Aurelia Butler

NEW YORK/LONDON (Reuters) – Russia is on the cusp of a unique kind of debt crisis which investors say would be a first time a major emerging market economy is pushed into a bond default by geopolitics, rather than empty coffers.Until the Kremlin launched an attack on Ukraine on Feb. 24, few would have entertained the possibility of Russia defaulting on its hard currency bonds. Its strong solvency track record, bumper export revenues and an inflation-fighting central bank had made it a favourite of emerging market investors. But the U.S. Treasury’s decision not to extend a licence allowing Russia to keep up debt payments despite wide-ranging sanctions, have set Moscow on the road to default. The Russian finance ministry has wired some $100 million in interest payments on two bonds due on Friday to its domestic settlement house. But unless money shows up in foreign bondholders’ accounts, it will constitute a default by some definitions. And even if funds go through this time, payments of nearly $2 billion are due by the end of the year. One in late June is mandated to be settled outside Russia – a task experts predict will be impossible without the U.S. waiver.Emerging market debt crises are nothing new — Russia itself reneged on its rouble bonds in 1998. Geopolitics too have spilled into the debt sphere before, forcing defaults in Venezuela and Iran for instance.Yet in Iran’s case, small amounts of loan debt were hit by U.S. sanctions after its 1979 revolution, while Venezuela’s economy was already on its knees before U.S. curbs in 2019 pushed $60 billion in sovereign and sub-sovereign debt across the brink. Russia meanwhile continues to rake in oil and metals earnings. Even with half its $640 billion reserves’ war chest frozen by sanctions, the central bank has enough cash to repay the $40 billion outstanding in sovereign hard currency debt. “This is a completely different crisis from other emerging market crises, it’s not about ability or willingness to pay, they technically cannot pay,” said Flavio Carpenzano, investment director at Capital Group, an asset manager that – like many others – was exposed to Russia before war erupted. The impact is amplified by the fact this would be Russia’s first major foreign bond default since just after its 1917 Bolshevik revolution. Sanctions on Russia and its own countermeasures have effectively severed it from global financial systems. Comparisons with recent defaults such as Argentina in 2020 are inappropriate because most countries’ finances are strained when defaults happen, said Stephane Monier, chief investment officer at Lombard Odier.”This would be the first externally and politically driven default in emerging markets’ history,” Monier said.The Treasury license expiry means creditors may be unable to receive payments anyway, which Daniel Moreno, head of global emerging market debt at Mirabaud Asset Management, likened to “turning the world upside down.” “Me, the creditor, is now not willing to accept the payment,” he added. NO GOING BACKRussia’s international bonds, most of which started the year trading above par, have dropped in value to between 13-26 cents on the dollar. They have also been ejected from indexes.A key difference with past defaulters such as Argentina or Venezuela is that Russia’s attack on Ukraine — which it calls a special operation — has made it a pariah in many investors’ eyes, probably for years to come. “There is a huge stigma in actually holding these bonds, with emerging markets asset managers under pressure from their clients asking them not to invest in Russia and to liquidate their positions,” said Gabriele Foa, portfolio manager for the Algebris Global Credit Opportunity Fund. For now, a potential default is symbolic because Russia cannot borrow internationally anyway, nor does it need to. But what comes further down the line is crucial.Regime change in Russia could at some point end Western sanctions and allow it back into the fold. But first, creditors face a long and costly process to recover money, for instance by exchanging defaulted bonds with new ones.A default stigma would also raise future borrowing costs.By defaulting “you increase the cost of funding and it’s very likely this will happen to Russia too. They will need to pay a premium,” said Capital Group’s Carpenzano.The White House expects a default to have minimal impact on the U.S. or global economy but Carpenzano reckons events around Russia are forcing a re-assessment of geopolitical risks in emerging markets. “Geopolitical noise has increased and investors would like to be compensated for this higher risk,” he said, citing China’s hefty investment outflows in recent weeks. More

NEW YORK (Reuters) -Bad news may once again be good news on Wall Street, as signs of slowing U.S. growth fan hopes that the Federal Reserve may not need to tighten policy as much as previously expected.Home sales have fallen for a third straight month, while big misses from retail giants such as Target Corp (NYSE:TGT) and Walmart (NYSE:WMT) Inc shook their share prices last week. The Atlanta Fed’s GDPNow estimate of real GDP growth for the second quarter fell to 1.8% on May 25, from 2.4% the previous week.Softer economic growth raises risks of weaker corporate profits, in theory paving the way for softer share prices. Several Wall Street banks have in recent weeks warned that the chances of a U.S. recession are rising, along with an increased likelihood of the low-growth, high-inflation environment known as stagflation.In the near-term, however, some investors believe a nascent slowdown could bolster the case for the Fed to pull back on an aggressive monetary policy tilt that has unnerved investors and helped drive the S&P 500 index to the cusp of the 20% decline that many call a bear market.. The index rose 6.6% this week, snapping a seven-week losing streak, though it is down around 13% for the year to date. Net weekly inflows to U.S. stocks stood at their highest level in 10 weeks, data from BofA Global Research showed Thursday.”It’s very clear that everyone at the Fed is on board for 50 basis-point (interest rate hikes) for the next two hiking meetings. But after that, it’s unclear what they do, and if there is a sharp slowdown in growth, they may be able to wait a little bit,” said Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy at Columbia Threadneedle Investments, who recently raised her allocation to equities. Concerns over the impact of higher rates at a time when inflation may have peaked will likely mean the central bank will pause its tightening in September, leaving its benchmark overnight interest rate in a range of 1.75% to 2% if financial conditions worsen, BofA strategists said in a note.Expectations of Fed hawkishness have eased, with investors now pricing in a 35% probability that the Fed funds rate will be between 2.25% and 2.50% after its September meeting, down from a 50% probability a week ago, according to CME. The Fed has already raised rates by 75 basis points this year. Minutes from the central bank’s latest meeting showed officials grappling with how best to navigate the economy toward lower inflation without causing a recession or pushing the unemployment rate substantially higher.Signs that growth may be slowing have helped bolster Treasury prices, suggesting investors are increasingly looking to bonds for safety rather than as assets that could be at risk during times of high inflation, said Anders Persson, chief investment officer of global fixed income at Nuveen. Yields of benchmark 10-year Treasuries, which move inversely to prices, hit a six-week low of 2.706% on Thursday, after soaring to as high as 3.14% this month. “The market is pricing in a slowdown,” but not a recession, Persson said, making riskier parts of the fixed-income market, such as high yield bonds, more attractive. U.S. data on Friday also showed price increases may be slowing. The personal consumption expenditures (PCE) price index rose 0.2%, the smallest gain since November 2020, after shooting up 0.9% in March.A potentially less hawkish Fed is not necessarily a green light for equity buyers over the long term. With inflation at its highest in decades, concerns have grown over impending stagflation, a phenomenon that weighed heavily on all asset classes during the supply shocks of the 1970s.Among those sounding the warning are hedge fund manager Bill Ackman, a member of the Fed’s investor advisory committee on financial markets, who on Twitter (NYSE:TWTR) this week urged the central bank to quell inflation by raising rates more aggressively.Meanwhile, Citi’s global asset allocation team this week cut its U.S. equity allocation to “neutral,” saying, “While a U.S. recession is not the base case for Citi economics, uncertainty is very high.” Some investors, however, believe a turning point may be near. Esty Dwek, chief investment officer at FlowBank, is betting the central bank will begin to see signs that inflation and growth are slowing by August, when policymakers hold their annual meeting in Jackson Hole, Wyoming. “The Fed is past peak hawkishness,” she said. More