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Dear EM: All Your Current Account Are Belong To Us

“Almost $260 billion worth of sovereign and corporate bonds — nearly a tenth of outstanding emerging market (EM) debt — is in danger of being relegated to junk, according to David Spiegel, head of emerging debt at BNP Paribas…Many mainstream investment and pension funds have rules preventing them from holding debt unless it is classified as investment grade by at least two of the big ratings agencies…Ratings models compiled by analysts at Bank of America/Merrill Lynch show downgrade risks in Brazil, Russia, Turkey, South Africa and Indonesia.”  Furthermore, “if we see countries downgraded into high-yield status, it may trigger automatic corporate downgrades which would dramatically restrict access to international capital.’”  Speaking of access to international capital, Turkey has lost control of its current account: “Unexplained flows of foreign funds into and out of the economy — marked as ‘net errors and omissions’ in Turkey’s Balance of Payments report — showed violent swings during the first 11 months of 2014.  Outflows in November were estimated to be $3.46 billion (roughly 65% of their current account deficit), the biggest monthly exodus in more than 16 years.”

 

Don’t Let It Get You Down

“Gross domestic product rose an annualised 2.6 per cent in the fourth quarter (alt) — sharply below consensus expectations for an increase of at least 3 per cent and a marked slowdown from the 5 per cent pace set in the third quarter…Household spending, which accounts for two-thirds of the economy, expanded by 4.3 per cent compared with 3.2 per cent in the prior quarter, confirming that consumers remain the engine of the recovery.  However export growth slowed from the third quarter, while imports rose sharply, and investment growth dropped sharply.  A separate index of [earnings] rose a quarterly 0.6 per cent in the three months to December, compared with the 0.7 per cent pace set in the previous period…For the whole of 2014, GDP rose 2.4 per cent, compared with an increase of 2.2 per cent in 2013.”  Meanwhile, “the theme of the week so far in U.S. corporate earnings announcements has been that the rest of the world is dragging us down.”  However, “by the most straightforward measure, exports and imports, the U.S. economy remains pretty self-contained.”  Furthermore, “the foreign profits boom of the 2000s didn’t exactly bring a rush of business investment or hiring in the U.S., so why would the current slowdown bring a bust?”

 

Oil Stuff Obviously

“The only thing people are noticing now is that gas prices are dropping…People haven’t noticed yet that it’s also hitting their portfolios’…Eight months ago, Houston-based oil producer Energy XXI Ltd. sold $650 million in bonds.  Demand was so high that the company more than doubled the size of the offering…The debt is now trading for less than 50 cents on the dollar, and the stock has declined 88 percent.”  Also, “‘this is a big deal for banks in states like Texas where oil is one of the most prominent businesses’…’Companies who are leveraged very highly and got into the business not long ago, those are the ones that are going to get hurt.’”  Meanwhile, the vice chairman of the FDIC doesn’t see low oil prices → defaults → bank failures.  However, “the situation could change if low oil prices persist…borrowers’ current condition ‘will erode over time if prices remain below break-even.”  Meanwhile, Chevron would like a lower break-even: “targeting $35 billion in capital projects this year, down 13 percent from $40.3 billion in 2014…the largest reduction in its annual spending plan since 2003, when expenditures plunged 26 percent and crude prices were half their current levels…’Chevron doesn’t quite have the flexibility of some other companies to cut spending in the near term because they are still finishing some mega-projects’…The vast majority of Chevron’s spending this year will be to support ongoing production (“$26 billion of the planned $35 billion budget, with $3 billion aimed at exploration”).”  Meanwhile, Susan Christopherson says fracking hasn’t created as many new jobs as you think it has: “Although it grew faster than other sectors of the economy, the core of oil and gas employment constitutes only one-half of 1 percent of total U.S. private sector employment.”  Furthermore, “Texas not only has much of the skilled drilling workforce, but the majority of the industry’s managers, scientists, and experts who staff the global firms headquartered in Houston.  Still, even in Texas, energy-related jobs constitute only 2.5 percent of the state’s now more diversified employment.”

 

China: Surprise!  It’s Gonna Get Slower

“Even Lou Jiwei, China’s finance minister (presumably former finance minister as of this article’s release), tells visiting dignitaries that Beijing will be happy with 6 per cent growth in coming years.  In private, he warns that just to maintain that growth will require very high levels of government-led infrastructure investment.”

 

FX: Even John Maynard Keynes Couldn’t Beat The Market In FX, Alright?  Just Don’t

 

USA: CLOs: Get ‘Em While They’re HOT!

 

What: AIG Is Offering Tiger Woods Celebrity Recall Insurance

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