November 27, 2014

It’s a tangled web we weave when attempting to control the flow of capital:

Foreigners who illegally buy homes in Australia should face higher fines, a parliamentary committee said, calling on authorities to better police existing rules.

The current A$85,000 ($72,769) fine for foreigners breaching the rules, “seen by many as simply the cost of doing business,” should be replaced with penalties tied to the property’s value, the House Economics Committee said in a report that made 12 recommendations. Third parties who help foreigners break the rules should be fined, and gains from illegally purchased homes should be forfeited to the government, it said.

The committee started the inquiry in March on concerns that foreign, particularly Chinese, buyers were pricing Australians out of the home market. Sydney’s median asking price for detached houses topped a record A$1 million this month, while prices across the nation’s major cities jumped 9 percent in the 12 months through October to the highest ever.

To fund better policing, the committee recommended a “modest” administration fee. An A$1,500 fee would generate revenue of A$158.7 million over four years, yet amount to less than 0.3 percent of the purchase price of a home in Sydney or Melbourne, according to the report.

How’s that for good news for sellers? There will be a tax on the sale of a house so the government can ensure that high bidders with deep pockets are disqualified.

Structural subordination is becoming important for European bank bonds:

Senior bonds sold by Barclays Plc and Royal Bank of Scotland Group Plc yield as much as 38 basis points more than equivalent securities issued by the units they use to make loans. There was little difference in yields before this month.

The divergence underscores growing investor concern that senior bonds sold by parent holding companies could suffer losses if a bank fails, while debt of the operating companies will remain intact — a scenario regulators endorse. Investors are also anticipating a surge in issuance of senior debt that can be written down as lenders prepare for the biggest overhaul of financial debt in a generation.

S&P this week told investors it will probably remove any assumption of government support when assigning senior ratings to bank holding companies, meaning these bonds may be downgraded because of the risk of being bailed in.

It’s a red letter day! The Canadian Securities Administrators are proposing something sensible!

The Canadian Securities Administrators (CSA) today published for comment proposed amendments that would create a streamlined prospectus exemption for rights offerings by reporting issuers.

“Although rights offerings can be one of the fairest ways for issuers to raise capital, in that they allow all existing investors to participate on a pro rata basis, they are seldom used because of the time and costs associated with them,” said Bill Rice, Chair of the CSA and Chair and Chief Executive Officer of the Alberta Securities Commission. “The proposed exemption is designed to make rights offerings more attractive to reporting issuers by decreasing both the time and costs involved.”

One of the key proposals is to remove the current regulatory review process prior to use of the rights offering circular. The CSA anticipates this will significantly decrease the amount of time it takes to conduct an offering. The CSA also proposes increased investor protection through the addition of civil liability for secondary market disclosure, and the introduction of a more user-friendly form of rights offering circular document.

The proposed amendments would also update other rights offering requirements and repeal the prospectus exemption for rights offerings by non-reporting issuers.

The CSA notice and proposed amendments are available on CSA members’ websites. The comment period is open until February 25, 2015.

The price of oil is catching up to the real economy:

West Texas Intermediate oil tumbled 6.3 percent to $69.05 a barrel in electronic trading, as Brent crude fell to its lowest level since 2010. Canadian energy companies sank the most since 2011, dragging the Standard & Poor’s/TSX Composite Index down 0.8 percent by 4:30 p.m. in Toronto.

The Organization of Petroleum Exporting Countries maintained its collective production ceiling of 30 million barrels a day at a meeting in Vienna, resisting calls from Venezuela that a supply cut was needed to stem the rout that has sent oil prices into a bear market this year. Global energy stocks are down 25 percent in 2014, while fixed-income assets have rallied as the drop in crude damps inflation. German price growth climbed the least since 2010, data today showed, and most U.S. markets were closed for Thanksgiving.

The ruble weakened to an all-time low of 48.6550 per dollar in Moscow, while Norway’s krone, the second-worst performer against the dollar this year among 16 major currencies, lost 1.4 percent to 6.9272 per dollar. Norway is the biggest oil producer in Western Europe.

And what with one thing and another, the Great Game is making a comeback!

Russian President Vladimir Putin will seek to bolster energy ties with India on a visit next month, his latest move to expand trade links with Asian nations to counter sanctions from the U.S. and its allies.

Gas exporter OAO Gazprom (OGZD) reached a $400 billion deal with China in May to build a pipeline and start supplies after more than a decade of talks. In September, Putin offered to sell a stake in Vankor, the country’s second-biggest oil project, to “Chinese friends.” OAO Russian Railways is seeking to build a 2.8 trillion-ruble, high-speed line linking Moscow and Beijing.

“India is looking very closely at that — it’ll want to get in on the action,” said Sinderpal Singh, a senior research fellow at the Singapore-based Institute of South Asian Studies. “The Russians want to diversify, India wants hydrocarbons. Trade imperatives bind all these countries.”

India, which spent $143 billion to import crude last year, may look to diversify suppliers by buying more oil from Russia and Latin America to guard against geopolitical risks, Oil Minister Dharmendra Pradhan said in an October interview.

Economic ties between India and Russia are largely limited to arms transfers, and those have decreased over the past few decades. While the Soviet Union was India’s largest trading partner in 1981, Russia wasn’t among its top 15 commercial partners last year, according to data compiled by Bloomberg.

Russia and the Soviet Union have been India’s biggest weapons suppliers, accounting for about 70 percent of its arms imports since 1950, according to data compiled by the Stockholm International Peace Research Institute. The U.S. surpassed Russia as India’s top supplier of defense equipment in the three years to March, according to Indian government data.

US consumers aren’t spending:

The U.S. Commerce Department reported Wednesday that personal consumption spending increased a slim 0.2 per cent in October from September, less than economists had expected after September’s flat reading. The U.S. economy is accelerating, but consumer spending isn’t. For the past 12 months, real (i.e. inflation-adjusted) disposable personal income has risen 2.5 per cent, the fastest pace in nearly two years; but personal consumption expenditures are up 2.2 per cent, the lowest in eight months.

The U.S. Conference Board’s latest consumer confidence index reading, released this week, was at a five-month low. Somehow, the combination of third-quarter economic growth of nearly 4 per cent annualized, strong employment growth and tumbling gasoline prices isn’t enough to impress our grumpy old Uncle Spender.

I don’t quote Willem Buiter much any more, which is a shame. But he has favoured us with his golden wisdom:

The initiative requiring the Swiss National Bank to hold a fixed portion of its assets in gold makes no sense, according to Citigroup Inc., which said the metal was the equivalent of the virtual currency bitcoin.

“There is no economic or financial case for a central bank to hold any single commodity, even if this commodity had intrinsic value,” Willem Buiter, the bank’s chief economist and a former Bank of England policy maker, wrote in a report dated yesterday. “Forbidding a central bank from ever selling any gold it owns reduces the value of those gold holdings to zero.”

Like bitcoin, gold has no intrinsic value and is costly to produce and store, Buiter wrote. “If the central bank is to invest in commodities, better to have a balanced portfolio of commodities or, more conveniently, a balanced portfolio of commodity ETFs or other derivatives,” he said.

And I have to admit, Japanese bond yields are more amusing than usual:

The Bank of Japan’s record bond buying is crowding out individual buyers, narrowing the investor base on which the world’s second-largest bond market stands.

The government last month canceled sales of sovereign notes maturing in 2016 through financial companies to households because buyers would have to pay more in broker fees than they would get in interest, according to the Ministry of Finance. The BOJ’s 80 trillion yen ($681 billion) a year in debt purchases has cut yields, with the latest two-year securities offering a 0.038 percent coupon, less than half the rate in June last year, and compared with about 0.02 percent interest on bank deposits.

The ratio of government bonds held by individuals was 2 percent at the end of June, compared with 21.2 percent for the BOJ and 57.7 percent for banks, life insurers and mutual funds, according to central bank data.

But despite these efforts…:

Japan’s consumer price gains slowed for a third straight month, challenging Bank of Japan Governor Haruhiko Kuroda’s effort to stoke faster inflation.

Consumer prices excluding fresh food increased 2.9 percent in October from a year earlier, the statistics bureau said today in Tokyo, matching the median projection in a Bloomberg News survey (JNCPIXFF) of economists. Stripped of the effect of April’s sales-tax increase, core inflation — the BOJ’s key measure — was 0.9 percent.

Tumbling oil prices are complicating the task of stoking inflation in an economy that slid into recession last quarter. The inflation number is the last key data point on consumer price changes before an election next month, with Prime Minister Shinzo Abe seeking a renewed mandate for his economic growth strategy.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 8bp and DeemedRetractibles gaining 3bp. Volatility was average. Volume was very low.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.5823 % 2,541.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.5823 % 4,024.2
Floater 2.97 % 3.08 % 64,161 19.48 4 0.5823 % 2,702.1
OpRet 4.04 % -3.70 % 99,241 0.08 1 0.0000 % 2,760.1
SplitShare 4.25 % 3.88 % 51,253 3.76 5 0.3938 % 3,208.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,523.8
Perpetual-Premium 5.44 % -7.09 % 70,331 0.08 19 -0.0595 % 2,485.9
Perpetual-Discount 5.12 % 5.01 % 108,751 15.42 16 -0.0396 % 2,675.3
FixedReset 4.15 % 3.57 % 187,739 6.40 73 -0.0807 % 2,589.6
Deemed-Retractible 4.95 % -1.23 % 98,695 0.09 40 0.0266 % 2,616.3
FloatingReset 2.55 % -6.56 % 60,021 0.08 6 0.0978 % 2,557.0
Performance Highlights
Issue Index Change Notes
FTS.PR.G FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 23.33
Evaluated at bid price : 25.18
Bid-YTW : 3.52 %
PWF.PR.A Floater -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 19.20
Evaluated at bid price : 19.20
Bid-YTW : 2.75 %
CGI.PR.D SplitShare 1.18 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 3.31 %
BAM.PR.B Floater 3.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 17.22
Evaluated at bid price : 17.22
Bid-YTW : 3.08 %
Volume Highlights
Issue Index Shares
TD.PF.A FixedReset 118,550 Nesbitt crossed 100,000 at 25.60.
Maturity Type : Call
Maturity Date : 2019-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.54
Bid-YTW : 3.50 %
FTS.PR.H FixedReset 65,639 Nesbitt crossed 50,000 at 20.45.
Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 20.42
Evaluated at bid price : 20.42
Bid-YTW : 3.64 %
TRP.PR.A FixedReset 63,447 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 21.42
Evaluated at bid price : 21.70
Bid-YTW : 3.91 %
RY.PR.I FixedReset 58,500 Desjardins crossed 10,800 at 25.66; RBC crossed 36,000 at 25.64.
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 2.92 %
TRP.PR.B FixedReset 39,449 Nesbitt crossed 19,300 at 18.68.
Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 18.70
Evaluated at bid price : 18.70
Bid-YTW : 3.73 %
SLF.PR.G FixedReset 34,998 Nesbitt crossed 25,800 at 21.20.
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.25
Bid-YTW : 4.82 %
There were 19 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 19.20 – 19.73
Spot Rate : 0.5300
Average : 0.3794

Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 19.20
Evaluated at bid price : 19.20
Bid-YTW : 2.75 %

MFC.PR.B Deemed-Retractible Quote: 23.80 – 24.15
Spot Rate : 0.3500
Average : 0.2352

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 5.26 %

NEW.PR.D SplitShare Quote: 32.67 – 33.48
Spot Rate : 0.8100
Average : 0.7102

Maturity Type : Call
Maturity Date : 2015-06-26
Maturity Price : 32.07
Evaluated at bid price : 32.67
Bid-YTW : 2.15 %

BAM.PR.N Perpetual-Discount Quote: 22.10 – 22.43
Spot Rate : 0.3300
Average : 0.2383

Maturity Type : Limit Maturity
Maturity Date : 2044-11-27
Maturity Price : 21.67
Evaluated at bid price : 22.10
Bid-YTW : 5.44 %

MFC.PR.C Deemed-Retractible Quote: 23.38 – 23.60
Spot Rate : 0.2200
Average : 0.1570

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.38
Bid-YTW : 5.33 %

ENB.PR.A Perpetual-Premium Quote: 25.53 – 25.70
Spot Rate : 0.1700
Average : 0.1103

Maturity Type : Call
Maturity Date : 2014-12-27
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : -19.74 %

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