Aurelia Butler

President Emmanuel Macron’s two-day summit in Paris involved 40 world leaders, a concert headlined by Billie Eilish and a plan to overhaul the world’s financial system to tackle climate change and poverty — and left plenty of work for a hectic negotiations schedule leading up to the UN COP28 summit in Dubai.What was missing from Paris last week was most of the G7 country leaders, and any substantial new finance or debt cancellation for poor countries suffering disproportionately from climate change. The proposals for reform presented were also criticised by non-profit groups representing some of those most affected as too modest or not concrete enough.As he closed the conference, a still hopeful Macron said participants had agreed on several “work streams” to address in the months ahead around the core issue of how to distribute funds to help developing countries cope.There will be a series of further opportunities to confront the wealthier countries in the next six months, with the G20 leaders led by India as this year’s host setting the tone at their September meeting in New Delhi. It will be followed by the UN Climate Ambition Summit in New York later in September, and the World Bank and IMF annual meetings in Marrakech in mid-October. The culmination of the year’s climate dialogues is the particularly contentious UN COP28 meeting of almost 200 countries in oil-rich Dubai for a fortnight from the end of November.In Paris, the presence of leaders predominantly from the group of countries known as the Global South for the finance summit, co-hosted by Barbados’ prime minister Mia Mottley, has put them in “the driving seat” on “all the substantive proposals”, analysts said.This would boost their profile and credibility at summits including the UN COP28 climate talks, said Franklin Steves, a senior policy adviser at the climate-focused think-tank E3G.Avinash Persaud, an economic adviser to Mottley, said: “Paris was a significant point along this journey but it is a just point along this journey.” Big push to raise cash for development banks

US Treasury secretary Janet Yellen, left, with IMF boss Kristalina Georgieva at the Paris summit © Lewis Joly/Pool/Reuters

US Treasury secretary Janet Yellen said proposed reforms to the lending practices of international development banks could unlock $200bn in new funds over the next decade.While Paris has “given them a target”, said Persaud, a key event to watch next would be the annual meetings of the World Bank and the IMF in October. “[Marrakech is] where we need to see the implementation of these reforms,” he said.Progress on major issues such as so-called callable capital — or the level of cash pledged by countries but not yet paid in to the lending institutions — was now needed, he added.The G20 meeting in India will also be important, where the agenda is expected to include talks on whether countries should be paying in even more cash to the multilateral banks.‘Pause clauses’ to freeze debt repayments

President Emmanuel Macron, left, and World Bank president Ajay Banga at the Paris summit © Ludovic Marin/Pool/Reuters

At the Paris summit, the World Bank said it would offer “pause clauses” to freeze debt repayments for countries in distress when they are hit by climate or other disasters. France and the US also promised to bring in similar clauses to their bilateral lending or export credit finance.The UK said it would add these clauses to its export credit finance to 12 African and Caribbean countries. It told other countries at the summit that all bilateral, multilateral and private lenders should offer these clauses by COP28 in Dubai at year end, or by the end of 2025 at the latest.“We have seen a first wave [of pause clauses] but we need to see this wave getting bigger with more institutions announcing it,” said Persaud. It has to move from “exotic to normal” in the months ahead, he added.The US, UK and France all committing to implement debt clauses by year-end was a “big win”, said Sara Harcourt, senior policy director at the non-profit poverty group ONE Campaign. “These will give countries much-needed additional room in their budgets when a natural disaster strikes. But we do need to see more countries and big creditors coming on board.”The $100bn target in reserve assets

US climate envoy John Kerry, left, and Macron at the Paris summit © Ludovic Marin/Pool/AFP/Getty Images

At the summit, developed countries said they had reached a target to make $100bn in so-called special drawing rights available for the fight against climate change and poverty — almost.SDRs are a type of reserve asset that are released in emergencies by the IMF in amounts linked to the size of member country economies. About $650bn was issued by the IMF in 2021 to help countries deal with the coronavirus pandemic, with the vast majority going to developed countries. The G20 agreed later that year to reallocate $100bn to poorer countries, which typically can only access limited amounts, but has struggled to reach that target.While the fund reallocation was one of the big headlines to come out of Paris, after France agreed to give away 40 per cent of its own drawing rights, the matter is still plagued with problems. The biggest question mark is over the US’s $21bn contribution after Republicans in the US Congress previously threatened to block the release of its share.How multilateral development banks can receive the drawing rights in the coming months is the next development to watch.Debt restructuring for debt-laden nations

Macron and Kenya’s president William Ruto at the Élysée Palace © Ludovic Marin/AFP/Getty Images

One of the main conversation topics of the summit was Zambia’s concurrent debt negotiations. After more than two years of talks, China and other creditors reached a deal to restructure $6.3bn in loans to Zambia.Speaking at the end of the summit, Kenya’s president William Ruto said there were more than 50 countries facing debt distress, warning there needed to be a “more creative way of dealing with this” problem.Ahead of the bank annual meetings and COP28, expect more discussions around how to speed up these debt negotiations.Julie Kozack, director of strategic communications at the IMF, was “cautiously optimistic” that the global roundtable on sovereign debt discussions held around the Marrakech annual meetings of the IMF and World Bank could iron out some issues that can plague debt restructuring deals, such as equal treatment for creditors and better information sharing. The roundtable participants have previously included major bilateral creditors such as China and France, as well as debtor countries and private sector representatives such as asset manager BlackRock.Setting a global carbon price

Georgieva and Macron at the Paris summit © Ludovic Marin/Pool/AP

IMF managing director Kristalina Georgieva told the Paris summit that “without a carbon price”, there was “no chance” of meeting the goal of limiting the global temperature rise to 1.5C above pre-industrial levels.The IMF proposed a carbon price floor, where poorer countries pay less, middle-income countries more, and rich countries have the highest price.Dan Jørgensen, Denmark’s minister for development co-operation and global climate policy, said there was “a lot of very strong voices advocating the need for more financing”.Denmark, Spain, Vietnam, Ireland and 19 other countries are backing a shipping levy, which is expected to be discussed at the upcoming International Maritime Organization meetings. Jørgensen said there was growing support for the levy, though the fine details of how it would work had yet to be agreed.But IMO meetings are typically difficult. “Often there is a disconnect between what leaders say and what happens at the IMO,” noted Nick Mabey of E3G.Other taxes and levies were also discussed, including a fossil fuel tax, which is also on the longlist of items due for further discussion ahead of COP28. More

Italian prime minister Giorgia Meloni has lashed out at the European Central Bank for its repeated interest rate rises, saying its “simplistic” approach to combating inflation was likely to hurt European economies more than help them.Speaking to parliament on Wednesday, Meloni argued that the eurozone’s persistently high inflation — which hit 6.1 per cent in May but is projected to fall to 5.6 per cent this month — was not a result of economic overheating, but a consequence of the energy price shock stemming from the war in Ukraine.Although she described the price rises as “a hateful hidden tax that hits the poorest and those on fixed income”, Meloni warned that the ECB’s strategy for trying to cool inflation was misguided.“It’s right to fight [inflation] hard but the ECB’s simplistic recipe of raising interest rates does not appear to many as the correct path to pursue,” she said. “We cannot overlook the risk that the constant rise in rates will end up affecting our economies more than inflation. The cure will prove more harmful than the disease.”Meloni’s criticism came a day after ECB president Christine Lagarde told the bank’s annual conference in Portugal that interest rates — already at their highest level in 22 years — needed to be raised further to counter the risk that soaring wages would keep inflation above the bank’s 2 per cent target for too long.The ECB’s aggressive and rapid monetary tightening — which has seen rates rise from minus 0.5 per cent a year ago to 3.5 per cent this month — is already taking a toll on the eurozone economy, which shrank 0.1 per cent in each of the past two quarters, and still shows signs of weakness in industrial production and business activity data.High rates are a particular worry for Italy, given its crushing public debt burden of nearly 144 per cent.But Lagarde said “barring a material change to the outlook” the ECB would raise rates again next month and that uncertainty was so high it was unable to say when rates will peak.“Our job is not done,” she said. “We have made significant progress but — faced with a more persistent inflation process — we cannot waver, and we cannot declare victory yet.”Her words sparked anger in Rome on Tuesday, where Antonio Tajani, the foreign minister, and Matteo Salvini, the deputy prime minister, both slammed Lagarde’s approach, with Salvini calling further rises “senseless and harmful”.Italy’s inflation rate dropped to a 14-month low in June, with consumer prices up 6.7 per cent year on year, compared with 8 per cent in May. Meloni told the Italian parliament that instead of raising rates ever higher, Europe should fight inflation by focusing on measures to control the price of energy and raw materials. “It’s probably more useful to focus on the specific causes that trigger this inflation,” she said.The Meloni government’s criticism of the ECB comes at a sensitive moment as Rome has just announced the appointment of Fabio Panetta, a member of the ECB’s executive board, as the new governor of Banca d’Italia, Italy’s central bank.The appointment of Panetta — one of the board’s most dovish voices who has warned of the risks of excessive tightening — will create a vacancy at the central bank that will test Italy’s ability to choose his successor on the board, as other countries clamour for representation. Additional reporting by Giuliana Ricozzi in Rome More

NEW YORK (Reuters) – U.S. government bond investors have racked up positive returns so far this year, with the higher income from bonds offering a buffer against market weakness if the Federal Reserve increases interest rates again.It is a turnaround from the losses of 2022, which marked the end of a 40-year bull market in bonds, as the U.S. central bank rapidly hiked rates to curb the hottest inflation in more than four decades.Rate hikes erode the value of existing bonds because new paper offers higher yields, but now, even if more hikes are coming, the bulk of monetary tightening is most likely over.This leaves investors to focus on how to play a widely anticipated economic slowdown – generally a good scenario for bonds because when central banks ease rates to stimulate demand existing fixed-rate securities are worth more.”The current level of yields on offer have not been seen since before the Global Financial Crisis,” said Arif Husain, chief investment officer and head of international fixed income at T. Rowe Price.”As we see economic activity slow, high-quality duration has grown in appeal as investors see policymakers already having one eye on when to ease monetary conditions,” said Husain, referring to bonds’ sensitivity to interest rate changes.Returns on U.S. bonds, including interest payments and price changes, totaled 2.4% so far this year, compared with negative 13% last year, according to the Morningstar US Core Bond TR USD index, which tracks fixed-rate, investment-grade U.S. dollar-denominated securities with maturities greater than one year.The U.S. Treasury component of the FTSE US Broad Investment-Grade Bond Index has risen about 1.8% so far this year, after falling about 12.6% last year, the biggest annual decline since inception in 1980.Some of the biggest bond funds have reflected this year’s improvement.Year-to-date, the Vanguard Total Bond Market Index Fund, with nearly $300 billion in assets, posted a 2.56% return, Morningstar data as of June 20 showed. PIMCO’s flagship $122 billion bond fund, the Income Fund, posted a total return of 3.89%. BlackRock (NYSE:BLK)’s iShares Core U.S. Aggregate Bond ETF, with nearly $92 billion in assets, posted a 2.58% return.Rising rates tend to impact shorter-dated bonds more than longer ones. And higher borrowing costs increase the odds of a recession, when investors typically seek protection in longer-dated securities.So far this year, Treasury yields – which move inversely to prices – have increased in the short part of the curve as the Fed raised rates another 75 basis points on top of 425 basis points last year. Two-year Treasury yields stood at 4.76% as of Tuesday, up from 4.4% at the beginning of the year.However, longer-dated bond yields, which are driven by macroeconomic expectations more than short-term monetary policies, have either held steady or declined, as the market anticipated an economic slowdown. Benchmark 10-year Treasury yields, for instance, have declined to 3.77% from 3.8%.”This means they have delivered positive returns from the interest they have earned over nearly half a year, and in the case where yields have declined, a small capital gain too,” said Husain.The yield-to-maturity of government bonds, as measured by the ICE (NYSE:ICE) BofA US Treasury Index, stood at 4.3% as of last week, up from 3.1% a year earlier.If inflation remains stubbornly high, bond prices could still weaken, but given how much yields have already risen, the potential downside is marginal, some investors said.At its last rate-setting meeting this month, the Fed anticipated two more hikes this year that would bring the fed funds rate to 5.6%.”If we think of how much further they can tighten, that risk is now significantly lower than at the beginning of 2022,” said John Madziyire, senior portfolio manager and head of U.S. Treasuries and TIPS at Vanguard Fixed Income Group.With the end of the hiking cycle in sight, and with high-quality bond yields at 4%-5%, investors can “get paid to wait,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.”We still like bonds, even if we do see … potentially higher yields over the short term, because that income is now so compelling.” More

WASHINGTON (Reuters) – The U.S. Federal Reserve is due to release the results of its annual bank health checks on Wednesday at 4:30 p.m. ET (2030 GMT). Under the “stress test” exercise, the Fed tests big banks’ balance sheets against a hypothetical severe economic downturn, the elements of which change annually.The results dictate how much capital those banks need to be healthy and how much they can return to shareholders via share buybacks and dividends. Big U.S. lenders are expected to show they have ample capital to weather any fresh turmoil in the banking sector.WHY DOES THE FED ‘STRESS TEST’ BANKS?The Fed established the tests following the 2007-2009 financial crisis as a tool to ensure banks could withstand a similar shock in future. The tests formally began in 2011, and large lenders initially struggled to earn passing grades. Citigroup (NYSE:C), Bank of America (NYSE:BAC), JPMorgan Chase & Co (NYSE:JPM) and Goldman Sachs Group (NYSE:GS), for example, had to adjust their capital plans to address the Fed’s concerns. Deutsche Bank (ETR:DBKGn)’s U.S. subsidiary failed in 2015, 2016 and 2018. However, years of practice have made banks more adept at the tests and the Fed also has made the tests more transparent. It ended much of the drama of the tests by scrapping the “pass-fail” model and introducing a more nuanced, bank-specific capital regime. SO HOW ARE BANKS ASSESSED NOW?The test assesses whether banks would stay above the required 4.5% minimum capital ratio during the hypothetical downturn. Banks that perform strongly typically stay well above that. The nation’s largest global banks also must hold an additional “G-SIB surcharge” of at least 1%.How well a bank performs on the test also dictates the size of its “stress capital buffer,” an additional layer of capital introduced in 2020 which sits on top of the 4.5% minimum.That extra cushion is determined by each bank’s hypothetical losses. The larger the losses, the larger the buffer. THE ROLL OUTThe Fed will release the results after markets close. It typically publishes aggregate industry losses, and individual bank losses including details on how specific portfolios – like credit cards or mortgages – fared.The Fed doesn’t allow banks to announce their plans for dividends and buybacks until typically a few days after the results. It announces the size of each bank’s stress capital buffer in the subsequent months.The country’s largest lenders, particularly JPMorgan Citigroup, Wells Fargo (NYSE:WFC) & Co, Bank of America, Goldman Sachs, and Morgan Stanley (NYSE:MS) are closely watched by the markets. A TOUGHER TEST?The Fed changes the scenarios each year. They take months to devise and test a snapshot of banks’ balance sheets at the end of the previous year. That means they risk becoming outdated. In 2020, for example, the real economic crash caused by the COVID-19 pandemic was by many measures more severe than the Fed’s scenario that year.The 2023 tests were devised before this year’s banking crisis in which Silicon Valley Bank and two other lenders failed. They found themselves on the wrong end of Fed interest rate hikes, suffering large unrealized losses on their U.S. Treasury bond holdings which spooked uninsured depositors.The Fed has come under criticism for not having tested bank balance sheets against a rising interest rate environment, instead assuming rates would fall amid a severe recession.Still, the 2023 test is expected to be more difficult than in previous years because the actual economic baseline is healthier. That means spikes in unemployment and drops in the size of the economy under the test are felt more acutely. For example, the 2022 stress test envisioned a 5.8 percentage point jump in unemployment under a “severely adverse” scenario. In 2023, that increase is 6.5 percentage points, thanks to rising employment over the past year. As a result, analysts expect banks will be told to set aside slightly more capital than in 2022 to account for expected growth in modeled losses.STRESSES IN COMMERCIAL REAL ESTATE, CORPORATE DEBTThe exam also envisages a 40% slump in the prices of commercial real estate, an area of greater concern this year as lingering pandemic-era office vacancies stress borrowers. In addition, banks with large trading operations will be tested against a “global market shock,” and some will also be tested against the failure of their largest counterparty. For the first time, the Fed will also conduct an extra “exploratory market shock” against the eight largest and most complex firms, which will be another severe downturn but with slightly different characteristics. This extra test will not count towards banks’ capital requirements but will allow the Fed to explore applying multiple adverse scenarios in future. Fed Vice Chair for Supervision Michael Barr has said multiple scenarios could make the tests better at detecting banks’ weaknesses.WHICH FIRMS ARE TESTED?In 2023, 23 banks will be tested. That’s down from 34 banks in 2022, as the Fed decided in 2019 to allow banks with between $100 billion and $250 billion in assets to be tested every other year. More

1. Futures slip lowerU.S. futures were broadly lower on Wednesday, as data pointing to strength in the U.S. economy was offset by caution ahead of an appearance by Federal Reserve Chair Jerome Powell later in the day which could provide cues on the path of interest rates.A Wall Street Journal report that Washington was considering new restrictions on exports of artificial intelligence chips to China was also weighing on sentiment.At 05:10 ET (09:10 GMT), the Dow futures contract edged down 17 points,  S&P 500 futures dipped 11 points or 0.2%, and Nasdaq 100 futures were down 73 points or 0.5%.The three main equity averages rebounded on Tuesday, with the tech-heavy Nasdaq Composite leading the way, rising 1.6%. The blue-chip Dow Jones Industrial Average snapped a six-day losing streak while the S&P 500 rose after falling in five of the last six sessions.Despite recent market weakness, a rally in growth stocks, an upbeat earnings season and bets that the Fed will soon end its monetary tightening mean the main indexes are on track for quarterly gains.Ahead of the market open, earnings are due from packaged foods company General Mills (NYSE:GIS) while Micron Technology (NASDAQ:MU) is due to report after the close.2. Economic optimismData on Tuesday indicated that the U.S. economy remained on a solid footing despite fears over the prospect of a recession, but also indicated that the Fed will likely have to keep hiking interest rates.Separate reports showed new orders for key U.S.-manufactured capital goods unexpectedly rose in May, and sales of new single-family homes surged last month, while U.S. consumer confidence rose to an almost one-and-a-half year high in June.The U.S. central bank paused rate hikes earlier this month but indicated that two additional rate hikes were warranted this year.The upbeat data prompted investors to narrow the odds on a July rate hike – traders are now pricing in a roughly 77% chance the Fed will raise interest rates by 25 basis points to the 5.25%-5.50% range in its July meeting, up from 74.4% a day earlier.3. Central bankersWith central banks sticking to hawkish commentary on the interest rate outlook investors will be paying close attention to a panel discussion at the European Central Bank annual forum in Sintra, Portugal which includes Powell, as well as ECB President Christine Lagarde and Bank of Japan Governor Kazuo Ueda.Hawkish comments by Powell last week stalled a rally on Wall Street that had pushed the S&P 500 and Nasdaq to an over one-year high and the Dow to a six-month peak.Lagarde said on Tuesday stubbornly high inflation will require the bank to avoid declaring an end to rate hikes.Diverging monetary policy has pushed the yen to an almost 15-year trough against the euro and an eight-month low against the dollar, giving rise to expectations that Japan could intervene in foreign exchange markets to stem the currency’s weakness.When Japan intervened last October it knocked the dollar down from a top of 151.94 to as low as 144.50 in a matter of hours.4. Oil prices riseOil prices moved higher Wednesday after data overnight showed a larger-than-expected drop in U.S. inventories, indicating that the demand outlook remained solid.Crude stocks fell by about 2.4 million barrels, according to a report from industry group American Petroleum Institute (API).The Energy Information Administration’s official supply report is due out at 10:30 ET (14:30 GMT).Brent crude was up 58 cents, or 0.8%, to $73.09 a barrel at 05:10 ET (09:10 GMT), while West Texas Intermediate (WTI) U.S. crude rose 61 cents, or 0.9%, to trade at $68.28.Brent is down about 15% this year as rising interest rates hit investor appetite, while China’s economic recovery has faltered after several months of softer-than-expected consumption and other data.However, some analysts expect the market to tighten in the second half of the year because of ongoing OPEC+ supply cuts and Saudi Arabia’s voluntary reduction for July.5. Nvidia hit by reports of China export curbsShares in Shares of NVIDIA Corporation (NASDAQ:NVDA) fell more than 4% ahead of the open on Wednesday after the Wall Street Journal reported that Washington is considering new restrictions on exports of artificial intelligence chips to China.Shares in rival chipmakers Advanced Micro Devices (NASDAQ:AMD) and Micron were down 3.5% and 1.6%, respectively in premarket trade.The Commerce Department will stop the shipments of chips made by Nvidia and other chip companies to customers in China as early as July, the report said. Nvidia gets about a fifth of its revenue from China.U.S. chipmakers are caught in the crossfire between China and the Biden administration as Washington tries to curb Beijing’s technological advances. More

WASHINGTON (Reuters) – U.S. President Joe Biden will use what aides are billing as a major speech on Wednesday to lift Americans’ dour mood about the economy, hoping to shore up his key political weakness as he seeks re-election.Biden, whose two-year term as president has witnessed a sharp rebound from the COVID-19 induced recession, has nonetheless watched his public approval ratings sag under the weight of voter anxieties about inflation and the knock-on effects of spiking interest rates on the direction of the economy.The U.S. president will attempt to re-introduce his vision of middle-class American prosperity during a speech in Chicago.The philosophy includes taxing the wealthy to invest in areas critical to national security, including semiconductors; educating workers; and improving economic competition, according to aides who previewed the speech for reporters.More than half – 54% – of Americans disapprove of how Biden is handing his job, while just 35% of respondents approved of his stewardship of the economy, according to a Reuters/Ipsos poll conducted earlier this month. Voters rate the economy as their top issue.The U.S. economy grew at a 1.3% annualized rate in the first quarter and unemployment was at 3.7% in May, when inflation rose at a 4% year-over-year rate.White House aides see those inflation figures as elevated but headed in the right direction under Biden-backed policies designed to reduce deficit spending and lower costs on a range of products from insulin to concert tickets.Federal Reserve officials have said they think they have “a long way to go” to get inflation back down to healthy levels and may need to raise borrowing costs more, which could cause a recession. Aides are using the term “Bidenomics” to capture the Democratic president’s approach, drawing a contrast with the tax-cutting ethos once called “Reaganomics” for its affiliation with Republican former President Ronald Reagan, who left office in 1989.”The president vowed to put in place a very different approach – (an) approach that grows the economy from the middle out and the bottom up,” said Lael Brainard, director of Biden’s National Economic Council.Whether his message will break through is an open question. The summertime afternoon speech comes ahead of the July Fourth holiday, 16 months before voters head to the polls and as Republicans sort through a large field of possible candidates led by former President Donald Trump.Biden’s last major address to the nation, a June 2 Oval Office speech trumpeting a bipartisan deal to end the debt limit crisis, drew an audience of just 6.2 million people and was only picked up by two of the major U.S. broadcast networks, according to research firm Nielsen.Trump has made inflation a key element of his attacks on Biden in the early months of the race.”Americans are worse off under Biden,” said Republican National Committee chairwoman Ronna McDaniel in a statement. “Prices continue to skyrocket, and hardworking Americans pay the price for failed ‘Bidenomics.'”Biden, 80, is also expected to attend a fundraising event while he is in the Chicago area ahead of a deadline for federal fundraising records. He is not expected to face a serious fight for his party’s nomination. More