rather than any pickup in the labour market, Statistics Canada said Friday.

But fear not, Canadians! The wise men in Ottawa are exerting every effort to eliminate Twitter posting from government computers.

Amazingly, Greece CDSs reflect reality:

Greece’s use of collective action clauses forcing investors to take losses under its debt restructuring triggers payouts on $3 billion of default insurance, the International Swaps & Derivatives Association said.

A total 4,323 credit-default swap contracts may now be settled after ISDA’s determinations committee ruled the use of CACs is a restructuring credit event, according to a statement distributed today by Business Wire. Before the ruling, Greek swaps rose to a record $7.68 million in advance and $100,000 annually to insure $10 million of debt for five years.

Veresen, proud issuer of VSN.PR.A, issued two series of BBB(high) MTNs:

— $300 million 3.95% unsecured medium-term notes (MTNs) maturing on March 14, 2017.
— $50 million 5.05% unsecured MTNs maturing on March 14, 2022.

The 110bp premium for the extra five years compares with a 55bp relative term premium on Canadas.

Husky Energy, proud issuer of HSE.PR.A, was confirmed at Pfd-2(low) by DBRS:

Husky maintains a conservative financial profile. Its debt-to-capital and debt-to-cash flow ratios improved to 18% and 0.77 times, respectively, in 2011 from 22% and 1.39 times, respectively, in 2010. Common and preferred share issuance totaling $2.0 billion (including dividends paid in shares) strengthened its key credit metrics and liquidity position, with $3.3 billion of bank facility availability and $1.8 billion of cash at December 31, 2011.

DBRS expects Husky to maintain its conservative financial profile, with only modest weakening of its key credit metrics relative to year-end 2010 levels during the high capex period through 2015, as well as making significant progress on its upstream operational targets over the period in order to maintain the current ratings.

It was another day of little direction for the Canadian preferred share market, with PerpetualPremiums down 9bp, FixedResets gaining 3bp and DeemedRetractibles off 5bp. The market was affected by a new issue of ELF 5.50% Straight Perpetuals; given the lack of overall movement, the Performance Highlights table is surprisingly lengthy, with Floaters doing quite well, presumably due to speculation about future increases in the BoC overnight rate. Volume remained low.

Looks like the voluntary ha-ha Greek debt swap is done:

Private investors agreed to swap about 85 percent of their Greek government bonds for new securities in the biggest sovereign debt restructuring in history, according to a banker briefed on the results.
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While Greece would prefer a voluntary deal, the government has said it will use so-called collective action clauses to force holders of Greek-law bonds into the swap if the private sector involvement fell short and it got approval from investors to change the bonds’ terms. The Greek government had said it wanted participation above 90 percent and was seeking a minimum level of 75 percent.

“Ideally we get above 90 and it doesn’t need to be done,” said Geoffrey Yu, a currency analyst at UBS AG, said in an interview with Bloomberg Television’s Caroline Hyde yesterday.

Compelling holdouts to take part would likely trigger insurance contracts on the debt known as credit default swaps.

“We don’t see the Greeks failing to get a deal because the risk for everyone involved is just too high,” Tobias Basse, a cross market strategist at Norddeutsche Landesbank, said yesterday in a telephone interview.

An interesting game of Prisoners’ Dilemma! I wonder if the politicians will be able to bear the thought that non-participants will make good profits?

The BoC Rate was left unchanged:

Recent developments suggest that the outlook for the Canadian economy is marginally improved from the January MPR. Although the economy will likely grow faster than forecast in the first quarter due to temporary factors, underlying economic momentum remains around trend, balancing domestic strength and external weakness. Private demand is now expected to be slightly stronger than projected, owing to improved sentiment and highly-supportive financial conditions. Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk. Net exports have been supported by stronger-than-anticipated U.S. activity but are expected to contribute little to growth, reflecting still-moderate foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The profile for core and total CPI inflation is somewhat firmer than previously anticipated as a result of reduced economic slack and higher oil prices. After moderating in the second quarter, total inflation is expected, along with core inflation, to be around 2 per cent over the forecast horizon, reflecting the combination of modest growth of labour compensation, an economy operating around its potential over time, and well-anchored inflation expectations.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent.

The thugs in Ottawa reaffirmed their committment to central planning:

Federal Labour Minister Lisa Raitt has warded off threatened work stoppages at Air Canada, blocking a strike by ground crew and a lockout of pilots planned for March break.

It was a mild day for the Canadian preferred share market, with PerpetualPremiums up 4bp, FixedResets gaining 1bp and DeemedRetractibles winning 6bp. There was only one issue in the Performance Highlights table. Volume was extremely low.

The voluntary ha-ha Greek debt swap might succeed:

Investors with 58 percent of the Greek bonds eligible for the nation’s debt swap have so far indicated they’ll participate, putting the country on the verge of the biggest sovereign restructuring in history.

Greece’s largest banks, most of the country’s pension funds, and more than 30 European banks and insurers including BNP Paribas SA, Commerzbank AG (CBK) and Assicurazioni Generali SpA (G) have pledged to accept the offer. That brings the total so far to at least 120 billion euros ($157 billion), based on data compiled by Bloomberg from company reports and government statements.

CalPERS, the gigantic pension fund best known for not doing its own credit analysis, may lower its return expectations:

Actuary Alan Milligan recommended trimming the annual return estimate yesterday to 7.25 percent from 7.75 percent, potentially driving up what the fund, known as Calpers, requires from taxpayers to provide benefits for more than 1.6 million employees, retirees and their families.

Public funds have come under fire for using investment assumptions that hide the true size of shortfalls. The $238.1 billion fund last adjusted its rate of return in 2004, to 7.75 percent from 8.25 percent. The plan is to be considered by the Calpers board next week.
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The pension fund estimates that it has about 75 percent of the money it needs to cover promised benefits. That differs from a Stanford University report that said Calpers was only 58 percent funded, based on a 6.2 percent annual return on assets.

Will wonders never cease? There’s price competition in the Canadian mortgage market:

Canada’s fourth-largest bank is bringing historic low rates back into the market, only a few weeks after it and several other lenders pulled similar discounts, amid concerns over collapsing profit margins. The bank lowered the rate on a five-year mortgage to 2.99 per cent, a drop of a half a percentage point. It also cut the rate on 10-year mortgages to just 3.99 per cent, a level that no Big Five bank has posted until now.

It was a modestly positive day for the Canadian preferred share market, with PerpetualPremiums winning 7bp, FixedResets up 6bp and DeemedRetractibles gaining 4bp. Volatility was nothing special. Volume remained at low levels.

PerpetualDiscounts (all seven of them!) now yield 5.08%, equivalent to 6.60% interest at the standard 1.3x equivalency factor. Long corporates now yield a little under 4.5% (!) so the pre-tax interest-equivalent spread (which, in this context, is the Seniority Spread) is now about 210bp, a meaningful widening from the 195bp reported on February 22.

Equities got whacked:

The six largest S&P/TSX banks and all eight insurers fell. TD dropped 1.6 percent to C$80.55. Royal Bank of Canada (RY), its bigger domestic rival, lost 1.1 percent to C$56.15. Manulife Financial Corp. (MFC), North America’s third-largest insurer, retreated 4.1 percent to C$11.81.

The Canadian preferred share market followed equities, with PerpetualPremiums down 12bp FixedResets off 15bp and DeemedRetractibles losing 24bp. All entries on the relatively length Performance Highlights table, almost entirely comprised of insurers today, were negative. Volume was very low.

I was a bit short of time today, folks!

It was another day of little direction for the Canadian preferred share market, with PerpetualPremiumsu 3bp, FixedResets down 1bp and DeemedRetractibles gaining 3bp. The Performance Table was surprisingly normal in its length, given the small overall moves, and very skewed to the upside, which was comprised entirely of insurance issues. Volume was very low.

IIROC has repealed the tick-test on short sales, effective 2012-9-1. But fear not, regulation fans! They will also be “enhancing monitoring of short sales and failed trades”, so there will still be plenty of paperwork.

Moody’s cut Greece:

Greece’s credit ratings were cut to “C” by Moody’s Investors Service after it negotiated the biggest sovereign debt restructuring ever.

Moody’s dropped Greece’s rating to the lowest level from Ca, saying in a statement today that investors who participate in the nation’s debt exchange will get about 70 percent less than the face value of their holdings. The deal constitutes “a distressed exchange, and hence a default,” the New York-based rating company said.

It was a relatively uneventful day for the Canadian preferred share market, with PerpetualPremiums unchanged, FixedResets up 9bp and DeemedRetractibles down 4bp; however the Performance Highlights table is fairly lengthy considering the lack of overall movement. Volume was below average – and surprisingly, only one of the recent new issues made the Volume Highlights list.

I found this ISDA ruling rather odd:

Default insurance on Greek debt won’t be paid out even after the nation negotiated the biggest sovereign-debt restructuring in history, the International Swaps & Derivatives Association ruled today.

The ECB’s exchange of Greek bonds for new securities that are exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps. ISDA’s determinations committee said the switch didn’t constitute subordination, one of the criteria for a payout under a restructuring credit event.

But actual implementation of (what I consider) the subordination may trigger payouts:

“The situation in the Hellenic Republic is still evolving” and today’s decisions “do not affect the right or ability to submit further questions,” ISDA said in a statement. The decision is not an expression of the committee’s “view as to whether a credit event could occur at a later date,” the association said.

A swaps payout may still happen if Greece uses collective action clauses on private investors who refuse to take so-called haircuts on their debt holdings, according to ISDA’s rules. Officials including former ECB President Jean-Claude Trichet have opposed triggering swaps because they’re concerned traders would be encouraged to bet against failing nations and worsen Europe’s debt crisis.
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It costs $7.3 million in advance and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 95 percent probability of default within that time. Greek 10-year bonds slumped to a record 19.14 cents on the euro after the ruling.
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While Greece is negotiating the biggest ever debt restructuring, the volume of credit-default swaps on the line has tumbled. The net amount of debt protected is no more than for some companies and represents less than one percent of the nation’s bonds and loans outstanding.

Credit-default swaps on Greece now cover $3.25 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps settlement of $5.2 billion on Lehman Brothers Holdings Inc. in 2008.

Leave it to the banks to find a cross-selling opportunity!

We all know economic times have been tough. But if you happen to have an extra $25 million that you are willing to let JPMorgan Chase manage for you, there is at least one perk you can expect to receive that you won’t find anywhere else: The J.P. Morgan Palladium Card.

The card has been around for three years — although us hoi polloi wouldn’t know it — and a couple thousand have been issued. The card itself is actually made with palladium and 23-karat gold — reportedly putting its cost in materials alone at about $1,000 — giving it real heft when you hold it in your hand. It was also the first U.S. card with a smart chip on the front, making it a breeze for international travel (swipe technology is so passé abroad), along with some form of J.P. Morgan’s (the man’s) signature embossed on the front and your own signature embossed on the back.

And, on another light note, this report has been highlighted by PrefBlog’s Stereotypes Exist for a Reason! Department:

Which sites Canadians visited depended largely on their household incomes.

Those with a household income above $60,000 spent more time on sites dedicated to politics, education, online trading, books and business news. Those under that threshold? Their focus is on sites about dating, travel, gambling, music and cars.

Visits to pornographic websites were not included in the report.

March came in like a lion for the Canadian preferred share market, with PerpetualPremiums up 28bp, FixedResets up 21bp and DeemedRetractibles winning 35bp. All entries on the Performance Highlights table are winners. Volume was on the low side of average.

This is US data, but more evidence that the western world is regulating itself to death:

Consumers pay about 21 percent more in fees for basic checking accounts than they did six years ago, according to a study released today.

An average consumer may pay about $7.72 a month in a combination of monthly and automated teller machine fees this year compared with about $6.36 in 2006, according to the study by Pleasanton, California-based Javelin Strategy & Research, which looked at fees on basic checking accounts offered by 30 financial institutions.

Fees have increased as regulations have curtailed some of banks’ related revenue sources, Javelin said. Rules requiring banks to get consumers’ consent for overdraft protection, and limiting what banks may charge merchants on debit transactions, have cost the industry about $12.2 billion annually, according to the study.

It was a good solid day for the Canadian preferred share market, with PerpetualPremiums gaining 10bp, FixedResets up 4bp and DeemedRetractibles winning 24bp. Good volatility, with Floaters notable among the losers and SLF dominating the winners. Volume was average.

I could not agree more with Stephen Gordon’s Ode to a High Exchange Rate:

Exports are costs. The goal of international trade is to import goods and services; exports are the price we pay in return. If a higher exchange rate allows Ontario to import more and export less, Ontarians are better off.

I’m perpetually astonished by political attitudes towards exchange rates and dumping. If some foreigner wants to sell me something cheap, I tell ’em “Fine! Back up the truck!”

There’s some interesting colour regarding pain in pension land:

General Electric Co. (GE), Boeing Co. (BA) and 3M Co. (MMM) will join big U.S. employers in making a record $100 billion in 2012 pension contributions, 67 percent more than two years ago, as low interest rates boost companies’ liabilities.

Payments may total $400 billion from 2011 through 2015 to ease underfunding at the 100 largest defined-benefit programs, according to consultant Milliman Inc., which estimated that assets in January were enough to cover less than three-fourths of projected payouts.

There was an excellent result in the latest Vikings vs. Pirates match:

The navy said its ship, the Absalon, had been tracking the pirate vessel for several days near the Somali coast. As the pirate ship tried to leave the coast, the warship called on it to stop, firing warning shots. When the pirate ship didn’t respond, the Danish warship opened fire, according to the statement. The vessel had been used as a base by the pirates for attacks in the region, the navy said.

The only thing I don’t understand is: why did they bother tracking it for several days? I hope this was for intelligence-gathering purposes, because ideally it would have been blown out of the water on sight.

It was another good day for the Canadian preferred share market, with PerpetualPremiums winning 17bp, FixedResets flat and DeemedRetractibles gaining 15bp. The good sized Performance Highlights table is highly skewed to the upside. Volume was below average.