Aurelia Butler

The contest for word of the year is already over. In the geopolitical category, the winner is “de-risking”. This D-word has moved from obscurity to ubiquity in less than two months. It was the centrepiece of a speech about China made in late March by Ursula von der Leyen, the European Commission president. De-risking was then seized upon by the Biden administration. Then, last week, it was endorsed by a G7 summit.One reason why western leaders have embraced de-risking with such alacrity is that it gets them off a rhetorical hook. Previous talk of “decoupling” western economies from China was often castigated as impossible and extreme. De-risking sounds more prudent and targeted. Western businesses are being told that they can still trade with China — it is just that some safeguards are needed.The kind of risks that the US and the EU are worried about can be put into two broad categories: stuff the west gets from China; and stuff that China gets from the west.In the category of “stuff they get from us”, advanced technology with potential military uses is at the top of the list. The restrictions on semiconductor exports announced by the US and — last week, by Japan — fall into this category.At the same time as the G7 nations are restricting China’s access to critical technologies, they are also trying to free themselves from what they regard as dangerous dependencies on China. The rare earths and critical minerals that are crucial for battery technology and the green transition are top of the list. As von der Leyen noted in her speech, the EU imports 97 per cent of its lithium — crucial in the production of batteries — from China.Another dependency that the west is striving to reduce is the more than 90 per cent of advanced semiconductors that come from Taiwan, the island which is vulnerable to an invasion by China. The US Chips Act of 2022 provided $52bn of funding to boost the manufacturing of chips in the US.The theory behind de-risking is now reasonably clear. The practice, however, is much murkier.Three big difficulties are already emerging. First, the clash between the interests of companies and countries. Second, the difficulty and expense of lessening dependencies on China. Third, a lingering ambiguity about the nature of the risk. Are we concerned about political coercion by China, or are we really worrying about a war?In normal times, supporting domestic companies that want to export is a key goal of western governments. But that is no longer always the case, in the world of de-risking.Last week Jensen Huang, CEO of Nvidia, the California-based semiconductor group, warned of “enormous damage” to American companies if they are prevented from selling advanced chips to China. But US officials are unrepentant. They point out that Nvidia chips are crucial to the development of AI.They also say that China could easily use advanced AI for all sorts of nefarious purposes, from the production of bio-weapons (a particular Chinese interest, apparently) to political manipulation through “deep fake” news. The further tightening of restrictions on outbound investment to China, by both the EU and the US, will mean that more western companies experience Nvidia-style controls in future.But the restriction of exports and critical technologies is obviously a game that two can play at. So the west is also urgently trying to reduce its dependencies on China in crucial areas.Opinions differ on how easy this will be. Liesje Schreinemacher, the Dutch trade minister, warned this week that Europe’s green transition will be impossible without China, which is by far the largest global producer of solar panels, batteries and the critical minerals that go into them. One western intelligence official contends: “It’s taken 30 years to build up our dependency on China for critical minerals and rare earths, and it will take the same amount of time to unwind it.” But Jason Matheny, president of the Rand Corporation, who worked on technology and national security in Joe Biden’s White House, is more optimistic. He points out that “rare earths are actually not that rare”. China’s real lock is on the processing of critical minerals, which is often a very dirty business. But some countries with a relatively low population density, such as Australia, seem prepared to take that on. The emerging western approach to de-risking rests on three broad pillars: reduce dependencies on China, restrict technology exports, but also continue to encourage western companies to trade with the vast Chinese market. It is a more or less coherent policy, as long as the risk that is being hedged against is political coercion. But it begins to fall apart if the risk is an actual war between the US and China, perhaps over Taiwan. Unnervingly, some US officials now put the chance of a military conflict at 50 per cent or more.If that happens, then western companies will come under immediate pressure to pull out of China. For a firm like Apple, whose products are mainly produced in southern China, or Volkswagen, which makes at least half its profits in China, that might spell corporate death. On the other hand, as one western security official puts it: “If there is a war with China, the impact on the world car market will be the least of our problems.”[email protected] More

1. Debt ceiling deal forgedU.S. Congressional lawmakers face a crucial vote on a tentative deal to raise the country’s $31.4 trillion debt limit and avoid a potentially catastrophic default.The agreement, forged by President Biden and Republican House Speaker Kevin McCarthy over the weekend after weeks of political wrangling, will lift the debt ceiling until 2025 and cap non-defense spending for the next two years.Both Biden and McCarthy said the accord is a child of compromise, although its terms have already received backlash from some members of their respective parties.The so-called Freedom Caucus – a collection of hard-line conservative Republicans – criticized the deal for not including a number of deep spending cuts. Leftwing Democrats, meanwhile, have chastised Biden for conceding on too many key issues.The Republican-controlled House of Representatives and the Democratic-controlled Senate are anticipated to vote on the deal later this week. All the while, the clock is still ticking toward June 5, when the Treasury Department now expects the federal government to run out of money to pay its bills.2. Asian markets rise after debt limit agreementMost Asian markets advanced on Monday, with Japan’s Nikkei in particular touching a more than three-decade high, as stocks were spurred higher by optimism over the debt ceiling deal and artificial intelligence.The fraught negotiations over the borrowing limit in Washington had rattled investors in recent weeks, especially as officials warned that a U.S. default could have dire consequences for the global economy.Asia’s stand-out performer was the Nikkei 225, which jumped at one point to its highest level since 1990. The gains were driven by chipmaking and technology shares, in a sign of persistently rosy hopes that a recent surge in interest in artificial intelligence will support the near-term performance of these companies.Australia’s ASX 200 and the Taiwan Weighted index also rose. However, the blue-chip Shanghai Shenzhen CSI 300 in China dipped following lingering uncertainty over the country’s ongoing recovery.Elsewhere, stocks in Europe edged up, although volumes were light with the U.K. and several other countries in the region closed. In the U.S., markets will be shuttered today for the Memorial Day holiday.3. Oil prices dip Oil prices slipped into the red in muted holiday trading on Monday, as optimism over the debt ceiling agreement was tempered by renewed expectations that the Federal Reserve will carry on with its long-running campaign of interest rate hikes.At 05:30 ET (9:30 GMT), the U.S. crude futures dropped 0.03% to $72.65 per barrel, while the Brent contract inched down 0.18% to $76.84 a barrel. Both WTI and Brent posted increases of more than 1% last week.The debt limit deal helped to reinvigorate hopes that the U.S. – the world’s largest economy and biggest oil consumer – will manage to avert a default that could potentially trigger a broader recession, although some analysts predict that it may allow the Fed to justify further increases to borrowing costs.4. Fed policy in focusDebate is swirling around whether policymakers will unveil an eleventh-straight increase in borrowing costs next month, or push pause on its rate hiking cycle.A hotter-than-expected April reading of the Fed’s preferred inflation gauge has helped to boost the case for further tightening, analysts at ING said. However, some members have previously signaled that they are open to keeping rates unchanged.Officials still have more data to sift through before they meet in June, including the nonfarm payrolls report for May. Economists predict that the closely-watched jobs report, due out on Friday, will show that the U.S. economy added 180,000 jobs in May, down from 253,000 last month.5. Turkey’s Erdogan secures election victoryThe Turkish lira slipped to a record low against the dollar on Monday, although stocks in Turkey rose, after President Recep Tayyip Erdogan secured an election that will see his long-standing tenure in power extended for another five years.According to unofficial results, Erdogan garnered a little over 52% of the vote, in a sign of deep divisions in Turkey over his rule.One of the pillars of Erdogan’s economic policy has been his refusal to back interest rate increases despite rampant double-digit inflation. Critics have said this decision flies in the face of orthodox economic theory and threatens growth.Erdogan promised in the run-up to the vote that he would continue to cut rates if he is elected, adding that he expects prices to come down as well. More

The agreement would suspend the debt limit until January 1, 2025. This eliminates it as a potential issue in the 2024 presidential election.Analysts at Link Securities said that welcome the agreement as it will prevent the country from defaulting on its payment commitments, which investors had been fearing.According to the analysts, the fact that both Wall Street and the London Stock Exchange will be closed Monday for local holidays will, however, mean that trading volumes will be very low, in line with what has been happening in recent sessions. They expect, however, that investors will once again bet on risk, in what can be considered a small relief rally, which began on Friday, as it is now very unlikely that the U.S. will default.Sergio Avila, market analyst at IG agrees, adding that risk appetite has cooled in recent weeks after the rebound from the March lows, and stocks are looking for a catalyst to push them higher.Link Securities noted that while it is true that the aforementioned agreement must still be ratified by both houses of the U.S. Congress, they expect that, despite opposition from the most radical wings of the Republican and Democratic parties, the necessary majorities will be reached in both the Republican-controlled House of Representatives and the Senate, where the Democrats have a majority, for the bill to reach President Biden later this week for ratification.However, some analysts remind us that the deal is not yet closed. Javier Molina, senior market analyst at eToro said that it looks like a deal is close, but it will still have to go through a very divided Congress.Bankinter analysts added that the differential difficulty with respect to the past is political polarization, with a Republican Congress and a Democratic Senate by razor-thin majorities (222 ‘vs’ 213 and 51 ‘vs’ 49) and presidential elections on Nov. 4, 2024, which means the campaign has already begun in practice.They further noted that this could delay its formal approval and it is estimated that between June 1 and 5 it will no longer be possible to meet all the committed expenditure without increasing the debt (because the limit applies to the size of the public debt, which on January 19 already reached its authorized maximum).Link Securities notes that this weekend the Secretary of the Treasury, Janet Yellen, has delayed from June 1 to June 5 the so-called “X” day, after which the U.S. will not be able to meet its payment commitments, which gives greater room for maneuver to the two chambers for the processing of the law.Bankinter added that although the most serious risk (partial shutdown of the administration and possible default) has been avoided, at least 3 days are needed from the time the text of the agreement is available until it is submitted to a vote in the chambers, so its formal approval will probably take place after the deadline.(Translated from Spanish) More

A deal on the U.S. debt ceiling, struck on Sunday, will move to Congress for a vote while in Turkey, voters gave President Tayyip Erdogan a mandate for another five years. Meanwhile, tech investors are on the hunt for undervalued opportunities in an over-valued space.Here’s a look at the week ahead in markets from Kevin Buckland in Tokyo, Lewis Krauskopf in New York, Dhara Ranasinghe, Naomi Rovnick and Karin Strohecker in London.1/JOBS IN FOCUS    Will U.S. jobs data out on June 2 show that the world’s top economy is strong enough to avoid a recession but not so hot that it forces another hawkish move by the Federal Reserve?     Non-farm payrolls for May are expected to record job growth of 180,000, according a Reuters poll. In April, U.S. job growth accelerated to add 253,000 with wage gains increasing solidly.    The jobs report will be one of the last pieces of data before the June Fed meeting, where the central bank is expected to hit pause on its aggressive 14-month-old rate hiking cycle to tamp down inflation.Meanwhile, U.S. President Joe Biden on Sunday finalised a budget agreement with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025, and said the deal was ready to move to Congress for a vote. 2/ECB 1, MARKETS 0At its meeting three weeks ago, the ECB reiterated that it was very much in rate-hiking mode to tame inflation. Markets, not convinced, dialled back bets for further increases and focused on weakening growth. Germany just entered recession.Yet, it is traders that – for now – have had to rethink their view. Thursday’s flash May euro zone inflation number and a slew of national data in the days ahead will likely stoke the peak rate debate. Euro zone business activity remains resilient, core inflation is sticky above 5% and wage pressures are picking up.HSBC expects the ECB’s key rate to peak at 4% from a current 3.25%. Data on Wednesday meanwhile showed UK inflation eased by less than in April, sending gilt yields rocketing. Traders know that they, like central bankers and economists, don’t always get it right. 3/CHINA’S LOTTERY HOPES     It’s China’s turn for PMI report cards – and there’s little reason to expect any turnaround in the ailing economy. From inflation figures to retail sales, recent data has without fail painted a dreary picture of lackluster domestic demand.    It seems the only thing the Chinese consumer wants is lottery tickets, with sales soaring to a decade high, staking their fortunes on luck rather than policy makers.    There is optimism in the interbank repo market, though, where record activity is a sure sign that traders expect central bank stimulus soon.    Of course, burst hopes of a post-COVID boom aren’t the only reason for caution: the tit-for-tat tech export spat with the U.S. continues to ramp up, while the Asian giant keeps sidling closer to Russia, provoking much discomfort in the West.4/FIVE MORE YEARSPresident Tayyip Erdogan extended his two decades in power in elections on Sunday, winning a mandate to pursue increasingly authoritarian policies that have polarised Turkey and strengthened its position as a regional military power.Erdogan prevailed despite years of economic turmoil which critics blame on unorthodox economic policies.While analysts expected that Erdogan would have to adjust some of his heterodox policies to ensure the country’s economy, marked by boom and bust cycles, would find some smoother waters ahead, they were cautious over just how much change a new government would herald.Turkey’s lira wobbled near record lows against the dollar on Monday, just shy of the 20.06 low hit on Friday. 5/AI MANIAArtificial Intelligence is having a moment. Shares in AI chipmaker Nvidia (NASDAQ:NVDA) soared some 25% in a single day after issuing bullish revenue forecasts.The technology took centre stage when Microsoft-backed Open AI unleashed its essay-writing bot ChatGPT last November. Industry insiders forecast huge progress in the competence of this so-called generative AI, while regulators and politicians fret about AI stealing jobs, or spreading misinformation. For investors, it raises a whole other sort of questions: Will AI cause long-term deflation? Will it create new jobs and new industries? And how will it make money? Stocks linked to AI are surging but all the tech’s ramifications are far from certain yet. Remember the dotcom bubble? More

BANGKOK (Reuters) – Thailand’s economy is on a solid path to recovery and showing resiliency, helped by good revenue collection and a normalisation of its tourism sector, while inflation should come in below 3% this year, its finance minister said on Monday.Southeast Asia’s second-largest economy expanded faster than expected in the first quarter of this year due to a revival in its vital tourism sector.The economic recovery has been supported by a comprehensive and timely policy mix of fiscal and monetary policies, which respectively should continue to be implemented proactively and prudently, Arkhom Termpittayapaisith told a World Bank forum.While predicting inflation would come in below 3% this year, inside the central bank target range of 1% to 3%, Arkhom said he could not tell whether there would be a reduced need for raising interest rates. “There is still uncertainty over energy prices and U.S. issues,” he told reporters on the sidelines.The central bank is expected to raise its key rate again by a quarter point to 2.0% on Wednesday before holding it steady through 2024, a Reuters poll showed.On Monday, the finance ministry in a statement said the economy in April was supported by stronger tourism, higher farm production and falling inflation, while Thailand was well-positioned to withstand global volatility.Arkhom said revenue collection also showed strong signs of recovery in the 2022 fiscal year and was expected to surpass the pre-pandemic level in the 2023 fiscal year.”I’m confident that Thailand is firmly heading towards full recovery and soon return to its vibrant economy,” he added. The finance ministry forecast economic growth of 3.6% this year, after a 2.6% expansion last year.The World Bank in a statement on Monday said Thailand now needed to address growing spending needs, while keeping public debt under control. Thailand’s public debt rose due to the pandemic response, but overall fiscal risks remain manageable, the bank said. More