Aurelia Butler

NEW YORK (Reuters) – New York State lawmakers return from a two-week break on Monday with a month left to decide the fate of a controversial bill that aims to streamline sovereign debt restructurings, with hundreds of billions of dollars in bond contracts on the line.Below are facts about the proposal and potential ramifications.WHY IS THIS IMPORTANT?Unlike corporations or individuals, countries cannot declare bankruptcy and the current process of a debt restructuring can be costly both in time and money. The proposed bill looks to “provide effective mechanisms for restructuring sovereign and subnational debt” and the rewrite of this state law would retroactively affect sovereign debt contracts and its holders across the world.A stronger, yet simpler international architecture for restructurings is needed, proof of which are attempts put together over the past decades by various stakeholders, most recently the Group of 20’s Common Framework for Debt Treatments. The International Monetary Fund recently endorsed a key reform to promote its own “capacity to support countries undertaking debt restructurings.”The bill was repeatedly discussed during last month’s meetings of the IMF and World Bank, with some stakeholders concerned about the implications of its eventual passage.THE BILL’S INTENTThe bill aims to strengthen “the role of New York State as a primary location for the issuing and trading of sovereign debt.” It also looks to discourage creditor holdouts – sometimes called vulture funds – by limiting their protection in state courts.If enacted, it would empower countries eligible for debt relief initiatives to opt between a set mechanism for restructuring or a process that would limit bondholders’ claims to those the United States would receive if it were a bilateral lender.”Low- and middle-income countries are facing unimaginable financial burdens, which are made worse by holdout creditors’ continued abuse of New York state laws,” said Ben Grossman-Cohen, director of campaigns at Oxfam America, an advocacy group championing the bill. “It is long past time for the state legislature to take action.”THE CONTROVERSYWhile proponents and their backers see the bill as a straightforward way to skirt the complications of debt restructurings, its detractors say unintended consequences will make it even costlier for poor countries to borrow.”The intention behind the bill is not a bad one, but the implementation probably doesn’t take into consideration the full ramifications,” said Trang Nguyen, the London-based global head of emerging markets credit strategy at BNP Paribas (OTC:BNPQY). She said upending the sovereign debt architecture without the input of the IMF, the Paris Club and others could be “quite detrimental.”Nguyen, who said the bill was discussed “ad nauseam” during the April IMF meetings in Washington, conceded there are flaws with the current architecture but said a bill imposed over all stakeholders would not be beneficial to debtor countries.The bill could also trigger legal challenges and lead to the migration of sovereign debt away from New York to other jurisdictions according to law firm Cleary Gottlieb, which has advised both sovereigns and creditors in debt restructurings.WHAT IS NEXT FOR THE BILLThe bill’s eventual passage this year would have to happen over the remaining 18 sessions before the legislature closes on June 6.It needs to be discussed and voted on in committees, smaller groups of lawmakers in both the State Senate and Assembly. If passed, it would be separately discussed and voted by the full chambers. Again, depending on approval, the bill is sent to the governor who can sign or veto. A veto can be overturned by a two-thirds majority in both houses. Democrats hold such majorities, with both chambers up for elections on Nov. 5. More

1. Futures higherU.S. stock futures ticked higher on Monday, with traders assessing the possibility of Federal Reserve interest rate cuts later this year following the jobs report for last month.By 03:23 ET (07:23 GMT), the Dow futures contract had gained 51 points or 0.1%, S&P 500 futures had risen by 8 points or 0.2%, and Nasdaq 100 futures had inched into the green by 22 points or 0.1%.The major averages all advanced in the prior session after the latest U.S. employment numbers suggested that there may be some cooling in the world’s largest economy. Employers tacked on 175,000 roles in April, well below estimates, while the jobless rate accelerated marginally to 3.9% from 3.8% in March. Month-on-month wage growth was also slower than projected.”None of this is terrible – it really isn’t a ‘bad’ report – but it is the first time we have seen every part of the report come in weaker than expected for a very, very long time,” analysts at ING said in a note to clients.Fed officials have been waiting for indications that the labor market is beginning to loosen before rolling out cuts to borrowing costs, which now stand at a more than two-decade highs. Traders subsequently reacted to Friday’s figures by bringing forward their timeline for an initial 25 basis point reduction to September fron November.2. Fed officials to speakMarkets will likely be keen to glean additional cues on the potential path of interest rates from speeches by several Fed policymakers this week.On Monday, New York Fed President John Williams and Richmond Fed President Thomas Barkin are both set to speak, followed by Minneapolis Fed President Neel Kashkari a day later. Chicago Fed President Austan Goolsbee and Fed Governor Michelle will make appearances later this week as well.Earlier this month, the central bank acknowledged a lack of progress on battling inflation, the key focus of a tightening cycle that has pushed rates up to their current heights. However, Chair Jerome Powell noted that he still believes borrowing costs were heading lower this year and said it was “unlikely” that the Fed’s next move would be to increase rates once again.Consumer confidence data on Friday is tipped to provide further insights into the trajectory of U.S. price pressures and the broader economy.3. Earnings season marches onWalt Disney, Wynn Resorts and Akamai Technologies (NASDAQ:AKAM) are among some of the larger companies due to report in the week ahead, as the latest quarterly earnings season approaches its final stretch.Some of the small cap names reporting include nutrition company Bellring Brands (NYSE:BRBR), gambling group Light & Wonder (NASDAQ:LNW) and oil and natural gas firm Permian Resources Corp (NYSE:PR).Small cap stocks have lagged broader market gains this year. The prospect of the Fed keeping rates elevated for a longer period has clouded the outlook for smaller companies, which rely more heavily on debt financing and consumer spending.4. Chinese services activity eases slightly in April – Caixin PMIChina’s services sector eased slightly in April but remained at a relatively steady pace, a private survey showed on Monday, as new business activity grew and export demand improved from last year’s lows.The Caixin Services Purchasing Managers’ Index (PMI) came in at 52.5 in April, in line with expectations, and fell slightly from the prior month’s mark of 52.7.The reading indicated that some aspects of the Chinese economy were resilient thanks in part to sustained stimulus and policy support from Beijing. External demand also appeared to be improving.“The recovery of the global economy has resulted in an increase in inbound tourist numbers. This has helped produce an upward trend in service exports,” Wang Zhe, Senior Economist at Caixin Insight Group said in a note.5. Oil prices climbOil prices rose in European trade on Monday after Saudi Arabia increased its official selling price for crude in June for most regions.Meanwhile, media reports said that the latest round of ceasefire talks between Israeli and Hamas delegates in Egypt had ended with no agreement being reached. The ongoing conflict showed little signs of de-escalation, keeping expectations of geopolitical unrest in the Middle East squarely in play. This factored into some bets that continued disruptions in the oil-rich region will eventually dent crude supplies.Brent oil futures expiring in July gained 0.7% to $83.54 a barrel, while West Texas Intermediate crude futures edged up by 0.7% to $78.32 per barrel by 03:21 ET.Both contracts slid between 6.6% and 7.5% last week, their worst weekly performance since October. More

Traders are on alert for Japanese currency intervention, while weighing up the effects of U.S. market turbulence. And the around-the-world election tour makes a pit-stop in Panama.Here’s what is in store for global markets in the week ahead from Rae Wee in Singapore, Ira Iosebashvili in New York, Andy Bruce in Manchester, and Naomi Rovnick and Marc Jones in London. 1/ DISTURBING GOLDILOCKSU.S. consumers are in focus as the University of Michigan’s preliminary reading on consumer sentiment in May gives a snapshot of their inflation expectations and economic outlook. Months of stubborn inflation have threatened to disrupt the so-called Goldilocks narrative of resilient growth and cooling consumer prices that have helped drive stocks higher.Any signs in the May 10 report that higher prices are weighing on sentiment could encourage the Fed to keep rates elevated, adding to recent pressure on stocks and bonds. The Fed on Wednesday acknowledged a recent lack of progress on inflation, although Chair Jerome Powell reiterated that rates are likely to fall in 2024 and Friday’s soft jobs numbers supported that view. Economists polled by Reuters expect the consumer sentiment index to rise to 77.9 from 77.2 in April.2/ RUN FOR SHELTERInvestors are scouring the globe for shelter from turbulence in U.S. markets shaken by the Fed’s reluctance to cut rates. The S&P 500 dropped more than 4% in April, while Treasuries had their worst month since September. Investors are trying to diversify. London’s FTSE 100, considered a hedge against tech-dominated S&P weakness because of its large crop of companies in so-called value sectors like oil and mining, is near record highs. Stocks in high-growth India have logged three months of gains. But insulating a portfolio from Wall Street’s swings is tough. The long-term correlation rate between Europe’s Stoxx 600 and the S&P is almost 90%, investment bank Baird estimates. Barclays calculates that a one percentage point rise for Treasury yields commonly pulls global yields up 56 bps. 3/ WAITING GAMEFlashes of illumination rather than fireworks are likely to emerge from the Bank of England on Thursday, when it publishes its May rate decision and new quarterly forecasts.While earlier this year rate-setters talked openly about the possibility of rate cuts, hard data and business surveys have painted a pretty mixed picture of price pressures in Britain’s economy, much like in the United States.With scant fresh data scheduled between now and Thursday, investors are increasingly betting the BoE could even wait until September before cutting rates.The results of local elections – which look set to pile yet more pressure on Prime Minister Rishi Sunak – are due from Friday, with monthly economic growth data due on May 10.Elsewhere in Europe, Sweden is seen as likely to start cutting rates on May 8 as inflation falls faster than expected.4/ UP, NOT DOWNThe Reserve Bank of Australia meets on May 7 and it’s poignant timing after Q1 inflation were hotter than expected, after the RBA in March watered down a tightening bias.No policy change is expected but markets will watch any comments from Governor Michelle Bullock closely.Having been spooked by the inflation figures, markets narrowed the odds on the RBA having to raise rates once more. Note, some of those bets were pared after Australian retail sales fell unexpectedly in March.Even so, the risk of another rate hike has done little to help the Aussie, which continues to struggle below the $0.66 level against the dollar.5/ WHAT NEXT, MULINO? Panama’s former security minister Jose Raul Mulino on Sunday stormed to victory in a presidential poll dominated by his old boss, the popular ex-leader Ricardo Martinelli, who buttressed his campaign despite being holed up in Nicaragua’s embassy.Now comes the challenge of governing.The Central American country is at serious risk of losing its coveted ‘investment grade’ status, having already been chopped to ‘junk’ by Fitch. Its business-friendly reputation has been tarnished by a decision to close the huge Cobre Panama copper mine that provides some 5% of its GDP. All this while the drought-hit Panama Canal’s contribution to state coffers is expected to fall nearly 3% this year.Mulino will need to improve the finances to win over ratings firms. He said his government would be pro-investment and pro-business and that Panama would honor its debt, but also vowed not to forget the poor.(Graphics by Pasit Kongkunakornkul, Kripa Jayaram, Prinz Magtulis and Marc Jones; Compiled by Dhara Ranasinghe; Editing by Alexander Smith and Bernadette Baum) More

This article is an onsite version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Berkshire Hathaway was a net seller of equities (including Apple shares) in the first quarter and its cash pile grew to a new record. It is hard not to conclude that the high returns available on short-term Treasuries are making its mark on the Berkshire portfolio, despite Warren Buffett’s insistence that cash yields don’t matter (“We don’t use the cash now at 5.4 per cent but we wouldn’t use it if it was at 1 per cent . . . we only swing at pitches we like.”). Let me know your thoughts: [email protected]. How good was that jobs report?Until last Friday, the evidence that the economy was slowing and bringing inflation down with it consisted of smallish data items and anecdotal corporate testimony. A slightly weaker ISM or consumer confidence reading here; bad news from McDonald’s and Starbucks there. Friday’s weaker-than-expected jobs report — 175,000 jobs added, against an expected 241,000 — represents a meaty, important data point around which all those other bits and bobs can coalesce. In the chart below, the light blue line shows why the news was welcomed so warmly by markets. What looked very much like a re-accelerating trend in job creation over the previous four months is suddenly more ambiguous:Still, the three- and six-months averages, which remain sideways-to-up, remind us that April is just one month. Happily, the wage data is more encouraging still. A quite clear, multi-month cooling trend is in place: Over at The Overshoot, Matt Klein looks at the evidence and concludes that “US inflation may be much closer to normalisation than I had previously thought.” Wage growth and inflation are closely linked, Klein notes, for the simple reason that consumer spending is mostly funded by wages and most business revenue is funded, directly or indirectly, by consumer spending. We have now had three consecutive months in which the nominal wage data, considered in its totality, has been below the high trend that began back in mid-2022:Aggregate weekly wage income, which is average hourly pay multiplied by the number of people on payrolls times the number of hours worked each week . . . translates pretty closely to nominal gross domestic product, and was unchanged in April 2024 . . . That would make last month the weakest month for aggregate nominal income growth since February 2021Unhedged has taken the view that the patchy evidence of a slowdown and cooling inflation is outweighed by other evidence suggesting above-trend growth and still-warm inflation. With this jobs report, we’re edging — provisionally — towards the idea that a slowdown might be beginning. That suggests there may be rate cuts in 2024 after all, an outcome markets would welcome. That said, it may be that the sticky inflation we are seeing now is about more than consumers’ ability and willingness to spend. Structural or supply-side factors may be more important. If so, while it may be that (as Klein has argued) wage growth below a certain threshold is necessary for inflation getting to target, it is not sufficient. Two pieces in the FT over the weekend make this point in slightly different ways. Mohamed El-Erian approves of the Fed’s decision to all but rule out further rate increases, but not because the current stance of policy is tight enough to bring inflation down to the two per cent target eventually. Instead, he thinks getting to that target would do pointless damage to the economy, which is more inflationary than previously for structural reasons: Economic developments are likely to show that the Fed is unable to get to 2 per cent unless it is willing to impose large and unnecessary damage on the economy. Indeed, 2 per cent may not be the right inflation target for an economy going through so many structural changes, both domestically and internationally . . . multiyear structural transitions that are inherently inflationary. Domestically, the US has been moving away from deregulation, liberalisation and fiscal prudence to tighter regulation, industrial policy and chronic fiscal looseness.Tej Parikh argues that the economy is now less rate sensitive, both because of the terming out of consumer and corporate debt, and because of the less capital-intensive, more service intensive nature of modern business. Increasing rates aggressively hits only select parts of the economy, such as construction, transportation, and poorer households. Meanwhile, the main causes of sticky inflation go largely untouched:Today, America’s sticky CPI holdouts are shelter and motor vehicle insurance. Both are partly a product of pandemic supply shocks — reduced construction and a shortage of vehicle parts — that are still percolating through the supply chain. Indeed, dearer car insurance now is a product of past cost pressures in vehicles. Demand is not the central problemBoth El-Erian and Parikh are counselling against the Fed pushing too hard on rates to get inflation all the way to target, because the costs might not be worth the benefits. But there is another lesson in what they argue. Part of the “last mile” inflation problem is only partly to do with excess demand, so a softer jobs market might not be enough to solve it. Utilities and the sector-performance flipA month ago I wrote that, in the equity rally reaching back to October of 2022, Utilities were far and away the worst performing sector. I showed a chart that looked a lot like this one: I wrote then that If you believe that, sooner or later, markets revert towards the mean, utilities are setting up for an absolutely glorious reversion. And this has happened in the past: in 2011 and 2014, for example, after several years of underperformance, utilities’ returns roared back and crushed the market by 15 and 18 percentage points, respectively. Utility outperformance is not limited to recessions and big market corrections.Well, here is what has happened in the month since:Not only utilities, but their fellow defensive sector consumer staples, have gone from being the worst to the best performers. Cyclicals such as financial and industrials, on the other hand, went from leading the way (trailing only the sectors dominated by big tech) to badly lagging the market. I mention this not as evidence that I can predict when mean reversion is going to happen. My history as an investor proves conclusively that I cannot. Instead, the point here is that the market has not simply lost momentum since the rally came to a halt in April. Its internal dynamic has shifted as well and this shift is not simply down to changing rate expectations. Utilities, as sometime bond substitutes, are usually rate sensitive. The prospect of higher-for-longer rates should hurt them, all else equal (it certainly did in much of 2023 and early 2024). But investors in US equities appear be putting a big premium on safety, all of a sudden, and looking part utilities relative yields Nicholas Bohnsack of Strategas, upgrading the utility sector this week, noted that its valuation is low relative to their own recent history and the rest of the S&P 500, despite solid earnings growth expectations for this year. I myself don’t know whether utilities’ strong relative performance will continue, but it does seem to suggest a change in investor risk appetite, perhaps in response to the (still patchy) evidence that the economy is slowing.One good readThe restless hunt for dullness.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. 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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an onsite version of our Europe Express newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday and Saturday morning. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Chinese President Xi Jinping has just arrived in Europe for his first visit in years, heading for France, Serbia and Hungary — but not Brussels. Read the preview by my colleague below. And our climate correspondent speaks to the head of Europe’s chemical industry body, who believes upgrading Europe’s old and creaky factories for the green transition will cost dearly.Damage controlChinese President Xi Jinping arrived in France yesterday for meetings to discuss the war in Ukraine, rising trade tensions with Europe — and cognac, writes Adrienne Klasa.Context: Xi’s six-day visit is his first to Europe since 2019, and also includes stopovers in Serbia and Hungary later in the week. It comes at a time when relations between the EU and China are touchy, as many European countries seek to reduce their reliance on Chinese goods and fret over spying allegations.During the meetings, French President Emmanuel Macron is set to address France’s desire for greater commercial reciprocity with China, and ask Xi to use his influence as Russia’s ally to move towards resolving the war in Ukraine.Ahead of the visit, Macron told French newspaper La Tribune that an update of relations was necessary “because China now has excess capacity in many areas and exports massively to Europe”. But he noted not all European countries agree on this point, because “some players still see China as a market of opportunities”.Today, Macron and Xi will be joined by European Commission president Ursula von der Leyen — a move meant to underline European unity.Von der Leyen said before the meeting that an “oversupply of Chinese subsidised goods” such as electric vehicles and steel was “leading to unfair trade”.“Europe cannot accept such market-distorting practices that could lead to deindustrialisation in Europe,” von der Leyen said. “I will encourage the Chinese government to address these overcapacities in the short-term.”The commission has begun a litany of investigations into suspected unfair trade tactics by China, including a landmark anti-subsidy probe into Chinese EVs sold in the EU, expected to end in the coming weeks. China has retaliated with its own probes into European goods. Macron is expected to focus on France’s cognac makers, after Beijing in January launched an anti-dumping investigation into French brandy imports.“The question of cognac is the subject of the greatest attention on the part of the French authorities . . . This question will be addressed during discussions in order to ensure that French interests are preserved,” an Elysée official said.With Xi expected to play hardball, it’s unclear whether the programme — which includes a state dinner this evening and an excursion to the Pyrenees tomorrow — can help ease the bubbling trade tensions.Chart du jour: Yawning gapYou are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Governments around the world are scrambling to figure out how to foot the immense bill for limiting climate change in line with the 2015 Paris agreement.Old and rustyUpgrading its industrial infrastructure will cost Europe dearly, the new head of the EU’s chemical industry body Cefic tells Alice Hancock.Context: The cost of meeting the EU’s goal of net zero emissions by 2050 has become starkly apparent as the after-effects of Covid-19, the energy crisis and higher inflation bite. Brussels has estimated the investment needed to decarbonise energy systems alone to be €660bn annually.Ilham Kadri, Cefic’s incoming president, said a huge part of the funds under the green transition would be needed for upgrading old plants and equipment, “without adding any capacity”.“Europe has the oldest industrial infrastructure in the world,” said Kadri, who is also chief executive of the Belgian industrial materials manufacturer Syensqo. “It’s a cost of doing business.”Concerns about the costs of a greener economy and whether European companies will still be able to compete in tight global markets have leapt up the agenda this year, in part pushed by Cefic, which masterminded an industrial declaration in February calling for a “European Industrial Deal” to complement the EU’s Green Deal climate policies. The declaration has now been signed by more than 1,100 businesses, unions, think-tanks and industry groups.Kadri said that central to her mandate at Cefic would be promoting the interests of smaller businesses, the suppliers and customers of large businesses such as Syensqo, which could little afford to upgrade their assets.“We are nobody without the small- and medium-sized enterprises,” she said.The crucial question, Kadri added, was whether companies could become “sustainable and profitable. It’s the power of the ‘and’, right?”What to watch today Danish Prime Minister Mette Frederiksen hosts migration conference in Copenhagen.Lithuanian foreign minister Gabrielius Landsbergis speaks at conference on resisting economic coercion in Vilnius.Now read theseRecommended newsletters for you Britain after Brexit — Keep up to date with the latest developments as the UK economy adjusts to life outside the EU. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: [email protected]. Keep up with the latest European stories @FT Europe More

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