There are good reasons for investing in so-called frontier markets, countries that belong outside the mainstream emerging markets category for reasons of development, market accessibility or size.
For example, in sub-Saharan Africa, there is the tantalising possibility that technology will help countries leapfrog the infrastructure hurdles that held them back until now. Or formerly closed-off Gulf nations need investment to help them wean themselves off oil dependence.
Italy’s new coalition government of the Northern League and Five Star Movement rattled the country’s debt markets this week. A leaked policy document suggested that the partners would tear up Eurozone fiscal rules and demand a write-off of €250 billion Italian bonds held by the European Central Bank.
Economists argue that if markets are efficient, trading volume ought to be minimal. Yet what works in principle doesn’t describe the real world. To resolve the paradox, Tom Hyer considers how relative value trading contributes to volume. Using a toy model, he shows that increasing the number of securities does not cause volume to decrease, while the potential for netting out trades within financial institutions is overstated. Finally, he shows that market incompleteness makes market participants trade needlessly on new price information, further increasing volume.
Brazil heads the list of large economies at risk from bond refinancing in 2018, according to a new Risky Finance analysis. A combination of maturing debt, bond coupon payments and a current account deficit means that Brazil must finance 15 per cent of GDP this year.
The risk comes as Brazil attempts to recover from recession and faces significant political milestones over the next 12 months. The data emphasises the importance of bond funds in the US and Europe that have poured money into the country’s debt in recent years, and now will be required to help roll it over.
Never mind Apple or the other so-called FANG stocks. One of the best winners for US investors in 2017 was Greek government bonds. According to a Risky Finance analysis of iBoxx data, Greek debt earned a dollar return of 66 per cent during the year. That not only beats Apple’s 43 per cent stock price return, but also top emerging market bond performers such as Angola, Bulgaria or El Salvador whose returns were in the mid-20s.
Two weeks ago, the European Commission gave a cautious thumbs up on Greece’s prospects in the wake of its review of the current EU support programme – the third given to the country since its debt crisis began in 2010.
When I give my class on the systemic risks of clearing, I usually joke that I should give the lecture by a campfire, with a flashlight held under my chin. It is therefore appropriate that on this Halloween Risk published Peter Madigan’s take on the effects of Brexiton derivatives clearing: it is a horror story.
If you’ve been paying the slightest attention to financial markets lately, you’ll know that blockchain is The New Big Thing. Entrepreneurs and incumbent financial behemoths alike are claiming it will transform every aspect of financial markets.
The techno-utopianism makes me extremely skeptical. I will lay out the broader case for my skepticism in a forthcoming post. For now, I will discuss a specific example that illustrates odd combination of cluelessness and hype that characterizes many blockchain initiatives.