“Venezuela Bond Defaults…..”

Venezuela Bond Defaults

Venezuela is suffering from defaults on more than $60 bn of international bonds after missing several interest payments.  S&P Global Ratings declared Venezuela to be in default after it missed two interest payments on its debt.  On Monday Venezuela held a crucial meeting with creditors in Caracas to discuss its plan on the renegotiation of the external debt, while bondholders in New York will discuss the delay of their payments, with fears of default in mind.  The Sanctions of the United States against Venezuela prohibit investors to negotiate Venezuelan debt.  The majority of the bondholders (70%) are Americans and Canadians.  President Maduro has appointed Chief negotiators Tareck El Aissami Vice President and Minister of finance Simon Zerpa whom the United States have sanctioned and banned its citizens from dealing with them.  In New York the Committee of International Swaps and derivatives (ISDA) which brings together holders of debt will evaluate the delay of payment of $1.161 million bond 2017 of Petroleos de Venezuela SA (PVDSA), the state oil company that will trigger default-insurance contracts.

Venezuelans are increasingly suffering from malnutrition and preventable diseases because they cannot find food and medicine or cannot afford them because of triple-digit inflation.  Sightings of poor Venezuelans eating from garbage bags is a symbol of economic implosion.  This contrasts with the era of the late socialist leader Hugo Chavez when oil prices helped fuel state spending and the most humble citizens could travel abroad or buy the latest cell phone.

US – Tax

On Tuesday the senate tax-writing committee gave out details of the tax cut proposal with Senate Finance Chairman Orrin Hatch releasing his modified tax proposal that will make middle class breaks and other provisions temporary in a bid to comply with the rigid fiscal rules of the Senate.   The revised plan include income tax reductions, the doubling of the standard deduction and an increase in the child tax credit.  It also ends a tax break for partnerships, limited liability companies and other pass-through companies starting on 1 January 2026.  The corporate rate cut to 20 percent from 35 percent and international tax-law changes would be permanent. Lawmakers are trying to reduce the costs associated with Obamacare in order to help offset the revenue impact of large tax cuts for corporations and individuals.  Treasury Secretary Steven Mnuchin is on a cross-country roadshow to persuade businesses and the Republican to put their weight behind a proposed tax overhaul from the Trump administration that so far lacks the public support.

US – Economy

A Labour Department report on Wednesday showed that consumer-price index excluding food and fuel accelerated on an annual basis for the first time since January while the overall cost of living rose in line with forecasts.  According to the figures from the Commerce Department the rise in retail sales in October followed a bigger advance in September.  The pickup in inflation and the unexpected gains in retail sales further solidifies the expectations of a possible December rate hike.  While it would be the third rate hike this year, inflation data in the coming months will determine the timing and the rate hikes in 2018, when Jerome Powell is set to take over Janet Yellen as Central bank chairman.

Euro Economy

In a report on Monday the International Monetary Fund said that growth across the European region which includes the euro area as well as developing economies in central and Eastern Europe is having a positive spill-over effect on the rest of the world.  The European Central bank policy maker Benoit Coeure last week said that in terms of balance and robustness, the economy is in the best shape since the birth of the euro in 1999 however, he called on governments to implement more reforms to support it.  The ECB has locked in ultra-loose monetary policy. Corporate profits are beating estimates and consumer confidence is at the highest since 2001.

Germany

Growth in Germany has steamed ahead in the third quarter keeping the largest economy on track for its best year since 2011.  The jump in the gross domestic product of 0.8 percent was an acceleration from the previous three months and was above the 0.6 percent median forecast in a Bloomberg survey.  The expansion was driven by exports and capital investment whilst net trade made a positive contribution.  The expansion is positively impacting the upturn in the euro area and supporting the global outlook.  Germany is also potentially approaching maximum capacity which could have an impact on inflationary pressures.  Germany has always been the engine for expansion for the euro area thanks to robust domestic demand and striving exports.  The rest of the region is catching up, and the differences in the growth rates between member states has been falling to the smallest in the region’s history.  Last week the European commission said that the 19 nation region will grow this year at its fastest pace in a decade.

Germany – Angela Merkel

German Chancellor Angela Merkel is struggling to form a coalition at the end of this week, a self-imposed deadline.   As she seeks to secure a fourth term  as Chancellor, disagreements over issues such as risk sharing in the euro area, curbs on carbon emissions and immigration have made the three-party negotiations particularly difficult.

UK Economy

Contrast to the European region the outlook for the UK is not that rosy with the uncertainty surrounding the Brexit which is having an impact on investment and a downward effect on the pound.  The pound fell against a number of major world currencies as doubts swelled around the Theresa May leadership and her ability to deliver Brexit.  Over the weekend it emerged that some 40 Tory MPs may now be willing to sign a letter of no confidence in her.  The spread between the 10 year bond and the two year government bonds has shrunk to 80 basis points this year in Britain while it has increased to more than 110 basis points in Germany, indicating a greater level of confidence in the biggest country within the EU.  There are still many issues effecting the euro area such as productivity which is still far from that recorded at the beginning of the millennium and unemployment still exceeds 10 percent.   In October the ECB announced that it will continue to buy public and private-sector debt for most of next year and interest rates will be kept at current levels for a long time guaranteeing an expansionary monetary policy.  The pound remains around 10 per cent lower against the dollar since the Brexit vote but has somehow stabilised in recent months.

Inflation in the UK

Inflation in the UK held at a 5 ½ year high in October, as cheaper auto fuel offset the rising cost of food.  According to the Office for National Statistics, consumer prices rose 3 percent from a year earlier.  Policy makers have raised their key interest rates for the first time in more than a decade this month in order to tackle the rise in the cost of living.  The pickup in inflation was driven by food prices which rose 4.2 percent in the year through October, which is the most in four years.  Food prices rose 0.6 percent on the month.  The increase reflects rising import prices that were caused by almost a 12 percent drop in the pound since the Brexit referendum.  The downward pressure resulted from cheaper gasoline prices, as the cost of auto fuel declined 0.4 percent on the month compared with an increase of 2.3 percent a year earlier.  Inflation may be close to its peak and the central bank predicts that there will be a slowdown in the coming months and through 2018.  This will be a relief for British consumers who have seen their spending power squeezed as the growth in pay failed to keep pace.  The growth in house prices accelerated to 5.4 percent in September from 4.8 percent in August.

Bitcoin

After losing almost a third of its value in less than four days on Monday Bitcoin recovered its value by more than $1,000.  It tumbled in the second half of last week falling as low as $5,555 on the Luxembourg based Bitstamp exchange on Sunday, a slide of almost 30 percent from a record high of $7,900 on Wednesday.  According to trading the fall has been driven by a decision on Wednesday to abandon a planned software upgrade that could have split the cryptocurrency in what is called “fork” – a move that had initially had a positive impact on the digital currency by increasing its value to as high as $7,888 on the view that it marked a resolution of a long-term dispute.  However, some were disappointed as the “Segwit2x” fork had been abandoned.  It would have increased the capacity of the “blocks” transactions are processed in, thus reducing competition to get payments processed and lowering transaction fees.

OPEC

Presently the Organisation of the Petroleum Exporting Countries, Russia and nine other producers are cutting output by about 1.8 million barrels per day until March next year  in an attempt to sort out the glut and extend the deal longer.  United Arab Emirates Energy Minister Suhail bin Mohammed al-Mazroui said on Monday he saw no need for the decision to be delayed beyond the 30 November meeting to be held in Vienna.   In its November oil market report, OPEC increased the forecast for 2018 demand for its crude by 360,000 bpd from last month’s report to 33.42 million bpd.  It further added that industrialised countries’ September commercial oil inventories, a key marker OPEC uses to measure market balance, fell by 23.6 million barrels to 2.985 billion barrels.  Stocks were 154 million barrels above the five-year average, the excess that OPEC aims to eliminate.  Mohammed Barkindo, the OPEC Secretary, said that participants in the deal are committed to achieving market stability.  According to traders, tensions in the Middle East raised the prospects of distruptions, adding that it was unclear if a strong earthquake that hit Iran and Iraq on Sunday had impacted the oil production in the region.

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