Aurelia Butler

1. U.S. and China hold talksU.S. Secretary of State Antony Blinken met his Chinese counterpart Qin Gang on Sunday, in what both called candid and constructive talks aimed at smoothing the many differences between the two global economic superpowers.The discussions would likely have included grievances over trade, the state of the global semiconductor industry as well as the status of self-governed Taiwan and Beijing’s human rights record.While it’s unlikely this meeting, the first visit to China by a U.S. secretary of state in five years, will result in concrete progress, it’s hoped that the fact the two sides are talking should prevent disagreements between the rival powers from descending into conflict.2. Goldman cuts China growth forecastsGoldman Sachs joined the growing band of major banks that are taking a more pessimistic view of the strength of China’s post-pandemic recovery, cutting its forecasts for the Asian giant’s economic growth.The influential investment bank lowered its full-year real gross domestic product growth forecast for the world’s second-biggest economy to 5.4% from 6%, and cut its 2024 growth forecast to 4.5% from 4.6%.Goldman follows the likes of Bank of America, JPMorgan, UBS and Standard Chartered in lowering their growth forecasts, citing the downturn in the country’s property market as the main reason.”We judge that growth headwinds are likely persistent while policymakers are constrained by economic and political considerations in delivering meaningful stimulus,” Goldman analysts said, in a note released late Sunday.3. Europe, Asia head lower; growth concerns weighEuropean and Asian stock markets headed lower Monday, as investors continue to fret about the global economic outlook, although activity is thin as the U.S. markets are on holiday due to the Juneteenth holiday.At 05:30 ET (09:30 GMT), the DAX index in Germany had dropped 0.5%, the FTSE 100 in the U.K. was down 0.3% and France’s CAC 40 had fallen 0.5%.This followed on from losses in Asia, where Japan’s Nikkei 225 fell 1%, the Hang Seng in Hong Kong dropped 0.7% and China’s Shanghai Composite index 0.5%.There is a lack of major earnings and economic data to digest Monday, but investors continue to worry about slowing growth, not only in Europe, with the eurozone entering a recession in the first quarter of the year, but also in China, a major regional growth driver.Additionally, the Federal Reserve has indicated that further rate hikes could be coming in the summer months as it tries to stamp down on inflation, potentially sending the world’s largest economy into recession.4. Central banks remain in spotlightThere are more central banks in the spotlight this week, starting with the People’s Bank of China on Tuesday. The PBOC cut a couple of lending rates last week in an attempt to stimulate its flagging economy, and is expected to follow up with a lowering of its prime loan rate by 10 basis points as it attempts to take the pressure off its troubled property market.On the flip side, the Bank of England is widely expected to continue its long-running hiking cycle, increasing interest rates by another 25 basis points on Thursday with the country’s inflation rate the highest in the G7, more than four times its 2% target.Rate hikes are also expected in Norway and Switzerland this week, while Hafize Gaye Erkan hosts his first policy-setting meeting as newly appointed Turkish central bank governor.President Tayyip Erdogan was elected to his third term last month, and his appointment of Erkan, a former Wall Street banker, has raised expectations that Turkey will abandon the unorthodox policies that have seen the lira plummet to all-time lows.5. Oil slips, handing back some of last week’s gainsCrude prices edged lower Monday, on concerns the faltering economic recovery in China will hit demand from the world’s largest crude importer in the second half of the year.By 05:30 ET, U.S. crude futures were 0.3% lower at $71.72 a barrel, while the Brent contract fell 0.3% to $76.61 per barrel.Both benchmarks recorded their first weekly gain this month last week, helped by the Federal Reserve pausing its run of monetary tightening and expectations China would further stimulate its struggling economy.However, a number of major banks have cut their 2023 gross domestic product growth forecasts for China this week, including Goldman Sachs [see above], on concerns over the post-COVID recovery in the world’s second-largest economy. More

Western manufacturers will be able to de-risk their operations in China but will find it impossible to cut ties completely with the country, according to the head of one of the US’s largest aerospace and defence companies.Greg Hayes, chief executive of Raytheon, said the company had “several thousand suppliers in China and decoupling . . . is impossible”.“We can de-risk but not decouple,” Hayes told the Financial Times in an interview, adding that he believed this to be the case “for everybody”. “Think about the $500bn of trade that goes from China to the US every year. More than 95 per cent of rare earth materials or metals come from, or are processed in, China. There is no alternative,” said Hayes.“If we had to pull out of China, it would take us many many years to re-establish that capability either domestically or in other friendly countries.”Hayes’ comments underline the difficulties facing western manufacturers amid growing friction between China and the US and its allies.Beijing in February imposed new sanctions on both Raytheon and US defence peer Lockheed Martin for supplying weapons to Taiwan. Hayes has also been placed under sanctions. The sanctions have had little commercial impact as the groups are not allowed to sell military equipment to China. Raytheon, however, has a substantial commercial aerospace business in the country through its engine subsidiary, Pratt & Whitney, and aviation systems and cabin equipment specialist Collins Aerospace. It has about 2,000 direct employees in China. Both subsidiaries, along with other western aerospace groups, are suppliers to China’s first large homegrown jet aircraft, the C919, which made its commercial debut at the end of May. China is also an important aviation market for Boeing and Airbus. Nevertheless, the company is looking for alternative sources for some of its components. “We are looking at de-risking, to take some of the most critical components and have second sources but we are not in a position to pull out of China the way we did out of Russia,” said Hayes.Raytheon believes that its decision to rebrand itself as RTX, announced on Sunday, will allow for a clearer distinction between the commercial aerospace businesses and its defence activities which will continue to trade under the Raytheon brand, he said.Hayes told investors on Monday, the first day of the Paris air show, that the company would still meet its target to achieve $9bn of free cash flow in 2025 despite headwinds over the past two years, including inflation and a strained supply chain that is stressing resources both on the civil as well as the military side.Pratt & Whitney has been juggling to supply enough new engines to Airbus while at the same time delivering spares to existing airline customers to fill gaps left by faster-than-expected wear and tear. Pratt & Whitney’s latest-generation GTF engine powers the Airbus A220s as well as some A320-neo family jets, although they have had some durability issues in particular in hot and dusty climates. About 100 aircraft were on the ground awaiting engines, he said.

Adding to the challenge is Airbus’s planned increase in production of its single-aisle aircraft to meet resurgent demand from airlines. “There is a natural tension between delivering engines to Airbus versus delivering spare engines to our customers,” said Hayes. The company is bringing on additional capacity both in the supply chain and in its maintenance operations. A new factory to manufacture turbine blades will open this year in North Carolina. It has also launched an upgrade programme to help improve the durability of the GTF engines. On the defence side, supply chain snarls continue to impact the production of rocket motors for missiles for both Raytheon and Lockheed Martin, including Stinger missiles and Javelins. The focus has been on capacity constraints at rocket motor producer Aerojet Rocketdyne which recently received government funding to help it expand its operations. “There is a bit of black magic to these rocket motors,” said Hayes. “We’ve had quality issues, shortages of labour and materials.” More

BRUSSELS (Reuters) – The European Commission on Monday proposed changes to the way investors pay withholding tax in the European Union, to attract more cross-border trade in securities and help develop the bloc’s capital market.The Commission’s proposal is to make sure cross-border investors pay the correct amount of withholding tax from the start or that they get any refund to which they are entitled quickly. “Refund procedures are often lengthy and costly. This creates immense frustration: studies show that close to 70% of retail investors who would be eligible to a reduced withholding tax rate do not claim it,” European Economic Commissioner Paolo Gentiloni said.”It also drives investment away from the EU. According to a recent study, 30% of retail investors have sold their EU portfolio because of this tax barrier. This is a situation we cannot afford to see continue,” he said.The Commission proposed to standardise withholding tax procedures which currently differ across the 27-nation bloc, split between either a “Relief at Source” or a “Quick Refund System” available to all investors. EU governments could choose which one they want to apply.In the “relief at source” system, the appropriate withholding tax rate would be applied at the moment a dividend on shares bought by the investor was paid. Under the quick refund procedure, the investors would still pay an excessive tax, but would get a refund no more than 50 days later.”The proposal will make life easier for investors by massively shortening the refund procedure and giving them a further incentive to claim the money they are owed,” Gentiloni said. “In fact, we estimate that our proposal will save investors an estimated 5.17 billion euros per year thanks to the fast-track procedures,” he said.The Commission hopes the changes will encourage more investors from outside the EU to invest in European securities and also boost intra-EU trade in shares and bonds, which would help develop the EU’s capital market, needed to provide financing for the bloc’s transition to renewable energy sources. More

French public spending as a share of GDP, long among the highest in the world, exploded during the COVID-19 pandemic and then during last year’s energy price shock, pushing the budget deficit to a record.The government of President Emmanuel Macron now aims to cut the deficit to 2.7% of economic output by the end of his five-year term in 2027, from 4.9% this year, only gradually working towards an EU-wide limit of 3% that France has rarely respected.”To achieve this objective, we have identified through our first spending review at least 10 billion euros in savings. That’s our target,” Le Maire told a public finance conference at the finance ministry.Savings will come from public sector spending on health, housing, quasi-public bodies and employment support measures. The government will also gradually reduce over four years a fuel tax break that benefits certain sectors, such as road transport.Le Maire said the savings were necessary to keep to plans to hasten the reduction of France’s national debt in the coming year.He also confirmed plans to end government caps on gas and power prices that were introduced to help households cope with last year’s energy prices, and put an end to subsidised vouchers to help low-income families cope with the prices.Credit rating agency Fitch cut its rating on France’s sovereign debt at the end of April to AA- over concerns about potential political paralysis and social unrest after an unpopular pension reform was passed.This month S&P spared France the embarrassment of a second downgrade in weeks, but remained cautious about the outlook, on account of strained public finances.($1=0.9153 euros) More

DUBAI (Reuters) – Buoyed by a swift economic rebound post-COVID, Dubai is racing to attract people and capital to drive long-term growth, betting it can avoid past debt crises that dented its global ambitions. The approach pursued by the glitzy Gulf city-state is a reboot of a flamboyant economic model that for decades focused on property investment, tourism and inflows of foreign capital.Property is booming once more — helped by Russian demand amid war in Ukraine and laxer residency rules — and analysts this time see more guardrails in place against any repeat of the problems that subdued Dubai after the 2008 global credit crunch.Home to the world’s tallest tower and man-made islands, Dubai is chasing lofty new goals: A 10-year economic plan known as D33 aims to double the economy’s size and make Dubai one of the top four global financial centres in a decade.It also wants to increase the length of its public beaches to 105 km from 21 km by 2040 and revive the dusty Palm Jebel Ali island abandoned in the wake of the 2008 financial crisis. Tourist numbers in 2023 are almost back to levels of 2019, and last year Dubai was the world’s fourth busiest ultra-prime property market, with 219 home sales over $10 million, according to Knight Frank research.At the same time, the property price surge and demand for the ultra-high-end segment is stirring memories of old excesses.In 2008, the global financial crisis hit Dubai hard, leading to a flight of capital and people, a crash in property prices and highly leveraged flagship companies known as government-related entities (GREs) struggling to repay debts.Abu Dhabi, the UAE’s oil-rich capital, eventually stepped in with a $20 billion lifeline, widely expected to be rolled over for a third time.Nasser Al Shaikh, head of Dubai’s finance department until 2009, told Reuters there is a risk Dubai will become too expensive to live in, and new developments need to ensure ample supply to meet demand for mid-income property as the population grows.”If private developers cannot provide that, then the government and GREs could play a bigger role to do that and keep prices reasonable,” Shaikh said, referring to the leading companies that have spearheaded Dubai’s breakneck growth.Dubai’s population grew to over 3.55 million in 2022, official statistics show, up 2.1% from 2021, and 4% since 2020; S&P estimates it to surpass 4 million by 2026.LESSONS LEARNED”There is always the risk of a major new round of borrowing (by GRE developers) on unrealistic expectations for real estate sales; however, I am hopeful that learning from previous cycles will mitigate this risk,” said Justin Alexander, director at Khalij Economics and Gulf analyst at GlobalSource Partners.The Dubai Media Office did not immediately respond to a request for comment on how its strategy is working towards ensuring growth is sustainable and not speculative.Dubai set up a Debt Management Office in 2022, has repaid or restructured some outstanding debt, and announced plans to list government stakes in 10 companies to raise capital and deepen financial markets. It listed four of those last year.Shaikh said current finance officials have learned from the experiences of the last 15 years.”Dubai has a strategy today, and development of capital markets is an important component of Dubai’s overall financial proposition, not only to generate liquidity and to pay off debt but also to deepen capital markets within the financial sector.”‘GLOBAL SAFE HAVEN’The United Arab Emirates’ commercial centre, Dubai has shovelled resources into social and business reforms and sectors like digital technology. Oil revenue accounts for less than 2% of GDP, unlike the deep-pocketed capital Abu Dhabi. Average property prices rose 12.8% in Q1, with villa prices up almost 15%, according to property research firm CBRE. Villa sales have surpassed 2014 highs. Russian buyers were third in Betterhomes’ May top 10 buyers, behind India and the UK.”Dubai has really set itself as a global safe haven,” said Richard Waind, group managing director at Betterhomes in Dubai, adding it was safe for families and stable politically and financially.”It’s no longer a speculative market. It’s a market built on genuine investment. I think that’s a very big difference to what we saw in 2008-2009 and perhaps the last peak around 2014.”The rebound has also bolstered balance sheets of top Dubai Inc companies, including GREs such as Emirates airline, and majority government-owned but listed Emirates NBD and Emaar Properties.S&P has estimated Dubai’s gross general government debt will fall to 51% of GDP, or about $66 billion by the end of 2023, from 78% of GDP in 2020, although broader public sector debt will stay elevated at about 100% of GDP due to high non-financial GRE liabilities.Dubai’s five-year credit default swaps, the cost of insuring against a default, reached a historic low of 66 basis points on March 8 this year, well below 316, the highest level it reached during the depths of the COVID-19 pandemic in 2020.TRANSPARENCY Last year, Dubai attracted an estimated $12.8 billion in foreign direct investment capital according to the 2022 Financial Times ‘fDi Markets’ report published last month; FDI into Saudi Arabia was about 30 billion riyals ($8 billion).Despite growing competition from Gulf neighbours, Dubai’s infrastructure, schools and hospitals remain in high demand. Several people Reuters spoke to highlighted concerns about a lack of data and transparency, particularly among GREs, making it more difficult to properly assess Dubai’s fundamentals.The UAE was placed on the “grey list” of global financial crime watchdog the Financial Action Task Force (FATF) in 2022, increasing the risk of reduced capital inflows, a decrease in M&A activity and a potential lack of investor confidence.But some prominent investors are sanguine.”Dubai has been one of the most resilient destinations,” said Philippe Zuber, CEO of Kerzner International which operates the luxury Atlantis and One&Only resorts, adding Dubai had kept borders open and businesses strong during COVID.Kerzner, part-owned by Dubai’s sovereign wealth fund, opened the “ultra luxury” Atlantis the Royal in 2023, its second Atlantis resort on Palm Jumeirah island. The Royal Mansion Penthouse, where Beyonce once stayed, costs $100,000 a night.($1 = 3.6728 UAE dirham)($1 = 3.7504 riyals) More

Blinken, who is in China for his second day of meetings, met with China’s top diplomat earlier on Monday and with Foreign Minister Qin Gang on Sunday.This is the first visit to China by a U.S. secretary of state in five years. More

Recent economic data showed the retail and factory sectors struggling to sustain the momentum seen in the first quarter, raising concerns China’s post-COVID comeback could ground to a halt this year and trigger massive job losses.The People’s Bank of China (PBOC) lowered short- and medium-term policy rates last week, signalling it is about to embark on another round of loosening in monetary settings in a push to rev up the recovery.In a poll of 32 market watchers, all participants predicted cuts to both the one-year loan prime rate (LPR) and the five-year tenor.Twenty-one, or nearly 66%, of all respondents expected the one-year LPR – on which most new and outstanding loans are based – to be cut by 10 basis points to 3.55% from 3.65%. Others projected the cut to range from five to 15 bps.Meanwhile, 16, or half, of the analysts and traders surveyed by Reuters, said they forecast a deeper cut of at least 15 bps to the five-year LPR, which serves as mortgage reference rate, to stimulate housing demand and prop up the property sector. Another 14 respondents predicted the five-year tenor to be cut by 10 bps to 4.2% from 4.3% currently.China last cut both LPRs in August 2022.”Traditionally, cuts to the medium-term lending facility (MLF) and open market operations (OMO) rates mean that we can expect a similar sized cut to the bank prime loan rate relatively soon,” said David Chao, global market strategist for Asia Pacific at Invesco.”However, the biggest risk is that rate cuts can be ineffective when households and businesses are excessively conservative, busy deleveraging and paying off debt.”Chao expects policymaker to introduce additional targeted fiscal and stimulus measures.China’s cabinet met on Friday to discuss measures to spur growth in the economy and pledged to roll out more policy support.Despite strong consensus of cuts to the LPR on Tuesday, market participants are divided on the size of the reductions. Some expect the mortgage reference rate could be trimmed by a deeper cut to aid the ailing property sector.”We are expecting an asymmetric cut with five basis points in one-year LPR and 15 bps in five-year LPR, as the property sector is clearly warranting more policy support,” Citi analysts said in a note.”We continue to see the July Politburo meeting as a window to watch if more significant moves are following.”Several global investment banks cut their 2023 gross domestic product growth forecasts for China after May data showed the post-COVID recovery was faltering.The LPR normally charged to banks’ best clients is calculated each month after 18 designated commercial banks submit proposed rates to the central bank. More

SYDNEY (Reuters) – Asian shares started cautiously on Monday after their best weekly run in five months, as investors looked ahead to China’s rate decision and U.S. Federal Reserve Chair Jerome Powell’s testimonies for clues on the rate path ahead.S&P 500 futures rose 0.1% early in Asia while Nasdaq futures firmed 0.3%. Cash U.S. Treasuries were untraded owing to the Juneteenth holiday, while futures were up a fraction with little liquidity. In Asia, Japan’s Nikkei fell 0.5%, having clinched a fresh three-decade top on Friday, buoyed by the Bank of Japan’s (BOJ) decision to leave its ultra-easy policy setting unchanged, which has sent the yen to a 7-month low against the U.S. dollar.MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.1% lower, after hitting a four-month high on Friday and finishing up 3% for the week, the best since January.In China, market hope for more forceful stimulus is growing after the cabinet met on Friday to discuss measures to spur economic growth. Also, the People’s Bank of China is widely expected to cut its benchmark loan prime interest rates on Tuesday, following a similar reduction in medium-term policy loans last week. Morgan Stanley (NYSE:MS)’s chief China economist Robin Xing expects an imminent stimulus package given second-quarter gross domestic product (GDP) growth is tracking at 0%, lagging the government’s target of around 5% for the year.”This requires more policy easing to stabilise investment – the key drag to 2Q GDP growth – and prevent weakness from spreading to household sentiment and services,” said Xing.After a busy central bank week as the stock market cheered the Fed’s decision to skip a rate hike in June, investors are looking to a number of Fed speakers this week, with Powell set to deliver congressional testimonies on Wednesday and Thursday.”Fed Chair Powell gives House and Senate testimony with focus on whether the July FOMC (Federal Open Market Committee) meeting is truly ‘live’, and if the Fed dot plot of two more hikes is a true base case depending on the data or more ‘aspirational’,” said Ray Attrill, head of foreign exchange strategy at National Australia Bank (OTC:NABZY).Markets are pricing in a 70% probability of the Fed hiking by a quarter point in July before holding steady for the remainder of the year, though officials have sounded hawkish and the dot plot indicates two more hikes..The dollar index was little changed against major peers early on Monday, after falling 1.2% the previous week, the most in five months.The yen was undermined by a dovish BOJ, touching a seven-month low of 141.90 per dollar, while the hawkish the European Central Bank, which hiked by a quarter point last week, aided the euro to hover close to a five-week top at $1.094.Oil prices declined early on Monday. U.S. crude futures fell 0.7% to 71.24 per barrel, while Brent crude was down 0.8% at $76.98 per barrel.Gold prices were flat at $1,956.84 per ounce. More