Aurelia Butler

The ECB ended an unprecedented streak of 10 consecutive rate hikes last week and investors are now pricing in some chance of a cut as early as April, despite President Christine Lagarde’s insistence that this is premature.Slovak central bank governor Peter Kazimir and his Lithuanian peer Gediminas Simkus – two so-called hawks who favour tighter policy – sought to hammer home the message on Monday, even keeping further hikes on the table as an outside possibility.”I would be surprised if we would need to lower rates during the first half of the next year,” Simkus told reporters in Vilnius.Kazimir said bets on a rate cut in the first six months of the year were “entirely misplaced” and ECB policymakers would need to see the bank’s next macroeconomic projections in December and March.”Only then will we be able to say the tightening cycle is completed and move on to the subsequent – monitoring – phase,” Kazimir said.Inflation has been easing, with a state reading out of Germany on Monday confirming expectations for a substantial fall in October, and growth slowing amid signs of a credit crunch induced by surging interest rates.The ECB last week left the rate it pays on bank deposits unchanged at a record high of 4% while it waits for its recent hikes to work their way through the economy.”We will have to stay at the peak for the next few quarters,” Kazimir said. More

On Monday, Simkus suggested that a rate hike might not be necessary at the year-end ECB meeting unless unexpected economic data emerges. He considers the existing restrictive levels adequate and does not anticipate a future rate surge. Simkus views the current inflation as overly high and labels discussions on rate cuts as premature.Simkus’s stance indicates a cautious approach by the ECB towards monetary policy adjustments in light of ongoing economic uncertainties. This approach underscores the importance of data-driven decision-making in shaping monetary policy, particularly in an environment marked by high inflation.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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1. Futures higher with Fed decision aheadU.S. stock futures rose on Monday ahead of whirlwind week marked by a key interest rate decision from the Federal Reserve, major corporate results and crucial employment data.At 05:52 ET (09:52 GMT), the Dow futures contract added 157 points or 0.5%, S&P 500 futures gained 26 points or 0.6%, and Nasdaq 100 futures jumped by 111 points or 0.8%.The benchmark S&P 500, tech-heavy Nasdaq Composite and the 30-stock Dow Jones Industrial Average remain on pace for a negative October heading into the final trading days of the month. A sharp increase in U.S. Treasury yields has contributed to the sell-off, weighing in particular on shares in technology companies.Attention now turns to the Federal Reserve’s latest interest rate announcement on Wednesday, with traders mostly expecting the U.S. central bank to signal that it has finished hiking borrowing costs this year in the wake of the surge in Treasury yields.2. Apple set to headline weekly earningsMarkets will also be keeping an eye on quarterly results from several large U.S. companies this week, including tech giant Apple (NASDAQ:AAPL).The iPhone maker, which has seen its shares slump by 15% from its 52-week high, is due to release its fourth-quarter earnings after the bell on Thursday.Investors fear that pressures could be mounting on Apple’s Chinese operations amid mounting competition from rival Huawei and a reported crackdown on the use of iPhones by government officials. However, these issues may be offset by an expected acceleration in demand for the company’s popular services businesses.Consumers’ spending habits will also be in the spotlight with other companies set to report include burger giant McDonald’s (NYSE:NYSE:MCD) on Monday, construction group Caterpillar (NYSE:NYSE:CAT) and drugmaker Pfizer (NYSE:NYSE:PFE) on Tuesday, snacks company Mondelez (NASDAQ:MDLZ) on Wednesday, and coffee chain Starbucks (NASDAQ:SBUX) and pharmaceutical firm Eli Lilly (NYSE:NYSE:LLY) on Thursday.3. Oil drops as busy week startsOil prices fell Monday as traders adopted a cautious stance at the start of a week that includes the Fed policy meeting and all-important economic data.By 05:52 ET, the U.S. crude futures traded 1.5% lower at $84.28 a barrel, while the Brent contract dropped 1.4% to $87.97 a barrel.Both benchmarks ended Friday up 3% after Israel stepped up a ground assault on Gaza, but the contracts still registered hefty losses over the course of the week as there were few signs that this conflict will expand into a wider regional war.Beyond the violence in the Middle East, traders are gearing up for Friday’s U.S. nonfarm payrolls report for October. After a blockbuster 336,000 jobs were added in September, economists are anticipating a more moderate figure of 182,000, although this would still be consistent with a robust labor market.4. HSBC announces fresh share buybacksHSBC has unveiled an extra $3 billion in share buybacks, bringing its total returns to shareholders this year to $7B, as the lender said it has reaped the benefits from higher interest rates.The move came as the bank reported profit before tax in the third quarter of $7.7B, missing analysts’ estimates of $8.1B, but jumping from $4.5B in the corresponding period last year. Revenue also surged by 40% to $16.2B.In a statement, Group Chief Executive Noel Quinn noted that the London-based group saw “broad-based growth across all businesses and geographies, supported by the interest rate environment.”He added that HSBC, which retains strong ties with East Asia, continues to monitor risks related to a liquidity crisis hitting China’s housing sector. The company’s provisions for loan losses amounted to $1.1B, with $500M of this total related to its commercial real estate portfolio in China.5. Evergrande given deadline for new restructuring planChina Evergrande Group has been given one final chance to come up with a deal to appease its creditors or face liquidation, as the indebted developer said it was working on a revised plan to restructure its operations.A court in Hong Kong agreed to push back a hearing to wind up Evergrande to Dec. 4, although High Court Judge Linda Chan said this will be the “last opportunity” for the company to present a “concrete” overhaul proposal. If not, Chan warned that Evergrande would likely be wound up.Evergrande, long a symbol of the crisis facing China’s property sector, saw a recent $23B plan to restructure its offshore debt scrapped after its founder Hui Ka Yan was confirmed to be under investigation for suspected criminal activities. The company, which previously defaulted on its offshore in 2021, faces over $300B in liabilities.A lawyer for Evergrande noted that it now aims to “monetize the value” of its Hong Kong-listed property services and electric vehicle divisions, saying it would help avert possible regulatory issues. More

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China this month celebrates the 10th anniversary of the Belt and Road Initiative, which ranks as the world’s biggest development programme ever undertaken by a single country. Over the last 10 years, the BRI, as it’s generally called, has seen Chinese financial institutions lending close to $1tn to finance infrastructure projects all over the developing world. With me to discuss all this is Yunnan Chen, a researcher at ODI, a global affairs think-tank. Yunnan, could I start by asking you, in your view, generally speaking, has the BRI been a success? So when the BRI was launched it served multiple purposes. It was seen as China’s global public good offer to the world, particularly to the developing world in providing infrastructure, finance, and providing the kind of connectivity infrastructure that could foster greater trade, growth and economic development. But it was also a way for China’s own domestic economy to resolve its own problems, and to achieve China’s own strategic and economic interests. Why was it helping China domestically? So in this period following the global financial crisis, the Chinese government pumps a huge amount of capital into a domestic economic stimulus. So you see massive infrastructure construction, a huge domestic investment in heavy industries. And around 2011 you’re already seeing excess capacity and a bit of an overheated economy. And in this period is when we also see the government trying to push companies and exporters to go out to seek more lucrative better returns in international markets. And they also inject capital into China’s policy banks and financial institutions, which enables them to provide the financing to support Chinese companies to win these contracts overseas. Right. It’s really extraordinary, though. Over 10 years, nearly $1tn has been lent by these Chinese financial institutions. For some of the recipient developing countries has this made a really big impact? We’ve seen huge railway projects, some mega projects as they’re called, in the form of standard gauge railways in Nigeria, Ethiopia, Kenya. High-speed railways in south-east Asia, in the case of Jakarta going through Laos. Also, several port investments as well in Kenya, in Pakistan with the China-Pakistan economic corridor. And in a lot of these places this hard infrastructure is also tied into wider investments. A lot of which has also come from Chinese state-owned enterprises and private companies. So you see the establishment of industrial zones, which were trying to bring in greater foreign direct investment. And so really, I mean, that seems like there’s been a lot of very positive activity. Have you seen clear impacts on the ground? Chinese investments have brought local employment. They have increased incomes in some areas. And they also have transformed the landscape of cities across Ethiopia, across Africa, for example, in providing this kind of much needed infrastructure. But there has also been quite a lot of controversy around the BRI. Infrastructure, overall, is a very high risk sector. They’re very, very long-term investments. They take a very long time to really come to break-even, or to even make money. But what they do serve is a bit more of a public goods function. That said, there have been a certain number of Chinese projects that have really struggled once constructed in making that economic rationale make sense. What we read about now is that the Chinese government is having to bail out quite a few countries that were part of the BRI. One of the consultancies that we quoted in the Financial Times recently said that over the three years from 2019 to 2022, the Chinese government was paying out $104bn to bail out countries that had fallen down on borrowing through the BRI. How does China feel about being, kind of, the lender of last resort to these developing countries? I don’t think China is necessarily bailing out the recipient countries, rather than bailing out its own banks. In the end, a lot of this finance, you know, it’s lent to the borrowing country. But ultimately it goes back into paying China’s policy banks or commercial banks. And in the end it is the Chinese contractors that win the project or that benefit. Well, that’s a very interesting point. So in a sense this money is being lent by China to prevent defaults by countries to Chinese financial institutions that have lent to the BRI. Exactly. There’s been a, sort of, systematic issue of moral hazard with a lot of these infrastructure projects. You have borrowing countries that have wishlists of infrastructure projects that they want to construct. You have Chinese companies who want to win these contracts. And you have Chinese policy banks and financiers who want to support these companies to go out. And so in all of this we’ve seen a period of exuberance, particularly in the early part of the 2010s, and then a bit more of a pullback, particularly after 2016. The real critical juncture is when China loses a quarter of its US dollar reserves after the 2015 stock market crisis. And after that you really see a growing conservatism and a bit more of a pullback, and a bit more of a reassessment of the risks that the financial sector is taking overseas – and also domestically. Going forward, do you think that the Chinese government is prepared to continue with these BRI bailouts? Are we going to see tens of billions of US dollars every year being spent by the Chinese government to bail out these BRI projects, or are we going to see something different? Because of the way in which these banks operate, they’re also policy-oriented institutions. What that has meant is that there’s been a little bit of a kicking the can down the road approach when it comes to dealing with projects that are facing difficulties, or borrowers who are struggling to repay the loans. Banks have, generally, been very unwilling to write down, or make any kind of concession or debt relief that requires them to take a hit on their balance sheets. And in turn, I think what we’ve seen from the central bank is… as well trying to keep these financial institutions afloat, and keeping them financially healthy. So that they can continue to operate in the way without having to agree to significant cuts or write-downs in their portfolio. Whether that’s sustainable, I think, is to be seen. So what do you think comes now, then? I mean, is China falling out of love with the BRI? Is China going to stop the lending to the BRI projects? Or are we already seeing, actually, a decline in the level of lending to BRI? What do you think the future holds for all of this? The impact of Covid, I think, was really already a tail-end of a very dramatic decline in overseas official lending. And there’s clearly been a bit more of a pullback and a greater risk aversion from China’s policy banks, as well as the ability of China’s policy insurer to finance and to underwrite this overseas lending. I don’t think this means the end of the BRI as a narrative. And certainly, with the forum this month, there is still a very top-level political commitment to what the BRI represents in terms of China’s relations, and as a platform to engage with the Global South and with developing countries. But the rhetoric has shifted already. We’re seeing more mentions of small and beautiful projects. A greater emphasis on a green BRI that’s more sustainable and prioritises cleaner, greener forms of infrastructure investment. So looking at it from the perspective of the developing world, as we said, China has lent almost $1tn over the last 10 years. This has been a real boon for the ambitions that those developing countries have to build crucial infrastructure. We’ve now got climate change coming up, presenting huge problems mostly for the developing world. And we’ve got a population explosion, which is going to see continents like Africa really increase their levels of population over the next 10, 20, 30 years. Doesn’t this come at just the wrong time for the developing world? I mean, the fact that China’s encountered so many problems in the BRI, and is now retreating a little bit. It does raise a question of where that infrastructure finance is going to come from. And we’ve seen a response of competitive offer from the G7, and the partnership for growth and infrastructure investment from the EU, in the form of the Global Gateway. And all of these are, again, infrastructure focused, trying to compete with the Belt and Road Initiative in a period where the BRI has already seen a bit of a decline. But China can still play a huge role for climate investment in supporting the energy transitions of developing countries through the provision of renewable technologies, for example. China is the biggest manufacturer and producer at scale of solar panels, of wind turbines, and of renewable and clean energy technologies. And the export of that, and the provision of these at low cost to developing countries will also be crucial in their ambitions for a green energy transition and for a green development pathway. More

The concerns underscore policymakers’ worries as the rising energy prices have already been a burden for the world’s third-largest economy that relies on imports to cover most of its energy needs. The government added the developments in the Middle East to factors requiring close attention as it “could pose a downside risk to the Japanese economy,” said an official at the Cabinet Office, which compiled the monthly report for October.”There could be a negative impact on Japanese households, consumption and corporate earnings through higher import cost,” he said.An Oct. 7 attack of Hamas militants on southern Israel set off a punishing air campaign on the Palestinian Gaza enclave, fanning concerns around the world the war could escalate into a wider conflict. The Japanese government’s monthly report also reiterated that careful attention needed to be paid to the effects of rising prices and fluctuations in the financial and capital markets.The Japanese currency recently weakened beyond 150 yen to the dollar to hit its weakest level since October 2022 year when authorities intervened in the market to stem the weakness. The 150 yen line is seen by markets as a danger zone that could trigger an intervention.As wage recovery is not strong enough to offset price increases, Prime Minister Fumio Kishida’s government plans to compile a package of measures to cushion the economic blow from rising inflation on Nov. 2. Japan raised its assessment on business sentiment for the first time since July and said it was “improving moderately as a whole”, according to the report. The upward revision reflected the Bank of Japan’s survey earlier this month that business sentiment improved in the third quarter. The government also kept its caution about downside risks from the global monetary tightening and worries about the outlook for China’s economy.The report came out ahead of the BOJ’s monetary policy meeting on Oct. 30-31 when the central bank will face growing pressure to shift further away from its controversial bond yield control. More

The brokerage’s previous base case was for a shutdown for up to 2-3 weeks in the current quarter ended December, which now seems “much less likely”, Goldman Sachs economists led by Jan Hatzius said. The conflict in Israel and other emerging geopolitical tensions such as the recent U.S. air strikes in Syria would make the Congress less likely to allow a shutdown, which also affects the military, the brokerage said. The election of House Speaker Mike Johnson after weeks of infighting also reduced the chances of a the government shutting down, economists led by Hatzius added.Hatzius however said there was still “some risk” of a government shutdown in early 2024, as the likely temporary extension of the spending bill by the Nov. 17 deadline was not expected to resolve the underlying policy disagreements. “The longer the government operates under short-term extensions, the less likely it will be that Congress will reach a deal on full-year spending bills,” said Hatzius.”So there is still some risk of a shutdown in early 2024.” More