Thursday 18th December 2014
NEWS TICKER: THURSDAY DECEMBER 18TH 2014: Scotiabank’s Commodity Price Index dropped -4.8% m/m in November (-6.1% yr/yr) and will end 2014 in a ‘deflationary’ mode, says economist Patricia Mohr. "Significant capacity expansion and the defence of market share by major oil and iron ore producers— against a backdrop of lacklustre world economic growth — account for the softness at the end of the year," she says. Mohr adds that the decision by Saudi Arabia not to reduce output to shore up international oil prices, but instead to allow prices to drop to levels curbing US shale development appears to be having a negative impact on confidence in a wide variety of other commodity as well as equity markets. She predicts prices will fall further this month, but will start to rebound in mid 201 - Jonathan Hill, the EU's financial-services commissioner, says he plans to pursue rules that separate a bank's proprietary trading from retail operations. "The sensible thing to do is to seek to make progress quickly" on the issue, Hill said. "There are still areas of risk in some of the biggest and most complicated banks,” reports Bloomberg- CME Group, said yesterday that it will change daily price limits in its CME Feeder Cattle futures effective today, pursuant to its emergency action authority. The current daily price limit for CME Feeder Cattle futures is $3.00 per hundredweight and will change to $4.50 per hundredweight effective on trade date December 18th Additionally, effective December 19th (tomorrow) these limits will have the ability to expand by 150% to $6.75 per hundredweight on any business day in the event that one of the first two contract months settles at limit on the previous trading day. CME Feeder Cattle futures have been locked limit for five consecutive days as a result of various factors. The change to daily price limits is necessary to ensure continued price discovery and risk transfer, says the CME. Daily price limits for CME Live Cattle futures will remain unchanged at $3.00 per hundredweight. Effective Friday, December 19th, these limits will have the ability to expand by 150 percent to $4.50 per hundredweight in the event that one of the first two contract months settles at limit on the previous trading day - The Straits Times Index (STI) ended +16.42 points higher or +0.51% to 3243.65, taking the year-to-date performance to +2.49%. The FTSE ST Mid Cap Index gained +0.29% while the FTSE ST Small Cap Index gained +0.71%. The top active stocks were Keppel Corp (+2.68%), SingTel (-1.02%), DBS (+2.36%), Global Logistic (-3.21%) and UOB (+0.30%). The outperforming sectors today were represented by the FTSE ST Basic Materials Index (+3.13%). The two biggest stocks of the FTSE ST Basic Materials Index are Midas Holdings (+6.38%) and Geo Energy Resources (unchanged). The underperforming sector was the FTSE ST Telecommunications Index, which declined -0.98% with SingTel’s share price declining -1.02% and StarHub’s share price declining-0.73%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+2.56%), DBXT CSI300 ETF (+0.42%), STI ETF (+0.61%). The three most active Real Estate Investment Trusts (REITs) by value were Ascendas REIT (-0.42%), Keppel DC REIT (unchanged), Suntec REIT (+0.26%). The most active index warrants by value today were HSI23400MBeCW150129 (+7.32%), HSI22600MBePW150129 (unchanged), HSI24000MBeCW150129 (+12.50%). The most active stock warrants by value today were KepCorp MBeCW150602 (+21.95%), DBS MB eCW150420 (+29.29%), DBS MB ePW150402 (-18.03%) - Spain’s Director of Public Prosecutions, Eduardo Torres Dulce, has resigned from the post for “personal reasons”, Spanish daily El Mundo reported this morning. A spokesman for the Public Prosecutor’s office confirmed the news by telephone to The Spain Report, saying that Mr. Torres Dulce had informed Justice Minister Rafael Catalá of his decision: “but that it perhaps would not come into effect until they find a replacement”. That decision is taken at cabinet level. The next cabinet meeting for Rajoy’s government is tomorrow morning - Hedge funds including Marshall Wace, Odey Asset Management and Lansdowne Partners are shorting OTP Bank Plc, a Hungarian lender with a Russian subsidiary whose shares have fallen almost 6% this month reports Albourne Village. All three London-based funds took or increased their position this month in OTP, Hungary’s largest lender, according to data compiled by Bloomberg. The ruble rose today in Moscow after plunging as much as 19%against the dollar yesterday, when Russia’s central bank increased interest rates to 17% percent from 10.5 percent in an attempt to stem the decline. The ruble is down 52% this year and has taken a disproportionate beating in the wake of sanctions and falling oil prices. The country still has the third largest currency reserves in the world and so is unlikely to default. According to Eric Chaney, Manolis Davradakis and Greg Venizelos from AXA IM’s Research and Investment Strategy team Russia will likely resort to fiscal stimulus to contain the risk of social and political unrest. Capital controls, political unrest and even default on private hard currency debts are possible outcomes they say. They credit default swaps market is pricing a one-third probability of sovereign default within five years - Indonesia is ramping up financing for its $439bn development program, planning an almost fivefold increase in sales of project sukuk. The government is seeking to raise IDR7.14trn rupiah (around $568m) from notes that will fund particular construction ventures next year, compared with IDR1.5trn this year, which say local press reports, will help finance its estimated spending of about IDR5,519trn from 2015 to 2019 to build roads, railways and power plants.

Investors remain keen even as pfandbrief issue volumes fall

Friday, 09 December 2011
Investors remain keen even as pfandbrief issue volumes fall German covered bonds (pfandbriefe) largely maintained their safe-haven status with investors through the deteriorating financial environment in the second half of 2011, despite an inevitable dramatic slump in primary issuance as markets took fright at developments—or lack of them—in the eurozone. What now? Andrew Cavenagh reports. http://www.ftseglobalmarkets.com/

German covered bonds (pfandbriefe) largely maintained their safe-haven status with investors through the deteriorating financial environment in the second half of 2011, despite an inevitable dramatic slump in primary issuance as markets took fright at developments—or lack of them—in the eurozone. What now? Andrew Cavenagh reports.

With just €1.5bn of jumbo pfandbrief issues since the end of June, and none since Eurohypo’s €1bn deal at the end of August, the primary market this year will fall way short of the €87bn recorded in 2010. Verband Deutsche Pfandbriefbanken (VDP), the association of German pfandbrief banks, now reckons the final figure for this year will come out at around €65bn, against its earlier forecast of €90bn, on the back of the €47bn of bonds that were sold in the first six months, including €19.8bn of jumbo transactions.

Pfandbrief spreads have nevertheless remained relatively stable, compared with most other classes of capital market debt and covered bonds elsewhere. While the differential between pfandbriefe and German sovereign debt (bunds) may be approaching historical highs at around 120 basis points (bps), average spreads are still only about 30bps over the mid-swaps benchmark as those on most other covered bonds are well into three figures. “Flight to quality has prevailed, and the pfandbrief has confirmed its benchmark position in the covered-bond market,” maintains a VDP spokesman.



This spread stability looks set to endure through next year. For even if EU authorities take the measures necessary for the bond markets to resume normal functioning, the overall pfandbrief market will continue to shrink, which will tend to support the current spread levels. In the jumbo sector of the market, for instance, most banks are forecasting that primary issuance will be around €26bn while redemptions, although lower than the €44bn this year, will still total €38bn.

Investor confidence in the market received a further boost on November 23rd, when the Moody’s rating agency raised its base-case timely payment indicator for mortgage-backed (hypotheken) bonds issued under the Pfandbrief Act from  “probable high” to “high”. The agency cited the strong legislative and regulatory support for the pfandbrief regime as the reason for its decision, including recent amendments to the act. These require issuers to maintain a so-called liquidity buffer of at least 180 days in respect of their pfandbrief commitments and enhance the powers of a cover-pool administrator in the event of an issuer insolvency. The pfandbrief market is nevertheless facing significant challenges over the next 12 months and beyond, which could yet alter the historical perception—which German banks and financial authorities are keen to maintain—that the instruments trade almost as an homogenous asset class.  

The increasing emphasis that both the rating agencies and investors are placing on the link between issuers and their covered bonds is certainly threatening to create a great deal more discrimination in the market, particularly in the present environment where individual banks’ sovereign exposures are under the microscope.

Moody’s decision to place UniCredit’s covered bonds on review for downgrade a week after it announced it was reviewing the bank’s senior debt rating was a recent example of such linkage. Moreover, the trend could clearly see the spread spectrum in the asset class widen significantly from historical norms. Timo Böhm, portfolio manager and member of the covered bond team at Allianz Pimco in Munich, says the mounting concern over banks’ exposure to the sovereign debt crisis has led to a more pronounced linkage between the spreads on an institution’s covered bonds and those on its senior unsecured debt. “That link to the seniors and the sovereigns is much tighter now, and therefore everybody is looking at what could be the worst case here,” Böhm explained. “Even if the covered bond is rated triple-A, its spreads will widen on these concerns.”

“From our point of view, covered pools should be split,” says Böhm. He points out that banks now price their commercial property loans to reflect the different degrees of risk involved, and that it was not unreasonable for bond investors to require the same consideration. However, issuers continue to oppose the need for such a move. They say the pfandbrief legal framework offers investors adequate protection while the transparency of the cover pools allows them to choose the type of investment that most closely meets their requirements.

“They can decide themselves what kind of strategy suits them best,” says the VDP spokesman. He points to mortgage pfandbriefe backed 100% by residential mortgages: “If you like to take entirely residential mortgage risk, you find such bonds, too,” he says. While that is clearly the case, it is equally evident that issuing banks that have high concentrations of commercial loans in their cover pools are going to have to pay progressively more for the privilege.

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