Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.War in Gaza is threatening the fragile and tourism-dependent economies of Egypt, Jordan and Lebanon and triggering concerns that the impact will spread across the Middle East. In Jordan, where tourism accounts for 10 per cent of gross domestic product, one tour operator said the war had triggered a string of cancellations: “Just like that, months and months of bookings have disappeared,” he said.In Egypt, where the government has already turned to the IMF to relieve its economic crisis, many tourism bookings in Sinai, which borders Gaza, have been cancelled. “We’re already seeing reports of cancelled bookings in neighbouring countries like Egypt,” said Farouk Soussa, Goldman Sachs’s regional economist. “We think it could cost Egypt billions in lost tourism revenues this fiscal year alone . . . Egypt doesn’t have the foreign exchange buffers to absorb that sort of hit.”Noura al-Kaabi, a United Arab Emirates minister of state for foreign affairs, on Friday said the Gulf state was working “relentlessly” for a full ceasefire and warned that the regional temperature was approaching a “boiling point”.“The risk of regional spillover and further escalation is real,” she told a conference in Abu Dhabi.The steep civilian death toll from Israel’s assault on Gaza following Hamas’s incursion into southern Israel has punctured hopes for an economic dividend from a new era of better relations between the Jewish state and its Arab neighbours.“There’s a great deal of uncertainty regarding the potential impact of the war on the region’s economy,” said Soussa. “The risk of further escalation threatens to both deepen and broaden the economic fallout.”The crisis has already spread, with shelling across the Israel-Lebanon border, and drone and missile attacks on the Israeli Red Sea town of Eilat by Yemen’s Houthi militia, which is supported by Iran. Israel’s tourism-dependent neighbours Egypt, Jordan and Lebanon were struggling even before the conflict.“Uncertainty is a killer for tourist inflows,” said Kristalina Georgieva, the IMF’s managing director, at Saudi Arabia’s Future Investment Initiative conference last week.  Lebanon, already in profound crisis, relies on tourism for about 40 per cent of GDP and now faces a further economic deterioration, Walid Nassar, its tourism minister, told CNN Business Arabic.  For the petrostates of the Gulf, on the other hand, higher oil prices could boost state revenues dented by Opec output cuts.“But this will likely be offset by reduced foreign direct investment inflows and tourism income,” said James Reeve, chief economist at Jadwa Investment in Riyadh. “Given that the priority is economic diversification, this is the bigger loss.”Bankers have been brutally reminded of the centrality of the Israel-Palestine conflict to the politics of the Middle East.Despite the war, top financiers flocked to last week’s FII conference, the so-called “Davos in the Desert”, trying to tap Saudi Arabia’s sovereign wealth funds for investment in global assets or to look at domestic opportunities, such as electric-vehicle manufacturing. But many attendees were just doomscrolling on their mobile phones, following the human tragedy in Israel and Palestine that officials fear could slow their grandiose development plans.In the post-pandemic boom town of Dubai, economic strength has been driven by an influx of Russians fleeing war and the ultra-wealthy seeking additional homes.Hoteliers say the Gaza war is responsible for some cancellations from Israeli and American tour groups, but few expect others to avoid the city because of a distant war on the shores of the Mediterranean. But a broader conflagration could deflate soaring property valuations and mar the busy autumn period. Events starring actress Jada Pinkett Smith and singer Macklemore have been postponed.   “Retailers are already worried about softer sales, especially in luxury,” said one consultant. “Some big launch events for new products are being cancelled — they are all scared of what comes next.”King Charles is scheduled to attend the opening of the UN COP28 climate summit in Dubai, along with other world leaders, from November 30. The UK government this week raised the risk of terrorist attacks in the UAE to “very likely” from “likely”. More

Jerome Powell, Fed Chair, noted the time lag in realizing the effects of monetary tightening and refrained from discussing prospective rate hikes. Despite these inflation issues, the U.S. economy demonstrated resilience with a 4.9% Q3 real GDP growth rate, bolstered by increased consumer spending backed by strong employment and wage growth.Concerns about an economic slowdown are rising as long-term U.S. interest rates reached a 16-year peak of 5% in October, alongside increasing Treasury yields. Uncertainty over U.S. consumer spending also looms due to the resumption of student loan repayments following COVID-19 pandemic suspensions.David Kohl, Chief Economist at Julius Baer, forecasts that the Fed will keep interest rates unchanged until Q3 2024 due to this robust economic growth and reduced inflation. Kohl highlighted that higher bond yields and weaker equity markets have tightened financial conditions, leading to questions about whether the current monetary policy stance is restrictive enough.In response to the global economic climate, other central banks have also held their interest rates steady. The UAE’s base rate for overnight deposit facility remains at 5.4%, while Qatar has also kept its interest rates unchanged following the Fed’s decision. Similarly, the European Central Bank has kept its policy rate steady for the first time since June last year, while the Bank of Japan continues with its monetary easing approach.Despite these measures, mounting interest rates in Europe have induced economic downturns, as evidenced by a 0.4% reduction in the eurozone’s real GDP. Despite this, Kohl expects that softening growth and lower inflation will convince the Federal Open Market Committee (FOMC) that further policy tightening is unnecessary.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

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Investors are warning governments to expect much higher borrowing costs over the coming years, in a shift that will pinch public finances and constrain states’ ability to respond to crises.Despite a recent rally, government bond prices have dropped hard on both sides of the Atlantic this year, in part reflecting a growing acceptance that interest rates will need to stay high for the long haul to dampen inflation. In addition, investors are struggling to digest governments’ much bigger debt issuance plans without central banks stepping in to hoover up supply. The result is much higher bond yields that tie governments in to large regular interest payments when they take on fresh debt. In 2018, the interest bill for G7 countries stood at $905bn a year, according to credit rating agency S&P. By 2026 it will be $1.5tn.“Investors have always worried about government debt and it’s never been a problem, but this time it feels like it’s for real,” said Jim Leaviss, chief investment officer of public fixed income at M&G Investments. Higher for longerThis is the second in a series of articles about the impact of high interest rates across businesses, governments and economies around the globe. Part 1: Private equity takes a hitPart 2: Government finances and the impact on marketsPart 3: Reverberations in the corporate worldPart 4: The consequences for asset management and emerging markets“We’re not just worried about the amount of government borrowing for normal stuff like healthcare spending and pensions,” he said. Instead, he is worried about “structural” issues such as the size of debt interest payments, the impact of central banks shrinking their own bond holdings and the huge 31 per cent slice of US government bonds that will need to be refinanced next year.The yield on benchmark US Treasuries has risen by about 3 percentage points in the past two years to roughly 4.5 per cent, and last month it rose above 5 per cent. Economists surveyed by Bloomberg now expect those 10-year bonds will yield about 4.5 per cent at the end of 2025, up from previous expectations of 3.5 per cent at the beginning of July.Elevated debt levels were at the forefront of conversations at the annual IMF and World Bank meetings in Marrakech last month, with the head of fiscal affairs at the Fund, Vitor Gaspar, telling the Financial Times that rising debt servicing costs for governments would be a “persistent trend” over the medium term and have a “lasting effect”.Over decades, investors and governments have become accustomed to a fairly reliable pattern in interest rates. Typically, central banks push them up to hose down inflation, but quickly cut them again when economies slow down. Now, it is becoming increasingly clear that a return to the post-2008 era of interest rates close to zero per cent is unlikely. The longer-term outlook for rates is highly contested, but factors that could keep them up include high levels of public borrowing including huge investment in projects such as the green transition and infrastructure.In addition, central banks are no longer stepping in to keep borrowing costs down by buying bonds in quantitative easing programmes; instead they are reducing the size of their balance sheets through quantitative tightening. “We are basically transitioning from markets that were engineered by central banks through QE to markets that are less engineered by central banks because they are now doing QT, and at the same time there’s a lot more fiscal activism so there’s a lot more issuance and the market needs to absorb that,” said Guillermo Felices, global investment strategist at PGIM Fixed Income. “We have left that era [of zero rates] behind us,” said Stephen Millard, a deputy director of the National Institute of Economic and Social Research in London. The IMF says global public debt is on course to approach 100 per cent of gross domestic product by the end of the current decade. Among the biggest drivers is the US, where the government deficit is on track to exceed 8 per cent of the country’s GDP this year. “Something must give to balance the fiscal equation,” the IMF warned about global debts. “Policy ambitions may be scaled down or political red lines on taxation moved if financial stability is to prevail.”The US, which has the highest central bank rate in the G7 and a low revenue base compared with its higher-tax peers, is on course for a dramatic surge in debt servicing costs. Bill Foster, senior vice-president at rating agency Moody’s, estimates that US interest expenses as a proportion of government revenue will jump from under 10 per cent in 2022 to 27 per cent by 2033.The expected jump in interest payments is more acute in the US than in some other countries because of the amount of Treasury bonds that will need to be rolled over in 2024, which is likely to lead to significantly higher government interest payments. Congressional Budget Office forecasts suggest that net interest spending will be close to half of America’s overall deficit by 2026. Investors doubt whether the US can grow its way to a lower debt burden. Economic growth forecasts for next year are anaemic at just 1.5 per cent, whereas benchmark inflation-adjusted yields stand at close to 2.2 per cent. “That is essentially telling you that there might be a problem going forward if interest rates stay this high,” said Felices. “If the market smells that fiscal sustainability is under threat then they will push governments to some sort of adjustment . . . by demanding a higher risk premium to own their debt,” he added. Smoke rises during the bombardment of the Gaza strip: the US House of Representatives has approved legislation to provide $14bn in new aid to Israel More

NEW YORK (Reuters) -Hopes that a rout in Treasuries has run its course are tempting some investors back into the U.S. stock market after a months-long selloff.The relationship between stocks and bonds has been a tight one in recent months, with equities falling as Treasury yields climbed to 16-year highs. Higher yields offer investment competition to stocks while also raising the cost of capital for companies and households.Over much of the last week, however, that dynamic has reversed, following news of smaller than expected U.S. government borrowing and signs that the Federal Reserve is nearing the end of its rate hiking cycle.Yields on the benchmark 10-year US Treasury, which move inversely to bond prices, are down about 35 basis points from 16-year highs hit in October. Meanwhile, the S&P 500 surged 5.9% in the past week, its biggest gain since November 2022. The index is off around 5% from its July peak, though up nearly 14% year-to-date.”The stability in rates is helping other asset classes find a footing,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. “If equities move higher you may find investors starting to feel as if they need to chase performance through the end of the year.” Draho expects the S&P 500 to trade between 4,200 and 4,600 until investors determine whether the economy will be able to avoid a recession. The index was recently around 4,365.Other factors may also be working in stocks’ favor. Exposure to equities among active money managers stands near its lowest level since October 2022, according to an index compiled by the National Association of Active Investment Managers – a compelling sign for contrarian investors who seek to buy when pessimism rises. Aggregate equity positioning tracked by Deutsche Bank fell to a five-month low earlier in the week, the firm’s strategists said in a Friday note, helping fuel a powerful bounce when investors rushed back into the market.At the same time, the last two months of the year have tended to be a strong stretch for stocks, with the S&P 500 rising an average of 3%, according to data from CFRA Research. The best two weeks of the year for the index, during which it has risen an average of 2.2% – kicked off on Oct. 22, according to data from Carson Investment Research. “We had an extremely oversold market in the midst of a strong economy, and the Fed coming out a little more dovish was the kindling we needed for a rally,” said Ryan Detrick, chief market strategist at Carson Investment Research, who believes the current rebound in stocks will take them past their July high.Bullish sentiment received another boost on Friday from U.S. employment data, which showed a slight gain in the unemployment rate and smallest wage increase in 2-1/2 years, suggesting that the labor market is cooling, bolstering the case for the Fed to stay its hand. The S&P 500 closed up 0.9% on the day.Of course, plenty of investors remain hesitant to return to stocks just yet. Technology bellwether Apple Inc (NASDAQ:AAPL) on Thursday was the latest of the market’s massive technology and growth stocks to offer an underwhelming outlook. The iPhone maker gave a holiday sales forecast that was below Wall Street estimates. At least 14 analysts cut their price targets for the stock, according to LSEG data. Still, analysts expect earnings growth of 5.7% for S&P 500 companies in the third quarter, with over 81% of the 403 companies in the benchmark index that have reported profits so far having beaten estimates, per LSEG data.At the same time, betting on reversals in Treasuries has been a losing proposition for most of the year, during which rebounds in the U.S. government bond market have been followed by deeper selloffs. The 10-year Treasury yield is up around 125 basis points from its low for the year. Some investors also worry that the so-called Goldilocks economy suggested by Friday’s jobs report may not last. Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, believes that while signs of softer than expected growth are boosting stocks and bonds for now, they may eventually stir recession worries.”Eventually ‘good’ moderation may turn into a debate of whether the economy and labor markets are weakening too much,” he said. More

“I think that product needs a close look and I think it’ll get a close look,” Senior Deputy Governor Carolyn Rogers (NYSE:ROG) said in an interview with Bloomberg News on Friday. “I think you’ll see the industry reflect on how much they want to offer that product,” she addedMany variable rate mortgages in Canada require borrowers to make regular payments in fixed amounts. So when interest rates rise, a greater share of the payment goes toward paying interest on the loan rather than paying down the principal, resulting in the amortization period being extended.The rapid pace of interest-rate hikes by the Bank of Canada since last year has pushed some mortgages into negative amortization, which occurs when interest on a loan exceeds the fixed payment on the principle — resulting in borrowers adding to the principle on their loans.”It is concerning. You don’t want a big portfolio of negative amortizing mortgages,” Rogers said. “It’s not good for the banks and it’s not good for the mortgage holders.”On monetary policy, Rogers said, “A rate hike is on the table until we are really confident that we are clearly on our way” toward lowering core inflation toward target.The latest inflation data, for September, showed some progress on the central bank’s favored measures of underlying price pressures, but they remained far above the 2% inflation target.Money markets see little chance of further tightening by the BoC and have moved to price in a rate cut by June. More