For the last two months, Wall Street has been skeptical of a Capriles victory. In fact, at the beginning of the summer, it seemed as if the Wall Street bet, had more to do with a bet on Chavez’ demise than on Capriles pulling off a victory. As recent as two weeks ago, only one major Wall Street firm was suggesting that the probability of a Capriles victory was significant, with all ther saying that Chavez would win.
Thus, the “standard” view was that a Chavez victory would have a small impact on bond prices, because “nobody expects him to lose”, while a Capriles victory would yield huge gains.
I disagreed on all counts. First, I have believed that Capriles’ chances were larger than expected by Wall Street, while on the other hand I know that Venezuelans are so positive that if Chavez won they would sell all their bond holdings, pushing prices down.
But in investments all things are dynamic and this week, there seems to have been a change of heart and all of a sudden bond price shave started to soar. This is mostly due to the new polls and weaker conviction on the part of Datanalisis, a Wall street darling.
For example, below you can see the so called benchmark for Venezuelan bonds, the Global 2027, and how in the last few days it has gone up and up and now is pushing its recent high, after weak oil prices pushed prices lower from Sept. 14th to Sept. 20th. :
since then, all bond prices have risen and the Global 2027 went from 85.5% to 90% in barely five days which is a strong move, to say the least, historically.
What this says is that Wall Street is beginning to buy the probability of a Capriles victory, something that it was not even close to admitting a few weeks ago.
What this means is that foreign investors were somewhat underrepresented in this trade and now want to try to take advantage of what may be a very asymmetric gamble: If Chavez wins, bonds will drop a reasonably small amount, but if Capriles wins they may rise triple the same amount, if not more.
Of course, nothing is sure in this world. Th road to a Capriles victory may be easier than the road to a Capriles Presidency, if Chavismo decides to create trouble or simply to spend all of the reserves before Capriles takes over.
But for now, Wall Street and international investors are putting their money into Venezuela and PDVSA bonds, which is no guarantee of victory, but given that they do have something to lose, their money, indicates a higher conviction and a much higher probability that Capriles may pull this off on October 7th.
The Devil's Excrement 