Bitcoin’s intraday rebound failed to hold and is returned to test the $26,000 area. It remains in need of a bullish catalyst but is holding up well in the face of tightening global liquidity.

Sunak said in a speech on Wednesday in London that he would push back by five years to 2035 a plan to bar the sale of new petrol and diesel cars, casting the decision as an effort to protect families struggling with bills. The vast majority of vehicles sold in the UK would likely be electric by 2030 without government intervention, he said.

“At least for now it should be you, the consumer, who makes that choice, not the government forcing you to do it,” Sunak said in Downing Street. 

While Sunak insisted he was still committed to reaching net zero by 2050 and not watering down any targets, he said the UK must act in a “more proportionate way.” He affirmed his belief that climate change was “real and happening,” but said that the debate over the issue had been “charged with far too much emotion and not enough clarity.” 

Is common sense breaking out in the UK, or is this policy reversal a calculated play for the electorate’s unspoken middle ground? Perhaps it is both. The harsh reality for consumers is the efforts to achieve zero emissions are more expensive and wages are not rising quick enough to compensate the majority.

Canada’s S&P/TSX has possible type-2 top with righthand extension characteristics. The yearlong sequence of higher reaction lows will need to continue to hold if the benefit of the doubt is to be given to higher to lateral ranging.

It is impossible to say how far the Chinese would prepare for a full-scale war with the US in the scenario of a blockade. It’s estimated by Western experts that that it would need a minimum of four months to be ready for prime time. The dilemma for Chinese strategists is that, if there is to be a war with the US, they would be better off striking the first blow, probably by attacking American naval assets in the Indo-Pacific, exploiting the classic vulnerability of ships in port.

Taiwan’s younger generation have no personal memory of the flood of refugees fleeing Communist rule. There has been a generational change and the continued success of the Democratic Party is a clear sign the population has no intention of ever recombining with China voluntarily. Therefore the are only two ways Taiwan can be encouraged to come back to the mainland fold.

The first is economic. Right now, Taiwan is a geopolitical jewel because of the strength of the semiconductor sector and the local ecosystem that supports it. However, the semiconductor sector has always been cyclical, capital intensive and low margin. That’s why companies were willing to stop competing for the prize of being the most efficient.

Cocoa – big trends often lose consistency at the penultimate high. Cocoa pulled back sharply for one week in August but recovered and jumped to a new high over the following five weeks. Today’s downward dynamic signals a peak of at least near-term but potential medium-term significance. Downside follow through will be required to confirm the signal.  

As evidence of economic stagnation increases the market is turning its attention to “how long the ECB will be able to keep rates steady,” said Mauro Valle, head of fixed income at Generali Investments. “It cannot be ruled out that the reversal of the monetary cycle may occur sooner than expected.”

Germany’s economy is stagnating which is bad news for the EU and the ECB’s efforts to get inflation back under control. The reason the Euro is weak is the ECB is predicting they have done enough to get inflation down but the Federal Reserve has repeatedly said they will err on the side of overtightening because the risk of failing to get inflation under control is too high.

The fact the ECB is still running negative real rates suggests the threat of a wage/price spiral remains credible. Against a background of rising oil prices and uncertainty of supply, monetary officials probably believe they don’t have much choice.

“The following is the text of a message from a businessman from Monterrey Mexico I met recently in Austria. His business (offshoring) is based in Mexico generating USDs.

“He is obviously pessimistic and believes there will be a new President next year.

“Thank you for your valuable service.

“Nice to have met you.  Following up on our conversation around the strong Mexican peso I mentioned that I think it is 4 things that are impacting, and some might not be sustainable, mind you I am not an economist or politician, just a small businessman."

​-

“The artificially high official interest rates the Mexican central bank is paying, around 11 or 12 percent which is generating purely short-term financial investments from foreigners that can leave as fast as they came. 

“At the same time Mexican companies cost of capital is extremely high as they mostly take loans in pesos The surprisingly high level of “remesas” which is the money that Mexican workers in the US send back home to Mexio, have grown from $20 billion us dollar annually to over $60 billion, story goes most of the BBC increase is related to the drug trade.

“Nearshoring which is direct investment by American, European (or Chinese companies trying to avoid getting caught in the middle of a trade war) and being close to US markets due to supply chain mgmt., which could be really sustainable.

Finally, the fiscal “discipline” of our government is more due to their lack of the most basic investments in schools, education, hospitals, medicine, highways, ports, infrastructure, and energy.  Once new govt takes over and realizes the major hole there, they will have to start the debt race again and the peso will probably lose value.

I believe only the third point could be sustainable in the mid-term. 

Thank you for this insightful account which raises several important points relating to the strength of the Peso. Since the currency has never had such a long period of outperformance relative to the US Dollar, it certainly worth taking the time to highlight what that has been the case and whether it is sustainable.

Latin American countries have been among the most aggressive in raising rates to combat inflation. Mexico has held its rate at 11.2% since March and is likely to begin cutting before long as inflationary pressures moderate. The CPI rate has fallen from 8.7% to 4.6% so the positive real rate has continued to improve. When that spread reverses, it will remove one of the tailwinds for the currency.

Banks are liquidity providers. When they are doing poorly, their inability to increase loan issuance has a knock-on effect for the wider economy. When they do well, loan issuance increases and liquidity flows into the wider economy. That helps to support asset prices. Therefore banking sectors tend to be lead, or at least coincident, indicators for their respective economies.

An inverted yield curve is a particular challenge because the sector’s basic business model is to borrow short-term to lend long term. When that happens, they need alternative business models to supplement income and thriving is more difficult. That’s why the performance of banks around the world at present is such an interesting development.
The Nasdaq Global Bank Index has held a sequence of higher reaction lows since late last year and is now firming from the region of the 200-day MA. Long-term it has been forming a base for the last 15-years.  A sustained move above 1000 will be required to confirm a return to demand dominance beyond 18-month bouts of enthusiasm that do not translate into long-term uptrends.

The government presented a draft 2024 budget late on Friday that boosts support for state oil giant Petroleos Mexicanos and social programs to consolidate Lopez Obrador’s legacy before the presidential election next June. Officials also proposed an $18 billion dollar-debt ceiling in the 2024 budget, triple the $5.5 billion set for this year.  

The increased spending will result in a fiscal deficit equivalent to 4.9% of gross domestic product — the largest since 1988. It’s a reversal of the president’s penny-pinching ways, which had won him favor with investors in past years as other countries boosted spending to cope with the fallout from the coronavirus pandemic. 

Mexican presidents are limited to a single six-year term so AMLO is currently priming the pump for his anointed successor. The Mexican electorate is spoiled for choice for the June 2024 election. Both candidates have impressive CVs with engineering and computer science degrees respectively, as well as some entrepreneurial experience. That represents a significant upgrade in technocratic experience for the Presidency regardless of who wins. 

Inditex has entered the second quarter with momentum and strong execution, and that should have continued throughout the quarter, making it comfortably the most consistent outperformer of the sector over this period, analysts at UBS say in a note. The Spanish fashion retailer's business model inspires confidence, and there is further upside in the shares to be expected, according to the analysts. In this context, the second quarter should again show that the company stands out among peers, the analysts say. Its differentiated sourcing model and focus on full-price sales should ensure stable gross margins, they add.

The retail apocalypse entered a new stage during the pandemic because stores had to close and move online. With reopening, many stores have become order fulfilment stations, return locations while also selling new lines of merchandise. That’s a heady mix and difficult to get right. There are some clear winners and losers.

GMB Organiser, Michelle McCrossen, said: “Today’s announcement is a humiliating admission of failure on the part of Birmingham City Council’s officials and leadership.

“Not only are they responsible for creating this crisis through years of discriminating against their own staff, but even they no longer believe themselves capable of fixing it.

“For decades the Council has stolen wages from its low-paid women workers, running up a huge equal pay liability that has brought Birmingham to the brink." 

They said today's news will be worrying for staff and residents. 

Equal pay cases are happening across retail as well.  

We revealed leaked documents that show a boost for the 55,000 claimants taking on Asda - where male dominated distribution centres have higher wages than the shop floor.

Disputes about equal pay seem out of character with the times we live in. Surely everyone doing the same job is offered the same pay? The reality is, they are. That is not what this issue is about. The GMB union’s successful gambit is council officials are incapable of defending their job description methodology in court. That’s especially true when many people are no longer capable of differentiating between genders in public life.

The initial promise of peaking Indonesia’s power sector emissions by 2030 at no more than 290 million tons of carbon dioxide, about 20% below a baseline level for the year, looks out of the question. An alternate scenario laid out in the draft plan would raise the target maximum to 395 MT of CO2, to account for the construction of new captive plants to serve growing industrial power needs.

Officials have said they are aiming to have a revised—perhaps final—investment plan before COP28 begins in Dubai at the end of November, taking on public feedback. But to do that, they will need to come to agreement on at least three major, interrelated issues: the money, the emissions target and the mechanics of the coal phaseout, including changes to Indonesian laws and policies that hold back wider green progress.

And

But there may not yet be enough in either bucket. There is just $289 million in grants, with half earmarked for technical assistance—funding for experts, consultants and advisors to model and support the energy transition. Almost all of the rest is loans, at interest rates to be determined later.

Talk is cheap. This is not the first time we have seen photo ops for politicians, and headline- grabbing promises of large capital infusions, only for reality to intercede a couple of years later. There is no getting around the fact that coal is cheap, available, and easy. Every other alternative is either more expensive, intermittent, or imported.

Developing countries have no time for handwringing. They have large young populations demanding improved living standards now. Moreover, European, and North American consumers are in no mood to write cheques, when their own living standards are declining and public services are under pressure.

PDD in recent years has used promotions to grab market share from more established Chinese rivals including Alibaba Group Holding Ltd. and JD.com Inc. In an attempt to replicate that success abroad, it created Temu, which was introduced with much fanfare during this year’s Super Bowl.

Since it launched last year, Temu has exploded into one of the top US apps, targeting cash-strapped Americans with cheap unbranded products shipped directly from Guangzhou, China. In just seven months, the app has been downloaded 50 million times.

The roll-out hasn’t been without hiccups. Temu is burning through money and squeezing its suppliers in a bid to take on Amazon.com Inc. It’s also involved in lawsuits with rival Shein over antitrust matters.

The question Temu is exploring is where the interchange between price and convenience resides. Amazon delivers convenience better than anyone else and charges a premium. Target, Wal-Mart, or Costco supply cheaper products, but nowhere near the same level of convenience. Temu supplies bargain basement prices that appear too good to be true. It does not have in-country fulfilment centres, so convenience is not measurable, and returns will inevitably be problematic.

Today you wrote about the heat in the Sahara Dessert. Watergen is an Israeli company that converts air into drinking water. Its products are sold in the USA, Latin America, India, Vietnam, Uzbekistan and on the African continent. Let's share some positive news on break the monopoly of pessimistic news in the various media.  

Thank you for highlighting this innovation. Coupled with a solar panel, Watergen’s system is truly a life saver in remote or underserved areas. Africa is where most population growth can be expected over the next several decades. Key innovations like mobile communications and the app economy are spreading quickly across the continent. That is providing large numbers of people with digital services before they have access to clear water, sanitation, and power provision.

Around 20,000 new homes a year have been put on hold as a result legal protections to clean and protect our precious water ways. This report explores the challenges that councils and other stakeholders are facing and sets out recommendations for action.

The idea of delaying home construction because of the impact on waterways gives the impression these are riverside apartments. That seems quite unlikely.

As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical. At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.

Restoring price stability is essential to achieving both sides of our dual mandate. We will need price stability to achieve a sustained period of strong labor market conditions that benefit all.

The 2% target is still official. Judging by the response of the market to Powell’s statement today, traders are beginning to give that statement some additional weight. Larry Summers’ remark on Twitter this morning helps to put the dilemma into fresh perspective.

“It is sobering to recall that the shape of the past decade’s inflation curve almost perfectly shadows its path from 1966 to 1976 before it accelerated in the late 1970s.”

The awkward 11-party alliance emerged after both camps saw their interests align in the wake of a May election that produced a stunning win for Move Forward, a party that advocated changes to a law forbidding criticism of King Maha Vajiralongkorn and other top royals. The royalist parties wanted to keep Move Forward out of power, while Thaksin sought to strike a deal that would allow him to return to Thailand after 15 years of shuttling between Hong Kong, Singapore, Dubai, and London.

“Pheu Thai is the most powerful party to battle the emergence of Move Forward, after the electoral defeat of the conservative parties,” said Yuttaporn Issarachai, a political scientist at Sukhothai Thammathirat Open University. “As the saying goes, the enemy of my enemy is my friend.”

Thaksin’s return will mark a full-circle moment in Thailand’s political drama, which has seen a cycle of coups and deadly street protests erodes the nation’s competitiveness as a Southeast Asian manufacturing destination since the turn of the century. Foreign investors have dumped about $3.8 billion of Thai stocks this year, triggering an almost 9% slump in the main stock index to rank it among Asia’s worst performers.

Speculation about a Modi-Xi meeting has grown following a series of high-level contacts between India and China in recent weeks. Both National Security Adviser Ajit Doval and external affairs minister S Jaishankar have met top Chinese diplomat Wang Yi, who is currently the foreign minister, on the margins of multilateral gatherings in recent weeks.

The joint statement issued after the latest meeting between Indian and Chinese military commanders on the standoff on the Line of Actual Control (LAC) has also fuelled speculation about a Modi-Xi meeting in Johannesburg. The statement, issued after the talks held during August 13-14, had described the discussions as positive and constructive.

There is rampant speculation the BRICS countries are preparing to announce the creation of a gold-backed currency unit. I’m still at a loss as to how that will work. The five members are hardly bosom buddies and any monetary co-operation is more likely to involve greater use of the Renminbi in trade with  China. I do expect a memorandum of understanding to be signed amid plenty of photo ops. Six months from now there will be little evidence of progress.

Indonesian President Joko Widodo set a modest growth outlook next year as he underscores a narrowing window to get the country’s young population rich before it grows old.

Gross domestic product is expected to grow 5.2% in 2024, Jokowi — as the president is known — said in his annual budget speech to parliament on Wednesday. That’s toward the lower end of a 5.1%-5.7% initial estimate.

Fiscal deficit is projected to be 2.29% of GDP next year, in line with the government’s latest outlook for this year’s shortfall at 2.28%, lower than the figure in the 2023 budget. That’s still well below the legal limit of 3%.

Indonesia is a significant potential beneficiary of the increasingly acrimonious relationship between China and the USA. Diversification of manufacturing capacity is an increasingly important theme and with a large young population Indonesia is in a positive position. The country’s primary challenge will be in continuity of rule when Jokowi hands over control to the next generation.  A successful transition of power would be a major indicator of improving standards of governance.

The latest data illustrate how American households — supported by a strong labor market and rising wages — are so far buttressing the economy against recession in the face of high interest rates. Too much strength, however, could force the Federal Reserve to pursue more aggressive policy should inflationary pressures prove sticky. 

“This will boost optimism that because of the resilience of the consumer we can achieve that soft landing,” Lindsey Piegza, chief economist at Stifel Financial Corp., said on Bloomberg Television. At the same time, “this simply means the Fed will have to be more aggressive raising rates higher and keeping rates higher for longer,” she said.

This is another example of how the excess liquidity in the economy has not yet been burned off. That is going to put further pressure on the Fed to continue to tighten and suggests the soft landing hype needs to find more data points to support the argument.

The decision offers reassurance on “the health of the Credit Suisse non-core portfolio,” Citigroup analysts said in a note. “The early voluntary repayment could potentially also help in other matters, such as negotiating the retention of the Credit Suisse Swiss business.” 

The fate of the Swiss bank has been widely watched as Swiss-based companies and politicians have voiced concerns over the market power that the combined bank would exercise. UBS plans to make a decision in the third quarter on whether it will fully integrate it with its own Swiss unit or seek another option such as spinning it off or listing it publicly.

The Swiss government essentially gifted Credit Suisse to UBS. In so doing they have given the impression that UBS is now too big to fail since it is the only remaining Swiss bank with global heft. Regardless of whether the rump of Credit Suisse is spun off, the dominant position now held by UBS is unassailable within the Swiss market.

I had the great pleasure of spending several days last week with David Brown talking about the drug discovery process, how artificial intelligence can be harnessed to speed it up, and how that all fits into the discussion around the evolution of a 3rd (some say 4th) industrial revolution. I discussed some of my updated thoughts on the subject in the Friday Big Picture audio/video. Here are some more; hopefully in a clearer format.

Before digging into the weeds, there is an important question to answer. Can you have a secular bull market without an industrial revolution? Of course the answer is yes. Industrial revolutions evolve over decades and can last a century. In that time there will be several long-term bull and bear market cycles through various asset classes.

For example, the evolution of China’s economy over the last 30 years was about the adoption of capitalistic economic policies and harnessing the labour of a billion people. That was a political decision to deploy lessons already learned elsewhere rather than new thinking. Secular bull markets in commodities develop because demand leaps higher before supply can adjust.

The high-yield bond market is becoming a favorite of companies that once raised cash using leveraged loans, luring borrowers with lower costs and a wealth of investor demand.

US firms have sold $55 billion of secured notes in the junk-bond market so far in 2023, marking a 17% year-over-year increase, according to CreditSights data. It’s the biggest issuance jump in more than a decade — and an indication that companies are replacing floating-rate debt in the wake of the Federal Reserve’s most-aggressive monetary tightening cycle in decades.

“It’s a good way to balance each of these markets off each other, and honestly, a better cost of capital,” said John Cokinos, global head of leveraged finance at RBC Capital Markets. “You can hedge naturally by just having fixed-rate debt.”

The conclusion that now is the time to issue fixed rate debt is an interesting one. It reflects the acceptance of the view that rates are going to stay high indefinitely and are unlikely to contract. The good news for borrowers is they can always refinance when yields decline but that does come with costs. The cheaper option would be to issue floating rate debt today on the expectation rates are unlikely to stay high forever and seek to refinance with fixed rates later.

Colombian President Gustavo Petro said that an investigation into whether his son took money from organized crime must be allowed to follow its course, since “no one can be above the law.” 

A prosecutor said Thursday that Petro’s eldest son Nicolás put some of the tainted money to his father’s successful 2022 campaign and kept some of it for himself. 

Gustavo Petro, center, waves to supporters alongside his son Nicolas Petro Burgos, right, on election night in Bogota, Colombia, on May 29, 2022.

The scandal is likely to further weaken the leftist government’s ability to pass its radical health, pension and labor reforms, and may also hurt its performance in upcoming regional elections in October. 

“The Petro administration lost a lot of leverage with this,” said Sergio Guzman, the director of Colombia Risk Analysis, a Bogota-based consultancy. “It was going to have a difficult time to move things through in congress, but this makes it all the more difficult.”

Even so, people who think Petro is now finished are “jumping the gun”, Guzman said. 

Investors often welcome developments that hinder Petro’s welfare reforms, fearing these will blow out the fiscal deficit. The peso was 1.9% stronger at 10.40 a.m. in Bogota, the best performance in emerging markets. 

The point that immediately came to mind is seeing the above story. The first is how many leaders in the so-called developed world would be willing to allow their son to stand trial for corruption? My suspicion is it would be dealt with well before it ever became mainstream news.

The decision by policymakers to cut rates by a consensus-busting 100bp to 10.25% on Friday made Chile the first major EM to lower its key policy rate since the aggressive post-pandemic tightening cycle across the emerging world. With the economy struggling, a marked improvement in the outlook for inflation encouraged policymakers to get on with the job of reversing past hikes that saw Chile’s policy rate climb from just 0.5% in mid-2021 to a peak of 11.25% in late-2022.

As we noted earlier this year, further steep declines in inflation, led by food, should make space for additional easing in the months ahead.

Who’s next?
Attention now turns to which EM central banks are likely to be the next to start cutting rates. Prior to lowering rates on Friday, the CBC was one of a handful of EM central banks that had already been on pause for longer than usual. Others in that category include Brazil and the Czech Republic, where monetary policy announcements are due this week on Wednesday and Thursday respectively.

Brazil’s central bank is expected to cut by at least 0.25% tomorrow. With a positive real rate in excess of 10% they have ample room to cut rates to support flagging economic activity.

Since several Latin American countries were both early and aggressive in their efforts to tame inflation. The trajectory of their policy offers a picture of what we can expect from countries that were slower to act.

Mixed set of results with the stronger-than-expected recovery in China offsetting the decline in cognac, mainly in the US

“Demand for entry-price leather goods, jewelry and cognac from US aspirational customers will not recover immediately and visibility for the rest of the year remains low,” notably due to an uncertain macro-economic environment in China.

Luxury goods were one of the primary avenues for betting on the strength of China’s reopening. A narrowing of breadth within the sector is a sign of declining global appetite for high priced aspirational goods. Declining demand for the less desirable brands spreading to the first tier is a sign of caution among consumers and is now also evident in luxury watches. Second-hand Rolex prices are now also falling.

The upbeat outlook is a vindication for Chief Executive Officer Tufan Erginbilgic, who is in the middle of an extensive turnaround after calling the prime UK manufacturer a “burning platform” shortly after taking over at the start of the year.

The company, which primarily makes engines for widebody jets that connect long-haul destinations, saw demand wiped out at the height of the pandemic when airlines were forced to ground fleets amid travel restrictions and quarantines. 

“Better profit and cash generation reflects greater productivity, efficiency and improved commercial outcomes,” Erginbilgic said in the statement. “Despite a challenging external environment, notably supply chain constraints, we are starting to see the early impact of our transformation in all our divisions.”

The reason we see conflicting signs of both economic strength and weakness in the global economy is mostly likely because of changing consumption patterns. Consumers have curtailed everyday spending but are still willing to splurge on special occasions. That helps to explain why see declining used car prices at the same time as fans of Taylor Swift are splurging on tickets and demand for summer travel is high. That’s a reflection of how consumers deal with the reality of inflation. They make cuts where they can but are willing to spoil themselves to ensure they can have a feeling on an undiminished living standard.

Investors are scrutinizing the first set of results presented by Chief Executive Officer Hein Schumacher for hints of his strategy to revive Unilever’s sluggish performance. The new CEO, weeks into the job, raised the full-year forecast slightly, predicting revenue growth of more than 5% this year. The guidance may be conservative, as analysts are forecasting 6.1%.

The company chose an external CEO to help fix its bureaucratic culture and deal with critiques that it had become too focused with the so-called “social purpose” of the consumer products it sells. 

Schumacher, the former boss of Dutch dairy cooperative Royal FrieslandCampina, is expected to revisit the debate over splitting food brands like Hellmann’s mayonnaise from the faster-growing personal care, beauty, and wellbeing units.

The job of a corporation is to ensure it looks after its shareholders. When we rely on repeat business that tends to mean ensuring you have happy customers who think well of your company and its products.

The challenge in the age of social media is there is a vocal minority who are motivated by the desire to be as contentious as possible. Companies are finally beginning to realise the loudest part of the mob does not reflect the majority of consumers. In their desire to appeal to the mob on social media they hopefully temporarily forgot who their customers are. It unfortunately has taken some high profile boycotts to get the attention of company boards.

None of this bodes particularly well for humanity, of course, and there are signs that the warming climate could increase the demand for pest control even further into new areas. The termite population is getting hungrier. The mosquito season is growing longer. And some bugs, including the German cockroaches, are losing their sensitivity to existing pesticides. One way or another, Americans — led by those newly christened Floridians and Texas that arrived in the past several years — are going to have to learn to live in a world full of unpleasant critters, and that’s likely to add to the extermination industry’s reputation as a recession-proof juggernaut.

It seems inevitable that the next trend in asset management will be in climate survival funds. Many ESG funds were just another way to leverage up on technology bets and displayed high beta to the sector. That’s not quite as compelling following the roller coaster of the last few years.

Meanwhile, investors are much more concerned these days with governance than environmental metrics. The way to get investors on board is to appeal to their desire to boost returns. Expanding markets lead to expanding earnings. If the range and prevalence of insects is growing that’s an investment opportunity.

“The demand issues are multifold,” said Judy Ganes, president of consultancy J. Ganes Consulting, who has followed the market for more than 30 years. “There’s not just cocoa prices that are high, but sugar prices are also high, and manufacturers always look for ways to meet margins and work to put fewer chocolate chips in a cookie, or they shrink the bar sizes.”

Factories usually process cocoa several months before products are turned into chocolate. That means the slowdown likely signals the industry is expecting less demand ahead. Barry Callebaut AG, the world’s largest maker of bulk chocolate, said earlier this month that its sales volume fell 2.7% in the first nine months of the year, with its gourmet and specialists’ business seeing the biggest drop. 
 

The sweet tooth of the emerging middle class has allowed companies like Nestle, Chocoladefabriken Lindt & Sprungli AG and Hershey thrive, while simultaneously feeding a diabetes epidemic which has created of the most reliable streams of cashflow in any market. It’s truly a sign of consumer pressure when demand for an addictive product like chocolate declines.

So far, Lula’s government is trying to support both technologies in a precarious balancing act. To appease the sugar industry, it will keep incentives for ethanol in place while simultaneously courting electric-car makers from China scouting new overseas factory sites with a compelling sales pitch: proximity to local battery-metal deposits, a growing domestic middle class and access to other Latin American markets with their own discretionary incomes to spend. It has worked, with at least two of China’s biggest carmakers — BYD Co. and Great Wall Motor Co. — planning to bring their vehicle production to the country’s shores. But even they plan to add some ethanol-fueled hybrids to their Brazilian lineups in what looks like a friendly — and savvy — gesture.

The discussion about electric cars is “very important for Brazil and for the world,” said Renan Filho, Brazil’s transport minister. But ethanol should be part of the conversation, too, he said. “Ethanol emits much less.”

The original reason for promoting ethanol as a transportation fuel was because of the high price of oil. The fact it produces fewer emissions is a modern day bonus that helps to compensate for lower efficiency. The rationale for electrification of the transportation sector depends on abundant cheap electricity. That implies investing in additional supply infrastructure and its safe to assume most of the hydroelectric opportunities have already been exploited.

Electricity prices across Europe are set to fall below zero this weekend as the continent experiences a
surge of summer winds combined with the peak season for solar generation.

The sub-zero prices are a preview of what’s to come for European power markets if a flood of planned renewable power production isn’t met with a shift in demand. The hope is that eventually larger electric car fleets, smarter grids and better battery technology will catch up, but for now the mismatch is a headache for policy makers and companies. 

The risk is that a prolonged slump in prices could undermine the case for future investments, add costs for consumers and waste energy that could be used to cut demand for polluting alternatives.

At the same time that record high temperatures are being posted across southern Europe, one would think that record high renewable energy production would be greeted as a serious benefit. Now, if someone could prevail on countries to invest that excess power in air conditioning, they would have a lot less to worry about. Instead people could enjoy the summer heat and regional economies would be more productive.

Richemont led luxury-goods stocks lower amid concerns that demand in the US and China, two of the biggest markets for the industry, is starting to sputter.

The Swiss owner of Cartier reported a surprise drop in revenue from the Americas in the three months through June.

While Richemont’s sales from Asia rose sharply, China reported slower-than-expected economic growth Monday, signaling signs of a possible pullback in consumer spending.

Richemont fell as much as 8.2%, the steepest intraday decline in more than year. LVMH dropped as much as 3.7% and Hermes fell as much as 4.2%.

The luxury-goods industry has been counting on a rebound in China after that country’s reopening would make up for weakness in the US market. Now Richemont and its peers are contending with the prospect that its two main growth motors are weakening.

Last week, Burberry Group Plc said the low end of the luxury market in the US softened.

Aspirational spending is heavily dependent on disposable income and availability of credit. The luxury goods sector thrived during the pandemic because consumers were flush with cash and had fewer options to spend it since travel and sports events were shut down. The sector leaped higher again when China’s lockdowns ended because investors were betting the post pandemic celebratory spending would be repeated. That has not been the case.

The about-face comes after months of arduous negotiations over Turkey’s demands and on the eve of a critical two-day NATO summit where leaders including US President Joe Biden are eager to show a united front and signal to Vladimir Putin that his war on Ukraine has only strengthened the alliance.

NATO’s northern enlargement heralds one of the most prominent changes in the European security landscape after Russia’s aggression led to shifts including a ramp-up of defense spending in Germany and plans to bring back conscription in France. The early 2022 attack on Ukraine prompted an almost overnight change in public opposition to membership in NATO in Finland and Sweden.

“Completing Sweden’s accession to NATO is a historic step that benefits the security of all NATO allies at this critical time,” Stoltenberg said in Vilnius. “I will not give you the exact dates for that. But this is a clear commitment.”

The big question for defense companies is where will the money come from for countries to meet their NATO spending targets? The need is clear, but the route to additional spending runs through national priorities like pensions and social programs. 

At stake was a report published by Goldman analysts including Shuo Yang last Tuesday, which highlighted margin risks and potential credit losses from banks’ exposure to local government debt. Yang, a former official at the China banking regulator, estimated that the “implied loss ratio of credit portfolio in debt investment book” could reach 25% for Merchants Bank, compared with 6% on average for lenders under its coverage.

A representative for Goldman declined to comment.

Shares of Merchants Bank have lost 12% in Hong Kong since Goldman cut its target price for the second time in three months with a neutral rating. The US bank now has one of the lowest target prices for the Chinese lender, according to data compiled by Bloomberg.

Merchants Bank argued that Goldman’s report is “illogical” in the way it calculates the potential losses, “lacks basic common sense,” and also overestimates its exposure to the local government financing vehicles. 

The Chinese banking sector is independent in name only. The government has no qualms about using the sector’s resources to further its long-term development goals. When that means supporting infrastructure development to industrialise the economy, banks were forthcoming with loans and earned strong margins. Now that government priorities have changed, bank liquidity is constrained and asset quality is deteriorating. 

"Talk of BRICS gold backed currency seems like an echo chamber. They do not have the gold to back a currency meaningfully," said Marc Chandler, managing director of Bannockburn Global Forex. "Have we not learned anything from the EMU experience of monetary union without fiscal union. Color me profoundly skeptical."

Many analysts have been speculating about a new global currency to challenge the U.S. dollar's role as the world's reserve currency. In late March, Former Goldman Sachs chief economist Jim O'Neill wrote in a paper published in the Global Policy Journal that the U.S. dollar's dominance is destabilizing global monetary policies. He added that a BRICS currency, challenging the U.S. dollar's dominance, would bring stability to the global economy.

"Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic," he said.

A competing reserve currency group to the US Dollar would act as a competing force and promote responsible monetary and fiscal action over the long term. In the short term, the scrabble to accumulate gold would be enormously disruptive and would result in a devaluation of every other asset relative to the metal’s price. That kind of pain tends to be sprayed around and would not be confined to the financial sector. 

Heat this summer has already put millions of people around the world at risk. China is experiencing a scorching new heat wave less than two weeks after temperatures broke records in Beijing. Extreme temperatures in India last month have been linked to deaths in some of its poorest regions, while last week saw a dangerous heat dome cover Texas and northern Mexico.

The extreme weather may put more pressure on global leaders to curb greenhouse gas emissions generated from burning coal, oil and natural gas that trap heat in the atmosphere. The effects of climate change are being exacerbated by the arrival of the first El Niño in almost four years.

It’s likely the world will exceed 1.5C of warming “in the near term,” with efforts on climate action still insufficient, the United Nations’ Intergovernmental Panel on Climate Change said in March in a report summarizing five years of its own research. Global greenhouse gas emissions need to be cut to 60% below 2019 levels by 2035, according to the report, and climate-related risks are rising with every increment of warming.

The “dangerous” heat dome over Texas was a non-event for most people living in the region. Every home has an air conditioner. Singapore’s Lew Kwan Yew was well aware of the benefit gained from air conditioning given their hot humid climate. It was a major contributor to economic productivity. Additionally, air conditioning is a great moderator in the spread of malaria which is a growing concern as average temperatures rise in previously temperate zones. (Europe, USA).

Financial support from multilateral lenders has boosted investor confidence — and returns — across troubled emerging and frontier markets in recent months, as funds were approved or disbursed for countries including Kenya, Tanzania, Senegal, Ukraine, Ghana and Ivory Coast. Other sovereigns in Africa, including Egypt and Mozambique, are expected to have their loans approved soon.

Inexpensive valuations are helping Pakistan’s market as well. Concerns related to the slew of negative headlines recently ranging from political turmoil to the risk of a debt default and sinking rupee had sent investors fleeing, with the KSE-100 Index becoming the world’s cheapest equity benchmark.

“Overall, the valuations are dirt-cheap with significant room for rebound,” said Ali Raza, head of international equities trading at BMA Capital, in Karachi. 

Pakistan dollar bonds advanced, with the paper due in 2024 gaining 17 cents in the past week. The 8.25% 2024 bond was indicated 3.1 cents higher to trade at 73.6 cents on the dollar on Monday, a level last seen about a year ago in August. The gains come after dollar bonds notched their best-ever week. Pakistan’s currency market opens Tuesday.

The jump in global interest rates and steady removal of liquidity has weighed heavily on frontier markets. The end of the USA’s war in Afghanistan, last year’s massive floods and slow recovery, as well as political upheaval have added to the negative perception of the Pakistan market’s potential.

Latin America’s largest economy is showing mixed signals, with stronger agriculture production while other sectors grow modestly, policymakers wrote in their minutes. With more resilient activity, central bankers raised their estimates for neutral rates, which neither stimulate nor restrict the economy, to 4.5% from 4% previously. 

“They are opening the door slowly, cautiously, given the uncertainty that remains around inflation targets,” said Cristiano Oliveira, chief economist at Banco Pine. “If current 3% goals are kept unchanged, rate cuts will begin in August.” 

Investors are awaiting a decision on long-term inflation targets later this week, when Campos Neto, Haddad and Tebet will meet to set the goal for 2026. 

“Decisions that induce the reanchoring of expectations and that raise confidence in inflation targets would contribute to a faster and less costly disinflation process, allowing monetary easing,” central bankers wrote in their minutes. 

Lula’s first two picks for the bank’s board are likely to participate in August’s rate decision meeting, with former deputy Finance Minister Gabriel Galipolo seen as an advocate for lower borrowing costs.

Brazil showed the rest of the world what has to be done to get inflation under control. They raised rates by 11.75% in 17 months. That’s double the Fed’s pace of tightening. Brazilian inflation has dropped from a peak of 12.13% in April last year to the latest reading of 3.94%. That level is back in the region of the lows from back in 2006/7 and 2017-2020.

Wagner mercenary group chief Yevgeny Prigozhin released an audio recording in which he discussed the past weekend’s events and said his group didn’t plan to overthrow the Russian government.

March toward Moscow showed serious security problems in the country, he said in a recording released on Telegram that didn’t specify from where he was speaking.

Prigozhin said he launched march because he wanted to preserve Wagner as a military group and not come under the command of the Defense Ministry.

Belarusian President Alexander Lukashenko helped find a negotiated solution to the weekend’s events, he confirms.

Belarusian President Alexander Lukashenko earlier brokered a deal in which Prigozhin ended the revolt in return for Putin letting him travel to Belarus and dropping criminal mutiny charges, the Kremlin earlier said.

Wars are full of surprises. Over the weekend, the spectacle of an armoured column, intermixing with civilian traffic, on the way to Moscow is something the whole world is pondering the implications of. At a minimum it raises questions about the control Putin has over his warlords and generals. It is also yet another example of how mercenary armies are loyal to themselves and eventually have to be put down. 

Vietnam was one of Asia’s fastest-developing economies last year, expanding more than 8 per cent, its highest growth rate since 1997. But growth slowed in the first quarter of 2023 to 3.3 per cent, down from 5.9 per cent in the fourth quarter of last year, as a grim global economic picture and high inflation cut into demand for the country’s exports.

“We rely on the world’s demand for our products, which is facing a lot of difficulties,” Ho Duc Phoc told the Financial Times, adding that the war in Ukraine had raised petroleum and consumer prices, putting pressure on manufacturing input and trade costs and depressing buyers’ appetite. “Our orders from international partners have reduced drastically.”

He said the government was targeting full-year growth of 6 to 6.5 per cent, following anticipated first-half growth of about 4 per cent. “In the next six months, we will probably have [to take] aggressive steps to achieve that target,” he said, citing an extension of deadlines for tax payments, the reduction of value added tax and petrol levies amid proposals to help lower costs and boost demand.

Vietnam’s central bank this month cut interest rates by 50 basis points, its fourth reduction this year.

Vietnam is a major exporter but not of semiconductors. Since that is a major business for regional economies like South Korea and Taiwan, Vietnam offers a more complete picture of how global demand is shaping up. The slowdown in container pricing offers an additional insight into the trajectory of global demand. It has completely unwound the pandemic spike and is trading back inside the prior range. 

Major institutional owners including Blackstone, Brookfield and Pimco have already chosen to stop payments on some buildings because they have better uses for their cash and resources. “There’s significant stress,” says Harold Bordwin, a principal in New York at Keen-Summit Capital Partners LLC, which specializes in renegotiating distressed real estate. “People don’t give up assets so easily unless they just don’t see any hope and they recognize that they’re pretty well underwater.”

The number of transactions is plunging—and when deals do happen, the price declines are stark. In the US, where return-to-office rates have been lower than in Asia and Europe, values for institutional-quality offices are down 27% since March 2022, when interest rates started going up, according to data analytics company Green Street. Apartment building prices have declined 21%, and malls are off 18%. Office prices are expected to fall more than 25% in Europe and almost 13% in the Asia-Pacific region before hitting a trough, PGIM Real Estate, a unit of Prudential Financial Inc., forecasts.

The work from home trend coupled with sharply higher interest rates is a bad recipe for the commercial real estate sector. It is true that all property markets are local and trophy properties are more likely to thrive than others. However, the bigger question is who owns commercial properties? 

Zambia reached an agreement in principle to restructure $6.3 billion of debt with bilateral lenders and will announce a deal Thursday, according to a French official, setting a precedent for countries struggling to service their liabilities.

The accord marks the first major relief won by a developing country under the Group of 20 nation’s Common Framework that brings the traditional creditor nations of the Paris Club around the same negotiating table with China and India. Details are still unclear, beyond that the creditors led by China and France agreed to extend the maturities on their loans over some 20 years, with a three year grace period. 

The parties will sign the memorandum of understanding in coming weeks, the official said.

This could lead the way for other nations — including Ghana, Sri Lanka and Ethiopia — locked in negotiations with creditors from China, the Paris Club and bondholders. More than 70 low-income nations face a collective $326 billion burden, with more than half of them already in or near debt distress, according to the International Monetary Fund. 

Slowing demand in China, the end of low rates and the jump in the dollar over the last couple of years have represented a triple waterfall negative surprise for many low-income countries. That has resulted in several countries defaulting on their sovereign debt and turning to creditors for debt relief. 

Airbus secured the biggest aircraft order in aviation history, notching a 500-plane deal with India’s dominant airline, IndiGo. The mammoth accord for Airbus’s top-selling A320 family of single-aisle jets brings IndiGo’s order backlog to close to 1,000 planes as extends its lead in the world’s fastest-growing large market for aviation.

“No one has ever ordered an order of this magnitude,” IndiGo Chief Executive Officer Pieter Elbers said from the podium. “It speaks to the potential of Indian aviation and the ambitions which Indigo is having.”

An Indian airline placing the world’s largest airplane order is not something most investors would have predicted a decade ago. It is a clear vote of confidence in Indian consumers’ appetite and ability to pay for domestic and international travel. Greater access to travel will also enhance the ease of doing business and help to spread opportunity to more regions of the country. 

The UK housing market is under particular pressure from a triple whammy of pricey borrowing, economic uncertainty and high inflation. While the average two-year fixed-rate home loan surpassed 6%, the five-year fixed-rate deal climbed to 5.67% after breaching 5.5% for the first time since January last week.

When my parents bought their first home in the mid-1970s they secured a fixed interest rate for the term of the loan. By the time they sold that house twenty years later, the repayment cost was negligible, and the availability of fixed rate mortgages has evaporated. That was a happy circumstance for my parents, but it was funded by government efforts to support home ownership that were unsustainable. Today prices are high, rates are floating higher, government debt is already problematic and young people are being squeezed. It’s a combustible mix. 

But though the nearshoring story remains plausible, the data so far do not quite justify the exuberant optimism that North America can pull Mexico into the developed world.

Recent government trade data confirm that the US is moving away from China. Last year Chinese exports accounted for only 17% of US imports, down from 22% during President Trump’s first year in office. In 2023 they have cratered, accounting for only 13% of what the US bought from abroad in the first four months of the year.

But Mexico is not taking over. Its 15% share of US imports this year is only 1.3 percentage points higher than it was in 2017. Indeed, other Asian exporters are taking a larger chunk.

Moreover, the nearshoring boom is hard to detect in the investment numbers. Foreign direct investment into Mexico has been stronger in the last ten years than in the prior decade, but the data show no recent upsurge. Indeed, new investment — excluding reinvested earnings — seems somewhat lower.

To date the bulk of inward investment to Mexico has been focused on utilities. That’s a bet on a growing population and increasing demand water, electricity and gas. That’s now, it does not speak to the future. The continued strength of the Peso suggests more than a few institutional investors are more than happy to bet on the nearshoring theme. 

The new stimulus package under consideration has been drafted by multiple government agencies and includes at least a dozen measures designed to support areas such as real estate and domestic demand, according to people familiar with the matter. 

A key component is support for the real estate market. Regulators are seeking to lower costs on outstanding residential mortgages and boosting relending through the nation’s policy banks to ensure homes are delivered, one of the people said.

The State Council may discuss the policies as soon as this Friday but it’s unclear when they will be announced or implemented, the people said.

“The aim of stimulus this time is to keep growth ticking over, consistent with the relatively conservative ‘about 5%’ gross domestic product growth goal, rather than to spur a round of robust growth,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “Policymakers are still wary of repeating the kind of debt hangover that the Global Financial Crisis stimulus produced and they spent the decade up to the pandemic trying to sort out.”

Property Woes
The weak property market remains a major drag on China’s economy, although policymakers appear reluctant to use its old playbook of driving up investment in real estate as a way to boost growth. Goldman analysts said in a recent report they don’t expect a repeat of the 2015-2018 shantytown renovation program that pumped central bank money into the property sector and sent home price surging.

Beijing is seeking to reduce the economic and fiscal reliance on the housing market, Goldman said, which suggests an L-shaped recovery in coming years.

The old playbook is whenever a problem arises, governments and central banks will open the sluice gates of liquidity to make it go away. In the 15 years since the global financial crisis that has been the mantra every investor has learned to live by. The belief nothing has really changed is the primary reason for bullishness on Wall Street today. 

The data on Tuesday showed faster-than-anticipated wage growth and lower unemployment. Hours later, new BOE rate setter Megan Greene joined policymaker Catherine Mann in warning of the risks of persistent inflation and the difficulty of getting back to the 2% target. 

The surprise April wage figures were partly driven by an increase in the national minimum wage, which won’t be repeated in later months. Still, according to Goldman Sachs analysts including Isabella Rosenberg, “we don’t think they can be ignored.”

“The BOE has much further to go than other central banks,” they said.

There are several factors conspiring to keep UK inflationary pressures at uncomfortably high levels. The first is the obvious one. Islands have more complicated supply chains, which push up inflation relative to continental peers. 

Brazil’s annual inflation slowed much more than expected in May, hitting the lowest level in two and a half years and piling pressure on the central bank to ease monetary policy in coming months.

Official data released Wednesday showed consumer prices rose 3.94% from a year earlier, less than all forecasts in a Bloomberg survey of analysts that had a 4.04% median estimate. Monthly inflation stood at 0.23%.

Brazil was more aggressive in raising rates than just about anywhere else. With inflation at 3.94% they have close to a 10% positive real rate. The central bank has been adamant they would not cut rates if the government embarks on irresponsible spending. That resulted in the da Silva administration agreeing to cap public sector wages. 

President Recep Tayyip Erdogan, who won reelection to a five-year term, has long championed an unorthodox economic policy based on ultra-low interest rates. The costs of that policy piled up in the form of depleted foreign-currency reserves, an inflationary spike, and an exodus of foreign capital, leading markets to price in a large depreciation after the vote as investors bet that it was unsustainable. 

Minister Simsek
Erdogan’s appointment of Simsek, a former Merrill Lynch strategist, has intensified expectations of a return to orthodoxy and abandonment of state intervention in favor of allowing the market to determine fair value for Turkish assets. Since the election on May 28, the lira has weakened more than 13% against the dollar.

Investors are betting that more weakness is coming. The options market is currently pricing about an 80% chance that the lira will hit 25 per dollar within the next three months, and a more than 60% chance that it could hit 27 per dollar, according to data compiled by Bloomberg.

Turkey’s state banks don’t comment on their interventions in the foreign-exchange market. A former governor of the central bank said in 2020 that state-owned lenders carry out transactions in line with regulatory limits and could continue to be active in the currency market.

We have some great examples of what works and does not work on the international stage. Brazil and Mexico have successfully overcome inflationary pressures by taking aggressive measures and expressing a willingness to tolerate economic weakness. Many other countries have raised rates but are curtailed from being overly aggressive by high debt loads and interest rate sensitive asset markets. They have not yet overcome their inflationary threats. Then we have Turkey which has insisted on keeping rates low and ignored inflation. That is leading to a significant additional currency devaluation. 

It's understandable to assign higher revenue multiples to smaller and highly disruptive companies with exponential growth potential. However, the combined market capitalization of these seven companies now exceeds US$10 trillion, so how can they deliver such growth while defying the laws of diminishing returns, especially when they were unable to do so when they were smaller, more innovative and capital was next to free with interest rates hovering around zero per cent? Over the past decade, Nvidia's revenue has grown sixfold and yet the market is now giving it a 38 times multiple. Microsoft has grown revenue by 2.7 times with a current 12 times multiple, and Apple's revenue has grown 2.2 times and yet it has a seven times multiple.

It isn't as if this hasn't happened before. Take Sun Microsystems Inc., which traded at more than 10 times its revenue prior to the bursting of the 2000 tech bubble. In 2002, chief executive Scott McNealy responded to the aftermath with a thought-provoking quote.

"At 10 times revenues, to provide a 10-year payback, I would have to distribute 100 per cent of our revenues to shareholders for 10 consecutive years in the form of dividends. This assumption assumes that I can achieve such an arrangement with our shareholders, that we have no cost of goods sold (which is highly unlikely for a computer company), that we have zero expenses (difficult with 39,000 employees), that we pay no taxes (also challenging), and that you, as shareholders, pay no taxes on the dividends received (which is illegal)," he said.

"Additionally, this assumption presumes that, with no investment in research and development for the next 10 years, we can maintain the current revenue rate. Considering these unrealistic assumptions, would any of you be interested in purchasing our stock at US$64? Can you fathom the absurdity of these basic assumptions? We don't need any transparency or footnotes to recognize their implausibility. What were you thinking?" In a seemingly repetitive cycle, we wonder if we will eventually be questioning ourselves again with a "what were you thinking?" moment. If you are tempted to say "this time it's different," we checked with ChatGPT and will leave you with its answer.

…"It's prudent to exercise caution, diversify portfolios and focus on fundamental principles rather than getting carried away by the idea that the current situation is entirely unprecedented."

I created a chart today to demonstrate the dominance of mega-caps in the Nasdaq-100. The eight FANGMANT shares represent 61.86% of the Index’s market cap. Those companies are Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Netflix and Tesla.

The dam, 30 metres (yards) tall and 3.2 km (2 miles) long and which holds water equal to the Great Salt Lake in the U.S. state of Utah, was built in 1956 on the Dnipro river as part of the Kakhovka hydroelectric power plant.

It also supplies water to the Crimean peninsula, annexed by Russia in 2014, and to the Zaporizhzhia nuclear plant, which is also under Russian control and which gets cooling water from the reservoir.

The International Atomic Energy Agency (IAEA) said there was no immediate nuclear safety risk at the plant due to the dam failure but that it was monitoring the situation closely. The head of the plant also said there was no current threat to the station.

The destruction of the Kakhovka is an obvious response to the beginning of the Ukrainian counter offensive. Back in February there were several stories about how Russia had opened the sluice gates at the dam to drain the reservoir. That action puzzled commentators at the time but the intention is now clear. 

A mountain of developer debt — equal to about 12% of China’s GDP — is at risk of default and poses a threat to financial stability, according to Bloomberg Economics. That’s despite a slew of existing support measures for the industry, which include: 

Lower mortgage rates for first-home buyers if newly constructed house prices drop for three consecutive months
A nationwide cap on real estate commissions to boost demand
Allowing private equity funds to raise money for residential property developments
Pledging 200 billion yuan ($28 billion) in special loans to ensure stalled housing projects are delivered
A 16-point plan unveiled in November that ranged from addressing the liquidity crisis to loosening down-payment requirements for homebuyers

Speculation about further policy support helped propel a gauge of Chinese property developers to a more than 6% gain on Friday before the Bloomberg report, the most since December. In the coastal city of Qingdao, the government this week lowered the down payment ratio for first- and second-time home buyers in areas not subject to purchase restrictions, local media reported earlier on Friday.

Everyone can agree that moral hazard is a problem for economists. Create an incentive and resisting regulation ensure it will be exploited to the greatest extent possible by any and all means possible. Unbridled debt issuance is a hallmark of speculative activity in China. That’s been a clear feature of the housing/infrastructure boom. It was equally evident in the pace with which loans were made to foreign governments and projects as part of the Belt and Road Initiative. 

India’s GDP growth increased to 6.1% year on year in January-March, from an upwardly revised 4.5% in the final quarter of last year. The reading exceeded even our forecast of 5.7% — the highest in a Bloomberg News survey — and was 1.1 percentage points higher than the consensus estimate.

For fiscal 2022, which ended March 31, that translates into GDP growth of 7.2%, higher than the government’s second advance estimate of 7%. This was in line with our forecast, but 0.2 ppt higher than the consensus estimate.

Key drivers behind the positive data surprise included government subsidies that are energizing the electronics sector, multinationals shifting back-office business to India to reduce costs, and stronger real credit growth.

The Reserve Bank of India’s cumulative 250 basis points of repo rate increases in this cycle didn’t appear to have any meaningful impact. The construction sector, which is most sensitive to interest rates, also recorded higher growth in 1Q.

India’s Manufacturing PMI is in expansion territory and continues to trend higher. That is in sharp contrast to the negative readings in both China and the USA. Manufacturing capacity has been migrating for much of the last decade as China’s wage bill trended higher. The low end garment industry is now well established in places like Bangladesh, Pakistan, and Ethiopia for example. 

By 2050, the UK’s Environment Agency expects the gap between available water and what’s needed by homes and businesses to reach 4 billion liters per day in England — enough to fill 1,600 Olympic size swimming pools. Leaks are part of the picture, but so is a neglected network, some of which was built more than 150 years ago, that doesn’t store enough for times of drought, and water consumption that outstrips many other parts of Europe.

The crisis has become a national obsession. The public is furious with a privatized English water industry that has paid out millions to executives and shareholders while failing to keep pace with population growth and climate pressures, and the government and regulators that have allowed it to happen. As well as the threat of water shortages, underdeveloped pipes and treatment plants mean raw sewage is frequently dumped in rivers and the sea, causing environmental damage.

Now, after years of delays, the UK is racing to fix its broken water system before it’s too late. “The worst risk has not materialized yet,” says Jim Hall, a professor of climate and environmental risk at Oxford University and a member of the government’s official infrastructure adviser. “There is some sense until now that we’ve got away with it,” he says, but “a severe and prolonged drought could materialize at any time.”

The population of Greater London declined between the 1950s and early 1980s but then jumped around 50% over the last forty years. There was no incentive to invest in water infrastructure during a time of declining population growth and it takes a long time for institutional mindsets to change. Today, there is urgency to the investment case because urgent remedial action in both storage and usage are necessary. 

Anheuser-Busch InBev ADRs fall as much as 2.5% ahead of the bell after the latest Nielsen data shows accelerating volume and sales declines for its Bud Light beer. Shares dropped as much as 1.9% in Europe.

Nielsen data through May 20 show that Bud Light volume declines accelerated to -27.2% vs -25.0% in the week ended May 13, while sales worsened to down 24.3% from down 21.6%, writes Citi analyst Simon Hales

The broader InBev beer portfolio also continues to see weakness, while Molson Coors’ Coors Light beer continues to see market share gains accelerate, he says.

The culture wars are ramping up a year ahead of the US Presidential election. “Protect the children” is developing as the counter point to the rollback of abortion rights earlier this year. It is reasonable to expect continued efforts to deepen the gulf between the parties as centrists are increasingly forced to pick a side. Taking the bi-partisan agreement to raise the debt ceiling as a sign that partisanship is ebbing would seem to be rather naive. 

But the latest swing higher in real yields shows that in spite of fraught debt-ceiling negotiations, the world’s biggest bond market senses another jolt of policy tightening and an extended period of staying on hold may be warranted. A similar outlook is being echoed in the swaps market, with traders almost fully pricing in a quarter-point hike within the next two policy meetings.

That view has found support in recent data pointing to a resilient US economy and sticky inflation. A report on Friday showed the inflation rate for US personal spending on items excluding food and energy running firmer than forecast at an annual pace of 4.7% in April. That comes amid upside surprises in UK and European inflation numbers, reminders that central banks may have more work to do and bond yields may keep climbing. 
 

PCE inflation, the trimmed kind followed by economists who don’t like volatile real life data, surprised on the upside today. That is a mirror of the UK result earlier this week. It suggests the primary sources of inflation are now services and shelter. The sources of inflation which can be influenced by interest rates are already subsiding. For example food prices are now contracting. 

Delivery companies as publicly listed entities are under pressure to churn out profits. And there’s very little competition. Consolidation, particularly since that start of the pandemic, has left three dominant players in the US. DoorDash had 65% of food delivery sales as of April, including those from its Caviar unit, according to Bloomberg Second Measure, a provider of transaction data analytics. Uber Eats has a 25% share, aided by its 2020 acquisition of Postmates. Grubhub Inc. — which has over the years absorbed Seamless, Eat24, and Tapingo before being acquired by Just Eat Takeaway.com — has 9%. 

Delivery apps are a vestige of the success stories that characterised the pandemic living experience. The market is not big enough to accommodate all the companies vying for dominance so the best capitalised are most likely to gain markets share as the weaker companies disappear. 

“The health of the local economy is now the primary concern,” said Brendan McKenna, an emerging-markets strategist at Wells Fargo Securities in New York. “It’s difficult to make a really compelling case to deploy capital toward South Africa and the rand at the moment. The rand has been an EM currency that has underperformed for most of this year, and given the commentary from the SARB today, that underperformance is likely to continue.”

Bloomberg’s forecast model based on prices of options to buy and sell the rand shows a 53% chance of the currency breaching 20 per dollar within the next week. That compares with a probability of just 6.8% before Thursday’s rate decision.

All of the monetary policy committee’s five members voted for the half-point increase, the first such unanimous decision since September 2021. There have been a cumulative 475 basis points of interest-rate hikes since November 2021, the most aggressive tightening cycle in at least two decades.

“The rand should strengthen after an interest rate hike, but given the poor reaction in the currency, the market seems to think that this is a potential policy mistake,” said Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank in Johannesburg. “The yield curve has steepened aggressively post the rate hike as fiscal fears start playing in investors’ minds on the back of poor growth prospects.”

When the former CEO of Eskom writes a book called Truth to Power and refers to the company as South Africa’s largest organised crime network, it is not exactly good for the country’s international reputation. The cholera outbreak north of Pretoria, which has killed 17 people so far, is an additional sign that South Africa’s water infrastructure is also in need to remedial care. 

Aside from the capital, no state received more money than Nuevo Leon’s $2.3 billion. Jalisco received $1.2 billion, while Puebla and Mexico State followed with $0.9 billion each. The majority of the investment growth came from companies that expanded existing operations in Mexico.

“The greatest part of the foreign direct investment was reinvestment in utilities, which is related to the increase in the capacity of plants already installed by companies, and explained by the long-term perspective on export growth,” said Gabriela Siller, director of economic analysis at Banco Base.

The movement of companies from other parts of the world to just south of the US — a practice known as nearshoring — has generated buzz around Mexico’s production possibilities. Nearly $10 billion of the investment went to the manufacturing sector, while $6 billion went into financial services.

If the current pace continues, total investment for the year could reach $43 billion, Siller said. That would represent a 51% gain in total foreign direct investment from 2022 after $6.9 billion from the media merger and Aeromexico restructuring is excluded.

https://en.wikipedia.org/wiki/Isthmus_of_TehuantepecMexico’s GDP is around $1.27 trillion so inward investment approaching $100 billion in a year moves the needle for economic growth. At present Mexico is growing at around the pre-pandemic trend rate of 4%, and inflation (6.25%) continues to trend lower. Fiscal constraint has been a hallmark of AMLO’s presidency and that has helped to support the peso. In turn that has improved the perception of upside potential for foreign investors in the stock market.  

Confidence in that view has now been dented, however, with attendees at a luxury conference in Paris organized by Morgan Stanley flagging a “relatively more subdued” performance in the US, according to Edouard Aubin, an analyst at the investment bank. That reflects “weakness in the aspirational consumer in particular.”

That was counterbalanced by more buoyant demand elsewhere, according to Morgan Stanley. “Overall, we found corporate commentary resilient, pointing to an ongoing soft landing in the US largely offset by strength in other markets.”

Both Asia and the US are important markets for European luxury companies. Asia excluding Japan accounted for 30% of LVMH’s sales in 2022, while the US made up 27%, according to the company’s annual report. 

Deutsche Bank AG analysts have also said that a slowdown in the US is now a growing concern. While the rebound in Chinese demand has been among the key drivers of strong sales, investors are likely to be picky from here on, they added.

Hermes doubled in less than a year. For a “limited supply” champion that’s an impressive performance. The share’s trend has been supported by the low float and its status as a vehicle for playing China’s post pandemic consumer rebound, without in fact investing in China.  

At first, the insurance pricing process -- heavily reliant on algorithms and mathematical modeling -- seemed ripe for upending, thanks to advances in the sheer amount and variety of data digitally-native companies could suddenly collect on customers.

But the Silicon Valley axiom to move-fast-and-break-things hasn't been enough to transform an industry built on centuries of observed human behavior, massive marketing budgets and a savvy grasp of the regulatory environment.

Founded in 2015, Lemonade initially aimed to sell renters and homeowners insurance. It was worth $9.87 billion at its peak in 2021; it's now worth $1.23 billion. Root Insurance, also founded in 2015, began with the idea of using telematics -- or in-car data -- to offer personalized auto insurance based on how people drive. In 2020, it was worth roughly $6.8 billion, and has since swooned to about $67 million. Property and casualty insurance startup Hippo went public at a $5 billion valuation in 2021. It is now worth around $425 million.

So far, the insurtechs have been slow to gather and contextualize enough data to actually build better models. Regulations have restricted the use of some of their data and differentiated pricing. And it has been difficult to chip away market share from established industry giants.

I have been a beneficiary of the insurtech market, so perhaps I am more positively disposed towards the sector than others. As a user of MyFitnessPal, I was provided with a life insurance policy (at my peak pre-pandemic fitness point) at a rate that was far below anything available elsewhere. The home insurance premium I pay Lemonade is half what other companies have quoted. The big question is whether these companies can achieve profitability before they run out of money. 

As Parks dug into the details of the loans, he found something alarming: Clauses mandating that borrowing countries deposit U.S. dollars or other foreign currency in secret escrow accounts that Beijing could raid if those countries stopped paying interest on their loans.

In effect, China had jumped to the front of the line to get paid without other lenders knowing.

In Uganda, Parks revealed a loan to expand the main airport included an escrow account that could hold more than $15 million. A legislative probe blasted the finance minister for agreeing to such terms, with the lead investigator saying he should be prosecuted and jailed.

Parks is not sure how many such accounts have been set up, but governments insisting on any kind of collateral, much less collateral in the form of hard cash, is rare in sovereign lending. And their very existence has rattled non-Chinese banks, bond investors and other lenders and made them unwilling to accept less than they’re owed.

“The other creditors are saying, ‘We’re not going to offer anything if China is, in effect, at the head of the repayment line,’” Parks said. “It leads to paralysis. Everyone is sizing each other up and saying, ‘Am I going to be a chump here?’”

Loans as ‘currency exchanges’
Meanwhile, Beijing has taken on a new kind of hidden lending that has added to the confusion and distrust. Parks and others found that China’s central bank has effectively been lending tens of billions of dollars through what appear as ordinary foreign currency exchanges.

Foreign currency exchanges, called swaps, allow countries to essentially borrow more widely used currencies like the U.S. dollar to plug temporary shortages in foreign reserves. They are intended for liquidity purposes, not to build things, and last for only a few months.

But China’s swaps mimic loans by lasting years and charging higher-than-normal interest rates. And importantly, they don’t show up on the books as loans that would add to a country’s debt total.

Mongolia has taken out $1.8 billion annually in such swaps for years, an amount equivalent to 14% of its annual economic output. Pakistan has taken out nearly $3.6 billion annually for years and Laos $300 million.

The swaps can help stave off default by replenishing currency reserves, but they pile more loans on top of old ones and can make a collapse much worse, akin to what happened in the runup to 2009 financial crisis when U.S. banks kept offering ever-bigger mortgages to homeowners who couldn’t afford the first one.

Some poor countries struggling to repay China now find themselves stuck in a kind of loan limbo: China won’t budge in taking losses, and the IMF won’t offer low-interest loans if the money is just going to pay interest on Chinese debt.

For Chad and Ethiopia, it’s been more than a year since IMF rescue packages were approved in so-called staff-level agreements, but nearly all the money has been withheld as negotiations among its creditors drag on.

The G-7 meeting starts today in Japan and the BRICS Summit will be in August in South Africa. On one side we have the major developed countries getting together to talk about cooperation and how to counter Russia and China. On the other, are the world’s major population centres, where growth will be concentrated over the coming decades. They are suspicious of G7 motives and not least since the confiscation of Russia’s sovereign reserves and are also seeking cooperation but with one another. A major PR exercise is now underway to win hearts and minds in the emerging markets as geopolitical battles lines are drawn. 

A temporary slowdown in inflation may give Egypt’s MPC room to pause, especially after Governor Hassan Abdalla signaled higher interest rates are doing little to cool prices.

The central bank “is likely to remain data-led, and will see declining global commodity prices and a reduction in domestic inflation as supportive of their current monetary stance,” said Farouk Soussa, an economist at Goldman Sachs Group Inc. The monetary authority sees inflationary pressures stoked mainly by supply issues, “reducing the rationale for a further hike in the medium term,” he said.

Emerging markets have no choice but to aggressively hike rates when inflation surges. They don’t have deep domestic capital markets and rely on offering a real rate of return to attract inward investment. Egypt’s year over year inflation has probably peaked at around 30% but with overnight rates closer to 18%, there are still sharply negative real rates. That’s the primary reason for the downtrend in the Egyptian Pound. 

President Joe Biden expressed confidence that negotiators would reach an agreement to avoid a catastrophic default, even as House Speaker Kevin McCarthy criticized his decision to travel to Japan for an international summit.

“I’m confident that we’ll get the agreement on the budget and that America will not default,” Biden said Wednesday at the White House, shortly before departing to Hiroshima, Japan for a Group of Seven leaders summit.

On Capitol Hill, McCarthy and other Republican lawmakers criticized Biden for his decision to travel, with the House speaker labeling the president “a big obstacle” to an agreement.

“Mr. President, stop hiding, stop traveling,” McCarthy said.

On Tuesday, Biden and congressional leaders agreed to a new narrower round of staff-level talks with hopes of reaching a bipartisan deal to avoid an unprecedented US default. The US president also announced he was canceling planned stops in Australia and Papua New Guinea, and would return to Washington by the beginning of next week for continued negotiations.

The decision to attend the G7 meeting is a clear signal there are more important issues at stake than the inward facing decision about how spending and taxing priorities are apportioned. Holding the sovereign debt market to ransom is not the most productive use of anyone’s time but at least it ensures there is a discussion about the trajectory and sustainability of the national debt and obligations. 

 “An important influence over the last year has been the closing of the IPO market,” Burns said in the statement. “We had fourteen companies go public in 2021 but as the IPO market closed in 2022 companies postponed their plans with no private holdings going public.” 

During the year the fund invested £281 million into private companies for follow-on investments as well as two new investments in UPSIDE Foods and Climeworks, Burns said. Private holdings made up 28.6% of the portfolio at March 31.

“We will continue to closely monitor the proportion of the company invested in private companies throughout the year recognising that the proportion can be volatile,” he added.

Scottish Mortgage is not the only fund to have to write down investments in private assets. The low interest rate, low inflation and abundant credit of the last decade allowed long duration assets like high growth, zero profit companies to expand rapidly. The right investment decision was to bet big on the private assets sector. The big mistake was to think the trend was immune to tightening credit conditions. 

Brazilian lawmakers introduced changes to President Luiz Inacio Lula da Silva’s proposed spending rules to include automatic penalties in case the administration is unable to meet fiscal goals set in the bill.

The government would be forced to reduce spending in case revenue comes in below its estimates, including delaying some payments, freezing the salary of public workers and halting the hiring of new ones, according to the text of the bill released on Tuesday by lawmaker Claudio Cajado, the bill’s rapporteur.

“Party leaders’ reaction to the new text is very positive,” Cajado told reporters, adding that the plan is to take the bill to a floor vote on May 24. “We made room for different opinions and I hope there will be no more changes to the bill.”

The new fiscal framework proposed by Finance Minister Fernando Haddad includes small but growing primary budget surpluses, which don’t take into account interest payments, in order to stabilize public debt. It’s part of government efforts to assuage investors worried about Brazil’s finances under Lula and to help the central bank lower interest rates, considered by the president as the main impediment to growth.

Brazil was among the first to aggressively raise rates to ensure a positive real rate would counter inflationary pressures by sucking liquidity out of the economy.  Today that positive real rate stands at 9.57%. 

Turkey will hold a runoff election, with President Recep Tayyip Erdogan just failing to secure enough votes for a first-round victory.

The 69-year-old, looking to extend his two decades in power, will face Kemal Kilicdaroglu, 74, in another vote on May 28 after doing better than polls predicted.

Turkish stocks and bonds dropped, while the cost of insuring the government’s debt against a default spiked, as the results wrong-footed investors betting on a quick end to Erodogan’s unconventional economic policies, which include keeping interest rates well below the level of inflation.

“This is a major disappointment to investors hoping for a win for opposition candidate Kilicdaroglu and the reversion to orthodox economic policy he promised,” said Hasnain Malik, a strategist at Tellimer in Dubai.

Erdogan won 49.5% of the votes, while Kilicdaroglu secured just under 45%, with nearly all the ballots counted, Turkey’s High Election Board said on Monday. Another contender, Sinan Ogan, received 5.2% and was eliminated from the race.

Turkey has a population of 85 million and a median age of 33. It’s no longer a very young country and is stuck squarely in the middle income trap. Erdogan’s domestic policy of promoting Islamic nationalism and international policy of boosting the country’s regional footprint have gained geopolitical points but has also been expensive. 

Under a constitution promulgated in 2017, the military-appointed senators get to vote alongside the 500 elected lower house members to decide on the next prime minister. 

Political parties affiliated with Thaksin, 73, have won the most seats in every national vote dating back to 2001, only to be unseated from power by dissolutions or coups. 

Whether Thaksin’s planned return to Thailand in July will exacerbate tensions with the military elite is another question. The telecoms magnate has been living in self-imposed exile after fleeing to avoid prison over a corruption conviction that followed a coup that toppled his own government in 2006.

Thaksin Shinawatra’s plan to return to the land of smiles in July is certainly going to represent a flash point in democrats’ relationship with the military. Quashing the corruption charge could easily be a precondition for successful negotiation of a coalition agreement to form a civilian government. The challenge will be in how a new administration will further their aims, without running headlong into opposition from the military/royalty-aligned status quo. 

Relations between South Africa and the US — its second-biggest trading partner after China — have soured over Pretoria’s insistence that it is taking a non-aligned stance toward Russia’s war in Ukraine. Even so, South Africa participated in naval exercises with Russia recently, while officials of the ruling African National Congress have expressed support for Russia’s invasion of Ukraine.

State Department spokesman Vedant Patel wouldn’t be drawn on whether the US would consider sanctions against South Africa should the arms claim prove true, but added during a regular State Department briefing Thursday that the US had “serious concerns” about a sanctioned Russian vessel docking in a South African port.

“The political stakes are high, with trade deals and market access all now in question,” economists at Rand Merchant Bank wrote in a client note. “This will add an additional layer of risk until the debate around this has cleared, and the rand should reflect that risk premium.”

Eskom’s challenge in keeping the lights on pales into insignificance relative to the threat of forcing countries to pick sides in the new geopolitical landscape. Selling arms to Russia is not exactly remaining unaligned. Of course South Africa could argue they are equally willing to sell arms to Ukraine. Nevertheless, from NATO’s perspective, depriving Russia of resources is essential to the path to ending the conflict so South Africa’s nonconformity is likely to be viewed very negatively. 

But it's not unfair to say that Google, which in April, according to data from SimilarWeb, hosted roughly 91 percent of all search traffic, is somewhat synonymous with, well, the internet. And the internet isn't just some ethereal, predetermined thing, as natural water or air. The internet is a marketplace, and Google is its kingmaker.

As such, the demo raises an extremely important question for the future of the already-ravaged journalism industry: if Google's AI is going to mulch up original work and provide a distilled version of it to users at scale, without ever connecting them to the original work, how will publishers continue to monetize their work?

Google has unveiled its vision for how it will incorporate AI into search," tweeted The Verge's James Vincent. "The quick answer: it's going to gobble up the open web and then summarize/rewrite/regurgitate it (pick the adjective that reflects your level of disquiet) in a shiny Google UI."

Google announced it would pay the New York Times $100 million over three years this week. That results from years of litigation that Google was giving away content that should have been paid for.

The advent of advanced large language models means computer programs can scour Twitter for titbits and write journalistic synopses just like most journalists. Several services like Buzzfeed and CNET have tried and failed to use AI for unsupervised article writing. 

Separately, data from the People’s Bank of China showed credit and new loans were much worse than expected in April as consumers and businesses curbed their borrowing.

“China’s credit data came in well below estimates, reinforcing the concerns over the sustainability of post-Covid recovery,” said Zhou Hao, chief economist at Guotai Junan International Holdings Ltd. Overall growth momentum “has been slowing significantly,” he said. 

Expectations of policy easing has been growing, and a “policy rate cut looks imminent in the second quarter,” he added.

China’s economic growth accelerated to a one-year high in the first quarter after pandemic restrictions were dropped, led by stronger consumers spending on travel and shopping. Recent data has been more mixed though, with manufacturing activity contracting in April and imports plunging.

China did not engage in the same pandemic spending as many western governments. That ensures inflation was kept under control. Instead they decided to use the pandemic as a means to curtail speculation in the housing sector which was the exact opposite of what happened in other countries. That has helped to keep government bond yields contained and the trend is still lower. 

“Unfortunately, the negative sentiment is dragging down the real estate sector more broadly,” the firm’s president, Connor Teskey, told investors during an earnings call Wednesday. “We think that’s completely unfair.” 

The Brookfield group is one of the world’s largest owners of prime office properties, with a portfolio that includes New York’s Manhattan West and London’s Canary Wharf. Office landlords in major cities around the world are being squeezed by a combination of higher borrowing costs and lower occupancy, as many companies continue to allow employees to work from home at least part of the time. 

Brookfield Asset’s parent company has defaulted on mortgages covering more than a dozen office buildings, mostly in Los Angeles and around Washington.

The property market is “bifurcated” as high-quality assets perform well and lower-quality assets struggle, Teskey said on the call. 

 

The durability of the work from home phenomenon will be tested by the upcoming recession. I’ve been working from home since 2007 and I can attest the better description is you live at work. However, the experience of entrepreneurial people versus those simply marking time is very different.  Flexible time arrangements are not appropriate for every position. Efficiency metrics will quickly be developed to decide whether the cost of a large office building is outweighed by the productivity gain for happier more flexible workers. 

As countries compete for capital, investors and developers have said aggressive subsidies like the US Inflation Reduction Act — which provides $374 billion in funding for clean energy — will be needed to attract the vast investment required.

The new measures are a “great first step,” Fortescue Metals Group Ltd. said in a statement on Wednesday. The Australian iron ore miner has ambitions to become one of the world’s biggest green hydrogen producers and plans to reach final investment decisions on five projects around the world this year.  

The announcement of significant investment in the green hydrogen sector comes hot on the heels of opening the Northern Territory to natural gas development. Regardless of how the global energy sector evolves Australia looks likely to be significant beneficiary. That also applies to coal exports for both steel and electricity generation. 

Platinum ETFs saw heavy buying at the end of April from South Africa based funds. Year-to-date regional inflows into platinum funds in South Africa (+333 koz) are the standout when compared to the US (-107 koz), the UK (-18 koz) and Switzerland (-17 koz). Net flows have been positive every month this year so far, as South African investors are more acutely aware of the electricity supply issues being faced by PGM producers. Total global holdings stand at 3.3 moz, up from 3.0 moz at the beginning of the year, although that was down 1 moz from the peak level of holdings in July 2021.

These investors bought into the recent price rally and hope for more. The platinum price had risen more than 20% since late February before the recent correction. Supply issues in South Africa (~75% of mined supply) are well documented. The regularity and severity of load-shedding in 2022 was unparalleled, with the situation unlikely to improve significantly during 2023. Load-shedding resulted in the build-up of above-ground stocks of unrefined PGMs last year and could lead to an estimated loss of ~250 koz of platinum production this year as the Southern Hemisphere winter begins to bite. Available first-quarter results of major South African PGM miners all cite load-shedding as impacting refined output to some degree.

Platinum prices went vertical during the last South African power cuts. That acceleration also marked the peak of the decade-long bull market as the global economy headed into the financial crisis in 2008.

At the time there was a lot of talk about platinum miners investing in their own generating capacity. The subsequent crash meant very few completed that work. The big decline in platinum prices following the diesel cheating scandal drove several platinum miners into bankruptcy. The recent issues with Eskom have revitalized talk of building solar and wind farms so operations can be independent of the utility. 

The country has burned most of its international reserves and recently faced difficulties to pay for fuel imports. The central bank stopped publishing reserves data in early February, when they stood at about $3.5 billion, out of which $2.6 billion was gold, suggesting only the precious metal is left.

While the Arce administration says the ability to operate with its gold in markets will halt the “low liquidity” Bolivia is going through, opposition lawmakers criticized the bill by saying it’s not a structural solution to the current economic crisis.

Senator Silvia Salame called it a “patch” to allow Arce’s administration to stabilize the country’s situation until the 2025 presidential elections.

Finance Minister Marcelo Montenegro said the gold reserves will be replenished by buying the commodity from local producers
in bolivianos.

Bolivia is not a big holder of gold so that is unlikely to be behind today’s weakness. Instead the prospect of continued rises in the Fed Funds Rate, in response to a stronger than expected jobs report, takes that mantle. 

“This is a solid report, showing a resilient economy on the back of supportive remittances, rising exports, and improving labor conditions,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. “We expect economic activity to be more resilient than in previous cycles.”

The economy’s accelerating growth gives some pause to economists who’ve predicted that the country is headed for a contraction later in the year, due to the expected downturn in the US, Mexico’s biggest trading partner. Part of the surprise is the boost from the domestic market, which has contributed especially to the revival of the services sector, after it plunged earlier during the pandemic.

The Mexican peso erased earlier losses and strengthened as much as 0.3% after the first quarter release.

Mexico is likely to be one of the primary beneficiaries of the reorientation of supply chains as geopolitical tensions between the OECD and China intensify. The prospect of exporting LNG to Europe and the potential for domestic lithium to be used for battery manufacturing and exports is a key reason for optimism about the potential for economic growth. 

The outlook depends largely on the resiliency of the job market. Low unemployment and persistent wage gains have so far allowed consumers to weather high inflation and keep spending.

The personal consumption expenditures price index grew at an 4.2% annualized pace in the January to March period. Excluding food and energy, the index rose 4.9%, faster than forecast and the most in a year. March data will be released Friday. Services inflation remained hot while prices of non-durable goods accelerated.

The inflation and consumer spending figures likely keep the Fed on track to raise interest rates by a quarter percentage point next week. First Republic Bank’s continuing struggles, however, do raise the possibility that the central bank could pause.

Consumer demand surged in the early part of the first quarter and eased back in the later part of the quarter. At the same time economic growth eased and inflation increased. 

When I see/read that Glaxo's shares have been ranging for 20 years, I can't help but be reminded by your service's maxim that, ranges are explosions waiting to happen." After 20 years, one must wonder when and in what direction will we see the explosion?

Thank you for this topical question. Glaxo has been a highly innovative company and yet the share has been locked in a lengthy and volatile range for decades. That suggests the innovations that drove the original bull market and funded the M&A activity that created GlaxoSmithKline are priced in.

Climate finance is likely to be a focus of December’s COP28 meeting in the United Arab Emirates, with the oil-exporting host saying it will address ways to fund the energy transition in poorer countries that simultaneously need to expand access to electricity. That adds pressure on industrialized nations and oil producers to step up. 

While Vietnam’s $15.5 billion and Indonesia’s $20 billion planned JETP agreements are at an earlier stage, they’re also much bigger and potentially more complex. A smaller deal envisaged with Senegal is complicated by its plan to start producing gas.

“We could have done an amazing, amazing model right here in South Africa,” said Tasneem Essop, executive director of Climate Action Network International, which represents over 1,900 climate-focused organizations in more than 130 countries. But “we got embroiled in the politics of it all.”

Coal might be dirty, but it is cheap, reliable, many countries have domestic supplies, plants can rapidly be constructed and last for decades. That’s hard to compete with. The unspoken drawback of forcing developing countries to abandon coal is higher electricity usage is a major contributor to higher standards of living.

Psychiatric medications are a crucial part of treatment for many mental health conditions, helping to ease symptoms and boost mental well-being. But there are some more commonly prescribed.

Mental health conditions are complex. Just one medication will help in some cases. Other times, you might try a few different medications before finding the right one or even need more than one medication.

Psychiatric medications are an important part of many people’s treatment plans, including therapy and other strategies. While they can’t cure your mental health condition, they can help manage your symptoms.

The pharmaceutical industry thrives on chronic conditions. That’s why some of the most successful companies cater to diabetes or why Viagra was such a big hit. The pandemic has seen an explosion in the number of people seeking mental health solutions. It is now much more socially acceptable to talk about mental health and to a certain extent is faddish on social media. That suggests a growth market. I took the list of medications in the above article and traced down the parent companies. 

However, lower risk in emerging markets isn’t just a China story. Fundamentals have also improved more broadly. Over the past 20 years, per capita GDP in emerging markets has roughly doubled as a share of developed markets (Exhibit 5, left side). Measures of external vulnerabilities have also improved from their periods of peak fragility in the 1980s and 1990s. Current account balances in emerging markets are now positive in aggregate, and measures of external debt sustainability (e.g., external debt as a percentage of exports) look much healthier (Exhibit 5, right side).

Bottom line: there are many reasons to believe that the relatively attractive valuations found in emerging markets represent a 5-10 year opportunity. In other words, the current expected premium is likely due to these markets being relatively underpriced, as opposed to representing compensation for assuming meaningfully greater portfolio risk.

The technology sector is a bet on the future and as such it is a long duration asset. When rates are low and credit is abundant, the penalty for taking long-term bets declines and the allure of those assets is boosted. Cashflows, valuations and sustainability are only truly relevant when there is a discount rate to compare them to. Another way of thinking about it is expected returns tend to fall when bond yields are high. In order to surmount the hurdle rate of money market funds, fundamentals and valuations matter. 

LVMH, Europe’s largest company by market value, has now made it to the world’s top 10.

A first-quarter sales beat sparked a 5% increase in the share price Thursday, giving the luxury powerhouse a 29% rally for the year. That, along with a gain in the euro against the dollar, lifted LVMH’s market capitalization to $486 billion, briefly ranking it as the world’s 10th-biggest company. Should it reach $500 billion, it would become the first European company to achieve that milestone.

Luxury goods represent an interesting paradox which must be among the marketing profession’s greatest triumphs. They have created an aura of desirability, mystique and aspiration for items that are not in limited supply. Of course, companies like Hermes ensure their most desirable bags are very hard to purchase, but the entire sector rides on the coattails of that limited supply argument. 

The group’s index of new orders at service providers dropped more than 10 points to a three-month low of 52.2. While still consistent with expansion, the scale of the drop suggests a significant slowing in the pace of bookings growth. The business activity measure, which mirrors the ISM’s factory production index, slipped to 55.4.

“There has been a pullback in the rate of growth for the services sector, attributed mainly to a cooling off in the new orders growth rate, an employment environment that varies by industry and continued improvements in capacity and logistics,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement.

The pandemic shutdown represented a massive dislocation which pulled the pendulum of demand into sharply negative territory. Massive fiscal and monetary stimulus was implemented to revive. That ensured when demand recovered, it swung to an extreme level in the opposite direction. Like any pendulum there are several swings to less extreme amplitudes, before it settles back to equilibrium. 

The US’s largest car insurer, State Farm Mutual Automobile Insurance Co., reported a $13.4 billion (!) underwriting loss last year, the largest shortfall in its 100-year history; Allstate Corp.’s auto-insurance underwriting loss was $3 billion, while Berkshire Hathaway Inc.’s Geico car-insurance unit lost $1.9 billion.

In the UK, Direct Line Insurance Group Plc’s chief executive departed in January after mounting losses at the motor division forced it to scrap its dividend. The stock has declined more than 50% in the past year.

These woeful results have shaken confidence in the industry’s purported ability to assess risk and forecast accurately. Insurers are belatedly hiking premiums, though often not as quickly as they’d like. Customers who drive Range Rovers and other vehicles prized by thieves, may struggle to get coverage at all.

Soaring used-car prices are the proximate cause of insurers’ woes – a textbook example of how supply chain upheaval can cascade through the economy. Historically, vehicles were a depreciating asset, but suddenly the cost of replacing a stolen or damaged vehicle was far more than insurers had calculated.

The insurance sector is not in the habit of sustaining losses on underwriting so premiums are most assuredly going up. That’s true of every area of the insurance business and not only automotive rates. Everything from commercial, to health to cyber rates are rising.

This news struck me as interesting because it follows hot on the heels of Piguet Ademar’s issuing a replacement guarantee on any high end watches bought over the last couple of years. The threat of theft has growth so high it is impacting sales of their timepieces. 

LVMH shares rise to a record high, contributing most to gains in the French and European indexes on Friday as analysts upgrade their estimates for the French luxury behemoth. Peer Hermes International also hits an all-time peak.

News that foot traffic is ramping up in Macau is clearly positive news for the luxury goods sector as Chinese consumers hit the shops after a lengthy hiatus. 

“The broad ideas are orthodox and the government does agree with the idea of stabilizing debt,” said Katrina Butt, a senior economist at AllianceBernstein LP. “Still, there are some unanswered questions and the government seems to bank on economic growth to be able to achieve the targets, given an increase in the tax burden doesn’t look feasible at this moment.”

The proposal is crucial for President Luiz Inacio Lula da Silva to win over investors, who have been worried about the health of public finances since the leftist leader obtained congressional authorization to boost outlays, bypassing current spending rules that will be replaced by the new fiscal framework. Since then, concerns about swelling debts have helped to fuel inflation expectations keeping, in turn, borrowing costs high.

Brazil was very early in raising rates and now has some of the highest real rates of any country. That begs the question, what will be required for rates to begin coming back down? The fiscal agreement announced today is a step toward placating hawks at the central bank who are reluctant to ease up while the government is talking about major giveaways. 

I am reweighting the Autonomies portfolio as we are approaching the end of the quarter. It’s a tumultuous three months with banks and several retailers experiencing steep selling pressure. Meanwhile several luxury goods companies are at new highs. Technology companies have staged impressive rebounds and commodity stocks are very steady. The biggest surprise for me is how varied the performance of the financial sector is. That clearly suggests there will be big winners and losers from the unfolding market environment. 

Sweden has long fallen short on its constitutional pledge to provide an affordable place to live for all of its 10.4 million people, but until recently that was masked by the growing economy which had helped disguise flaws in the system. 

The shortage of affordable accommodation is hitting recruitment. The Stockholm Chamber of Commerce reported last year that three out of four heads of human resources said the housing situation was making it harder for their firms to hire new staff. 

Rents are negotiated annually by landlords and the tenants association. Advocates say the system helps create a rental market in Stockholm where teachers, police officers, street cleaners and other public sector workers can afford to live alongside bankers, software developers and government officials. Yet supply hasn’t kept up with demand for decades. Average waiting times for a rent-controlled apartment is now 9.2 years, but can stretch up to 20 years in some parts of the capital.

Socialism’s only hope of functioning is to ensure the cost of living never rises. That means creating a social contract where the only means of generating personal wealth is through ingenuity and productivity. It’s a high bar and apparently unachievable for long. 

Collapses of Large Banks on Fridays:

- Friday, Mar. 14, 2008: Bear Stearns hit by liquidity crisis

- Friday, Sept. 12, 2008: Last trading day before Lehman Brothers declares bankruptcy

- Friday, Sept. 26, 2008: Washington Mutual seized by regulators marking largest bank collapse in US history

- Friday, Mar. 10, 2023: SVB seized by regulators, marking 2nd biggest bank failure in US history

- Friday, Mar. 10, 2023: Signature Bank sees $10 billion in withdrawals, seized by regulators 2 days later

- Friday, Mar. 17, 2023: UBS bids for Credit Suisse, $CS, to avoid its collapse

- Friday, Mar. 24, 2023: Deutsche Bank, $DB, credit default swaps hit 4-year high on contagion fears

Just about every large bank failure in recent history has occurred on a Friday.

This can't be a coincidence.

Giving regulators time to make an announcement over the weekend helps to avert market panic. That’s as good a reason as any to announce bad news as close to the market close as possible on a Friday. 

The PDI-P, which secured 22 per cent of parliamentary seats in 2019, is the only party that can nominate candidates without having to ally with other parties. Both Mr Widodo and Mr Ganjar are members of PDI-P.

For Mr Ganjar, the main obstacle to being named PDI-P’s presidential candidate is his own party, said Padjadjaran University political communication expert Kunto Adi Wibowo.

“If Ganjar wants the nomination, PDI-P should be the one to nominate him. He doesn’t want to quit his own party. But will Megawati (Sukarnoputri) give the ticket to Ganjar while she is grooming Puan (Maharani)?,” he said.

Ms Megawati is PDI-P’s chief, while Ms Puan, her daughter, is the House of Representatives Speaker and ranks low in electability rating polls.

Prof Firman noted that both PDI-P and Gerindra may finally have to strike a “tough deal” if they cannot come up with their nominees amid the constant rise in popularity of Dr Anies, given the solidity of his support. 

“If they are forced by pressing circumstances, they will make a deal and resort to the most popular candidates,” he said.  

President Widodo has been a stabilizing force for Indonesia throughout his tenure. The biggest test of sound governance is in the transfer of power. If the sound base he has built can be sustained, the long-term outlook for Indonesia’s potential will be upgraded by investors. 

Volkswagen’s China joint venture with SAIC Motor is offering 3.7 billion yuan ($540 million) in cash subsidies to boost sales, according to a statement on the company’s Wechat account, making the German automaker the latest participant in the ongoing price war. 

The venture will provide a subsidy of between 15,000 yuan and 50,000 yuan on any model in its lineup until April 30, which includes brands like Teramont, Lavida, Lamando, Tiguan, Passat, Touran, and the all-electric ID. series

Other incentives include short-tern interest-free loans, lifelong service packages, upgraded components and buy-back guarantees.

It’s been a busy week for Volkswagen. They are attempting to compete on price in China. The company revealed the design of a compact electric vehicle slated for mass production and costing around €25,000. Then they are also talking about direct investments in mining companies to boost access to resources. That all sounds expensive. 

Defence budget and levelling up
Mr Hunt confirmed the government will add £11 billion to the defence budget over the next five years and another £30 million is being allocated for veterans.

There will be 12 new investment zones, and they will potentially be in the West Midlands, Greater Manchester, the North East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool. There will also be at least one in each of Scotland, Wales and Northern Ireland.

Mr Hunt also announced a series of levelling-up and local transport-related funding pots.

Taxes
The chancellor confirmed the planned increase in corporation tax to 25 per cent will be going ahead, but announced a new policy of “full capital expensing” over the next three years, which will mean every pound invested in IT equipment, plant, or machinery can be deducted immediately from profits.

Mr Hunt said he will introduce a new tax credit for small and medium-sized firms that spend 40 per cent of their expenditure on research and development. Tax reliefs for film, TV and video gaming will also be extended, he said.

Up to £20 billion will be allocated for the early development of carbon capture and storage.

Mr Hunt said that, subject to consultation, nuclear power will qualify for the same investment incentives as renewable energy and alongside that “will come more public investment”.

Falling Gilt yields could not come at a better times for the UK and its mortgage holders. The upgraded growth estimate which expects to avoid a recession this year helps to highlight the efforts of the Bank of England to talk the market down were more about affecting sentiment than actually containing growth. 

Charles Schwab Corp. tumbled the most ever on an intraday-basis as the online brokerage sought to reassure investors that it has sufficient liquidity to handle any volatility following the collapse of Silicon Valley Bank.

Shares of Westlake, Texas-based Schwab dropped as much as 23% to $45 after trading was halted for volatility. The stock later pared its decline and was down 17% to $48.93 at 10:09 a.m.
in New York.

The firm has a broad base of customers and capital in excess of regulatory requirements, founder and Co-Chairman Charles Schwab and Chief Executive Officer Walt Bettinger said in a statement on its website Monday.

“Schwab’s long-standing reputation as a safe port in a storm remains intact, driven by record-setting business performance, a conservative balance sheet, a strong liquidity position, and a diversified base of 34 million-plus account-holders who invest with Schwab every day,” the executives wrote.

The company, with roughly $7.4 trillion of client assets, said it has access to about $100 billion of cash flow, more than $300 billion of incremental capacity with the Federal Home Loan Bank and other short-term facilities, and that more than 80% of deposits at its bank are insured by the Federal Deposit
Insurance Corp.
 

Companies like Schwab offered an attractive service to their customers during the big bull market. Instead of selling highly appreciated assets and absorbing the capital gains tax hit, why not offer the stock portfolio as collateral against a loan to buy a new house, car or boat? Real Estate agents I know report that was a major source of funding during the pandemic housing boom. 

Your focus on some military defence companies is timely. What do you think are the best "spades and shovels" type defence companies (not high techs like Raytheon) but ones that makes bullets, shells, camouflage, personal military equipment? Have we missed Rheinmetall?

Can you pls keep them under review in the video thereafter as I sometimes don't have time to read the front page and prefer video. Thanks and keep up the good work.

Thank you for this email and suggestion. I’ll certainly cover more of the charts in the videos in future.

The challenge of investing in defense stocks is the sector went through a lengthy process of consolidation as budgets were cut following the fall of the USSR. For example, the UK armoury where munitions are manufactured is owned by BAE Systems and it represents a negligible portion of earnings. 

Brazil’s worsening credit outlook amid troubles facing local retailer Americanas SA raises the risk of a recession that could lead its central bank to change its balance of risks at the upcoming interest rate decision on March 21 and 22, Tony Volpon, a former director at the bank, said in an interview.

“At the very least, the central bank committee should change the balance of risks at the next meeting, which would be a signal to start cutting its rate in May”

NOTE: BCB said in the statement of Feb. 1 meeting, which maintained the Selic rate at 13.75%, that the risks to its inflationary scenarios remain in both directions, upside and downside

According to Volpon, high interest rates and worsening of credit in the midst of the Americanas case may reduce investment and increase the risk of a drop in economic growth

“If the BCB does nothing, it is almost certain that there will be a recession”

Volpon had written earlier on Twitter that “almost every recession needs a ‘snap’ and the Americanas case and the collapse of the credit market already set up an exogenous shock that, left unanswered, should lead to a recession”

Basic scenario is interest rate cuts starting in May, but BCB could cut it later this month if credit data show a more serious deterioration, says the former director

According to him, part of the market could react badly to an eventual Selic cut, which would lead to a greater rate curve steepening, but this would not prevent the positive effect of monetary relief on the economy

Possible negative investor reaction to an early interest rate cut could also be mitigated with announcement of the new fiscal framework, says Volpon

The Selic overnight rate is currently sitting at 13.65% and CPI is at 5.77%. The aggressive pace of hikes in 2021, a year ahead of developed markets, successfully capped inflationary pressures and the central bank has held rates at elevated levels for long enough to convince consumers they are serious about fixing the problem. 

Discovered by retail investors as a cheap way of gambling during the meme-stock era in 2021, zero-day options got a fresh boost on index trading after firms like Cboe Global Markets Inc. last year expanded S&P 500 options expirations to cover each weekday. The offerings became an instant hit among institutions as daily reversals ruled the market, spurred by the Federal Reserve’s most aggressive monetary tightening in decades. 

By the third quarter of 2022, 0DTE contracts accounted for more than 40% of the S&P 500’s total options volume, almost doubling from six months earlier, data compiled by Goldman Sachs Group Inc. show. 

Behind the explosive rise, according to JPMorgan, are likely high-frequency traders — the computer-driven firms present at virtually every node of the modern equity landscape — as market makers and fast-moving seekers of an investing edge. 

It’s a match made in quantitative heaven: For firms known to measure the life cycle of trades in thousandths of a second, zero-day options hold obvious benefits as tools to balance exposure and otherwise hone strategies designed to harvest fleeting profits by darting in and out of positions. 

At any time the market is a centre for speculation. The pendulum of perception swings from casino conditions to conservativism as money supply ebbs and flows with the broad economic cycle.

Those making money believe they have invented a better mouse trap. Those who are outside the new market believe it is too good to be true and therefore dangerous. 

"There is good performance improvement opportunity in this business in all the divisions, especially in civil aerospace and power systems," he told reporters. "And that is ongoing and then strategic review will create the clarity."

He said he would focus on reducing its debt, which stood at 3.25 billion pounds at year-end, to obtain an investment grade, before resuming payouts to shareholders.

Rolls, which also has defence and power systems divisions, posted operating profit of 652 million pounds for 2022, up 57% and beating an analyst forecast of 478 million pounds.

It guided to underlying operating profit of 0.8-1.0 billion pounds and free cash flow of 0.6-0.8 billion pounds this year, based on a forecast for its engines to fly 80-90% of 2019's level.

Rolls Royce has three divisions. These are Civil Aerospace, Defence and Power Systems. Within each of those units it has maintenance contracts. Aftermarket service represents about 55% of all revenue. That means the company is highly leveraged to the 

While US mortgage holders tend to borrow over 30-year terms, insulating them from tightening cycles, a majority of Australian borrowers are on variable rate home loans that adjust upwards each time the central bank hikes. 

Australia’s housing market is already in a downturn and higher borrowing costs are likely to drive more declines this year. 

There’s a further risk from re-pricing of loans that were fixed for 2-3 years at record-low rates during the pandemic. RBA data suggest 23% of all outstanding mortgage debt will be re-priced this year and in some cases borrowing costs will more than double to close to 6%. 

While the RBA is relatively sanguine about housing, Eliza Owen, head of research at property consultancy CoreLogic Inc., sees risks on the horizon.

“Australians with fixed-rate loans are about to see a painful adjustment. This is partly the intention of rising rates,” Owen said. “The true test of the market will be over the next 10 months.”

Australia, “the lucky country” avoided recessions between the early 1990s and the pandemic because many of the troubles assailing the rest of the world did not impact the domestic market. Moreover the boom of Chinese demand, for just about everything Australia exports, was a major boost to the economy over the last twenty years and insulated Australia from the credit crisis. 

An office landlord controlled by Pacific Investment Management Co. has defaulted on about $1.7 billion of mortgage notes on seven buildings, a sign of widening pain for the industry as property values fall and rising interest rates squeeze borrowers.

The buildings — in San Francisco, New York, Boston and Jersey City, New Jersey — are owned by Columbia Property Trust, which was acquired in 2021 for $3.9 billion by funds managed by Pimco. The mortgages have floating-rate debt, which led to rising monthly payments as interest rates soared last year.

“We, like most office owners, are addressing the unique and unprecedented challenges currently facing our asset class and customer base,” Justina Lombardo, a spokesperson for Columbia Property Trust, said in an emailed statement. “We have engaged with our lenders on a restructuring of our loan on seven properties within our larger national portfolio.  We look forward to a collaborative process yielding thoughtful solutions that reflect current market conditions and best serve the interests of all stakeholders.”

Over the last few months I have been struck by the number of conversations I’d had where investors have been investing in private credit for years already. One way of thinking about it is investment banks are going back to their roots.