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GDP Warrants Hit 32-Month Correlation High With S&P 500: Argentina Credit
Argentine securities linked to the country’s economic growth are tracking U.S. stocks the closest in 32 months as investors pay more attention to global risk- taking than to President Cristina Fernandez de Kirchner.
A gauge of how closely the warrants rise and fall together with the Standard & Poor’s 500 Index increased to 0.69 last week, the highest since December 2007, according to data compiled by Bloomberg. A reading of 1 indicates the two move in lockstep.
“It doesn’t matter what happens in Argentina,” said Siobhan Morden, a debt strategist with Royal Bank of Scotland Group Plc in Stamford, Connecticut. “If you’re an investor, you’re forced to actively trade it because they tend to sell off and rise the most in the context of external risk appetite.”
The so-called gross domestic product warrants, which pay holders when growth exceeds government projections, rose the most in four years last week as a 3.8 percent rally in U.S. stocks sparked demand for higher-yielding assets. The correlation is explained by Argentina’s dependence on commodities, said Eduardo Suarez, an emerging-markets strategist at Royal Bank of Canada in Toronto. Argentina is the world’s second-largest corn exporter and the biggest of soy oil.
Warrants rose 1.45 cents last week, the most since April 2006, even after Fernandez escalated a fight with the country’s largest media company. Fernandez, 57, asked a court on Aug. 25 to review the 1976 purchase of a newsprint producer by Grupo Clarin SA, a move opposition leaders say is an attempt to silence critics in the media.
Political Conflicts
JPMorgan Chase & Co. on Aug. 25 recommended investors cut holdings of Argentine bonds, saying “domestic political conflicts are escalating.”
Argentina had a record 55-million metric ton soybean harvest from its latest crop. Wheat prices surged 38 percent in July after Russia suffered through its worst drought in at least 50 years.
“Commodities rise or fall depending on risk appetite, and that changes the growth expectations in Argentina,” Suarez said in an interview.
The securities are triggered when growth is above 3 percent and the inflation-adjusted value of the country’s gross domestic product surpasses a base-case scenario laid out in the contracts. The government made a warrant payment of 3.11 cents on Dec. 15 after the economy grew 6.8 percent in 2008 and will make no payment this year after growth slowed to 0.9 percent in 2009.
The central bank forecasts Argentina’s gross domestic product will grow as much as 9.5 percent in 2010, the most since 1992. JPMorgan predicts the economy will expand by 8.5 percent this year and 4.5 percent next year, enough to trigger warrant payments in December 2011 and 2012.
Sovereign Bonds
The extra yield investors demand to buy Argentine sovereign bonds over Treasuries rose seven basis points, or 0.07 percentage point, to 693 at 5:05 p.m. New York time, according to JPMorgan’s EMBI+ index. The so-called spread is the biggest after Venezuela and Ecuador.
Five-year credit-default swaps tied to Argentine debt surged 36 basis points to 889. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
Media Pressure?
The peso was unchanged at 3.9455 per dollar.
The yield on benchmark 7 percent bonds due in 2015 rose 20 basis points to 10.88 percent, according to Bloomberg market average pricing.
Fernandez said Aug. 24 the sale of paper maker Papel Prensa SA to Clarin, La Razon and La Nacion was illegal. The parties involved denied wrongdoing.
Opposition lawmakers, including former Buenos Aires Governor Felipe Sola and Elisa Carrio, said Fernandez’s administration is trying to pressure the media for coverage favorable to the government.
Presidential spokesman Alfredo Scoccimarro didn’t return messages left at his office.
“You now have additional political noise,” said Jonathan Binder, who manages about $100 million of emerging-market debt at Consilium Investment Management in Fort Lauderdale, Florida. “She’s attacking opponents. Yields look attractive on the surface, but the government’s track record is not good.”
The S&P 500 fell for the first time in five days, dropping 1.2 percent to 1,091.84.
“When the S&P goes up, risk aversion goes down, and that plays well for Argentina,” said Alberto Bernal, head of fixed- income research at Bulltick Capital Markets, a Miami-based brokerage that focuses on Latin America. “If things turn complicated in the U.S. and the S&P falls, people are going to say, ‘Argentina is very risky.’ Argentina is what you sell first.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net
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