Aurelia Butler

LONDON (Reuters) – The dollar was a touch softer against other major currencies on Friday as banking sector woes added to talk of U.S. rate cuts later this year, ahead of the much-anticipated monthly U.S. jobs report. Sterling rose to its highest level in almost a year, the euro recovered some ground from losses made after Thursday’s European Central Bank meeting and the yen was set for its first weekly gain in nearly a month – benefiting from safe-haven demand.The dollar index, which measures the greenback’s value against other major currencies, was a whisker softer at 101.31, and set for a second straight week of falls.Growing expectations for a Federal Reserve rate cut later this year have dimmed the outlook for the dollar, while fresh turmoil among U.S. banks has ratcheted up recession risks and added to speculation that the Fed could soon reverse course.The central bank hiked rates by a quarter point on Wednesday and signalled it may pause an aggressive tightening campaign. Shares of U.S. regional banks have tumbled this week as First Republic Bank (OTC:FRCB) collapsed and Los Angeles-based PacWest Bancorp said it would explore its strategic options.”Conviction levels are rising that credit conditions will tighten and the U.S. economy would slow more than it otherwise would,” said Chris Turner, global head of markets at ING.”That takes the heat out of inflation and paves the way for the Fed to cut rates.” Traders have priced in more aggressive rate cuts from the Fed, with Fed funds futures implying a small chance that cuts could come as soon as July.The April non-farm payrolls report later on Friday could provide the next steer for currency markets. Economists polled by Reuters forecast the U.S. economy created 180,000 new jobs, versus 236,000 in March. Data released earlier this week showed that the U.S. services sector maintained a steady pace of growth in April, suggesting that inflation remains sticky, while U.S. private employers boosted hiring last month.The dollar was steady at 134.26 yen, although the Japanese currency was headed for a weekly gain of 1.5%, snapping three straight weeks of losses.Sterling climbed over a third of a percent to $1.2633, reaching its highest level in almost a year. It was around 0.2% firmer at 87.44 pence per euroAnd the euro was marginally firmer at $1.1021, holding below recent one-year peaks. It came under selling pressure on Thursday after ECB on Thursday slowed the pace of its interest rate increases with a 25-basis-point rise and noted that past moves were having an impact on the economy.Although ECB President Christine Lagarde signalled more tightening to come, markets pared back their expectations on how much further rates would rise.The Aussie and the kiwi were among the largest beneficiaries of the sliding dollar, touching multi-week highs, though the kiwi later pared gains. The U.S. dollar meanwhile fell 1% to 10.58 Norwegian crowns, while the Swiss franc weakened after data showed Swiss annual inflation eased more than expected in April.The dollar was last up 0.64% at 0.8915 Swiss francs”The U.S. dollar is weaker against all the G10 currencies today but the Swiss franc,” said Marc Chandler, chief market strategist, at Bannockburn Global Forex.”The backdrop seems fragile even though a few regional bank shares have done better in after-hours trading and Apple (NASDAQ:AAPL)’s earnings were received well by the markets.” More

MILAN (Reuters) -Intesa Sanpaolo, Italy’s biggest bank, raised its 2023 profit goal on Friday after first-quarter net income nearly doubled thanks to higher interest rates and shrinking loan loss provisions.The lender forecast 7 billion euros ($7.7 billion) in net profit this year, having said in February that it would top last year’s result of 5.5 billion euros.The upgrade comes after fellow heavyweight UniCredit raised its 2023 profit target this week by more than a fifth.Intesa reported first-quarter net income of 1.96 billion euros, far above a 1.54 billion euro consensus in analyst forecasts compiled by Reuters. Total revenue topped expectations at 6.06 billion euros, up 7% from the previous quarter. Higher interest rates lifted lending income by 66% year on year, helping to offset a 6.6% drop in net fees and commission.With its business geared towards asset management, as well as insurance, Intesa is more exposed than rival UniCredit to recent market turmoil affecting investment inflows and performance. However, it said the boost from higher rates would continue to drive profit higher and forecast more than 13 billion euros in net interest income this year.The bank confirmed its 70% payout ratio.Core capital edged up in the quarter to 13.7% of risk-weighted assets from 13.5% at the end of last year.($1 = 0.9069 euros) More

LONDON (Reuters) -Not for the first time, the European Central Bank is determined to display policymaking independence from its Transatlantic cousin – but the two central banks are likely more in sync than it seems.Two potentially pivotal policy decisions within 24 hours this week from the ECB and U.S. Federal Reserve ended up with two very distinct directions of travel. Both hiked interest rates a quarter point – but only the ECB said more was to come.Without committing to it, the Fed signalled a pause in its 13-month, five percentage point tightening campaign. The ECB publicly dismissed any suggestion its squeeze over nine months and amounting to 375 basis point to date was done yet.Almost piqued by the question, ECB President Christine Lagarde insisted the bank was not dependent on the Fed: “We are not pausing – that is very clear.”And in the shadows of the council’s deliberations, well-known hawks were clearly pleading for an even harsher medicine.Strategic autonomy? Parallel universes? Or economies and policy cycles only marginally out of step?A counter-intuitive recoil of the euro against the dollar following the more hawkish ECB position on Thursday strongly suggested the last of those options. So did the fact there was barely a flicker in the two-year transatlantic yield gap. Even though the ECB is clearly dealing with higher inflation rates, it started credit tightening four months after the Fed last year – perhaps fearful that the energy shock following the Ukraine invasion would hit the underlying economy.Now, the euro area has swerved a winter recession, the ECB is playing catch-up to some extent – for all the clear differences in the nuts and bolts and vulnerabilities of both economic blocs.It’s not that the ECB can’t or shouldn’t adopt a different course. Although it tended to follow Fed cycles in its infancy and with lags anywhere from six to 18 months – failing twice in two attempted solo tightening bouts – the ECB has managed to spend much of the past decade ignoring the Fed and pursuing a lonely anti-deflation battle of its own. The global nature of the shocks of the past three years, however, shift the dial again. Money markets do partly agree with Lagarde – seeing one more quarter point rate rise in the pipeline. But that’s only in tandem with last year’s four-month lag to the Fed. They now see the so-called terminal ECB rate at 3.5% in September – still a chunky 175 bps below peak Fed rates if you assume that at 5.25%, those have now reached the end of the line.And even though futures assume U.S. rates will be cut by as much as 100 bps by year-end, they still won’t get back below ECB on those prevailing market assumptions. The 2-year U.S. sovereign yield premium over Germany remains about 120 bps.Is there a bigger gap in balance sheet management perhaps? The ECB on Thursday clearly indicated it would pick up the pace of its balance sheet contraction this summer, tightening financial conditions even further. But, curiously, both central banks’ pandemic-bloated asset piles are now almost identical after a year of gradual unwinding.To be sure, some investors think the relatively dovish market take on hawkish ECB rhetoric may be mistaken – or at least distorted by this week’s reverb of U.S. banking upheavals.”Lagarde was not able to fully convince markets of the ECB’s determination to fight inflation,” said Joost van Leenders at Van Lanschot Kempen, adding there’s a “clear risk” the ECB would have to execute more than the one last quarter point hike priced. AXA Investment Managers’ Hugo Le Damany and Francois Cabau also felt at least two more hikes were still possible, with risk to markets’ implied terminal rate “tilted to the upside.”IN SYNC?But many also argue the ECB is talking tough for effect.While the euro zone’s 7% April inflation rate is still more than three times the ECB’s target and more than two points higher than the U.S. equivalent – both are set to fall below 4% by year-end and converge to within a point of each other.Core rates are “stickier” but these could quickly dissipate when the lagged effects of a year of rate rises flattens credit growth. The ECB’s Bank Lending Survey on Tuesday showed a significant tightening of credit standards and credit growth to the broader economies was well underway. The Fed’s version — the quarterly loan officer survey due next week — is likely to reveal the same.According to the International Monetary Fund, U.S. economic growth for this year will, at 1.6%, be twice that of the euro zone – even if the latter is expected to catch up and overtake the U.S. next year with a meagre 1.1% expansion.”The peak of interest rates might be nearer than ECB President Lagarde tried to make markets believe at the press conference,” said ING’s global head of macro Carsten Brzeski.For some, the ECB may even have gone too far already.”The extent of policy tightening delivered by the ECB to date is already sufficient to cause a recession,” said Fidelity International’s Anna Stupnytska. “The ECB is very likely already in the policy mistake territory that would ultimately require a rapid course correction in coming months.”The opinions expressed here are those of the author, a columnist for Reuters.(By Mike Dolan, Twitter: @reutersMikeD; Editing by Lisa Shumaker) More

A flood of gilt sales is driving up the UK government’s borrowing costs, investors say, as markets are asked to absorb record volumes of bonds without the Bank of England stepping in to hoover up supply. Bond yields in most large economies have shot up over the past 18 months as soaring inflation drove a slew of aggressive interest rate rises, reflecting a decrease in prices. But they have remained stubbornly high in the UK even while dropping back elsewhere. By November last year, gilt prices had recovered from the turmoil sparked by September’s disastrous “mini” Budget, but in recent months yields have drifted back up. Benchmark 10-year UK gilts currently yield 3.69 per cent, compared with 3.36 per cent on equivalent US Treasuries and 2.19 per cent on German Bunds. Until this year, US bonds typically traded with higher yields.That relative shift reflects the outlook for the BoE, which is expected to lift interest rates by at least a further 0.5 percentage points this year as it battles stubbornly high inflation, unlike the US Federal Reserve, which is widely believed to have finished its tightening cycle with this week’s rate rise. However, gilts have underperformed recently even relative to German debt — the benchmark for the euro area, where further rate increases are anticipated.Many fund managers argue that the UK’s hefty borrowing needs, exacerbated by the BoE selling government bonds that it bought under its quantitative easing programme, are adding to the pressure on gilts.“Undoubtedly, the surge in gilt supply along with quantitative tightening is weighing on prices,” said Matthew Amis, investment director at Abrdn. “It’s relentless and it will be for the next fiscal year.”The government plans to sell £241bn of gilts in the current financial year, a sharp increase from £139.2bn issued in the last financial year, with issuance net of BoE purchases expected to be about three times more than the average over the past decade. Investors say the impact of the government’s borrowing spree is starting to show up in the widening “spread” — or difference in yield — between the UK and other big bond markets, an important indicator that investors are starting to demand a premium for UK bonds. “This year the enormity of gilt supply is weighing slowly on the spread with [German] Bunds,” said Mike Riddell, bond fund manager at Allianz Global Investors. He is buying up government bonds because he expects the global recession to be far worse than markets predict, but is opting for bonds in the US, Australia and Scandinavia over UK gilts.“Everywhere there is a lot more net supply but it’s particularly pronounced in the UK. People will buy at a price but not where we are today — not at the long end.”Economists at credit rating agency Fitch forecast that the combination of debt sales from the UK government and the BoE will be equivalent to 9 per cent of GDP this year. In the eurozone, the equivalent figure is just under 5 per cent. Evidence of pricing pressure is also showing up in UK bond auctions, where the gap between the average price paid and the lowest bids accepted has been larger than usual, according to HSBC’s head of UK rates strategy Daniela Russell. The gilt market’s biggest buyer has already turned to a seller since the BoE began to unload its massive portfolio of government debt last year. But there are signs that foreign investors, another traditional mainstay of demand, are also shying away from the market. BoE data published this week showed that overseas investors were net sellers of gilts every month this year, totalling £36bn in the first quarter and reversing net purchases of £40bn in 2022.

“It’s really quite marked selling pressure that is broadly akin to a trend that we were already seeing . . . it’s part of this lack-of-demand story,” said Imogen Bachra, head of UK rates at NatWest.Investors point out that the scale of bond issuance is far from the only factor propping up yields — a double-digit inflation rate that could prompt a hawkish message from the BoE at its meeting next week has also turned many investors off gilts.But Quentin Fitzsimmons, a portfolio manager at T Rowe Price, said the recent weakness also betrays lingering concerns about borrowing following last year’s crisis, which was triggered by former chancellor Kwasi Kwarteng’s package of unfunded tax cuts. He said gilt yields would need to climb “considerably higher” than those on Treasuries in order to lure sufficient numbers of foreign investors back to the market.“The fiscal stability of the UK is a very ephemeral and fragile creature,” he said. More

Over the past couple of years, a shortage of everything from iPhones to paracetamol due to pandemic lockdowns in China has highlighted the reliance of global supply chains on the country.It has also drawn attention to the danger of future disruption for multinational companies as cross-border trade and dealmaking becomes more complex — and the value of possible legal remedies.Once known as mere assemblers of high-end products and producers of their components, Chinese companies have been moving up the manufacturing value chain.For example, Apple, already well known for sourcing many of its US-designed products in China, this year hired Chinese contract manufacturer Luxshare Precision to help lead the design of its augmented reality headsets — one of Apple’s latest premium products.This increasingly complex east-west interdependency is growing as China becomes a more significant consumer of goods and an acquirer of foreign companies.China’s imports of consumer goods reached a record RMB1.9tn ($280bn) last year, doubling over the past decade. Demand for beauty and luxury products from Europe has been particularly robust, while the price tags for cross-border acquisitions have ballooned in recent years. But these businesses’ growing size and significance also mean takeovers are much more complicated.One example is last year’s purchase of LF Logistics, the logistics unit of the world’s largest supply chain manager Li & Fung, by Danish transport group Maersk for an enterprise value of $3.6bn.Takeover challenges: Danish transport group Maersk’s $3.6bn purchase of LF Logistics required complex reorganisation of the target business © Brent Lewin/Bloomberg“The global freight management business had been very much an in­teg­ral part of the target group,” says Sarah Su, partner at Freshfields Bruckhaus Deringer. “So an incred­ibly complex reorganisation had to happen before the logistics business and freight management business could be properly separated.”As global trade expands and supply chain operations lengthen, the legal and geopolitical challenges for the logistics sector are growing, too.“Some regulations in India, for example, restrict the ability of buyers or investors that are affiliated with China from being able to acquire or invest in certain Indian businesses,” says Su. The key is “finding work­arounds for those restrictions and structuring businesses to fit regulatory requirements for each jurisdiction”, she notes.Escalating geopolitical tensions between China and the US, alongside a growing concentration of the world’s supply chains in China, has also drawn attention to disruption risk. Yet foreign companies and investors remain committed to maintaining the ties and flow of trade bet­ween mainland China and the rest of the world as the country reopens fully from its Covid pandemic lockdowns. The country’s Qianhai Cooperation Zone is one of the ways it is opening up further. Alvin Ho, partner at Pinsent Masons, describes the economic development area as an “extra gateway from mainland China opening not only to Hong Kong but to the rest of the world”.Attracting foreign companies and investment is crucial to the venture, which is designed to foster economic development and closer co-operation between mainland China and Hong Kong.Requirements crucial for the zone’s success are a straightforward legal and procurement model for infrastructure projects, easier cross-border settlements and a dispute resolution framework for construction contracts covering both Hong Kong and Chinese law.

“We have a sense of what changes regulators will accept and what changes they will find difficult to understand and accept,” says Ho. “We have to come up with a system that is attractive enough for foreigners but still looks quite familiar to the mainland officials, and also acceptable to them.”Giving foreign companies the option to use Hong Kong law and arbitration if they choose to has been a key differentiating factor for the Qianhai Cooperation Zone. It is a “unique set-up that is different from the rest of China”, says Ho.The expansion of these special economic zones has helped many local companies become leaders in the global supply of many consumer and industrial goods.But with this growth has come a surge in legal disputes over patents and other forms of intellectual property. Last year, Chinese smartphone maker Oppo lost a patent dispute in a regional German court with Nokia, which may prevent the company selling certain handsets in the European country. This is just one example of how leading global suppliers in the Asia-Pacific region are having to handle legal battles, cross-border deals and patent disputes that are ever more complicated across many jurisdictions.Conventional dispute resolution strategies are not always effective in such cases. For example, in cross-jurisdic­tion disputes, a court in one country may pass a decision that contradicts one made in another.In these circumstances, lawyers aim to develop global strategies to help their clients. In the case of Nokia, Anand and Anand has used Indian courts as one starting point for global action on disputes alongside action in other jurisdictions in Europe and Asia, including the Finnish telecom group’s case against Oppo over 4G and 5G technologies. This could serve as a template for similar instances of international IP disputes. More

WASHINGTON – A fight between Republicans and Democrats over the debt limit ceiling could send the U.S. economy into a recession even if the standoff doesn’t actually trigger a debt default, analysts say – and a much worse downturn with perhaps 7.5 million people thrown out of work if it does. Already some corners of the vast market for U.S. debt are feeling a sharp pinch after Treasury Secretary Janet Yellen on Monday said that by early June the government may run short of the money to stay current on its bills – whether they are payments owed to foreign or domestic investors in Treasuries, federal employees and contractors or Social Security pensioners.Total government spending on average is about $525 billion a month. A big chunk of that, about $225 billion on average in the first quarter, is deficit spending.Hitting the debt ceiling would mean the government could no longer run that budget shortfall, delivering an immediate blow to millions of Americans who rely on government money directly or indirectly.The market swoon from what would be an unprecedented U.S. default would bludgeon away billions more in wealth. And while analysts have floated a few workarounds to keep money flowing, including invoking a constitutional provision that would likely face challenges in court, all are untested.Investors are taking the risk seriously. Yields on as much as $650 billion of Treasury securities maturing in the first half of June rocketed to record highs after Yellen’s announcement, reflecting the increased chance that they may not be paid off on schedule.The cost to insure U.S. government debt against default has shot to the highest since the 2007-2009 financial crisis.”I don’t think there are a lot of people in the market who would bet heavily that there will be a default. Most people I speak to think there will be a compromise between the Republicans and the White House,” said Lou Brien, an analyst at DRW Trading. “But the odds are not zero, so the market is pricing in the possibility that they will be too late to prevent some sort of funding problem.”All of this is occurring as the economic outlook is dimming anyway. TAKING THE AIR OUTNationwide Chief Economist Kathy Bostjancic was already expecting a recession later this year, as the Federal Reserve’s rapid-fire interest-rate hikes aimed at battling inflation raise borrowing costs for households and businesses and slow bank lending. All of that takes air out the economy’s tires and could start to push up the unemployment rate, now at a historically low 3.5%. Some top economic policymakers like those at the Fed had predicted as early as last December that the unemployment rate would be roughly 1 percentage point higher by the end of 2023.A debt crisis and a default, even if only on some of the interest payments due each day, would move it forward, Bostjancic said. To make what payments it could, the government would need to cut spending on whatever it could. “It immediately hits the cash flow that goes to individuals or businesses,” she said. “That’s going to feed directly into GDP; it does reinforce the recession scenario.” Indeed, the soft 1.1% annualized growth rate in U.S. gross domestic product logged in the first quarter was already seen as the likely high-water mark for the year. How deep and long-lasting the effects would be, she and others said, depends a lot on how long any non-payments last, which in turn will be shaped by how financial markets react – strongly, she and others said.In the 2008 financial crisis, for instance, Congress at first voted down the Treasury’s proposed bailout fund for banks, but the ensuing record collapse in stock prices and rise in bond yields changed minds quickly. Lawmakers approved the plan just days later.Should even that reaction not stir Congress to lift the debt cap quickly, a prolonged breach of the so-called “X-date” could catapult a relatively mild recession – with between 1 and 2 million lost jobs and the unemployment rate topping out around 5% – into something far more painful, Mark Zandi, chief economist at Moody’s (NYSE:MCO) Analytics, estimated in a report in March.In his worst-case scenario of a prolonged breach, with the government forced to slash spending for an extended period and consumer and business sentiment crushed by the political standoff and resulting financial chaos, unemployment rockets to above 8% – a loss of between 7.5 million and 8 million jobs – and is slow to recover.With the U.S. credit standing likely permanently impaired, “The economy’s long-term growth prospects are also weakened,” Zandi wrote.Between those two scenarios, Zandi said the next-harshest economic outcome would be for the House Republican plan calling for drastic spending cuts to prevail. A recession would be slower coming – likely not until 2024 – but unemployment in that case peaks near 6% and recovers even more slowly than under a prolonged breach. (This story has been refiled to correct a typo in paragraph 3) More

(Reuters) – ANZ Group Holdings Ltd on Friday edged past expectations with a 22.8% rise in first-half profit but warned of a tough second half amid stiff competition in retail banking and rising cost pressures.The lender’s record profit, driven by “solid revenue growth across the board”, follows a period of rapid policy tightening by the country’s central bank.”The next six months will be more difficult than the last. Competition in retail banking is as intense as it has ever been, both in Australia and New Zealand,” Chief Executive Officer Shayne Elliott said.A key gauge of bank’s profitability, ANZ’s net interest margin was up at 1.75% at the end of March, but the company faced risks from lending and deposit competition, and higher funding costs.Australia’s No. 2 lender National Australia Bank (OTC:NABZY) (NAB) on Thursday said its margins had peaked.ANZ warned of “emerging stress” among its customers owing to a challenging environment spurred by higher borrowing costs, sustained inflation and a slowing property market.ANZ’s total expenses are likely to increase by nearly 5% in fiscal 2023 off its 2022 base of A$9.17 billion on a constant currency basis.Australia’s fourth-largest bank said cash profit from continuing operations was A$3.82 billion ($2.56 billion) for the six months ended March 31, up from A$3.11 billion a year ago and beating a consensus estimate of A$3.81 billion.($1 = 1.4945 Australian dollars) More