Three Thoughts From London

ThinkstockPhotos-155914063[1]Whilst markets continue to focus on developments in Greece, economic headwinds in Brazil and the differing implications of oil price declines also come into view.

1) Despite fascinating new discoveries about Pluto’s surface and news that rapper 50 Cent has filed for bankruptcy, investors are still focused on developments in Greece. The reason is clear: although the program looks to be on track, there are plenty of opportunities for things to go wrong. For example, the bridge loan, the state of Greek banks, the resistance of hardliners such as Finland, and of course, the rebellion of parts of Syriza ahead of the Greek parliamentary vote tomorrow. Although these short-term risks seem small individually, the cumulative probability of a negative surprise is not. This has helped fuel a “buy the rumour, sell the fact” instinct, which curbed the euro rally and weighed on sentiment towards Greek assets. Although Greek markets are closed, it’s worth noting that the US ETF GREK fell 4.3% yesterday despite the deal. Similarly, Greek debt has not rallied as much as one may have expected.

2) Oil prices are pushing towards recent lows with news that a deal has been reached in Iran, spelling out differentiation in various assets. The likes of INR and TRY should see some immediate benefits while CAD, RUB and MYR should lose out, along with specific equity plays such as Petrobras, the biggest component of Brazil’s Bovespa index. We see Mexico as a special case. Sure the country is heavily dependent on oil (about 1/3 of its budget), so the first order effect is negative. However, there are at least two mitigating factors. First, Mexican policymakers have been very proactive in dealing with the shortfall, already cutting $8.3 bln for the 2015 budget. Second, Mexico is in a better position to rebalance its economy from energy to industrialized exports given its proximity to the US, along with the potential positive impacts of lower energy prices in US consumption.

3) Brazil is considering an amnesty to undeclared funds held abroad. The measure is part of the government’s struggle to maintain fiscal credibility against the headwinds of an ailing economy and a difficult political situation. The idea is to allow Brazilians to bring back money to the country at a cost of 35%, between tax and fines. According to the senator who authored the project, the measure could lead to $8-9.50 bln in tax revenues. Of course there is no way to know how much undeclared Brazilian money is out there, but this still strikes us as optimistic. A 35% cut is a high price to pay upfront. Moreover, tax evaders have done quite well keeping their money abroad. Over the last 12 months, for example, they made 29% in nominal appreciation if the money was denominated in USD, 25% if it was in CHF, and 12.5% if it was in EUR. Either way, we doubt this will have any material impact on BRL.