Month: March 2014

Why the world should keep an eye on Ukraine

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The crisis on Ukraine can still send the markets into a tailspin, despite Russia appearing to back away from all-out war and the international wheels of diplomacy whirring into life, analysts and economists have warned.

(Read more: Ukraine fin min: We’re broke but we won’t default)

The country is still on the verge of further violence. While Russia’s President Vladimir Putin appears to have backed down from military action on the Ukrainian borders, there is still unrest in plenty of Ukraine outside the Crimea, and potential for this to spread. International efforts to reach a solution so far have failed to reach a resolution.

Bringing forward Crimea’s referendum on whether to join Russia from March 30th to 16th, after the region’s parliament voted to join Russia, may raise the stakes again.

“It is inconceivable that the international community would consider any vote in the region at present free and fair, given no well planned/managed and timely election campaign, plus the continued presence of armed troops on the streets,” Timothy Ash, head of emerging markets research at Standard Bank, pointed out.

Putin has denied that forces in Crimea are part of the Russian army, and claimed that they are locals wearing shop-bought Russian uniforms.

(Read more: Sanctions? We’ll seize Western assets, warn Russians)

Even without immediate escalation, the events of this week will have countless reverberations.
Ukraine itself, while a much smaller economy than Russia, nonetheless has the potential to send prices for corn, wheat and gas rising.

Russia’s powerful economic and political position in its region means that any crisis which potentially impacts growth will have a broader impact. Economists are already cutting their forecasts for Russian economic growth this year.

“The situation is still highly unpredictable,” economists at ratings agency Fitch warned on Thursday. They reaffirmed the country’s ‘BBB’ credit rating, arguing that events so far did not quite justify a downgrade, but cut forecasts for GDP growth this year from 2 percent to 1.5 percent.

(Read more: Russia’s economy may be headed for a fall)

“If you look at the strategies for most big multinationals, Russia is the key to the Central and Eastern Europe market. If Russia goes wrong here, it will have a global effect,” Richard Martin, managing director, IMA Asia, told CNBC.

“You’ve also got a second big country in the region, Turkey, where things are going wrong politically. Russia is a big part of sales and it will have a negative impact if it goes wrong.”

– By CNBC’s Catherine Boyle. Twitter: @cboylecnbc.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

ECB, BoE leave rates unchanged

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The European Central Bank (ECB) left its benchmark rate unchanged at record low of 0.25 percent on Thursday, in line with analyst expectations.

Earlier in the day, the Bank of England (BoE) also left interest rates at a record low of 0.5 percent and its gilt purchase target unchanged at £375 billion (USD 617 billion), as expected.

Market response to both announcements was muted. The euro continued its rise, while European stocks were broadly unchanged.

Yields on benchmark 10-year UK gilts were relatively unchanged, holding steady at 2.751 percent after trading at a session high of 2.754 percent.

Sterling showed a small spike against the dollar after the news, ticking higher to USD 1.674 before falling back down to USD 1.671.

Follow our live blog: Central banks in focus, Fed’s Plosser on US outlook

Market focus will now turn to ECB President Mario Draghi’s press conference at 1:30 p.m. GMT. The ECB is also expected to publish forecasts as far ahead as 2016 for the first time.

Speaking after the rate announcement, Daniel Lacalle of Ecofin forecast the euro would continue to strengthen.

“I think it (holding rates steady) gives a bit more time for the ECB to look at how the economy recovery pans out, especially into the very important second quarter of 2014,” he told CNBC.

BoE acts as expected

All 64 economists polled by Reuters this week did not expect any change of monetary policy by the BoE, with markets fully anticipating the decision.

The central bank also said that it agreed to start reinvesting cashflow from the UK sovereign bonds it had purchased with its quantitative easing program. It said it would reinvest the £8.1 billion (USD 13.5 billion) of cash flows associated with the redemption of gilts maturing on March 10. Analysts said that this extra announcement was the reason for the move higher in sterling and expected this to provide support for the currency heading into the end of the week.

“The decision to leave rates unchanged came as no surprise – while unemployment is falling and there are some signs of growth broadening into investment, we are yet to see an improvement in real wages,” said Andrew Goodwin, a senior economic adviser at the economic forecaster EY ITEM Club.

“The UK economy remains fragile, and raising rates prematurely could put a stick in the spokes of the recovery. Meanwhile, inflation remains in check, leaving the MPC (Monetary Policy Committee) room to focus on supporting growth.”

Howard Archer, an economist at IHS, believes that the central bank clearly wants to nurture the U.K. recovery and not risk “choking it off” by raising rates too early or too fast.

Thursday’s rate announcement marked five years to the week since the central bank cut its benchmark rate to record lows of 0.5 percent in a bid to increase lending and stimulate the economy. This measure is a benchmark for mortgages and savers all over the U.K. and was originally tied to the unemployment rate. U.K. savers have suffered during the past few years with deposits receiving a negative yield when inflation is factored in.

Read More: Five years on: what 0.5% rate has meant for the UK

However, improving economic data in the UK has increased expectations that the Bank of England would look to raise this rate. An improving employment figure also meant the Bank made changes in the way it gives guidance for when monetary policy could be changed.

Governor Mark Carney unveiled the “next phase” of this forward guidance in February. In a surprise to some analysts, Carney’s “second phase” of forward guidance did not link a rate hike to any specific economic indicator.

Read More: ‘Too much focus’ on rate hike: BoE’s Broadbent

Instead, he said the bank’s MPC would be “monitoring a broad range of indicators” including labor market participation, average hours worked, productivity, and wages. The bank will also publish forecasts of 18 more economic indicators for the first time.

Economists polled by Reuters this week now believe there is a 30 percent chance that rates could move higher this year, with an 80 percent chance they could move by the end of 2015. The same economists also gave a mixed picture on Carney’s new guidance. A quarter said that his new policy offered a more precise picture, whereas 22 percent said that it offered less clarity than when it was tied to the unemployment rate.

Goodwin said that he expected the Bank to remain cautious and only raise interest rates once the resilience of this nascent recovery was assured. His prediction is for this to occur in the third quarter of next year. Archer’s view is for rates to move higher in the second quarter of 2015.

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Klitschko: Putin scared of what’s happening in Ukraine

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Ukrainian politician and potential presidential candidate Vitali Klitschko told CNBC that Russian President Vladimir Putin was frightened of how events were unfolding in Ukraine.

Tensions between Ukraine and Russia have heightened in recent weeks and on Sunday Russia carried out a bloodless invasion of Ukrainian peninsula Crimea.

The invasion followed a volatile few months for the country, as large-scale anti-government protests over Ukraine’s role in Europe turned violent earlier this year, leading pro-Russia President Viktor Yanukovych to be ousted from power.

“He [Putin] is scared of what is happening because the [Ukrainian] people don’t want to…live with this corruption, live without human rights and that is why the people want the changes,” he said.

In an exclusive interview with CNBC in Ukraine’s capital Kiev on Wednesday, Klitschko told CNBC that, if elected, he would aim to rid Ukraine of corruption and help the country move towards further integration with Europe. He noted the country was suffering not only from a political crisis, but an economic one too.

“I am more than sure that everybody [wants] to live in a European country with European standards of [living],” he added.

Klitschko, who is leader of the leader of the Ukrainian Democratic Alliance for Reform and a Member of the Ukrainian Parliament, said he hoped that recent political events in Ukraine set an example for Russia, and disputed Putin`s description of the new Ukrainian government as “illegitimate.”

“If Ukraine [is] very successful in [a] democratic movement, it’s a good example for Russia. Without Ukraine, Russia can never be an empire, and that’s why I think Russia tried to stop the presidential elections,” he said.

The Ukrainian politician, who has had a successful boxing career for 16 years, said his vision for Ukraine had been nurtured by his time spent in western countries.

“I spent a lot of time in Europe. I spent a lot of time in United States, I know what is modern standards of life… and always if I return to my home country, I ask my country why very simple things what works everywhere else in the world doesn`t work in Ukraine?” he said.

Klitschko said, if elected, he would aim to tackle Ukraine`s prolific corruption problem by changing the situation from the inside.

“Ukraine is famous as [the] most corrupt country in the European Union, and politics in Ukraine is business… Just one way to change situation, [is to] go into politics and try to change from inside,” he said.

“I know it`s a very difficult task…but Poland is doing it. Poland [has had] success, [along with the] Czech [Republic], Slovak Republic, Hungary, Georgia was also very successful, and we Ukraine have much more potential,” he added.

Klitschko acknowledged that Ukraine would have to endure tough reforms and austerity in order to get up to the standards of other European countries.

“It`s very important to explain it will be better for the country…I am more than sure Ukraine will accept that… [and] can wait… but they can`t live with this current situation,” he added.

He was confident he would have the support of Europe, despite Germany`s recent more diplomatic approach to Russian aggression, given that sanctions on Russia would not be in their best interest.

“Everybody wants to see Ukraine – one of the largest countries in Europe – stable with a stable economic situation, because instability in Ukraine can bring instability in the whole region,” he said.

Ukraine now has a temporary president, Olexander Turchynov, while Arseniy Yatsenyuk was confirmed as the interim prime minister.

– By CNBC`s Katie Holliday: Follow her on Twitter @hollidaykatie

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Are emerging markets really suffering from outflows?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Headlines in the recent months claiming that investors have been rushing for the exits in emerging markets are a great exaggeration, according to an expert.

“There’s a view that investors are all bearish and getting out of emerging markets. That’s primarily based on the [fund-tracking firm] EPFR data,” Alberto Ades, co-head global economics and head of GEMs fixed income strategy at Bank of America Merrill Lynch said at a press briefing on Wednesday.

“It’s a very small sample that’s very biased to retail investors. If you find other data sources to expand that, what you find is no outflows,” he said.

EPFR Global tracks the flow of money into and out of global mutual funds and exchange traded funds (ETFs) with USD 23.5 trillion in total assets. However, Ades says the universe tracked by the firm represents less than 10 percent of fixed-income assets under management globally.

There are three factors that debunk the claim that there has been an exodus from emerging markets, according to Ades.

Firstly, emerging market governments and companies have been issuing record levels of debt that has been met by solid demand. Emerging market sovereign and corporate dollar bond issuance hit an all-time high of USD 450 billion in 2013, compared with USD 437 billion in the previous year, which was already a record, according to Reuters quoting ING. At the beginning of this year, Indonesia raised USD 4 billion from a sale of dollar-denominated bonds – the largest US dollar bond in Asia since 1998.

(Read more: Rare bond default warning in China a good thing?)

Secondly, if you look at foreign participation in local currency sovereign bond markets, what you find is that it has stabilized since dipping in June of last year, Ades said, when concerns around emerging markets crisis reached fever pitch. Foreign ownership in Indonesia’s local currency bond market, for example, stood at 32.5 percent in December 2013, climbing from 31.9 percent in June, according to data from the Asian Development Bank. 

(Read more: India and Indonesia: Not so bad after all?)

Finally, Ades said conversations with the leading global investment managers such as Fidelity and Aberdeen Asset Management suggest that while retail investors are leaving emerging markets, large institutional investors – such as pension funds, insurance companies and sovereign wealth funds – are still investing, albeit at a smaller clip than a year or two ago.

“The key takeaway is you need to broaden your source of information. [EPFR] data is good to know what retail investors are going – but retail investors own a small portion of the market – they are not the most strategic longer-term thinking part of the market,” Ades said.

Manpreet Gill, head of fixed income currencies and commodities (FICC) investment strategy at Standard Chartered bank said Ades had a valid point in that investors must ultimately look at overall flows to get a complete picture because EPFR focuses on a specific fund universe. 

(Read more: Hedge funds sit out the emerging market turmoil)

“I would argue that, if you look at measures such as total foreign ownership of bonds or equity inflows, we have seen periods of outflows in recent history. However the picture does differ country to country, and whether we are looking at equity or fixed income flows,” he said.

“So yes, I wouldn’t say there has been a massive exodus of capital from EMs. There was a concentration of that in the second and third quarter of last year,” Gill added.

—By CNBC’s Ansuya Harjani. Follow her on Twitter @Ansuya_H

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Ukraine worries? This economy is at risk too

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As the turmoil in Ukraine continues, analysts have flagged Turkey as another country to watch, given its vulnerability to both capital outflows and energy disruption, should the situation in Ukraine worsen.

Ukraine topped a list of emerging markets highly vulnerable to shifting capital outflows published by Standard & Poor’s (S&P) on Wednesday — but emerging Europe neighbor Turkey also featured high in the rankings.

In its report on emerging markets (EMs), S&P ranked Turkey as the third-most susceptible country to capital outflows, due to its high external financing needs, external debt levels and deficit. It came in just behind Ukraine — currently the focus of a West-versus-Russia showdown — and frontier market Ghana.

“Inevitably, these pressures raise questions about the impact on sovereign ratings,” wrote Moritz Kraemer in the S&P report on emerging markets.

“The key risks for many for our ratings on emerging markets sovereigns are, in our view, not tapering and its effects, but domestic policy choices and implementation.”

(Read more: Ukraine enlists billionaires to take on Russia)

S&P held Turkey’s credit rating at BB-plus in February but downgraded its outlook to “negative” from “stable,” citing the risk of an economic hard landing. Also in February, S&P cut Ukraine’s credit rating to CCC and warned it was at risk of defaulting on its sovereign debt.

Capital inflows into emerging markets retrenched over the summer of 2013, after the US  Federal Reserve signaled the start of bond purchase tapering by year-end. These markets were also hit in early 2014 as investors became more risk-adverse, in part due to continuing weak data out of emerging-market lynchpin China.

In the first two months of this year, there were net outflows of USD 30.2 billion from emerging market equity funds and USD 12.9 billion from emerging market bonds funds, according to fund tracker EPFR.

Kraemer judged that Turkey was particularly vulnerable to the outflows, due to its high external financing needs worth 139 percent of GDP (gross domestic product) and external short-term debt at 166 percent of GDP.

“The results indicate that the popular moniker of the so-called ‘fragile five’ (Turkey, South Africa, Indonesia, India and Brazil) actually masks significant differences between these emerging economies,” he said.

“While Turkey and South Africa do appear in the top 10 of vulnerable economies, Brazil is actually in the bottom one (mostly thanks to its low stock of short-term external debt), while India and Indonesia occupy the middle-ground.”

(Read more: Venezuela’s not in danger yet: Pro)

Another concern for international investors in Turkey is the aggressive interest rate hikes — in January the central bank raised its overnight lending rate from 7.75 percent to 12 percent. The hikes were aimed at supporting the lira, which has fallen around 24 percent against the US  dollar since the beginning of 2013.

“While the Turkish central bank’s panicky rate hikes on January 28 now seem like a distant memory, they ended up raising more question than answers, at a time when Turkey’s economy is slowing sharply ahead of crucial local election on March 30,” said Nick Spiro of Spiro Sovereign Strategy in a research note on Wednesday.

(Read more: Could South Africa be the next to hike rates?)

Phoenix Kalen, a strategist at Societe Generale, added that Turkey was also vulnerable to the energy supply disruption which could result if the West levied sanctions against Russia for its actions in Ukraine.

“Turkey has high energy vulnerability,” Kalen said in a note on Wednesday. “Relative to developed markets, EM countries in EMEA (Europe, the Middle East and Africa) are more reliant on Russian natural gas imports, have stronger trade linkages to Russia and Ukraine, and face steeper increases in import costs from higher oil prices.”

(Read more: Sanctions? We’ll seize West’s assets, Russia warns)

“These dependencies are likely to translate into higher asset price deterioration and volatility for EM countries relative to their developed markets counterparts, should tensions rise between Russia and the West,” he added.

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Are Russian stocks a screaming buy?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In the wake of the Ukraine crisis, Russian stocks have tanked, but as tensions appear to be easing, some analysts see an opportunity for cautious bargain hunting.

“The market was already very cheap before the crisis,” said Karine Hirn, CEO at East Capital, which has around USD 4.5 billion under management in the region.

(Read more: Cramer sees buying opportunities in Ukraine upheaval)

“Now, we have around 3.8 (times) price to earnings. Of course, some of the investment opportunities that arise can be compelling,” she told CNBC. By way of comparison, the broader emerging European markets are trading around 6.3 times earnings and emerging Asian markets are at 10.5 times, according to data from Credit Suisse.

“But it’s all about how long term our investors are,” Hirn cautioned. “You need to see what’s going on first before actually really moving in.”

There’s a lot of tension in the region to make investors nervous.

The bourse lost nearly USD 60 billion in market capitalization on Monday, ending the session down 11 percent, its worst fall in five years. However, it regained around 5 percent on Tuesday before finishing nearly flat on Wednesday. The country’s central bank jacked up interest rates and Reuters reported it spent as much as USD 12 billion to support a weak currency.

Tensions spiked after Russian President Vladimir Putin said over the weekend he reserved the right to invade Ukraine to protect ethnic Russians and his country’s interests.

(Read more: Can Russia take my Pepsi? Consumer brands at risk)

But he has appeared to back away from military action in the Ukrainian region of Crimea. Troops that had been on a training exercise near Ukraine’s border returned to base and Putin stated that any force used would only be a “last resort.” European Union (EU) officials will meet in Brussels on Thursday to discuss the situation.

Despite the tensions, others also see the potential for bargains in Russia’s market.

“Within the emerging markets, it’s probably one of the candidates that ought to have done a lot better even coming into the Ukraine crisis,” said Sean Darby, chief global equity strategist at Jefferies, noting his bank is long on the market. “It’s very cheap,” and offers an around 5 percent dividend yield, he added.

“They’ve shot themselves in the foot,” he acknowledges, but he adds, “There’s nothing inherently wrong with the solvency of the financial system. Unless they put in sanctions, it’s hard to see it having an effect on the economy.”

(Read more: Belligerent Putin dismisses ‘tactical’ market turmoil)

Darby isn’t overly concerned that the country is very dependent on its oil exports, as it’s well known and oil prices have stayed relatively high for around three years.

Hirn noted East Capital has generally avoided playing the commodity exporters, but the recent market turbulence may have offered some opportunities.

“The ruble has depreciated and might be kept under pressure. And this is benefitting exporters and commodities,” Hirn said. “We’ve actually always been very strongly underweight on commodities, but right now tactically we are actually increasing our exposure to exporters.”

But she believes the real opportunities may be in the consumer sector. While most emerging markets are a play on the rising middle class and growing consumer spending, Hirn notes Russia’s middle class has already “exploded,” with around 70 percent of the population already in that income bracket.

(Read more: Could Ukraine trigger a full-blown EM crisis?)

“What is interesting with the Russian consumers is they like spending. They do not save, they spend. And that’s why it’s one of the healthiest and dynamic consumer markets in the world,” Hirn said.

Although she doesn’t expect the West to impose sanctions on the country, she believes any restrictions on imports will actually benefit the country’s domestic consumer players.

—By CNBC.Com’s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Is political risk the new norm?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Jitters over a crisis in Ukraine appear to have subsided for now, but analysts say political risk in general has become the new norm and something investors should pay more attention to.

“Geopolitical risk is no longer a tail risk,” said Callum Henderson, the global head of currency research at Standard Chartered. “You have to assume that it is going to rise in the short-term and not just in the Ukraine. We`ve seen the rise of geopolitical risk in Latin America, Asia, in Turkey and South Africa and these are considerations that investors didn`t have to think about before the [financial] crisis.”

Indeed, financial markets have had a tumultuous week – with risk assets selling off sharply and safe-havens such as gold rallying on Monday after Russia tightened its grip on Russian-speaking Crimea in a move that followed the ousting last month of Ukraine`s president after bloody street protests.

On Tuesday, Russia`s President Vladimir Putin said he would use force in Ukraine only as a last resort, easing fears of tension between the West and Russia over Ukraine and boosting risk assets.

(Read more: Global markets rally on Putin `climb down` )

While analysts say global markets have proved resilient to bouts of geopolitical uncertainty, recent developments in both developed and developing markets suggest investors need to be more wary about pricing in political risk.

And this means safe-haven assets such as the U.S. dollar could see greater demand.

“Investors need to get used to the idea that a continuously simmering pot of political unrest is the new reality for the global economy,” said John Rutledge, chief investment strategist at Safanad in California.

“The dollar and the yen will be treated very differently by global investors. Safe dollar assets, along with gold and other “fear-based” assets will enjoy large inflows and rising prices,” he added.

New era

Analysts said the global financial crisis in 2007-2008, which sparked a huge degree of social dislocation and pain, is one reason for the rise in political risk.

“Political risk reared its ugly head after the global financial crisis and has become much more pronounced over the past several years,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy. “Because it`s difficult to assess, not to mention price, many investors chose to ignore it.”

Spiro said that while in some countries political instability is usual and can be ignored, in the case of Ukraine there was a need to pay attention to further developments because of the wider ramifications for emerging markets.

In a sign that Ukraine remains a source of tension, U.S. President Barack Obama said late Tuesday he would not attend the G8 summit in Sochi, Russia, in June if the status quo in Ukraine remains.

Ukraine is not the only source of geopolitical tensions globally. In Asia, a territorial spat in the East China Sea has soured relations between China and Japan, the world`s number two and three economies respectively. In Venezuela meanwhile, anti-government protests continue and have claimed about 18 lives.

(Read more: Why investors should watch out for Japan-China tensions )

Add to this is a decline in U.S. power, which adds to political risk globally, analysts said.

“To some degree, the increase in global political risk has roots in the financial crisis… The biggest cause, however, is the relative demise of the U.S. as the dominant super-power,” said Safanad`s Rutledge. “We are now moving from a world with one dominant power to a world with no dominant power, an inherently less stable situation.”

– By CNBC.Com`s Dhara Ranasinghe; Follow her on Twitter @DharaCNBC

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Rare bond default warning in China a good thing?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A rare bond default warning from a Chinese firm unsettled markets in Shanghai on Wednesday, but should be seen as a positive sign of reform taking place in the world`s second biggest economy, analysts say.

In a statement posted on the Shenzen stock exchange`s website late Tuesday, Shanghai Chaori Solar Energy Science and Technology said it will be unable to meet interest payments on bonds due this Friday.

It was scheduled to deposit 89 million yuan (USD 14.5 million) in interest on Wednesday for the 1 billion yuan “Chaori-11 bond” it issued in 2011, but was only able to pay 4 million yuan, Reuters reported. This means the firm will not be able to fully pay the interest for the `Chaori-11 Bond” in time on March 7, the firm said.

The news weighed on Chinese stocks, with the benchmark Shanghai Composite stock index down 0.2 percent in mid-day Asian trade – bucking a generally firmer tone in Asian equity markets.

(Read more: China liquidity situation is `troubling`: Soho China )

Last year, Chaori avoided a bond default after a local government persuaded banks to defer claims for overdue loans and this allowed the firm to meet its bond interest payments.

While the sums involved are small, the significance of the default should not be over looked, analysts said.

According to analysts at Bank of America Merrill Lynch (BoAML), this will be the first default of an onshore bond in China.

(Read more: China sets 2014 growth target at 7.5% )

“China needs to become a more open market and allowing this default could be a psychologically important step in this direction,” said Chris Weston, chief market strategist at trading firm IG in Melbourne.

“People need to realize that if you invest in a triple-C rated junk bond there is a risk and up until now there just hasn`t been that perception,” he added.

BoAML analysts also outlined why their initial reaction to the Shanghai Chaori news was positive.

“We think it`s a good thing as a normal economy needs defaults to better price bonds and other debt products,” they said in a note. “There`s no need to worry. Let`s not underestimate Chinese onshore investors` resilience. Defaults of some debt products are not on a similar scale to a collapse of a major financial institution.”

They said that the bond default could be seen as good news for less risky debt products but negative for riskier debt products, adding that China needed to improve its bankruptcy laws and legal procedures to promote healthily growth of the corporate bond market.

(Read more: China minting billionaires at `phenomenal` rate: Forbes )

The news from Shanghai Chaori came ahead of a slew of headlines from the first day of the annual meeting of China`s parliament, the National People`s Congress.

China set its gross domestic product (GDP) growth target for 2014 at 7.5 percent, as expected.

“2014 will be the year China seriously cleans up mounting local government and corporate debts which have been rapidly accumulated since late 2008,” the BoAML analysts said.

“We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market,” they added.

– By CNBC.Com`s Dhara Ranasinghe; Follow her on Twitter @DharaCNBC

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Key driver of gold in 2014: physical demand

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Demand for physical gold out of China and other emerging markets has become the key driver of bullion prices, according to HSBC, as the rampant outflows from exchange traded funds (ETF) seen last year begin to stabilise.

“Investment demand, which had fueled the rally for over a decade, is no longer driving gold prices,” James Steel analyst at HSBC wrote in a report on Tuesday.

(Read more: Ukraine fear sends investors into safe-haven gold)

“Instead, we believe gold is being driven by physical demand for jewelry, coins, and bars from China, in particular. Indeed, we would argue that physical demand trends in the emerging world will largely define gold’s price movements this year,” Steel added.

Gold’s 12-year bull-run ended in 2013, with prices suffering their largest annual decline since 1981 as the Federal Reserve’s decision to taper its monthly asset purchases triggered heavy ETF selling.

Investors liquidated 881 tons of gold from ETF holdings last year, reducing total holdings by one-third from their peak at the end of 2012.

While the prospect for further liquidation exists, the bulk of ETF sales have likely occurred, the bank said, forecasting ETF demand will increase by around 90 tons this year.
China ‘main actor’ in gold market

As institutional investors shun gold, Chinese consumers have come to the rescue, absorbing the flood of gold from the ETFs. Last year, China overtook India to become the largest consumer of the yellow metal, and the bank expects to see continued robust demand out of the mainland.

(Read more: Will gold see double-digit declines this year?)

“China is the main actor in what has become a historic physical migration of gold from western investment hands to eastern consumers,” Steel said, noting that the country alone is absorbing the equivalent of half the world’s gold mine production.

While the pace of gold buying in China may moderate this year from the white-hot levels of 2013, there’s no reason for a notable slowdown, he said.

As economic policy shifts from export- and investment-driven growth to greater domestic consumption, this should benefit the purchases for luxury gold items and stimulate consumption in regions where, up to now, demand has been modest, he added.

Based largely on the growing appetite for gold in China, the bank forecasts a 5 percent on-year increase in jewelry demand to 2,310 tons in 2014.

Price outlook

Nonetheless, the HSBC is leaving its price forecasts for gold unchanged at an average of USD 1,292 per ounce for 2014, below current levels of USD 1,350.

(Read more: Gold eyes 4th week of gains on Ukraine default fears)

“[We] expect a slight reduction in mine growth supply, weak increases in scrap supplies, steady central bank demand, and ongoing increases in jewelry, coin, and bar demand,” he said.

On the other hand, however, Steel notes that Fed tapering, possible U.S. dollar strength, and disinflationary trends could present headwinds to further gold rallies.

—By CNBC’s Ansuya Harjani. Follow her on Twitter @Ansuya_H

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World’s most expensive city is no longer Tokyo

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Singapore has topped Tokyo to become the world`s most expensive city, according to a cost of living survey from the Economist Intelligence Unit (EIU).

In its 2014 Worldwide Cost of Living Survey, the EIU said the world`s ten most expensive cities to live in are: Singapore, Paris, Oslo, Zurich, Sydney, Caracas, Geneva, Melbourne, Tokyo and Copenhagen, respectively.

Singapore, which was the world`s 18 th most expensive city ten years ago, has steadily crept up the rankings on the back of a strong currency, the high cost of owning a car and soaring utility bills.

“Car costs have very high related certificate of entitlement fees attached to them, which makes Singapore significantly more expensive than any other location when it comes to running a car,” the EIU said in its report.

“As a result, transport costs in Singapore are almost three times higher than in New York. In addition, as a city-state with very few natural resources to speak of, Singapore is reliant on other countries for energy and water supplies, making it the third most expensive destination for utility costs,” it added.

And according to the EIU, Singapore is also the most expensive place in the world to buy clothes given an influx of luxury brands and expensive shopping malls and boutiques.

The EIU`s cost of living survey is a relocation tool that uses New York, the world`s 26^th most expensive city, as a base. The survey compares prices on a range of goods and services such as food, drink, clothing, rent and utility bills across 131 cities.

A high cost of living has become a contentious issue in Singapore, a wealthy Southeast Asian city, which has one of the biggest wealth gaps in the developed world in terms of its Gini coefficient. 

Meanwhile, Japan`s capital city Tokyo was pushed off the top of the cost of living ranking on the back of weakness in the yen, which fell just over 20 percent against the dollar last year.

And while one Asian city ranked as the most expensive in the world, another ranked as the world`s cheapest.

Mumbai, India`s financial center, followed by Karachi and New Delhi, were the top three least expensive cities in the world, the EIU said.

“Mumbai`s title as the world`s cheapest city and is a reflection of the structural factors that define price within the Indian subcontinent,” it said in the report. “Although India has been tipped for future growth, much of this is driven by its large population and the untapped potential within the economy.”

– By CNBC.Com`s Dhara Ranasinghe; Follow her on Twitter @DharaCNBC  

Copyright 2011 cnbc.com

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