Aurelia Butler

(Reuters) -Brazilian President Luiz Inacio Lula Da Silva said on Wednesday he will send the European Union a counter-proposal on the long-delayed trade deal with the South American bloc Mercosur in the coming two or three weeks.Lula, who spoke after the two-day EU-CELAC (Community of Latin American and Caribbean States) summit in Brussels, said Brazil put together a response that it was now being discussed by the Mercosur bloc, which also includes Argentina, Paraguay and Uruguay.”In two-three weeks time we will deliver the definitive proposal to the European Union,” Lula told reporters, adding he believed the EU would “very easily” agree with it. The EU and the Mercosur bloc completed negotiations in 2019 but the deal has been on hold due to concerns about Amazon (NASDAQ:AMZN) deforestation and Brazil’s commitment to climate change action.Lula, who was elected last year, has promised to overhaul his country’s climate policy.The Commission has proposed attaching an annex to the agreement to show commitments on deforestation and other areas of sustainability and is awaiting Mercosur’s response.In Brussels, Lula said that “for the first time” he was optimistic both parties would conclude the agreement later this year.Although the EU-CELAC summit marked a new era of increased political and economic cooperation between European, Latin American and Caribbean leaders, the meeting was clouded by wrangling over how to address Russia’s war in Ukraine.The Brazilian leader irritated Western countries earlier this year when he suggested the West had been “encouraging” war by arming Ukraine.Lula said it was necessary for countries to “convince Russia and Ukraine that peace is the right way to go”. More

Good morning. Bank of America, reporting second-quarter results yesterday, drove home the message sent by other large banks last week: credit quality is still fine, the consumer is still fine, interest rate margins are still fine. The shares rose 4 per cent, and the whole sector rallied. Note, however, that bank stocks still have not approached the levels that prevailed before the banking micro-crisis in March. I’m not sure if that makes sense or not. Send me your thoughts: [email protected] bondsAt various points in the past year or two, Unhedged has noted the appeal of owning bonds at the short end of the curve. As the Fed had increased rates, the short end offers a chance to get some meaty returns and then reassess things in just a year or two when the smoke, literal and figurative, has cleared. That argument looks as strong now as it ever has. One-year Treasury yields are above 5 per cent. Inflation, depending how you measure it, is 3 per cent-ish. With stocks not looking terribly cheap, why not take your 2 per cent after-inflation return and see what the equity market offers in the summer of 2024?It seems to me, however, that the improving inflation outlook increases the appeal of the long end of the curve, too. The 10-year Treasury yield has not moved much since the autumn of last year, but the inflation situation is both clearer and more benign. Rates volatility appears to be easing off. If we are one the way back to normal after a bout of supply-shock inflation, then locking in a 3.8 per cent yield for 10 years — when pre-pandemic long yields were quite consistently below 3 — seems like a logical bet.None of this is to suggest I know something the bond market doesn’t. If long yields have not fallen much as the news on inflation has improved, there is a reason for that. But the basic thought seemed worth exploring. So (being fundamentally a stocks guy) I got in touch with my favourite fixed-income people and asked as simple question: is duration risk becoming more attractive?“Yes it is. Bought US 10s around 4 per cent so enjoying some returns.” That’s Scott DiMaggio, co-head of fixed income at AllianceBernstein. He was, presumably, too busy earning money to add much detail. Jim Sarni of Payden & Rygel, made his argument more explicit: “investors are better off being smart than lucky.” That is to say, investors who need income should lock in yields in the middle of the curve — five years or thereabouts — without worrying about whether they are getting peak yields. “The risk of being too short is greater than the risk of being too long. If cash flow is important to you, you might not see these yields again. You need to lock some of that in.” Dec Mullarkey of SLC Management agrees: It’s certainly getting close to an environment where duration can generate gains. The positive tone for both headline and core inflation and a Fed that is about to settle close to its terminal rate are all constructive for extending duration. With real rates still close to a post GFC high and inflation cooling, the Fed should have room for sizeable rate cuts next year to support trend-like growth.The argument against adding duration is equally simple, though: lower inflation and, to an extent, falling rates are already largely priced into the market. The futures markets anticipates more than six quarter-point rate cuts by January of 2025. Five-year inflation break-evens have been parked near 2 per cent for several months now. The inverted yield curve also indicates that falling rates are priced in. Bond yields can’t be expected to fall much when what is expected to happen happens. “The curve already prices in a decent fall in rates and spreads are just normal to slightly tight so you aren’t locking in anything special — either for rates or for spread,” Greg Obenshain, who manages corporate bonds at Verdad Capital, told me. Unhedged’s regular interlocutor Ed Al-Hussainy, of Columbia Threadneedle, agrees that deflation is largely priced in, but he is long 5- 7-year bonds all the same. A real yield of 2 per cent on a 5-year “is not a bad starting point,” he says. He is worried, though, that the battle against inflation is not quite won, which makes it hard to bet aggressively against the short end of the curve: I’m a bit nervous here. The odds that the fed funds rate exceeds 5.25-5.5 per cent by the end of the year are around 25 per cent. The Fed would have to revise their inflation forecast lower to justify this pricing. We’re not quite there yet.Thomas Tzitzouris of Strategas also frets that inflation is not dead yet and adds, furthermore, that bets on higher bond prices at the long end have to contend with the fact that the Fed is still shrinking its balance sheet — increasing the supply of long-duration assets. Further relaxation of the Bank of Japan’s yield curve control program could pull money out of the US bond market, too. He’s cautious. I keep coming back to Sarni’s point, though: trying to be smart rather than lucky. We don’t know how close we are to the end of inflation and the peak of rates, but we know we are close. We don’t know where yields are going, but we know that is better to invest at significant positive real yields than at the near- or below-zero real yields that have predominated for so long. Adding a little duration makes solid sense. One good readA great interview with Joyce Carol Oates: “You suddenly realise that the human experience is going to be your experience. When that starts to happen to you, it is quite stunning.” More

The writer is on leave as a senior fellow at the Hoover Institution at Stanford University and author of ‘The World According to China’China has repeatedly caught the world off-guard. Its Belt and Road Initiative launched in 2013, its management of Covid at home and abroad and, most recently, its emergence as the world’s biggest auto exporter and leader in electric vehicles have all surprised large segments of the international community.Typically, the element of surprise in international politics relies on a determined effort to deceive or do the unexpected. But the Chinese government has perfected the art of surprise by default. The opacity of its system enables China to routinely shock the rest of the world and force others to spend time, energy and money adjusting their expectations and policies in response.There is no way to avoid all surprise, but we improve the odds by adopting a comprehensive framework for understanding China: one that pays attention not only to its on-the-ground reality, but also its long-term ambition; not only to Chinese leaders, but also to Chinese society; not only to the view from outside China, but also to that from within.Chinese policy reflects a mix of both on-the ground reality and long-term ambition. The startling rise of China’s EV sector, for example, was not an overnight miracle. It was a long-term national strategic priority.In 1999, China put in motion targets, timetables, and a range of central and local government actions that supported domestic clean vehicle production and complicated efforts for foreign manufacturers.

Progress was, at times, grim. Top-down mandates yielded electric buses without seats and cars without batteries. As late as 2020, China missed its goal of 5mn units by several million. But, last year, China produced 5.8mn EVs. Now, as China prepares to unleash its cars on the rest of the world, automakers — particularly in Europe, where the economic barrier to Chinese EV imports is low — are left struggling to respond.But ambition does not always translate into reality. Beijing planned 1,000 Confucius Institutes to promote Chinese language and culture in universities worldwide by 2020, but there are just over half that number. Its Thousand Talents programme did recruit 8,000 scientists and engineers to China from overseas during 2008-2018, but few were top-tier — and only 390 were born outside China.And, of course, Belt and Road has been a complicated mix of success and failure — cementing China’s economic, political, and strategic influence in some countries, while prompting significant popular backlashes in others.For the international community, though, there is also a price to pay for overestimating China’s success.Its government’s support for Russia is evident: presidents Xi Jinping and Vladimir Putin in 2020 declared that the “friendship between the two states has no limits”. But we must not assume there is no discourse or dissent within Chinese society. A number of academics have publicly denounced Beijing’s strong support for Moscow.

And, as Russia’s internal challenges and external failings mount, internal pressure on Beijing to modify its position may increase. The Chinese government’s Covid U-turn demonstrated how even a seemingly unshakeable policy can be shaken given the right domestic pressures.Spending time in China is essential to avoid surprises. Its political environment may not be as welcoming to foreigners as previously, but that means more, not fewer, foreigners should travel there. Analysts, journalists, businesspeople and students need to be in China to plumb the complexity and nuances of the country and its politics.As travel to China opens up, leaders in the US and elsewhere are taking the opportunity to engage with their Chinese counterparts and witness how the country works. No good coach would actively ignore the opportunity for a first-hand look at the mindset and playbook of a top competitor.President Xi has set out an array of grand-scale initiatives to promote China on the global stage. Some will come to fruition, some will not. But, by looking at China through a range of lenses, the international community has the best chance of avoiding missed opportunities and costly surprise. More

It is easy to forget that early in Joe Biden’s presidency he made a bridge-building overture to Vladimir Putin. During the 2020 campaign, Biden barely mentioned Russia as a geopolitical rival to the US. China hogged all the attention. At the Geneva summit with his Russian counterpart in June 2021, the US president went to great lengths to massage Putin’s ego, even calling Russia a great power.A few weeks later, Biden withdrew America’s remaining forces from Afghanistan in a debacle that threatened to define his presidency.In retrospect, it is clear that the two seemingly unrelated events — Biden’s positive mood music towards Russia and his Afghanistan pullout — reinforced Putin’s decision to invade Ukraine. The west, in Putin’s view, was unlikely to react any more decisively to his planned annexation of Ukraine than it had to Crimea in 2014.Such misunderstandings have characterised geopolitics through the ages.In this case, the consequences of Russia’s blunder in Ukraine — and the west’s unexpectedly unified response — are likely to reverberate for years, if not decades. Sixteen months into Russia’s “special military operation”, the world is at greater risk of great power conflict than since the most dangerous points of the cold war.

Talk of reviving the liberal international order — a state of global being that was never quite what its nostalgists hold it up to have been — sounds increasingly quixotic. The world is moving into a new type of great power rivalry. But comparisons with its 19th century precursor are at best misleading. That long period of so-called Pax Britannica ended in the tragedy of the first world war. Today’s world cannot afford a direct conflict between the US and China, its two competing giants.The challenge facing the US and its western allies is threefold.The first is in maintaining western unity against Putin. This is brought into sharpest relief by next year’s US election. Rarely has a US presidential election contained such divergent possible outcomes for the state of the world. If Biden were re-elected, the world could expect some continuity in US foreign policy until 2028. If Donald Trump, the likely Republican nominee, were to return to power in 2025 it could destroy western unity.Trump has promised to end the war in Ukraine within 24 hours of resuming office. That prospect, and that alone, is sufficient motivation for Putin to sustain his war on Ukraine for the next 18 months in the hope that Trump will ride to his rescue.It is almost impossible for America’s European allies to hedge against that spectre. Their fate — and Ukraine’s — lies in the hands of US voters.The second challenge for the west is in forging a common front on China without it spilling over into direct confrontation. Unlike the war in Ukraine, which must eventually reach some kind of messy conclusion, the rivalry between the US and China is a project without end. For the purposes of strategic planners, it offers no natural conclusion.This is where history ceases to offer much guidance. Short of Armageddon, there is no scenario in which either the US or China will emerge as the world’s sole hegemon.

This presents a novel challenge to a west that has been schooled in Manichean conflicts that result in one or the other side claiming victory. It will require unusual strategic patience and skill. To paraphrase China’s former paramount leader Deng Xiaoping, the west will have to cross the river by feeling the stones, except that the far bank of the river will never be fully visible.This year, president Xi Jinping accused the US of trying to “suppress, contain and encircle” China. Biden insists that his aim remains to co-operate with Beijing where possible, compete where necessary, and confront if left with no other choice.Managing the China threat is a gargantuan challenge. It is evident that a Trump victory next year could throw Biden’s complicated US-China balancing act into disarray.The west’s third challenge is to find solutions to the existential threats facing humanity, starting with global warming. Even without the revenge of geopolitics, this would be a steep climb. But war in Ukraine and growing tension with China have made it far more complicated.

The global south is a key zone of competition for influence between the US and China. It is also the chief victim of the fallout from Russia’s full-scale invasion of Ukraine. The energy and food price inflation triggered by the war and the west’s subsequent sanctions on Russia have combined with rising US interest rates to bring the global south to the brink of a new debt crisis.Taken together, these challenges might seem insuperable. But the west can do well by doing good. The more relief that it can offer to the global south — in the form of green energy financing, debt relief, and pandemic resistance — the better the west will fare on the geopolitical front.The so-called new great game with China is a zero-sum contest. The best way to limit China’s reach is for the west to offer solutions to the mounting problems facing the rest. On paper, the path of choice seems obvious. In practice, is the west capable of taking it? More

MELBOURNE (Reuters) – Rio Tinto (NYSE:RIO) flagged concerns about a global economic slowdown on Wednesday as it logged a raft of production issues across its operations but said its iron ore production should be at the upper end of its expectations for the year. Prices of iron ore, from which Rio Tinto derives around 70% of its profits, eased over the second quarter on concerns over China’s debt-ridden property sector, but could improve after Beijing on Tuesday pledged to roll out policies to boost growth.”China’s economic recovery has fallen short of initial market expectations, as the property market downturn continues to weigh on the economy and consumers remain cautious despite monetary policy easing,” Rio Tinto said in its quarterly report.”Manufacturing data in advanced economies showed a further slowdown and recessionary risks remain.”The Anglo Australian miner recorded a small miss on its second-quarter iron ore shipments on Wednesday, hurt by a train derailment during the quarter, but said it was on track for full-year shipments in the upper half of its forecast range of 320 million to 335 million metric tons.”It’s good to see solid iron ore production expectations for the full year, but on the margin it’s probably slightly disappointing given other production downgrades,” said Glyn Lawcock of Barrenjoey in Sydney, adding that Rio’s $900 million increase in working capital could impact shareholder returns. The world’s biggest iron ore producer shipped 79.1 million metric tons of the steel-making ingredient from its Pilbara operations in the three months ended June 30, down slightly from a year earlier and short of an estimate of 81 million metric tons compiled by Visible Alpha.Rio downgraded its expectations for refined copper production, alumina production, and output at its Canadian iron ore operations and warned of rising costs. “Production downgrades during the quarter highlight that we still have much more to do,” Rio Tinto Chief Executive Jakob Stausholm said in the report. Rio cut its refined copper guidance by about 10% to 160,000 to 190,000 metric tons and raised its cost guidance due to a smelter rebuild at its Kennecott operations in Utah that has also been delayed by a month. Wildfires in Northern Quebec impacted Canadian iron ore production, it said. Meanwhile, Rio is reviewing the $140 million estimate and development timeline for its Rincon lithium project in Argentina due to rising costs. Rio will report its first-half profit on July 26. (Reporting Melanie Burton in Melbourne, and Navya Mittal and Rishav Chatterjee in Bengaluru; Editing by Shounak Dasgupta and Sonali Paul) More