Top Communist Goes to the U.S., Brazil Debuts First ESG Bond

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Moody’s changed its outlook on U.S. debt to negative, Brazil fights Amazon deforastation with bonds, the biggest communist arrived in San Francisco, and Azerbaijan hit back on the U.S. peace talks initiatives.

We also feel bad for Sam being ousted as the CEO of OpenAI, but that’s a completely different story.

Let’s dissect.

Markets Snapshot

Oil Prices

• Brent crude oil prices hovered around 80$ over barrel, dropping by about 12% for the last month. As we mentioned last time, the decrease in the oil prices is driven by increased US crude inventories and lower global demand from China. Despite robust production numbers, OPEC+ members extended their voluntary supply cuts until year-end with high probability of further extension at least until the spring 2024.

• The FT reported on Tusday that the US-led $60-a-barrel price cap on russia’s oil sales is being almost entirely circumvented, according to 2 western officials and russia export data. In October, just 37 of the 134 vessels transporting russian oil had western insurance, and the number operating ships below the cap has since decreased. The price cap was established to ensure the flow of russian crude in global markets and prevent a supply crunch, yet limit oil revenues that moscow successfully utilize to fund the war in Ukraine. (FT)

Global Finance

US Credit Strength Slips, Moody’s Sounds Alarms

• Moody's has revised the U.S. credit rating outlook from stable to negative, citing increased debt servicing costs and 'entrenched political polarization'.

• The agency also highlighted that drastic rise in Treasury yields has increased pre-existing pressure on US debt affordability and increased risk of political divisions may hinder effective policymaking, preventing actions to address declining debt affordability

• Despite the concerns, Moody's held on to its rating for the U.S. debt, citing: “The affirmation of the Aaa ratings reflects Moody's view that, despite rising fiscal pressures and political risk, the US' formidable credit strengths continue to preserve the sovereign's rating

Implications:

• Credit downgrades typically result in higher interest rates across different forms of debt financing, including bonds, mortgages, and credit cards. This stems from a domino effect, as the federal government is perceived as riskier when seeking loans from investors.

• It is worth mentioning that Moody's decision follows an August downgrade in the U.S. credit rating by Fitch to AA+ from AAA, also citing political polarization and fiscal deterioration. S&P was the first among agencies to remove the U.S. from its perfect rating, back in 2013.

• Hence, the market has already factored in downgrade from other agencies and Moody's change in outlook is unlikely to have a substantial impact on the US market.

• S&P 500 index only saw a marginal decline of 0.08% last Monday, the first trading day after Moody's announcement the previous Friday. In comparison, On August 8 of 2011, now known as "Black Monday," the S&P 500 equity index fell nearly 7% in one day, a day after S&P downgraded the U.S. from AAA to AA+

  Might sound confusing but S&P Global, with subsidiaries S&P Dow Jones Indices and S&P Global Ratings, manages the S&P 500 index and is a major American credit rating agency

Eurozone Economic Slump

• In Q3 2023, the Euro Area's GDP contracted by 0.1%, marking the first decline since the 2020 COVID-19 impact. If we compare in annual terms to the same quarter of the previous year, the economy expanded by only 0.1%.

• This dip in the last quarter was partially influenced by a significant 1.8% contraction in Irish GDP. This marks a notable decline following the 0.5% growth in Q2.

• The ECB forecasts restrained 0.7% growth in 2023, citing factors like elevated prices and subdued demand, with slight improvements anticipated in 2024 and 2025.

Debuting the inaugural Brazilian ESG Bond!

• Brazil’s National Treasury has issued its inaugural dollar sustainable bond on the international market, in line with President Lula da Silva's environmental and social agenda.

• The GLOBAL 2031 ESG sustainable bond, maturing on March 18, 2031, raised a total of US$2.0 billion, offering investors a 6.50% rate of return. This corresponds to a spread of 181.9 basis points above the benchmark Treasury (the US Treasury bond), the lowest for new issuances in almost a decade.

• The bond proceeds will be directed towards eligible green and social projects, following Brazil's recently approved sustainable bonds framework. Officials have cited the goal of eliminating illegal deforestation by 2028 and reducing greenhouse gas emissions as key targets to be advanced through ESG financing

• The demand far exceeded the issued amount, with the order book totaling almost US$6.0 billion. The final allocation included a substantial number of non-resident investors, comprising approximately 75% from Europe and North America, and 25% from Latin America.

Our thoughts:

• It is an interesting scenario when Brazil, a major oil producer, issues a sovereign sustainable bond. Nonetheless, investor enthusiasm and high demand for the bond reflects optimism in response to President Lula's green initiatives following years of high deforestation under Bolsonaro. Brazil's debut ESG bond is a positive step, especially if it aids in preserving the Amazon rainforest and reducing emissions.

Geopolitics

The meeting between the biggest capitalist and the biggest communist

• Joe Biden and Xi Jinping met on Wednesday near San Francisco during the Apec summit. This encounter, almost a year after their last meeting in Bali, Indonesia, was described by Biden as "some of the most constructive and productive discussions we've had."

• Biggest capitalist and communist presidents agreed to resume direct military-to-military communications. In the coming weeks, the US Defense Secretary, Lloyd Austin, is set to meet with his Chinese counterpart once the new Chinese defense chief is appointed.

• The two sides also agreed to establish a counter-narcotics working group. Beijing commits to restricting the export of chemicals used in fentanyl production, addressing the synthetic opioid's role in the deadly drug epidemic in the US.

• However, it was evident that the meeting did not bring the US and China any closer on the Taiwan problem. Xi emphasized to Biden that Taiwan is potentially the most dangerous issue in their relations, urging the US to stop arming Taiwan and supporting China's peaceful reunification. The U.S government wants to maintain the status quo and that we asked the Chinese to respect the electoral process in Taiwan.

Azerbaijan hits back at the US and rejects Armenia peace talks 

• Azerbaijan withdrew from the scheduled peace talks with Armenia in Washington on November 20 following a statement by US Assistant Secretary of State James O’Brien, who emphasized that "nothing will be normal with Azerbaijan after the events of September 19 until we see progress on the peace track’’

• Baku and Yerevan remain entangled in a longstanding territorial dispute over Azerbaijan's Nagorno-Karabakh region, recently recaptured by Baku in a swift offensive against Armenia that was launched on the September 19 of 2023.

Our thoughts:

• With adept diplomacy and effective lobbying, the resource-rich country has long positioned itself in the UK and EU as a dependable security ally and crucial transport hub. Baku place itself as strategic partner and vital energy supplier to the EU after the Old Continent strarted looking for opportunities to reduce its dependence on russian oil last year. Meanwhile, gas supply from Azerbaijan constituted only 3% of the EU's total imports in 2022.

  By refusing to hold an Armenian-American meeting in Washington, Baku underscores its resolute stance on the Nagorno-Karabakh situation, aiming to leverage its image as a ‘crucial’ EU and US partner to discourage further Western questioning of its actions