TheChek News Flow

Companies transporting goods have to pay a new risk premium because of violence in the Middle East and a drought in the Panama Canal region. Higher rates could stick around, lifting some shipping stocks for a longer period.

Shipping stocks have soared as attacks by Yemen’s Houthi faction on ships in the Red Sea have forced companies to avoid using the Suez Canal, lengthening their trips and causing shipping rates to rise. The average rate to ship containers between Asia and Europe has more than doubled in the past month. There has been a spill-on effect on other routes too, as container ships are forced to make longer journeys, cutting the overall availability of ships. Furniture-seller IKEA, among other companies, has warned of delays in receiving shipments. Rates to ship goods between Asia and the U.S. East Coast have risen 40% since mid-December, according to Jefferies.

The big question is how long the disruption will last. The U.S. has put together a coalition to protect ships moving through the Red Sea, where several have been targeted by the Houthis. But so far, the coalition has not been able to stop the attacks, which the Houthis say are designed to force Israel to stop the war in the Gaza Strip. In fact, it appears the violence is escalating, despite the presence of more military ships. This past Tuesday, the British and American militaries thwarted 21 drone and missile attacks, which Eurasia Group called “the most sophisticated [attacks] to date.”

Companies also face delays and rate hikes in the Panama Canal, which has been forced to cut capacity due to a drought that’s unlikely to abate anytime soon.

The stock of A.P. Moller-Maersk, one of the world’s largest shipping companies, has risen 26% in the past month. Other shipping stocks are up too. Major shipping companies include Hapag-Lloyd, ZIM, Star Bulk Carriers, Golden Ocean Group, and Genco Shipping & Trading.

The latest spike in shipping rates will likely fade somewhat in the months ahead, absent a much broader conflict in the Middle East. Still, the disruptions could last for several more weeks. “I think we have to have a view that it could get worse before it gets better,” said RBC Capital Markets analyst Helima Croft in an interview. Companies could be forced to pay a higher risk premium to ship goods on a longer term basis.

To understand why, it helps to calculate just how inconvenient it is to avoid the Suez Canal. Shipping companies looking to avoid the canal have been rerouting shipments from Asia to Europe around Africa’s Cape of Good Hope. That journey is nearly twice as long for a ship traveling from Singapore to the Mediterranean: 92 days round trip on the new route, up from 48 days on the old, according to Jefferies.

Ships traveling for that long will also be delayed in picking up their next loads.

“We expect spot rates will continue to rise in the coming weeks as container vessels that have been rerouted via the Cape return late for loading in Asia, meaning there will be a shortage of vessel space available for export in the busy pre-Chinese New Year period,” wrote Goldman analyst Patrick Creuset. Maersk is the dominant player on the Asia to Europe route, meaning it should see the largest benefit from the current increase in rates.

Creuset upgraded Maersk stock to Neutral from Sell. He’s still relatively cautious on the stock because shipping companies are expected to add 11% more shipping capacity this year, outpacing demand growth.

Jefferies analyst Omar Nokta also thinks that the increase in shipping capacity is a negative for shipping stocks. But it’s likely that rates will settle at higher levels. He expects ”the continuing squeeze to abate as schedules are adjusted and more ships become available,” he wrote. “However, we believe freight rates will likely establish a higher floor than previously expected given the overall disruptions.”

Nokta upgraded Maersk stock to Buy from Hold with a price target of 16,500 Danish kroner, or $2,421. That represents a 27% premium to current prices of DKK12,955. Investors can also buy Maersk’s American depositary receipts, which trade under the ticker AMKBY.

Goodbye shock therapy. Hello, chain saw austerity.

That’s the label Argentine President Javier Milei’s detractors have devised for his dynamic first month in power. Investors are pleased, so far. “The probability of success for Milei is larger than of failure,” says Alejo Czerwonko, chief investment officer for emerging markets Americas at UBS Global Wealth Management.

Argentina’s hard-currency bonds, trading below 30 cents on the dollar before Milei’s November election, have risen to the mid-30s. He took office Dec. 10. The International Monetary Fund loaned Argentina an additional $4.7 billion on Jan. 11, noting the new government had “moved quickly and decisively.”

Milei promised root-and-branch reform of an Argentine state whose deficits are pushing inflation past 100% annually, and overregulation makes it “asphyxiatingly difficult to do business,” in Czerwonko’s phrase. He is trying to deliver.

Two days into his term, the new president cut the official exchange rate of the peso in half, bringing it closer to a market-driven “offshore” rate. He followed that with a Decree of Necessity and Urgency that would abolish controls on food prices and rents, loosen labor restrictions, and prepare all state companies for “future privatization,” among other measures.

Economy minister Luis Caputo unveiled a package of tax increases and spending cuts to shrink Argentina’s budget deficit by 5% of gross domestic product, theoretically yielding a “primary” surplus (not counting debt service).

Caputo started the new year by dangling a $71 billion swap program for peso-denominated bonds maturing this year. While few foreign investors hold this paper, a successful multiyear restructuring would show competence from the new government, says Gustavo Medeiros, head of research at Ashmore Group. “Debt rollover is an important part of the stabilization plan,” he says. “You won’t have a debt crisis looming every three months.”

Milei, who ran as a lone-wolf maverick, has smoothly allied himself with the forces of Argentina’s last right-leaning president, Mauricio Macri. That’s produced a seasoned cabinet headed by Caputo, who was a minister and central bank chief under Macri. It’s also brought Milei within hailing distance of majorities in Congress. “Without the Macri team, Milei is nothing,” says Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management.

Weather is on Milei’s side, too. A drought last year shaved 2.5% off GDP in agriculture-intensive Argentina, according to the International Monetary Fund. That could bounce back this year.

That doesn’t make rescuing Argentina easy. “Argentina has been chronically overspending since Juan Peron took power in the 1940s,” Medeiros says.

Milei’s emergency decree may survive because it stays in force unless both houses of Congress vote to annul it, Larose says. The budget cuts, and a 664-point “omnibus law” aimed at structural change, face more aggressive Congressional horse trading.

Chain-saw austerity will make things worse for most Argentines before they get better, as Milei acknowledges. Doing away with the managed peso, and slashing subsidies on fuel and other necessities, will accelerate inflation in the short term.

Protests have so far been muted by local standards. Unions will test their strength with a general strike called for Jan. 24. “A big question mark is whether the government will be able to control the social situation,” UBS’ Czerwonko says.

Argentina’s bonds aren’t priced for perfection, though. They aren’t even priced for being serviced to maturity. “The question is when the next restructuring comes and what the recovery rate will be,” Larose says.

He sold the bonds when they rallied near 40 cents on postelection euphoria. But “we’re close to a new entry point now.”

Deutsche Telekom, the largest shareholder of T-Mobile US, has sold just over $190 million of shares of the company so far this month through planned transactions.

According to forms Deutsche Telekom filed with the Securities and Exchange Commission, it has sold 1.17 million T-Mobile shares from Jan. 2 through Jan. 9 at an average price of $162.74 each.

The transactions were carried out by a so-called 10b5-1 trading plan that Deutsche Telekom adopted Sept. 13, 2023. Trading plans execute automatically when preset conditions, such as price and volume, are met.

The sales leave Deutsche Telecom with 692.5 million T-Mobile shares. Of those, about 90 million are held by units of SoftBank; Deutsche Telekom has a pact with SoftBank to potentially acquire those T-Mobile shares. In December, SoftBank received 48.8 million of those 90 million T-Mobile shares as partial compensation for selling Sprint to T-Mobile in 2020.

Deutsche Telekom didn’t respond to a request for comment on the sale of the T-Mobile shares. It seems to be Deutsche Telekom’s first sale of T-Mobile stock since T-Mobile merged with MetroPCS in 2013. Deutsche Telekom remains T-Mobile’s top shareholder, with a stake of more than 50%.

Although Apple has not clearly defined the product positioning and key applications of Vision Pro and the price is not cheap, the user experience (e.g., giving users the illusion that they can control the user interface with their minds) created by the groundbreaking technology innovations, along with the base of core fans and heavy users, should make it easy to sell out after the release.

The crypto asset manager launched a spot bitcoin ETF following SEC vote

With the Securities and Exchange Commission’s approval of U.S. exchange-traded funds holding bitcoin, cryptocurrency asset manager Grayscale Investments must focus more on managing risk and communicating with participants, Chief Financial Officer Ed McGee said.

Stamford, Conn.-based Grayscale was one of several firms that launched a spot bitcoin ETF on Thursday after the SEC approval of the vehicles the previous day. The Grayscale Bitcoin Trust, which the company converted into a spot bitcoin ETF, saw $2.3 billion in trading volume in its first day on the New York Stock Exchange.

Grayscale was thrust into the center of the debate over bitcoin ETFs when a court in August ruled the SEC shouldn’t have rejected its application to make the conversion. The SEC didn’t appeal the ruling.

McGee spoke with CFO Journal about the financial implications of Grayscale’s ETF and how he expects his role to change. His responses have been edited for length and clarity.

WSJ: What is the core financial impact you expect the ETF to have on your business?

McGee: From a sponsor or CFO perspective, the most impactful takeaway from this event is we will now be operating an open-ended fund, which would impact the fee we earned as denominated in bitcoin on a more variable basis, meaning the number of bitcoins we were taking in and the risk management of that was a fairly steady state up until this point. Now, with the ability for more bitcoins to come into the fund or bitcoins potentially coming out of the trust, managing that adds a new variable layered on top of a volatile asset, which resulted in a risk management process we’re ready to handle.

WSJ: As CFO, what will be the biggest change to your day-to-day responsibilities?

McGee: It will be twofold. It will be monitoring the performance of the product and net inflows into the product and how we risk-manage new assets within the product. That will take up a large portion of time.

From an initial onboarding perspective, we are consistently going to be evaluating our counterparties’ performance, and we would expect them to be evaluating Grayscale. Those relationships will now move from awareness or touch points we’ve had with them in other capacities to now being service providers for the Grayscale Bitcoin Trust. In that capacity, that will likely be more frequent oversight and conversations with those counterparties as to how the product is behaving, how they’re performing in relation to the market infrastructure for ETFs. If they have any questions, of course we’re going to be available, and I’m going to be available to make sure they understand what Grayscale Investments is doing and how it’s operating to the extent it benefits their ability to service GBTC because that will only benefit the investors.

McGee: We have engaged liquidity providers and authorized participants. As part of entering into agreements with those parties, they become new stakeholders. From my perspective, there may be more time providing information to those stakeholders as it relates to Grayscale Investments as an operating entity in addition to the Grayscale Bitcoin Trust, which they are likely familiar with but they’re less familiar with us as an entity. That third-party vendor management and third-party oversight process incorporates new key stakeholders we largely have had relationships with, so we’re familiar with each other from a market stakeholder perspective. But as contracted counterparties, that will be something that changes going forward.

WSJ: What would be an example of risk-management moves you would make and when?

McGee: If there was a significant amount of bitcoin that came into the fund due to a creation event, that will change the amount of bitcoin in the trust. We’re very comfortable dealing with the digital assets and risk managing new bitcoin that comes into the trust. We’ve been doing that for years. But what that will change from my perspective is now the amount of bitcoin we at Grayscale have exposure to as managers of the fund will also increase. Are we taking appropriate measures to make sure we understand we have that exposure? For how long will we have that exposure? Should we as an operating entity react to increases or decreases in digital-asset prices on a bigger notional value of tokens we’re exposed to?

After Legal Victories, Grayscale Charts New Pathways (October 2023)

That can take many forms. That could change our expectations for converting that bitcoin to cash and treasury optimization and balance-sheet optimization. It could work its way into existing risk-monitoring models we have as to how much accrued risk is sitting within the business, more from the awareness perspective. Whether or not you should mitigate that risk through either hedging or other strategies to ensure there isn’t an impact on the Grayscale operating enterprise we shouldn’t live with from a risk tolerance perspective.

WSJ: What issues do you expect these authorized participants to have?

McGee: We look and feel like a traditional asset manager when interacting with others. Some may be surprised we aren’t a nascent crypto-only or crypto-native operating enterprise. While we do feel we have expertise with this asset, the feedback we’ve gotten from these market participants has been positive in that we are at an institutional grade from a compliance and due diligence perspective.

WSJ: You’ve said you weren’t sure of the expected size of the ETF in terms of participation and total funds. Do you have any more clarity around that?

McGee: The timeline for these new investors to engage with these digital asset products will vary. That means some of these investors have been waiting. They have their understanding and their thesis well understood and will be engaging with the products more quickly than others who still may need to see how the environment develops, how their own internal risk-management functions evaluate digital assets, not bitcoin ETFs listed on national securities exchanges. Therefore their adoption or lack thereof may not reveal itself to the market for months or even later in the year. That’s just fine from our perspective.

WSJ: How does the ETF affect the long-term growth plans for the company?

McGee: This demonstrates the culmination of a belief we’ve had for a long period. U.S. investors should have the ability to express their belief or lack thereof in this asset class through something familiar to them: Wrapping bitcoin in a security wrapper traded on a national securities exchange sitting alongside other investments in their portfolio is a fantastic thing for the investor to have the option to pursue. What it does to the Grayscale Investments operating company is still yet to be determined, but we’re prepared for any outcome.

Some European officials are wary of plan discussed by U.S. and U.K.

The U.S. and its partners are exploring ways to use some of the $300 billion in frozen Russian central bank reserves to back loans to Ukraine, one of a series of ideas that Western officials are considering as they struggle to agree on a method to seize Russian funds without spooking international investors.

With Congress blocking funding for Ukraine, there is renewed impetus in Washington to find other sources of long-term financial support. After the outbreak of war, billions of dollars in Russian foreign currency reserves, gold and government bonds were frozen across the U.S., Europe and Japan to ensure they weren’t used to fund its illegal invasion.

Pushed by the Biden administration, the Group of Seven democracies is now exploring several ways to confiscate the frozen Russian funds to give to Ukraine, a move that would represent a significant escalation against the Kremlin and that is fraught with legal difficulties.

G-7 officials hope to present options in time for the second anniversary of the invasion in February. But it could take at least another year before anything actually happens, some officials say. There are fissures among Western allies about how best to proceed. While the U.S. and the U.K. back the idea, other European partners, in particular Germany, worry that seizing Russian sovereign assets would backfire, dissuading countries around the world from storing their wealth in the West for fear it might get taken away.

“The G-7 leaders asked that options be developed and the matter be studied, to the extent that there are risks that they’d be evaluated, international law issues studied and so we’re in the process of doing that, but certainly no decision has been made,” Treasury Secretary Janet Yellen said this week.

Nonetheless, the political imperative of using Russian assets to help pay the massive costs of supporting Ukraine and helping it rebuild have become increasingly compelling, European and U.S. officials say. G-7 leaders have already said Russia must pay for the cost of the war.

Ideas under discussion range from taxing the interest payments the frozen assets generate to seizing the funds outright and transferring them to Ukraine, according to people familiar with the talks.

Another idea is using Russian government reserves as collateral for loans to Ukraine. Under this idea, which is still at an embryonic stage, lenders would receive the Russian assets if Ukraine defaults on the loan, potentially issued by an international financial institution such as the World Bank. That could create a financial incentive for Russia to avoid destroying Ukraine’s economy and its ability to pay back its debts, the thinking goes. Another advantage: The underlying collateral could be handed back to Russia if hostilities halted and the seizure needed to be reversed.

As with other sanctions-related initiatives since the war began, like the price cap on Russian oil, Washington’s push on confiscating assets has caused tensions with European countries, including concern about the legality of the move, the precedent it sets and how it would work practically. Europe holds the vast bulk of the frozen Russian assets, around 180 billion euros of them, equivalent to around $197 billion, in Belgian clearinghouse Euroclear.

“There is a concern among some—the U.S. Treasury, the Fed, the ECB—that if you do this you undermine the reserve status of the dollar and euro,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, adding that he didn’t think confiscating assets would turn key countries away from the world’s two most liquid currencies.

Currently the West is spending around $100 billion a year supporting Ukraine, said Timothy Ash, an associate fellow in the Russia and Eurasia program at think tank Chatham House. The costs of both supporting and rebuilding Ukraine over the coming years will be substantial. If allies are sincere about supporting Ukraine but won’t seize Russian assets, “then where are we going to get that money from?” he says.

A key point of contention is whether the West can seize Russian assets under international law. U.S. officials believe it would be legal to confiscate the assets, pointing to principles that allow those affected by a country’s violation of key international norms to breach the protection that central bank assets are usually guaranteed.

Some senior European officials say they are skeptical. The U.S. and its allies aren’t at war with Russia, and Russia didn’t amass its wealth through illicit means but largely by selling oil and gas, much of which went to the West. Another concern is that seizing Russia’s assets could appear arbitrary.

British Foreign Secretary David Cameron said recently that the legal arguments behind confiscating Russian assets are solid. “I am pushing hard on this. The world has changed. The arguments against are not as strong as people said, and there is a legal route,” he said.

Biden administration officials have been working with Capitol Hill to develop legislation that would authorize the seizure of Russian assets in the U.S. Cameron said that he hoped that all G-7 members would unite to seize the assets but that the U.K. and the U.S. could go it alone if needed.

Beyond the legal questions, the Western partners are still debating the basics of any potential plan, including whether to restrict the use of the Russian money for reconstruction efforts. Giving Ukraine the Russian money to directly fund its military could prove particularly provocative to Moscow, inviting broad retaliation.

The Kremlin said in late December it has a list of U.S. and European assets in the country it would seize in a countermeasure.

The European Commission has already proposed a more modest plan to use proceeds—interest payments and others—from the assets, mostly held at Euroclear to support Ukraine.

The European Central Bank has argued the plans, which could generate around €4 billion annually, may tarnish the international attraction of the euro by driving countries such as China or Gulf states to withdraw investments in euro assets for fear they could suffer a similar fate.

EU governments forced the European Commission, the EU’s executive body, to delay by months a proposal on taxing the windfall. When the proposal finally came in December, it focused only on legislation to place the profits from matured Russian assets into separate accounts at financial institutions in the bloc, leaving aside for now a separate proposal on how to use the revenue for Ukraine.

Internal EU discussions on taxing the Russian proceeds have avoided talk of confiscating the underlying Russian assets, diplomats say. A decision by the bloc would likely need backing by all 27 governments.

Still, U.S. officials are quietly confident they can persuade Europe to come on board with Russian asset confiscation, as they did after months of wrangling to implement a Washington-inspired price cap on Russian oil in 2022. Having every major Western economy move together would mitigate risks to the euro, the U.S. argument goes.

There are precedents. In 1990, former President George HW Bush froze some $30 billion in Iraqi and Kuwaiti assets in the U.S. following Saddam Hussein’s invasion of Kuwait, a move echoed by the U.K. and France. The U.S. took a similar step following its invasion of Iraq in 2003 while Washington froze Yugoslav assets in the U.S. during the 1990s. The assets were eventually returned.