Venezuela’s dollar-denominated bonds, which have fallen to trade as low as a third of their original value after pricing in the likelihood of default, are attracting the interest of hedge funds jostling to take advantage of any future debt swap.
Sovereign bonds, maturing 2038, traded around 36.5 cents on the dollar on Tuesday, a 13-month low. The 2037 bond of state oil firm PDVSA fell to 31 cents. Few investors believe Venezuela, rocked by daily protests and facing a humanitarian catastrophe with shortages of food and medicines, can dodge default for much longer. Betting the endgame is not far away, some are piling back in.
Some hedge fund managers believe the writing is on the wall for Maduro, who is highly unpopular with Venezuelans, Western powers and Latin American neighbours for driving the economy into the ground. Deep in recession, the country suffers the world’s highest inflation rate. Central bank reserves are estimated at less than $10 billion.
That will almost certainly result in significant writedowns on bonds’ principal – haircuts in bond parlance – but investors reckon the securities are still a good buy at current prices. “If you get a more rational government, they could pursue a debt restructuring, which – if done in a credible way, associated with credible economic policies – you could end up with bond prices higher than where they are today, despite the fact you get a haircut,” a Hedge Fund manager said. Also to note: Goldman Sachs bought $2.8 Billion Worth of Venezuelan Bonds in May.
Grand Jury for Trump
Geopolitics took center stage again ahead of the closely watched U.S. employment report that may provide clues on the strength of the world’s largest economy and the Federal Reserve’s next policy move.Special counsel Robert Mueller is using a federal grand jury to help collect information as he probes Russia’s meddling in the 2016 election and possible collusion by Trump campaign associates. During a speech at a rally in West Virginia later Thursday, Trump would lash out once again at the investigation, calling it a “total fabrication.”
A grand jury helps prosecutors determine whether to bring criminal charges or indictments against a defendant. It can issue subpoenas for documents, and witnesses who testify are under oath and can be prosecuted for not being truthful. It’s not clear whether the Washington grand jury has begun hearing from witnesses. “Grand jury matters are typically secret,” an expert said. “The White House favors anything that accelerates the conclusion of his work fairly” and “is committed to fully cooperating with Mr. Mueller.” He said “we have no reason to believe” that Trump is under investigation personally. This is expected to increase market volatility and weakness of the dollar.
$10 Billion Threat for US as Venezuela Spirals Out of Control
As Venezuela’s democracy slid into what may be its final crisis, underscores the uneasy partnership that the American oil industry has entered with a nation some fear is marching toward dictatorship. From New Jersey down to Texas, oil companies have come to depend on crude-soaked Venezuela to feed their massive refineries. Last year alone, more than 270 million barrels worth about $10 billion reached American shores — enough to produce about 5 billion gallons of gasoline.
Now that vital flow could be stanched if, as industry leaders fear, President Donald Trump’s administration embargoes imports to pressure his Venezuelan counterpart, Nicolas Maduro. The socialist autocrat’s allies on Thursday will begin rewriting the constitution, pushing aside Venezuela’s democratic institutions. The prospect of a U.S. response that cuts off crude has been particularly unsettling for the likes of Chevron, Phillips 66 and Valero Energy Corp. which have spent billions calibrating their plants to handle Venezuela’s sludgy-but-abundant oil. “The reason why Trump has not hit back immediately is because there are lots of constituencies,” foremost among them U.S. refiners and anyone who drives, said a commodities research director. “A lot of different parties will be impacted.” The U.S. on Monday froze any American assets owned by Maduro, a largely symbolic move.
White House officials have prepared a menu of possible additional sanctions, but are divided over whether to restrict crude sales, according to a person familiar with the planning. The person asked not to be identified discussing internal deliberations. An embargo on oil from Venezuela, the third biggest supplier to the U.S., could force a slowdown in production at Gulf Coast refineries and at least a temporary spike in gasoline prices. That could be sensitive for Trump, who repeatedly attacked Barack Obama over prices at the pump. “Gas prices are at crazy levels–fire Obama!” he tweeted in 2012.
Euro maintains strong week
The euro traded at $1.1878, on course for a fourth week of gains. The European currency has advanced as the dollar has come under pressure amid concerns about the Trump administration’s ability to carry out its economic policy agenda. Meanwhile, German factory orders jumped in June, indicating a pickup in momentum in Europe’s largest economy.
Economic events
1.30 pm – US non-farm payrolls (July): Expectations are for an increase of about 183,000, after June’s 222,000 rise beat expectations and May’s upwardly revised figure of 152,000. Markets to watch: Global indices, dollar crosses
1.30 pm – Canadian employment change (July): Often overlooked by the US figure, keep an eye out for this figure as a driver of CAD volatility. Estimated to fall from 45.3k to 29.8k. Market to watch: CAD Crosses
