Moody’s sees ‘tough terrain’ ahead for emerging economies as Russia-Ukraine war extends

By Jorgelina do Rosario

LONDON (Reuters) – Emerging economies will face a “tough terrain” for the next few quarters due to the Russia-Ukraine war, Atsi Sheth, global head of strategy and research for Moody’s Investors Service, said on Thursday.

While the overall picture is gloomy, commodity exporters will face better outcomes than other countries or companies, she added.

The ratings agency forecasts in a report that nearly 30% of rated non-financial companies in emerging markets would face “heightened credit risks” in a worst-case scenario in which Russia’s invasion of Ukraine triggers a global recession and liquidity squeeze, including a suspension of energy trade between Europe and Russia.

“Companies that serve consumers are likely to suffer a little bit more because their wallets are going to be constrained by inflation,” Sheth said at a conference.

Asian firms are more highly exposed due to supply chain disruptions and limited access to funding while Latin American corporates are less exposed, the Moody’s research found.

In a less severe scenario, where commodity shocks, higher inflation and interest rates crimp global growth in 2023, some 8% of emerging market firms would face heightened credit risk, it found.

Automotive manufacturing is one sector that may continue to suffer from supply chain disruptions.

On the sovereign level, Sheth added that the credit agency was closely monitoring elections in emerging economies this year, as demand for change amid economic and financial hardship could lead to political change.

Colombia has first-round presidential elections on May 29, while Brazil heads to the polls in October.

Credit risk increases when a democratic government changes to an authoritarian one, and vice versa. Moody’s calculated that in 25% of such cases there are associated defaults on the country’s government bonds.

“That’s how social risk becomes a credit risk”, she said.

Countries that have stuck with credible monetary policy aimed at fighting inflation throughout the pandemic and the Russia-Ukraine war will face less financial risk in the medium-term, Sheth added.

“Take a look at Turkey – the markets are sort of punishing (it),” Sheth said.

(Reporting by Jorgelina do Rosario, editing by Karin Strohecker and Hugh Lawson)

IMF says Argentina program objectives, targets “remain unchanged”

(Reuters) – The International Monetary Fund said the agreed objectives of the recently approved program for Argentina remain in place as the first program review draws close.

“I would characterize the status of the discussions on the first review as good progress being made,” said Gerry Rice, a Fund spokesman, in a scheduled press conference.

The first review of the $44 billion program agreed earlier this year was brought forward to mid-May from an original June date.

“We hope to communicate about the conclusion of the mission soon,” Rice said, without giving a specific date.

(Reporting by Rodrigo Campos and David Lawder)

London’s FTSE 100 tumbles on global slowdown worries

By Sruthi Shankar

(Reuters) -UK’s FTSE 100 tumbled on Thursday as investors globally fretted over the broadening impact of inflation on economic growth and corporate profits, while Royal Mail slumped after reporting disappointing results.

The export-oriented FTSE 100 dropped 1.8%, joining a rout in global markets, with the stronger pound weighing on consumer companies.

Unilever, Diageo, Reckitt Benckiser, and British American Tobacco were down between 1.7% and 5.3%, while supermarket chain Tesco dropped nearly 4.1%.

Investors wiped almost 25% off U.S. retailer Target’s shares on Wednesday after its profit halved, and it fell another 4.9% on Thursday.

“Target is more of a discount retailer. The expectation would’ve been that they may have not been hit so badly by the slowdown in consumer spending. Inflation hit them worse,” said Chris Beauchamp, chief market analyst at online trading platform IG.

“You’re seeing that across the retailers this morning in Europe, (they’re falling) on expectation that they will also take a hit. There is no hiding place on the bad news.”

Royal Mail was fell 12.4% to its lowest level since December 2020 after its full-year profit came in slightly below market expectations and the postal company warned of margin pressures in the United States.

Oil and gas stocks also declined as worries about slowing global economic growth knocked crude prices. [O/R]

Data this week showed British inflation hit a 40-year peak in April, deepening worries about the pain inflicted on consumers and a potential recession.

The FTSE 100 and the domestically focussed midcap indexes have lost almost 2% so far this week.

On Thursday, housebuilder Countryside Partnerships Plc slid 1.6% after it posted a lower half-year profit as the group recovers from operational issues including costly expansions and losses from manufacturing businesses.

Low-cost carrier easyJet inched 0.1% higher after saying that bookings in the past 10 weeks were consistently above pre-pandemic levels.

HomeServe jumped 10.2% to the top of the midcap index after Canada’s Brookfield Asset Management said it had agreed to buy the British home repair services firm for 4.08 billion pounds ($5.04 billion).

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Subhranshu Sahu and Aditya Soni, William Maclean)

Marketmind: Which earnings to the rescue?

A look at the day ahead from Danilo Masoni.

Traders have sold the latest rally, and savagely, tipping world equities back on the brink of confirming a bear market pattern. And the fear behind the rout is that the support which strong earnings have provided so far against pressure from rising rates is starting to dwindle.

Big-box retailers on Wall Street showed the world how painful inflation and supply chain problems can be, while adding to concerns that the American consumer who powers the world’s top economy might not be in as strong shape as thought. That sent investors rushing for the exit.

The S&P 500 fell 4% in its biggest drop since June 2020 as retail giant Target tanked 25% after warning of a bigger margin hit due to rising fuel and freight costs. The day before rival Walmart trimmed its profit forecast.

The sour mood spilled over to Asia and Europe too looks set to extend Wednesday’s losses, although the safe-haven dollar eased and riskier currencies like the Aussie jumped as Shanghai set out plans to end a COVID lockdown.

Meantime, early signs of “capitulation” among retail traders have emerged, according to Vanda Research, which cited put option trading near record highs and Charles Schwab net assets suffering outflows for the first time since 2020.

Against this backdrop energy and commodities feature amongst the rare safe harbours. Brent crude is rising 1% back above $110, and Europe’s energy index struck a fresh three-year high on Wednesday, escaping the stock market battering.

Key developments that should provide more direction to markets on Thursday:

* Japan’s exports extended double-digit gains for a thirdstraight month in April. * Speaker’s corner: BoE’s head of Financial MarketsInfrastructure, Christina Segal-Knowles, ECB Vice-president Luisde Guindos * Central bank meetings: South Africa, Egypt, Philippines * U.S. initial jobless claims/Philly Fed index * US 10-year TIPS auction * Earnings: Generali, Investec, Royal Mail, Kohl’s

(The story refiles to fix chart.)

(Reporting by Danilo Masoni)

As ECB pares back stimulus, investors alert for fragmentation risk

By Dhara Ranasinghe

LONDON (Reuters) – As the European Central Bank races towards the stimulus exit to tame record-high inflation, angst about whether it can contain stress in weaker economies is creeping back into corners of bond markets.

For sure, indicators of stress are comfortably below peaks seen at the height of the 2020 COVID-19 crisis, and nowhere near levels of the 2011-2012 euro zone debt crisis. Cohesion is stronger after the pandemic and war in Ukraine, while an 800 billion euro recovery fund supports the bloc and France last month re-elected a pro-European president.

Yet with inflation at 7.5%, ECB bond-buying stimulus will end soon — challenging weaker southern European states and putting fragmentation risks back in focus as their government borrowing costs versus safer Germany shoot higher.

“It is something I worry about,” said DZ Bank rates strategist Christian Lenk. “The million dollar question is where are bond spreads too wide that the ECB intervenes.”

Here’s a look at what stress indicators show.

1/ CANARY, COALMINE

If the premium investors demand to hold bonds from lower-rated states rises too far above top-rated Germany, the ECB’s ability to transmit monetary policy effectively is challenged. So-called fragmentation risk could heighten economic instability.

At 200 basis points (bps), highly-indebted Italy’s 10-year bond yield gap over Germany is below peaks of more than 300 bps hit in March 2020 and 2018, when a new populist Italian government clashed with the European Union over budget policy.

But it is near the widest levels since May 2020 after widening 65 bps this year. Talk of ECB measures to contain spreads has grown; ING says markets could test the ECB’s resolve by pushing Italy’s spread to 250 bps.

Graphic:Italy’s 10-year bond yield gap over Germany- https://fingfx.thomsonreuters.com/gfx/mkt/byprjdlrgpe/BTPspread1805.PNG

A blowout in this spread prompted the ECB to launch its emergency stimulus scheme in March 2020, as a pandemic-induced financial rout raised fears about the currency bloc’s viability.

2/ INSURANCE POLICY

The cost of insuring against a debt default in southern Europe has risen recently to the highest since 2020, although credit default swaps (CDS) sit below previous peaks.

Graphic:CDS in southern Europe creeping higher again- https://fingfx.thomsonreuters.com/gfx/mkt/akvezrqmkpr/CDS1805.PNG

Another gauge of fragmentation risk is the spread between CDS contracts issued under trade body International Swaps and Derivatives Association’s (ISDA) 2003 definition and those issued under its 2014 guidelines. The latter includes guidance on redenomination risk and carries a premium.

The gap between two such Italian CDS contracts is roughly 64 bps, around the widest since April 2020, Rabobank said.

Rabobank’s head of rates strategy Richard McGuire notes the spread was double current levels in 2018. “From an historical perspective this gives investors cause to be alert rather than alarmed,” he added.

Graphic:Italy 2003 CDS vs Italy 2014 CDS- https://fingfx.thomsonreuters.com/gfx/mkt/byvrjdlkgve/ITCDSVSCDS.PNG

3/ LIFE AFTER 2013

How investors trade bonds issued before and after 2013 is also worth watching.

That year, regulators said European government bond contracts should contain collective action clauses (CACs), meaning majority bondholder approval is needed for a restructuring including a change in the currency of payment.

UniCredit estimates that roughly 415 billion euros of Italian bonds are not covered by CACs.

An Italian bond issued in 2008, before the CAC ruling and maturing next year, has risen 72 bps this year. A one-year Italian bond issued in 2022 and maturing 2023, is up a similar amount.

If the 2022 bond outperforms its non-CAC peer, that would suggest fragmentation worries are returning.

(Reporting by Dhara Ranasinghe; Additional reporting by Alessia Pe in Milan; Editing by Toby Chopra)

Explainer-Washington holds key to Russia’s sovereign default

By Karin Strohecker and Jorgelina do Rosario

LONDON (Reuters) – The prospect of a Russia sovereign default is moving centre stage again with a deadline for a U.S. license allowing Moscow to make payments expiring on May 25 and $100 million in interest payments due shortly after.

Sweeping sanctions imposed by western capitals on Russia in the wake of its invasion of Ukraine on Feb. 24 as well as counter measures by Moscow have all but severed the country from the global financial fabric.

So far, Russia has managed to navigate the plethora of measures and make payments due on seven of its international bonds since the start of the war, averting a default.

But with a key license needed to transfer the funds due to expire, Moscow might be running out of road.

Here are some questions and answers on the issue:

WILL THE LICENSE BE EXTENDED?

The U.S. Office of Foreign Assets Control (OFAC) issued a license https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220302 on March 2 allowing for transactions between U.S. persons and Russia’s finance ministry, central bank or national wealth fund in relation to debt payments.

The license is due to expire on Wednesday, May 25.

An extension by Washington seems an increasingly remote scenario. Treasury Secretary Janet Yellen said that while no final decision had been taken, it was “unlikely that it would continue.”

WHAT ARE THE ARGUMENTS FOR AND AGAINST EXTENDING?

Those in favour of extending argue that allowing Russia to service its debt would drain its war chest by forcing Moscow to use its hard-currency revenues to make payments to creditors after roughly half of the country’s $640 billion currency reserves were frozen.

Opponents of the extension point to Russia having to pay less than $2 billion on its external debt until year-end. That pales compared to Moscow’s oil and gas revenue, which bulged to near $28 billion in April alone thanks to high energy prices.

WHAT PAYMENTS ARE DUE?

On May 27, interest payments on two Eurobonds are due – $71 million on the dollar-denominated 2026 bond and $29 million a euro-denominated 2036 bond.

Both have provisions that payment can be made in alternative hard currencies such as dollars, euros, pound sterling or Swiss franc, while the rouble is also listed for the euro-denominated bond. Switching currency can only be done if for “reasons beyond its control, the Russian Federation is unable to make payments of principal or interest” in the original currency.

The premise has yet to be tested, but experts believe it could be difficult for Russia to make that argument given sanctions were a response to its invasion of Ukraine.

Both bonds have a 30-day grace period.

The next payment afterwards is $235 million across two Eurobonds on June 23.

CAN AND DOES RUSSIA WANT TO PAY?

Finance Minister Anton Siluanov said Russia will service its external debt obligations in roubles if Washington blocks other options, adding Moscow will not call itself in default as it has money to pay its debts.

To avoid default, funds generally need to be paid within the prescribed timeframe and in the right currency.

The case is very complex, said Ian Clark, a partner at White & Case, who thinks Russia might still be able to make the payments to the registered noteholders at the national securities depository in Russia, outside U.S. jurisdiction.

“It may be that those payments cannot then be transferred on to other holders, including U.S. persons, but Russia may well have complied with its obligations under the terms of the bonds and escape default – at least in the short-term,” said Clark. “The devil will be in the detail.”

Apart from Russia potentially making the payment in roubles, it could also make the payment early and ahead of the May 25 deadline.

WHY DOES RUSSIA WANT TO AVOID A DEFAULT?

While Russia has enough money to make current debt payments, it will eventually look for overseas financing.

    In a cease-fire scenario, the country will try to rebuild international economic ties that have been cut off during the war, said Chris Miller, Eurasia Director at Greenmantle and the author of “Putinomics: Power and Money in Resurgent Russia”.

A sovereign default would complicate access to capital markets even for non-sanctioned corporates and also push up their borrowing costs, Miller said.

“If you are sitting in the Kremlin and you are trying to be optimistic, what you tell yourself is that commercial relationships normalized pretty quickly after 2014,” Miller added, referring to Russia’s annexation of Crimea seven years ago. However, this time might be different.

“It’s going to take more time”.

WHY IS THIS DEFAULT DIFFERENT?

Countries usually stop servicing their debt when they have little or no money left in international reserves and lack market access.

This is different. A Russia default was unthinkable until recently, the country rated investment grade prior to the Ukraine invasion.

“Russia has the luxury of running a huge current account surplus,” said Wouter Sturkenboom, strategist at Northern Trust Asset Management. “The real game changer is if Europe stops buying oil. That would certainly put a lot of pressure on them.”

(Reporting by Karin Strohecker and Jorgelina do Rosario in London, additional reporting by Rodrigo Campos in New York; Editing by Kim Coghill)

FTSE 100 slips on inflation worries, Premier Foods tops midcaps

(Reuters) -UK’s blue chip index fell on Wednesday as data showed inflation jumped 9% last month, fuelling fresh worries about the economic toll from surging prices, while Premier Foods topped midcap stocks after it announced plans to raise prices.

The FTSE 100 index closed 1.1% lower snapping a three-day winning streak, while the mid-cap FTSE 250 index fell 0.6%.

British inflation leapt in April to its highest annual rate since 1982. Soaring energy bills were the biggest driver, reflecting last month’s increase in regulated energy tariffs.

“The risk is that should they (the Bank of England) raise interest rates too quickly at a time when consumers are already feeling the pinch, then this could crimp demand and push the economy into recession,” Ambrose Crofton, global market strategist at J.P. Morgan Asset Management, said.

“Doing too little, however, risks entrenching inflation expectations and driving a more persistent wage-price feedback loop.”

A report on Tuesday showed Britain’s unemployment rate fell to its lowest since 1974 in the first three months of this year, reinforcing expectations that the central bank will need to continue raising rates to fight inflation.

Sterling slipped after a recent run-up against the dollar. [GBP/]

Premier Foods, the maker of Mr Kipling cakes and OXO cubes, added 10.1% to become the top midcap gainer, as it said it will raise prices of its products as part of plans to tackle rising input costs.

Pub operators Marston’s and Mitchells & Butlers slid 7.2% and 1.4%, respectively, after they warned that the cost of living crisis and expenses stemming from the Ukraine conflict would crimp their businesses.

European travel company TUI’s UK-listed shares fell 12.9% after it announced a share sale to pay back elements of a German state bailout that it had received during the peak of the pandemic.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Uttaresh.V and Shounak Dasgupta)

China, U.S. lead rise in global debt to record high $305 trillion – IIF

By Rodrigo Campos

NEW YORK (Reuters) – The world’s two largest economies borrowed the most in the first quarter as global debt rose to a record above $305 trillion, while the overall debt-to-output ratio declined, data from the Institute of International Finance showed on Wednesday.

China’s debt increased by $2.5 trillion over the first quarter and the United States added $1.5 trillion, the data showed, while total debt in the euro zone declined for a third consecutive quarter.

The analysis showed many countries, both emerging and developed, are entering a monetary tightening cycle -led by the U.S. Federal Reserve- with high levels of dollar denominated debt.

(GRAPHIC- Global debt totals: https://fingfx.thomsonreuters.com/gfx/mkt/zgvomebnxvd/GlobalDebt.png)

“As central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities,” the IIF report said.

“The impact could be more severe for those emerging market borrowers that have a less diversified investor base.”

The yield on the benchmark 10-year Treasury note has risen some 150 basis points so far this year and earlier this month hit its highest since 2018.

SOVEREIGNS BEWARE

Corporate debt outside banks and government borrowing were the largest sources of the increase in borrowing, with debt outside the financial sector rising above $236 trillion, some $40 trillion higher than two years ago when the COVID-19 pandemic hit.

Government debt has risen more slowly in the same period, but as borrowing costs rise sovereign balance sheets remain under pressure.

(GRAPHIC- Government financing needs: https://fingfx.thomsonreuters.com/gfx/mkt/movanzkwdpa/GovernmentFinancingNeeds.png)

“With government financing needs still running well above the pre-pandemic levels, higher and more volatile commodity prices could force some countries to increase public spending even further to ward off social unrest,” said the IIF.

“This might be particularly difficult for emerging markets that have less fiscal space.”

The lack of transparency has also become a burden for emerging markets, where total debt is approaching $100 trillion from $89 trillion a year ago.

“The lack of timely disclosure of public debt obligations, very limited coverage of contingent liabilities (including SOE liabilities) and the extensive use of confidentiality clauses are the major impediments causing information asymmetries between creditors and debtors,” said the IIF report, noting that it pushes borrowing costs higher while limiting access to private capital markets for EM borrowers.

(GRAPHIC- Government interest expense: https://fingfx.thomsonreuters.com/gfx/mkt/zdvxowdqjpx/GovernmentInterestExpenses.png)

The global debt-to-GDP ratio fell to 348%, about 15 percentage points below the record set a year ago, with major improvements seen in European Union countries. Vietnam, Thailand and Korea posted the largest increases in that measure, the IIF said.

“Growth is expected to slow significantly this year, with adverse implications for debt dynamics,” said the IIF report.

“On the back of strict lock-downs in China and tighter global funding conditions, the anticipated slowdown will likely limit or even reverse the downward trend in debt ratios.”

(Reporting by Rodrigo Campos; Editing by Chizu Nomiyama)

Global bond ETF industry to triple to $5 trillion by 2030 – BlackRock

By Saikat Chatterjee

LONDON (Reuters) – Assets under management held by global fixed income exchange traded funds are expected to triple to $5 trillion by 2030, according to the world’s largest asset manager, BlackRock.

BlackRock said it believes the global bond ETF industry is poised to reach $2 trillion in 2023, despite currently “challenging macroeconomic conditions”.

Bonds have come under pressure this year with government bond yields rising across major markets as hawkish central banks and surging inflation have upended a four-decade trend of falling interest rates.

Fixed income ETFs have proven to be a resilient investment tool during various market conditions, including near-zero interest rates, pandemic-related market stresses and inflationary pressures, BlackRock said.

“The global bond ETF industry is growing faster than we expected, propelled by self-reinforcing and enduring adoption trends from our clients during the pandemic era,” said Carolyn Weinberg, Global Head of Product for ETF and Index Investments at BlackRock.

(The story refiles to correct figure in headline to $5 trillion from $10 trillion earlier)

(Reporting by Samuel Indyk; Editing by Saikat Chatterjee)

Marketmind: Extreme fear? Seriously?

A look at the day ahead in markets from Julien Ponthus.

One might think that with CNN’s popular gauge of investor sentiment stuck on ‘extreme fear’, it would take some seriously good news to lift up markets these days.

But all it took yesterday was a whiff of COVID-19 optimism from China and decent U.S. retail data to send global equity markets back into a jolly bullish risk-on mode.

Tech and growth stocks that many investors would no longer touch with a barge pole outperformed with Microsoft, Apple Tesla and Amazon lifting the S&P 500 and the Nasdaq higher.

The upbeat mood was hard to reconcile with BofA’s self-described “extremely bearish” monthly survey which showed fund managers had not been as underweight on stocks since May 2020.

Supposedly weary traders were also more than happy to knock the dollar further away from last week’s two-decade high and dash into riskier currency bets across Oceania, Asia, Europe and even cyberspace with bitcoin claiming back $30k.

Adding to the upward thrust enjoyed by the dollar’s rivals were fast rising bond yields displaying confidence central banks would be able to carry on monetary tightening despite lingering recession fears and Citi’s economic surprise index falling in negative territory.

Even U.S. Federal Reserve Chair Jerome Powell insisting interest rates would go as high as needed to tame inflation didn’t deter the buy-the-dip crowd.

As it stands this morning in Europe though, the latest batch of data might have the bulls hesitate before seeking to pursue this tentative bounce any further.

Consider this: in the last few hours Japan announced its economy shrank in the January-March period, China said new-home prices in April fell and Britain just unveiled its highest inflation reading since the 1980s with a whopping 9% in April.

(Reporting by Julien Ponthus; Editing by Saikat Chatterjee)

Morgan Stanley sees Ukraine GDP slump by 60% in 2022 if “no clear resolution”

LONDON (Reuters) – Morgan Stanley said on Wednesday Ukraine’s economy could slump as much as 60% year-on-year in 2022 in case of a “more prolonged conflict with no clear resolution” following Russia’s invasion.

The bank considers this would be the worst case scenario, which included Ukraine losing access to the Black Sea in the south. The bank’s base case scenario is a 39% GDP contraction in 2022, factoring a prolonged conflict “with fading intensity.”

“While the external balance deterioration should be limited due to a major imports drop, fiscal and more broadly funding needs are a major challenge” wrote Morgan Stanley economists in a note.

Ukraine’s sovereign international bonds are currently pricing in a “light” debt restructuring with “all payments cleared until 2026 yet no haircut, at a conservative exit yield of 14%”, the note added.

On Wednesday, Ukraine’s $1 billion bond due in September 2022 traded at just under 70 cents in the dollar while most of the remaining issues were bid between 34 cents and 47 cents, Refinitiv data showed.

Morgan Stanley sees Ukraine financial needs at $4.7 billion a month and said how the country will use international aid for reconstruction will play a key role in the economy’s long-term outlook.

(Reporting by Jorgelina do Rosario, editing by Karin Strohecker)

Russia to service foreign debt in roubles if other options blocked -finance minister

(Reuters) – Russia will service its external debt obligations in roubles if the United States blocks other options and will not call itself in default, Finance Minister Anton Siluanov said.

Washington is considering blocking Russia’s ability to pay its U.S. bondholders by allowing a key waiver to expire on May 25, which could take Moscow closer to default.

“We are not going to call any defaults, we have money – unless Western countries make it impossible to service our debts,” Siluanov told a forum. “We will be able to pay and will pay foreigners in roubles as a last resort option if Western (financial) infrastructure is closed for us.”

Western sanctions on Russia ban transactions with Russia’s finance ministry, central bank or national wealth fund.

But the U.S. waiver, issued by the Treasury Department’s Office of Foreign Assets Control on March 2, had made an exception for the purposes of “the receipt of interest, dividend, or maturity payments in connection with debt or equity.”

That has allowed Moscow to keep paying investors and avert default on its government debt, and allowed U.S. investors to continue to collect coupon payments.

After the waiver expires on May 25, Russia will still have almost $2 billion worth of external sovereign bond payments to make before the end of the year.

Moscow is due to make interest payments on two Eurobonds on May 27. One payment is $29 million for a euro-denominated 2036 bond, with a provision for alternative payment currencies, including roubles. The other is $71 million on a dollar-denominated 2026 bond, which has no provision for payment in the Russian currency.

Both bond payments have a 30-day grace period after which a default could occur if payment is missed.

“An omission of a payment can trigger a cross-default on all other obligations,” Russian brokerage BCS said in a note.

(Reporting by Reuters; editing by John Stonestreet and Jane Merriman)

JPMorgan backs Sri Lanka bonds on bets that crippling crisis to ease

LONDON (Reuters) – U.S. investment bank JPMorgan backed Sri Lanka’s crisis-hit government bonds on Wednesday, saying recent political changes in the country should gradually improve its strains and help its talks with the International Monetary Fund.

Adding an ‘overweight’ – effectively a buy recommendation – JPMorgan analysts said: “political stability should pave the way for bonds to move higher from near all-time lows”.

Sri Lanka is officially now in default as a so-called “grace period” to make some already-overdue bond interest payments expired on Wednesday.

“We think this stability should result in both IMF discussions and the process of appointing legal and financial advisors moving forward,” JPMorgan added.

(Reporting by Marc Jones, editing by Karin Strohecker)

FTSE 100 lags European peers on strong pound

By Sruthi Shankar

(Reuters) -UK stocks advanced on Tuesday on hopes that China would ease its COVID-19 curbs and regulatory scrutiny, although strength in the pound following an upbeat employment report capped gains for the export-oriented FTSE 100.

The blue-chip index closed 0.7% higher, but lagged its continental peers as the pound jumped more than 1%. [GBP/]

Britain’s unemployment rate fell to its lowest since 1974 in the first quarter of 2022, but soaring inflation led to the biggest annual fall in real earnings excluding bonuses since 2013.

“Even if employment stays supported, we suspect we will still see some of the impetus behind wage growth fade. This underscores the message from the BoE (Bank of England) that it probably won’t need to hike too much further over the coming months,” ING economist James Smith said in a note.

BoE Governor Andrew Bailey said on Monday the surge in inflation was the central bank’s biggest challenge since it gained independence in 1997.

The BoE this month raised interest rates to their highest level since 2009, but warned that Britain risks a recession.

Still, a large presence of commodity-linked and defensive stocks in the FTSE 100 has helped it outperform this year as the Ukraine war boosted oil and metal prices, while concerns about a global economic slowdown drew investors to less risky stocks. The index is up 1.8% in 2022.

The domestically focused FTSE 250 gained 0.7%.

Among top movers on Tuesday, Imperial Brands jumped 7.9% after reporting a marginal increase in first-half sales, helped by demand for e-cigarettes and heated tobacco products.

ContourGlobal surged 32.9% to the top the FTSE midcap index after KKR & Co agreed to buy the London-listed power generation firm for 1.75 billion pounds ($2.16 billion).

Strength in sterling dented shares of global companies such as Unilever, AstraZeneca and GlaxoSmithKline. Societe Generale downgraded Unilever’s stock to “sell”.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Subhranshu Sahu, Aditya Soni and Ed Osmond)

Marketmind: Apocalypse now?

A look at the day ahead in markets from Dhara Ranasinghe.

Bank of England boss Andrew Bailey is sorry for an “apocalyptic” view of the world, saying that monetary policy faces its biggest test in 25 years with surging inflation exacerbated by war in Ukraine and China’s COVID lockdowns.

Federal Reserve chief Jerome Powell, who warned last week that taming inflation will “include some pain”, and European Central Bank president Christine Lagarde speak later on Tuesday.

No wonder markets are so volatile — swinging one way one minute on a view that surging inflation will bring aggressive rate hikes in major economies to swinging the other way the next on fears that all this inevitably raises recession risks.

A heavy hint from Australia’s central bank that another rate hike is coming in June is lifting the Aussie dollar today.

But in general, it’s that growing fear of recession risk – heightened by Monday’s gloomy China data – that holds sway. U.S. 10-year Treasury yields are down almost 30 basis points from 3-1/2 year highs hit just over a week ago.

For now stocks markets are stable. Yet, first quarter euro zone GDP numbers, U.S. retail sales and industrial production data later pose a new test for fragile sentiment.

Economists polled by Reuters forecast retail sales rose 0.9% in April versus a 0.5% gain a month earlier.

Data out early on Tuesday shows Britain’s unemployment rate fell to its lowest since 1974 at 3.7% in the first three months of this year, which could bring some comfort to policymakers.

Finally, while sentiment is largely risk off, commodity prices continue to surge — wheat futures and other agricultural goods prices shot up on Monday. No doubt, there’s no shortage of sources of angst right now.

U.S. retail sales https://fingfx.thomsonreuters.com/gfx/mkt/dwvkryxdypm/Pasted%20image%201652306123735.png

(Reporting by Dhara Ranasinghe, editing by Karin Strohecker)

Shanghai residents leverage Excel skills, management savvy to navigate lockdown

By Julie Zhu and Engen Tham

HONG KONG/SHANGHAI (Reuters) – China’s worst COVID-19 outbreak has frayed nerves and stirred resentment among many residents of Shanghai but some have thrived in the face of adversity, stepping up with bright ideas and commitment to help their communities through the crisis.

Not surprisingly, many such people have used the skills they developed in their jobs to help others navigate the frightening new world of forced quarantine and lockdowns that no one dreamed of before COVID.

Li Di, a senior executive with a global bank, knew he had to help when he was admitted to the Nanhui quarantine site in April, after testing positive for COVID, and was confronted by chaos.

“There were only 120 to 150 staff to take care of 10,000 patients. The staff literally had their hands full,” said Li.

Li set up a team of more than a dozen volunteers to arrange meals, distribute various supplies and help elderly patients who were struggling with various quarantine centre requirements.

He also set up a more efficient way for people in quarantine to communicate with staff, which helped to streamline the process for the compulsory testing of the 400 people in his building, cutting the time it took from three hours to just one, to the approval of over-stretched staff.

He even helped organise halal food for Muslims.

“You have to bring in some modern management skills to make things more efficient and make life easier,” Li said.

Shanghai has become the epicentre of China’s largest outbreak since the virus was first identified in the city of Wuhan in late 2019. Under China’s zero-COVID policy, everyone who tests positive, and their close contacts, must quarantine at designated sites.

Videos on social media have shown hastily arranged quarantine centres across the city, including one made of shipping containers and one at a school with no blankets or hot water.

The huge majority of Shanghai residents who have dodged COVID have not escaped the ordeal of lockdown.

People ordered to stay at home in their flats have struggled to get fresh food and other essential items as the restrictions have shut shops and exposed a huge shortage of delivery staff.

‘WORKING LIKE A TRADER’

The last thing tech-savvy banker Vera expected was to take charge of bulk-buying for her housing compound. But within days of lockdown, Vera, who works for a large U.S. house in Shanghai and asked that her family name not be used, had taken on the job, known as “tuanzhang” in Chinese.

Trapped with 1,000 neighbours at home and everyone struggling to order food, Vera saw an opportunity to improve the situation for all.

She approached neighbours through the messaging service WeChat to collect orders and then loaded them into Excel spreadsheets for bulk buying.

“I’ve been working like a trader as I have to monitor a number of screens and loads of new messages at the same time,” said Vera, who usually ends up checking orders and communicating with suppliers and delivery services late into the night.

Shirley, a mergers and acquisition banker in Shanghai, said apart from good Excel skills, a strong social network, just like in the real world of business, can be a crucial asset for getting through lockdown.

She was able to use connections she made at work to get in touch with several major suppliers including online grocery firm Missfresh and household brand China Mengniu Dairy and arrange bulk-buying.

“You really need good connections,” she said.

Sun Chuan, a Shanghai-based partner at a global law firm, helped raise donations for the elderly as part of a campaign a Peking University alumni association helped launch.

According to official data, China’s most-populous city has nearly 6 million people aged 60 or older, accounting for about 23% of the population. Many live alone and struggle with online shopping.

Sun called on friends via WeChat to join the campaign and his post quickly spread.

“At first, most donors were my friends but later many others I don’t know at all donated. I was deeply touched by their kindness,” Sun said.

Initially aiming to raise 660,000 yuan ($97,350), the campaign eventually secured nearly 870,000 yuan and provided food for a week for more than 4,000 older people in Shanghai.

($1 = 6.7796 Chinese yuan renminbi)

(Reporting by Julie Zhu in Hong Kong and Engen Tham in Shanghai; Editing by Sumeet Chatterjee, Robert Birsel)

DeSantis says Florida could take control of Disney’s special district

(Reuters) – Florida Governor Ron DeSantis said on Monday he wants the state, not local governments, to take control of Walt Disney Co’s special district when it is scheduled to be dissolved in June next year.

The Republican governor last month signed a bill that will eliminate the Reedy Creek Improvement District in Central Florida, a special governing jurisdiction that has allowed the company to operate Walt Disney World Resort as its own city since the late 1960s.

DeSantis has been locked in a feud with the entertainment company since its leaders came out in opposition of a new state law that limits the teaching and discussion of LGBTQ issues in schools.

DeSantis told a news conference on Monday that rather than have local communities absorb jurisdiction over Disney, it is “more likely that the state will actually assume control.”

His administration is working on proposals for what will happen when Reedy Creek is dissolved, but they will not be taken up by legislators until after the November election, he said.

Disney did not immediately respond to a request for comment.

Under Florida law, local governments would inherit the assets and liabilities of Disney’s district, the Orlando Sentinel reported https://www.orlandosentinel.com/politics/os-ne-desantis-disney-world-reedy-creek-plan-20220516-eq6h2jprd5f2ndcwjip6qsnpim-story.html, an eventuality that some local officials have warned could have dire consequences for taxpayers.

Experts have said the financial impact of the legislation on the company and the state is unclear at this stage.

Without elaborating, DeSantis on Monday reiterated that Disney will be responsible for honoring its nearly $1 billion bond debt and that the company will pay its “share of taxes.”

(Reporting by Maria Caspani in New York; Additional reporting by Lisa Richwine in Los Angeles; Editing by Matthew Lewis)

FTSE 100 rises as healthcare, resource-linked gains offset China jitters

By Sruthi Shankar

(Reuters) -UK’s blue-chip index rose on Monday, aided by gains in healthcare and resource-linked stocks, though subdued data from China stoked slowdown concerns in the world’s second-largest economy and kept sentiment in check.

The FTSE 100 index ended 0.6% higher, with pharmaceutical giants such as AstraZeneca and GlaxoSmithKline and oil majors Shell and BP among top boosts.

Data showed that China’s retail and factory activity fell sharply in April as wide COVID-19 lockdowns confined workers and consumers to their homes and severely disrupted supply chains.

“It’s no secret that there is some growth downside in China because of the zero-COVID strategy, so continue to expect the negative impact on data,” Karim Chedid, head of investment strategy for iShares EMEA at BlackRock, said.

“The question is whether we’ve already seen the worst impact of the data.”

Big miners including Glencore and Antofagasta rose along with industrial metal prices as China, the world’s top metals consumer, set out plans to ease COVID-19 restrictions. [MET/L]

Consumer companies Unilever and Reckitt Benckiser were the biggest drags on the FTSE 100.

The domestically focussed midcap index ended flat.

Vodafone jumped 1.9% after telecoms group e& bought a 9.8% stake in the company for $4.4 billion.

Ryanair fell 0.2% after the airlines group said it was impossible to give a detailed forecast beyond hoping to return to “reasonable profitability” this year amid uncertainties over COVID-19 and the Ukraine war.

Technical products and services provider Diploma slid 5.7% after first-half results.

British baker and fast food chain Greggs slipped 0.5% after it said cost pressures were increasing as it reported a rise in first-quarter sales.

Bank of England Governor Andrew Bailey said he was “not at all happy” about the surge in inflation in Britain but added that he did not think the central bank could have done anything differently to prevent it.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Aditya Soni, Rashmi Aich and Andrew Heavens)

Analysis-Egypt faces sharp rise in costs to finance proposed $30 billion deficit

By Patrick Werr

CAIRO (Reuters) – Higher interest rates, a weak currency and broader investor wariness of emerging markets suggest Egypt could pay steeply to finance a projected $30 billion budget deficit for the financial year starting in July.

Even before U.S. Federal Reserve rate hikes that started in March and Russia’s invasion of Ukraine, Egypt had been struggling to sustain appetite for its local and foreign borrowing to plug current account and budget deficits and fend off pressure to let its currency weaken, analysts say.

As well as the two events sparking a portfolio investment outflow calculated at $20 billion by the country’s prime minister, the Ukraine war delivered a new shock to Egypt’s tourism sector – an important earner of foreign currency – as well as driving up the price of wheat and other key commodities required for the government’s vast food subsidy programme.

The price of Egypt’s 2032 dollar-denominated Eurobond is currently about 75 cents on the dollar, falling as investors drawn in after the IMF-monitored reforms of 2016 grow increasingly wary of the government’s finances.

That suggests Egypt will have to pay higher rates if it seeks to issue more bonds, even as it tries to diversify its debt with green, sharia-compliant and yen-denominated samurai bonds.

James Swanston, Middle East and North Africa Economist at Capital Economics, pointed to the “quite significant” increase in the proportion of Egypt’s debt issued in foreign currency in recent years.

Medium- and long-term external debt more than tripled to $121.5 billion over the seven-year period to Oct 1, 2021, according to central bank data.

“The risk is that if, as we expect, the (Egyptian) pound weakens further, it pushes up the debt (to GDP) ratio further, and also that any attempt to roll over debt or issue new debt would be at much higher interest rates given the tightening of global monetary conditions,” Swanston said.

The government, currently seeking a new round of assistance from the International Monetary Fund, presented a draft budget to parliament last week that projects 2022/23 spending of 2.07 trillion Egyptian pounds on revenue of only 1.52 trillion, leaving a deficit of more than 558 billion pounds ($30.5 billion).

A Finance Ministry official did not respond to a request for comment.

PRIVATE PARTICIPATION

A debt servicing bill where domestic and foreign interest payments alone are set to swallow 45.4% of all revenue – up from a projected 44.6% this financial year – leaves little room for spending once government salaries and subsidies are paid for, analysts say.

Egypt is also working on or has announced a series of megaprojects over the last few years, including a $60 billion new administrative capital city, a $23 billion highspeed rail network and a $25 billion nuclear power station.

Prime Minister Mostafa Madbouly told a news conference on Sunday such projects were essential to absorb a million people entering the workforce each year.

He said Egypt plans to raise $10 billion by the end of the year and another $30 billion in the subsequent three years by way of “private participation”, including the sale of stakes in state firms on the stock exchange.

The government has been talking about such moves for years, in 2018 announcing it would offer minority stakes in 23 state-owned companies in a plan to raise up to 80 billion pounds.

Howeover, the programme has been repeatedly delayed due to weak markets, legal hurdles and the readiness of each company’s financial documentation, according to government officials.

Meanwhile, foreign debt payments of almost $16 billion in 2022/23 include nearly $2 billion owed to the IMF, mainly for the $12 billion financial package secured in 2016.

    “Even when that debt is concessional it adds to balance of payments pressures. The fact that Egypt has to find almost $6 billion to repay the IMF in 2025 is a case in point,” said Farouk Soussa, senior economist at Goldman Sachs.

Taking into account principal repayments, total debt servicing costs will amount to 965.5 billion pounds, according to the draft budget.

The central bank in March allowed the pound to fall by 14% to about 18.40 to the dollar, making it more expensive to buy foreign currency. Street-level black market dealers were buying dollars for 19.40 pounds last week.

However, Egypt may also be able to turn to its traditional allies in the Gulf for support. In March, Saudi Arabia said it had deposited $5 billion with Egypt’s central bank.

($1 = 18.2700 Egyptian pounds)

(Additional reporting by Mahmoud Salama; Editing by Kirsten Donovan)

Marketmind: COVID lockdowns may end but China is still sneezing

A look at the day ahead in markets from Sujata Rao.

With swathes of China spending April under lockdown — 46 cities according to one estimate — it was inevitable that dining out, shopping, factory output and energy usage would all take big hits.

The dire data overshadowed announcements that some COVID curbs would be loosened. A Q2 economic contraction looks inevitable. What’s more, the 6.7% urban unemployment rate — the highest since 2018 — won’t escape the notice of authorities, wary of any kind of unrest.

So after a series of half-hearted measures, a decisive policy response might finally be unveiled on Friday, when the People’s Bank of China meets to decide benchmark loan prime rates.

The central bank will be wary however, of further weakness in the yuan, already near 20-month lows to the dollar, and the possible implications for inflation.

Brent crude futures slid around 1.5 % on Monday but remain firmly above $100 a barrel. But the data has extinguished the brief spark of optimism that lifted Wall Street on Friday, with equity futures and bond yields both lower. The China-reliant Australian dollar has shed 0.7%

The optimistic may point to this month’s near-30 basis-point slide in five-year inflation expectations alongside a fall in where markets price U.S. interest rates would peak. But some, such as Goldman Sachs’ ex-CEO Lloyd Blankfein, reckon those may amount to warning signals; recession is “a very, very high risk factor,” Blankfein said on Sunday.

In any case, a Friday survey showing U.S. consumer sentiment at an 11-year low bodes ill for upcoming retail sales data.

Finally, last week’s big movers, crypto and Twitter. Bitcoin has slid a further 5% but Twitter shares — with an Elon Musk takeover now in balance — are up 1% in Frankfurt trade after Friday’s 10% tumble. Musk’s weekend tweets may not help; he said there was “some chance” over 90% of daily active users were fake accounts”.

TIPS https://fingfx.thomsonreuters.com/gfx/mkt/klvyklxyxvg/Pasted%20image%201652650383583.png

(Reporting by Sujata Rao; editing by)