Aurelia Butler

Investors have scaled back their expectations of global interest rate rises in the aftermath of banking sector turmoil, with market indicators suggesting that the period of rapid increases has come to an abrupt end.The pricing of derivatives products, such as interest rate swaps, indicates investors believe many of world’s major central banks will not raise rates further and, in some cases, will begin to impose cuts before the end of the year. “Global interest rates are near a peak,” said Mark Zandi, chief economist at Moody’s Analytics. “The suddenly fragile global banking system is putting pressure on central banks to end their rate hikes sooner rather than later.”Swaps rates now suggest the US Federal Reserve, Bank of Japan and seven other major central banks are all now expected to keep rates on hold at their next meetings. Markets are split on whether the Bank of England and the European Central Bank will raise rates in May, after pricing in a high probability of a rise at the start of March.

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‘We’ve had one of the most aggressive rate hiking cycles in decades, followed by banking turmoil and now peak rates are firmly on the horizon,” said Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdown.The reappraisal comes after one of the sharpest tightening cycles in recent history. Over the past six months, 18 major central banks have increased rates by a total of 16.45 percentage points.Just a fortnight ago, the peak in global interest rates had looked further away. In early March, investors had expected the federal funds rate target range to rise as high as between 5.5 per cent and 5.75 per cent by December, from its current range of 4.75 per cent to 5 per cent. The shift in derivatives pricing signals markets now expect the range to be around 4 per cent by then. At the start of this month, investors had expected the European Central Bank’s deposit rate to hit 4 per cent towards the end of the year – up from its current level of 3 per cent. They now anticipate a deposit rate of 3 per cent by then. The expectation for the Bank of England’s bank rate towards the end of the year has gone from around 4.75 per cent at the beginning of March to around 4.25 per cent as of Monday. “The major central banks, including the Fed and the ECB, should make a joint statement that any further rate hike is off the table at least until stability has returned to the financial markets,” said Erik Nielsen, chief economics adviser at UniCredit Bank. Last week, the Fed, Bank of England and Norway’s central bank all raised rates by a quarter percentage point. The Swiss National Bank went for a half-point rise despite the rescue-takeover of Credit Suisse by its rival UBS, and the ECB did the same the previous week. However, policymakers in most of those banks have signalled that a further rise in borrowing costs depends on turmoil in the banking system abating. “You can think of [the turmoil] as being the equivalent of a rate hike or perhaps more than that,” said Fed chair Jay Powell last Wednesday, signalling the panic could do rate-setters’ job for them. “Because of stressful conditions, banks become less willing to lend and they’re going to lend often by increasing the interest rate,” said Costas Milas, a professor at Liverpool university. UBS forecasts that, by the end of 2023, more than half of the 32 central banks it tracks will have lowered their policy rates. Another seven will have left them unchanged.

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However, some economists remain concerned high inflation will force lenders to keep on raising rates. Zandi said signs inflation will prove persistent could mean central banks would “sacrifice their economies to get inflation back to their targets”.Inflation figures for the US and eurozone are due out on Friday. Some rate-setters in Latin America and eastern Europe have kept interest rates on hold for months.“Central banks in emerging markets were some of the first to react to rising inflation and hike rates, and still may be the first to embark on a rate cutting cycle,” said Streeter.The market for interest rate swaps is one of the world’s largest derivatives markets. The gross value of outstanding interest rate derivatives rose significantly over the first half of 2022 in response to central banks’ rate rises, according to Bank for International Settlements data. More

Prime Minister Najib Mikati said on Monday the decision had been taken after a “calm discussion” and that the state needed 48 hours to re-adjust their operations. Mikati angered many Lebanese when he decided last Thursday not to start daylight savings time over the last weekend of March but instead to roll clocks forward an hour on April 20. That decision came after a meeting with Parliament Speaker Nabih Berri in which Berri asked him to postpone the time switch, according to footage of the meeting seen by Reuters.It was seen as an attempt to score points among Muslims who are fasting until sunset during the holy month of Ramadan. Moving clocks forward means Muslims would have to fast an additional hour as sunset would be at a later time on the clock.But the move was defied by Lebanon’s top Christian authority as well as some schools, media outlets and businesses, which rolled their clocks forward on Saturday night. Mikati even faced objections from within cabinet, including the justice minister who said Lebanon had more important challenges to focus on.The country has been without a president for five months and a protracted financial crisis has brought most public institutions to a standstill.Mikati referred to the crises in his comments on Monday.”Let us be clear. The problem is not winter or summer time… Rather, the problem is the vacuum in the top post in the republic,” he said. More

Welcome to Trade Secrets. Now that the global banking crisis is definitely over, no worries there, we can go back to looking at cheerier subjects. Today I’m asking if the rash of sovereign debt crises involving China as a creditor are going to get fixed soon, and whether a non-binding declaration attached to an EU trade deal will be the thing that single-handedly solves global warming and deforestation in the Amazon. Obviously the answers are no and no, but at least there are moves in the right direction. Charted waters is on the state of China’s trade recovery.Sri Lanka’s insolvency, Beijing’s blockage Good news for the multiple emerging market countries in the novel and uncertain position of trying to exit from a crushing sovereign debt crisis with China as a major official creditor. Well, goodish news. Maybe. Last week the IMF decided it had enough assurances from the creditors to push ahead with a rescue loan for Sri Lanka and duly authorised a $3bn extended fund facility. Sri Lanka’s external position has been weakening for years (see this chart from the IMF) and it’s been in limbo waiting for the IMF deal for months after it defaulted on its sovereign debt nearly a year ago.

China, as in the other test case of Zambia, has declined to have its lending to Sri Lanka written down as though it were a rich-country Paris Club creditor. Instead, it’s tried to insist that its lending is development finance on a similar basis to World Bank loans, a move the rich creditors have blocked. This has delayed the IMF rescue: for fairly obvious moral hazard reasons the fund has rules limiting its lending to countries in arrears to other creditors. China has now given assurances in principle it will participate in a writedown, but details tbc.Traditionally, the rich countries holding defaulted sovereign bonds were also those who essentially ran the IMF. This led to obvious accusations that the fund was being used as their debt collector during restructurings, but at least there could be a coherent collective creditor position about debt sustainability.That’s notably absent here. China is a rich bilateral creditor acting like a developing country. (There was a different but also obvious mismatch in incentives, by the way, when the Europe-dominated IMF started bailing out EU governments in 2010 during the eurozone sovereign debt crisis.)As I’ve noted before, although Beijing has made a big deal in the past about taking its place at the top table of global governance, it’s also been keen not to take too much responsibility for running unpopular institutions like the fund. China’s unwillingness to take a writedown is making an IMF-led rescue harder. It’s also a pretty big signal to other EMs in the future: be careful of borrowing from China, if you don’t want to end up in a mess like this.Can the EU’s Amazon plan deliver?If you want a test of making trade — and specifically trade deals — compatible with saving the environment, buying Brazilian exports while safeguarding the Amazon is a good one. We’re about to see whether an old-school light-touch approach has enough credibility to get a deal over the line, let alone actually make a difference if it’s in place.The EU took nearly twenty years to negotiate a trade deal with Brazil and the three other members of Mercosur. It was signed in 2019 and has since been trying to overcome objections from European environmentalists (and European beef farmers wearing hastily printed “I ♥ Rainforests” T-shirts) to get ratified. Last week Friends of the Earth got hold of a “joint instrument” side letter to the Mercosur deal that the EU had drafted to try to placate critics. Brussels prudently waited until Luiz Inácio Lula da Silva had taken over the Brazilian presidency to propose it, given his predecessor Jair Bolsonaro’s unconstructive view that Emmanuel Macron had a “colonialist mentality” over saving the Amazon.But since new and substantive commitments would mean reopening the agreement and enduring years more talks, the letter is “interpretative guidance” of existing environmental provisions in the deal rather than anything new and binding. Environmental campaigners are obviously strongly sceptical about the instrument, and there’s an interesting statement here from trade and climate experts saying it’s unfortunate those provisions aren’t subject to dispute settlement with sanctions. The instrument is negotiated and non-binding. It’s in sharp contrast to the EU’s new deforestation regulation, which aims to block the sale in the European single market of products blamed for the clearing of trees for agriculture and takes a very different approach of unilateral coercion/autonomous conditionality (delete au choix). Even Lula’s administration might balk at having its commitments to halt deforestation enforced from Brussels via EU diktat.As trade-sceptic environmentalists would put it, it’s warm words versus binding rules; as some developing countries might say, it’s partnership against neocolonialism. I’ll keep an eye on who wins.Charted watersChina’s economic recovery — or rather the lack of it — is news today, following a warning from someone who should know, the head of AP Møller-Maersk, the world’s second-largest container shipping group.Fortunately, we have a chart to help give a little more context.

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At the heart of China’s problem is the ever rising tension with the US over trade, pushing manufacturers to relocate production to other countries. This has hit exports, the driver of Chinese economic growth through the pandemic, with exports declining in dollar terms for five consecutive months since last October.Despite his warning about the current malaise, Vincent Clerc, the new chief executive of Maersk, expresses some optimism that they will recover, despite the US clampdown. He blames China’s current economic problems on the lack of spending by Chinese consumers, “stunned” by the pandemic clampdowns. Of course, Maersk must hope that the real problem is not a long-term drop in Chinese exports and the subsequent hit on shipping firms. Jonathan MoulesTrade linksAdam Posen from the Peterson Institute is right as usual, arguing in Foreign Policy magazine that industrial policy can work but economic isolationism generally doesn’t, and Eswar Prasad from Cornell University ditto in the same publication about the effects of the retreat from globalisation on low-income countries. (See also earlier this month FP’s interview with USTR Katherine Tai on the same issues.)Presumably acting on the principle that if you don’t ask you don’t get, no matter how improbable the request, Bloomberg reports that the US wants an exemption from the EU’s carbon border levy by virtue of its proposed “green steel” club of low-carbon manufacturers.Russia has adopted the Chinese renminbi as one of its main currencies for foreign reserves and trade transactions. The move was forced by US sanctions related to the Ukraine war and hence evidence of the dollar’s dominance rather than weakness as a global currency, whatever you may read elsewhere.The monthly trade indicator produced by the Kiel Institute think-tank shows global goods trade still weak, and low freight volumes continuing rapidly to reduce congestion in cargo shipping.David Henig of the European Centre for International Political Economy argues that for UK trade policy to live up to its Global Britain ambitions it needs to grow up and get real (my words, not his), while my colleague Peter Foster in the FT’s excellent Britain After Brexit newsletter says Rishi Sunak’s government is ignoring trade as a policy objective.Rich countries are increasingly overstating their official development assistance by counting spending as aid that really isn’t, say two senior fellows at the Center for Global Development, who propose an independent assessment to hold governments to account.Trade Secrets is edited by Jonathan Moules More

MEXICO CITY(Reuters) – On an April day, the founder of a U.S. startup called Make Sunsets stood outside a camper van in Mexico’s Baja California and released two weather balloons containing sulfur dioxide into the air, letting them float towards the stratosphere.Entrepreneur Luke Iseman said the sulfur dioxide in the balloons would deflect sunlight and cool the atmosphere, a controversial climate strategy known as solar geoengineering. Mexico said the launch violated its national sovereignty.Iseman, 39, said he does not know what happened to the balloons. But the unauthorized release, which became public in January, has already had an impact: setting off a series of responses that could set the rules for future study of geoengineering, especially by private companies, in Mexico and around the world.The Mexican government told Reuters it is now actively drafting “new regulations and standards” to prohibit solar geoengineering inside the country. Mexico also plans to rally other countries to ban the climate strategy, a senior government official told Reuters.While the Mexican government announced its intention to ban solar geoengineering in January, its current actions and plans to discuss geoengineering bans with other countries have not been previously reported.  “Progress is being made… to prepare the new regulations and norms on geoengineering, that is, to advance an official Mexican standard that prohibits said activity in the national territory,” Mexico’s environment ministry said in a written statement to Reuters.The backlash from Mexico arrives as growing numbers of scientists and policy makers are urging further study of solar geoengineering, recognizing that emissions cuts alone will not limit dangerous climate change and that additional innovations may be needed. GLOBAL GEOENGINEERING BANClimate policy experts said Mexico is in a position to help set the rules for future geoengineering research. “A country like Mexico could start pulling together other countries and say: ‘Let’s work on this together and see how we can ban it together or make it happen properly together,’” said  Janos Pasztor, executive director of the Carnegie Climate Governance Initiative (C2G), which advises on governance of solar geoengineering and other climate-altering technologies.The Mexican environment ministry statement said it would explore using the Convention on Biological Diversity’s call for a moratorium on “climate-related geoengineering activities” to enforce its ban. Agustin Avila, a senior environment ministry official, told Reuters Mexico will also try to find common ground with other countries on geoengineering at the COP global climate summit in the United Arab Emirates this year.The Mexican government said Make Sunsets’ balloon launch highlighted the ethical problems of allowing private companies to conduct geoengineering events.”Why is this company, located in the United States, coming to do experiments in Mexico and not in the United States?” said Avila.Iseman told Reuters in an email he chose Mexico because “most researchers report that particles launched into the stratosphere near the tropics will create more cooling by staying up longer.” Also, he had a truck and camper in Baja and thinks the region is beautiful, he wrote.David Keith, a professor of applied physics and public policy at Harvard University who has dedicated much of his research to solar geoengineering, called Iseman’s launch a “stunt.” Iseman has a background in business, not science, but said he consulted with climate scientists. Other innovative startups were ridiculed in their early days, he said. “If the ‘responsible experts’ were solving the problem, we wouldn’t have to,” he said in an email.Until Mexico’s dispute with Make Sunsets, solar geoengineering had been gaining attention from policy makers and scientists as a possible solution to climate change, and limited research funding.The strategy, also known as  Solar Radiation Management, seeks to mimic the natural cooling effects of volcanic eruptions when ash clouds reflect back enough sunlight to reduce the warming of the earth by using planes or balloons to disperse tiny particles in the stratosphere.   Last month, 60 scientists including former NASA climate scientist James Hansen signed a letter in support of further research.   The Degrees Initiative, a UK-based non-government group, awarded $900,000 for research into the impacts of solar geoengineering on weather patterns, wildlife and glaciers to scientists from Chile, India, Nigeria and other countries. The U.N. Environment Program in late February also recommended further study of geoengineering.Yet some scientists remain opposed to further research, arguing that large-scale interventions in the atmosphere risk triggering extreme and unpredictable weather changes, including major droughts that would severely impact agriculture and food supply.In 2021, the Swedish government grounded a study led by Harvard’s Keith which planned to spray calcium carbonate dust into the atmosphere to deflect sunlight after indigenous Saami people accused researchers of lacking respect for “Mother Earth.”Frances Beinecke, a veteran environmental activist and board member of the Climate Overshoot Commission, a think tank focused on developing strategies to reduce the risk of overshooting 1.5 C in warming, said the Make Sunsets episode underscores the urgency of developing a regulatory framework that would allow further study of geoengineering and set safe and equitable rules for its use.“The Mexico example illustrated to us that it’s not only governance to consider whether or not to utilize it, but you need governance in the research phase,” she said. “People can’t just go all over the world and launch field experiments without some kind of oversight.”Iseman said he would welcome clearer regulation but that the international community is moving “too slowly.”Mexico has not set a date for implementing its ban, a spokeswoman for the environmental ministry said.And it’s unclear what effect a ban might have. Keith argues a ban is unenforceable. “You can’t write legislation that says you can’t put sulfur in the stratosphere since every commercial flight does that,” he told Reuters.Others note that a ban on geoengineering on Mexico’s territory would offer no protection from the planet-scale impact of future experiments by any of its neighbors.  “It could happen literally next door. In terms of impacts on the world, it’s the same,” Pasztor saidMeanwhile, Make Sunsets said in a Feb. 21 blog post it had performed three additional launches near Reno, Nevada.The National Oceanic and Atmospheric Administration (NOAA) said Make Sunsets did not report the launches. “The Weather Modification Act requires that any activity performed with the intention of producing artificial changes in the composition, behavior, or dynamics of the atmosphere be reported to the NOAA Weather Program Office before the commencement of such project or activity,” NOAA told Reuters.Iseman said he did seek clearance from the Federal Aviation Authority, but did not disclose the balloons contained sulfur dioxide. “As far as I can tell, there isn’t any rule that would require us to do so – or even anyone who it would be relevant to notify,” he said.  More