Aurelia Butler

WASHINGTON (Reuters) – The credit quality of U.S. middle market collateralized loan obligations (CLOs), major sources of debt funding for mid-sized companies, has worsened only slightly even as the overall risk of late payments by these companies has increased, according to Moody’s (NYSE:MCO). The new data suggests that despite increasingly challenging liquidity conditions and rising interest rates, demand for mid-sized companies’ debt has persisted, in contrast to fears funding would dry up as the Federal Reserve combats inflation with higher interest rates. CLOs are pools of leveraged loans, structured as one actively managed security. They have become the biggest source of funding for non-investment grade companies seeking debt financing.According to the Moody’s report, mid-sized borrowers’ cash flow relative to their debt has deteriorated significantly since last year, as have their prospects for refinancing debt maturing in 2024. The percentage of mid-market borrowers with “weak liquidity” – or those that depend on external, and highly uncertain, financing options – grew from 7% in the first quarter of 2022 to roughly 30% in the first quarter of this year, the report said. Nevertheless, the mid-market CLOs’ own credit profiles “have worsened only slightly.” Loans to mid-sized borrowers maturing in 2024 made up just under 9% of the CLO books examined by Moody’s, due in part to the rolling nature of Moody’s credit estimates.CLO managers have also actively assessed the loans in their tranches for potential loans that pose the greatest risk of default, switching them out for safer loans as needed.Shiloh Bates, partner and chief investment officer at alternative credit manager Flat Rock Global, pointed to the performance of mid-market loans post-pandemic.“During the last two years, middle market loans have shown their resiliency, though interest coverage ratios have retreated from record highs,” Bates said. More

Good morning. The US, Japan and South Korea are to create a leader-level hotline and hold annual joint military exercises as part of a historic trilateral agreement that will help Washington and its Asian allies boost deterrence against North Korea and China. President Joe Biden will unveil the move with Japanese prime minister Fumio Kishida and South Korean president Yoon Suk Yeol at Camp David on Friday, according to Kurt Campbell, the top White House official for the Indo-Pacific region. “We’re going to invest in technology to have a three-way hotline for the leaders and others inside their governments to communicate,” Campbell said in a preview of the summit at the Brookings Institution. The trilateral summit represents a significant victory for the White House, which has been urging Tokyo and Seoul to move beyond a longstanding dispute over Japan’s wartime behaviour to enable Washington to work more closely with its two allies.Campbell said Kishida and Yoon had engaged in “breathtaking” diplomacy, sometimes against the advice of their aides, that had elevated the Japan-South Korea relationship to “a new plane”. Read the full story.More China news: Retail investors with exposure to Chinese conglomerate Zhongzhi sought to lodge formal complaints with authorities in Beijing on Wednesday in a sign of growing alarm over a liquidity crisis across the group’s many businesses.China sinks Intel-Tower merger: Intel said on Wednesday that it was abandoning an attempt to purchase Israeli chipmaker Tower Semiconductor, after failing to secure regulatory approval in China for the $5.4bn deal.Here’s what else I’m keeping tabs on today:Results: ASX, Telstra, Origin Energy Bilibili and Lenovo report earnings.North Korea: The UN Security Council is due to hold its first session to discuss North Korean human rights abuses since 2017, a day after Pyongyang claimed that a US soldier who crossed over the border into its territory a month ago was escaping “inhumane abuse and racism in the US military”.Indonesia: Financial markets will be closed for independence day. President Joko Widodo is set to deliver the annual state of the nation address. Five more top stories1. Vietnamese electric vehicle start-up VinFast’s valuation has overtaken those of Detroit’s “big three” carmakers after shares of the lossmaking company soared on their first trading day in New York. VinFast, controlled by billionaire founder Pham Nhat Vuong, merged with a special purpose acquisition company to secure the US listing. Here’s more on the company touted as Vietnam’s answer to Tesla. Lex: Carmaker’s share price jump should not be taken as proof of widespread investor confidence. Here’s why.More EV news: Tesla rolled out price cuts of its China models this week, accelerating a price war in the world’s largest EV market.2. Exclusive: The US is pushing Iran to stop selling armed drones to Russia as part of discussions on a broader “unwritten understanding” between Washington and Tehran to de-escalate tensions and contain a long-simmering nuclear crisis. Here’s what we know about the discussions. FT View: The risk of a deepening nuclear crisis remains, but any efforts to contain it are welcome.3. The Federal Reserve has signalled more scepticism over the need to keep raising interest rates despite fearing the US central bank has not won its battle against inflation. Minutes from the Fed’s July meeting point to growing concerns about the impact of tighter policy on the US economy.4. EY has rejected a proposal from US private equity group TPG to break up the Big Four firm and take a stake in its consulting business. The FT on Tuesday revealed the details of TPG’s pitch, which came just months after the collapse of EY’s own attempt to spin off the consulting business and seek a $100bn enterprise value for it in a stock market listing. Read the full story.5. President Vladimir Putin was set to discuss ramping up currency controls with Russian policymakers on Wednesday after an extraordinary 3.5 percentage point rate rise failed to halt the rouble’s slide. Putin planned to hear proposals from Russia’s finance ministry to require exporters to convert some of their foreign currency earnings, most of which are currently held abroad, into roubles. Here are more details on the proposals.War in Ukraine: A container ship las left Odesa port for Istanbul, the first vessel to leave Ukraine’s ports since Russia threatened to attack civilian shipping in the Black Sea last month. Visual story

© Cecilia Reeve

About 3bn cups of coffee are drunk around the world every day — a number expected to double by 2050 if current trends continue. But warming temperatures mean up to half of current coffee farmland could soon be unusable. Can the world produce enough beans to meet growing demand? Find out more in this FT visual story.We’re also reading . . . Climate doomism: The truth about global warming is bad enough, writes Pilita Clark. We don’t need harmful hyperbole.Holding Trump to account: Prosecutors Jack Smith and Fani Willis are pursuing parallel cases against the former US president connected to his efforts to overturn the 2020 election. Here’s how their approaches differ. Interview: Former Goldman Sachs managing director Maeve DuVally’s coming out as trans in 2019 was a watershed moment for Wall Street. Corporate America needs to “step up” for trans staff, she told the FT.Chart of the dayChinese pharmaceutical companies are developing domestic versions of “miracle” weight-loss drugs as they take on western drugmakers selling anti-obesity medication in one of the world’s biggest markets. China has the world’s largest overweight and diabetic population, and health officials have said tackling diabetes and obesity is a top policy priority. Take a break from the newsHTSI’s creative director Rasha Kahil visits family in Lebanon, finding peace in a beachside guesthouse started by her mother a decade ago in the once-sleepy town of Batroun, along the country’s northern coast.

Beit al Batroun (“House of Batroun”) guesthouse © Syma Kahil

Additional contributions by Tee Zhuo and Gordon Smith More

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.Asian market sentiment on Thursday will again be a mix of caution and nervousness, with familiar roots: a supercharged dollar and rising U.S. bond yields, tightening financial conditions, and deepening concern over China.Wall Street’s steep fall on Wednesday following another batch of bumper U.S. economic data showed that the relentless rise in borrowing costs is weighing more heavily on investors’ psyche than the surprising strength of the U.S. economy.This will likely feed into the market open in Asia, where the economic calendar on Thursday is pretty full – Japanese trade and machinery orders, Australian and Hong Kong unemployment, and an interest rate decision from the Philippines are all on tap.The dollar is worth noting. It rose again on Wednesday and is now up 18 sessions out of the last 24. It is on track for its fifth consecutive weekly gain, which would be its best run since April-May last year.The greenback’s strength has this week pushed the Indian rupee to a record low, the Japanese yen to a 2023 low and into territory where Tokyo intervened heavily last year, and the offshore Chinese yuan within sight of October’s record low.The twin rise in the dollar and U.S. bond yields is a classic red flag for emerging markets, and this time is no different.Goldman Sachs (NYSE:GS)’s financial conditions indexes show that Chinese and aggregate emerging market financial conditions have tightened sharply this month, by more than 100 basis points, and are both now the tightest this year.The People’s Bank of China is responding – on Tuesday it cut rates in a surprise move, and on Wednesday it injected the most short-term cash into the banking system through seven-day reverse repos since February.But the pressure on Beijing to do more to support the creaking economy can be seen in the 10-year yield’s slide to its lowest since May 2020. Remarkably, China’s 10-year yield is now 170 basis points below the 10-year U.S. Treasury yield, the widest gap since 2007.Oil prices, which last week hit their highest levels of the year, are now in retreat due to fears over faltering demand from China. Brent and WTI crude are down 4% to 5% this week, both on course to snap seven-week winning streaks.Good news, perhaps, from the point of view of keeping global inflation in check; not so good news that the world’s growth engine is sputtering badly.It’s little wonder Chinese and regional shares are feeling the heat. Chinese blue chip shares fell on Wednesday for a fourth day, and the MSCI World and MSCI Asia ex-Japan indexes have now fallen 10 out of the last 12 sessions.Here are key developments that could provide more direction to markets on Thursday:- Philippines interest rate decision- Australia unemployment (July)- Japan trade (July) (By Jamie McGeever; Editing by Josie Kao) More

BUENOS AIRES (Reuters) – Confidence in Argentina’s peso plumbed new depths on Wednesday as the currency slid to 780 pesos per dollar in the popular black market, where savers are willing to pay more than twice the official rate now pegged at 350 pesos per greenback.The long-struggling peso, held in check by capital controls for years, plunged this week after a shock primary election result raised the possibility of a radical libertarian economist winning the presidential election in October. Households have rushed to convert their pesos to dollars as a more stable way to protect their savings. On Monday, the central bank devalued the official exchange rate some 18% and hiked the benchmark interest rate to 118% to protect the peso and tamp down inflation, already running at more than 113% and squeezing people’s savings and wages.”Demand for dollars continues to be sustained as people look to hedge and are increasingly concerned about an acceleration of inflation after the devaluation,” said economist Gustavo Ber, citing “a climate of political and economic uncertainty.”The Sunday primary vote saw outsider candidate Javier Milei, who has pledged to dollarize the economy and eventually scrap the central bank, win the largest share of the vote. He will face a three-way battle in an Oct. 22 general election.As the peso has slid, the government has tried to stabilize the local currency, reducing access to some parallel foreign exchange markets, cracking down on informal street-corner currency traders and starting talks to cap meat prices to tame inflation.Analyst Salvador Vitelli, however, said that despite the new measures a further devaluation was expected, even after the central bank pegged the official exchange rate at 350 pesos per dollar until the election.”The market does not seem to believe that they will be able to maintain the exchange rate until October,” he said.Future wholesale peso prices, a reflection of market expectations about its likely price trajectory, show 460 pesos per dollar for October, 629 by year-end and 890 by July 2024.Milei, who secured 30% of the vote in open primary elections on Sunday, will face the conservative opposition bloc of Patricia Bullrich, which won 28% and the Peronist coalition led by Economy Minister Sergio Massa, which received 27%. Analysts see a tilt towards tighter economic policy regardless of who wins, though any new president will face major challenges to stabilize the economy amid triple-digit inflation, scant reserves and a fragile $44 billion International Monetary Fund loan deal.Milei’s dollarization pledge, some added, was also pushing more people to dump their pesos even though it would likely be very difficult to pull off in the near-term.”The inevitable response of investors would be to shift out of pesos into dollars sooner rather than later,” said Peter West, an economic adviser at consultancy EM Funding.Argentina’s S&P Merval stock index, seen as a hedge against local inflation, jumped 6.8% on Wednesday, extending its rise after a similar advance on Tuesday.Sovereign bonds in the local over-the-counter market dropped by an average of 0.3%, slowing their decline after a sharper fall earlier in the week. More

Federal Reserve officials have become more wary about the need to keep raising interest rates despite fearing the US central bank has not won its battle against inflation, according to minutes from its July meeting.Officials unanimously backed a quarter-point increase at last month’s meeting. However, a number of policymakers were concerned that the risk of “overtightening” monetary policy versus not doing enough had become more evenly balanced or “two sided”, the minutes showed.That reflected a new cautious tone from the Fed, signalling the central bank is nearing the end of its historic rate-rising campaign.However, US markets sold off on Wednesday with the Nasdaq Composite and the S&P 500 closing down 1.2 per cent and 0.8 per cent, respectively. Investors sold Treasury holdings as well, sending the 10-year yield to a 10-month high of 4.28 per cent. The two-year yield, which moves with interest rate expectations, rose 0.02 percentage points to 4.97 per cent. Even as policymakers continued to fret about the risks of elevated inflation, the minutes showed growing unease among some officials about how much more the Fed should squeeze the economy given expectations that consumer spending will soon slow more notably, the labour market is cooling, and tighter credit conditions are beginning to bite. A couple of participants indicated a preference to hold rates steady at the July meeting, arguing that doing so “would likely result in further progress toward the committee’s goals while allowing the committee time to further evaluate this progress”. In a sign that officials are still on edge, however, most still saw “significant upside risks” to inflation, which they warned “could require further tightening of monetary policy”.The minutes also noted that officials need further evidence that price pressures are subsiding in order to become more confident that inflation is “clearly on a path” back to the 2 per cent target.Economists at Morgan Stanley said the differing opinions reflected “continued disagreement over . . . the need for further tightening” and suggested that while the July decision was unanimous it was “perhaps non-unanimous in spirit”.July’s quarter-point increase raised the federal funds rate to a target range of 5.25-5.5 per cent, the highest level in 22 years. It followed a brief pause in June, when officials adopted a more gradual approach to tightening monetary policy following the most aggressive campaign in decades. Economists broadly expect that last month’s rate increase will have been the final one of the year, even though the central bank’s officials in June projected the benchmark rate would peak a quarter of a percentage point higher at 5.5-5.75 per cent. Nancy Vanden Houten, lead US economist at Oxford Economics, said the minutes made clear that further rate rises were not “preordained” and maintained her call that the Fed had already concluded its campaign to raise borrowing costs.Fed chair Jay Powell stressed last month that the Federal Open Market Committee would digest the “totality” of the economic data ahead of the next meeting in September, but acknowledged that “given how far we’ve come, we can afford to be a little patient” when it comes to further rate rises.Inflation remains too high for the Fed’s liking, even as price pressures have eased in recent weeks and are expected to keep receding in the coming months. While labour market demand has further slowed, consumer spending on goods and services has remained strong despite higher borrowing costs than just over a year ago, when the Fed’s benchmark interest rate hovered near zero.Fears that the US economy would tumble into recession have ebbed as a result, with Fed staffers scrapping their call for a mild contraction this year. Still, they expect a “noticeable slowdown in growth”, according to Powell, who has long been optimistic about the prospects for a so-called soft landing. That would translate to a small increase in the unemployment rate from its current level of 3.5 per cent, the minutes said.Pausing rate rises again in September would give the Fed more time to take stock of how the economy is responding to earlier increases, or whether borrowing costs need to rise further to fully tame inflation.

Officials concluded that there was significant uncertainty about whether the rate rises of the past 18 months were cooling the economy sufficiently. They reiterated, however, that tighter credit conditions stemming from this year’s regional banking crisis would weigh on economic activity in the coming months.While officials continue to debate the need for additional action, they appear more unified about keeping the benchmark rate at a level that restrains demand for an extended period. No official has suggested the Fed will cut rates again this year. According to futures markets, traders broadly expect the central bank to hold off cuts until well into 2024.When the Fed eventually cuts its benchmark rate, the minutes indicated several officials want the central bank to keep shrinking its roughly $8tn balance sheet by ceasing to reinvest the proceeds of maturing Treasuries and agency mortgage-backed securities. More