Aurelia Butler

LONDON (Reuters) – Almost as surprising as the weekend’s shock events in Brasilia was how little world markets appeared to react – showing investors may already be braced for an era of more volatile geopolitics after 2022’s tensions over Russia and China.And yet just a year after most markets dismissed the chances of a full-scale Russian invasion of Ukraine, despite Moscow massing troops on the border for several weeks and despite the severity of the subsequent economic fallout around the world, it is still odd to see another significant political tail risk almost ignored.To be sure, some downplay the events as a shock per se. Many voices in Brazil reckon Sunday’s storming of the presidential palace, Congress and Supreme Court by thousands of supporters of former far-right President Jair Bolsonaro was no real surprise at all – and it merely underlined the country’s deep divisions.Bolsonaro, seen an acolyte of ex-U.S. President Donald Trump, has yet to concede defeat in October’s elections and has made false claims that Brazil’s electronic voting system was prone to fraud, spawning a violent movement of election deniers.The attack on government buildings came just days after the inauguration of leftist Luiz Inacio Lula Da Silva, the victor in October’s tight election. Lula appears to have restored order to the capital amid thousands of arrests. And critically, for a country that ended two decades of military rules only as recently as 1985, the army has so far not reacted to protester demands for a coup.Investors quizzed for their initial reaction appeared to see the whole event as a one-off and preferred to stay focussed on Lula’s economic plans and spending pledges instead. The real and stock market barely flinched on Monday, with spreads on Brazil’s sovereign dollar bonds steady to date also.Credit firm Moody’s (NYSE:MCO) said it did not see Sunday’s riots affecting the country’s Ba2 long-term sovereign rating by themselves. While negative credit implications could arise if violent acts persist and lead to economic disruptions, it added that it saw the probability of that happening as small.It did not address wider institutional concerns about the resilience of Brazilian democracy or risk of military rule and how allied Western democracies, who widely condemned the weekend riots, may be forced to react to such an extreme outcome in terms of sanctions. So perhaps it was just another volatile day in edgy Brazilian politics and everyone’s seen it all before. Graphic Brazil stocks since the pandemic https://fingfx.thomsonreuters.com/gfx/mkt/akpeqaqxlpr/One.PNG Graphic: Brazil stocks outperform over the past year https://fingfx.thomsonreuters.com/gfx/mkt/lgpdklkadvo/Two.PNG Graphic: Brazil’s real vs other BRICs and G4 https://fingfx.thomsonreuters.com/gfx/mkt/myvmogoqkvr/Three.PNG BRICKBATSYet Brazil’s assets do not, on the face of it, look like beaten-down bargains that have priced all the worst-case scenarios. Buoyed by commodity price windfalls that followed the Ukraine invasion last year, the real and Brazil’s leading stocks outperformed most other major economies over the past 12 months.What many banks point to is the assumed risk premium already built in to Brazilian real interest rates. For one, the central bank was one of the first to start raising interest rates after the pandemic recession and lifted its policy rate by more than 10 percentage points to 13.8% since early 2021. They have remained at that levels since August, right through the election process, and are the highest among the major developing economies even as domestic inflation almost halved last year from the 10% rate seen in 2021.JPMorgan (NYSE:JPM) strategists said their short-term valuation model put the real’s fair valued around 5.15 per dollar – about 4% stronger than where it started the year and leaving its risk premium amounting to a “reasonable” 1.5 standard deviation. It also said data showed foreign positioning in real was near the lows of the past two years.Goldman Sachs (NYSE:GS) reckoned rising inflation-adjusted interest rates keep the currency attractive and its metrics suggest an “idiosyncratic risk-premium” of almost 20% in the real – leaving room for gains even if markets continue to price some political tail risks.But beyond Brazilian markets, the wide global markets calm surrounding the weekend events was equally curious.After all, Brazil is the 12th largest economy in the world and one of the biggest food and raw materials exporters. With global inflation the economic bogeyman of the moment, anything that threatens shortages or another supply shock there may reasonably create waves.And how might a threat to democracy in Brazil position the country relative to the major Western allies or other autocracies within the long-standing BRIC grouping of giant emerging economies including Russia, India and China? But maybe investors are already across this.According to the surge late last year in BlackRock (NYSE:BLK)’s geopolitical risk indicator – which tracks the relative frequency of news and brokerage reports on specific geopolitical risks – investors are paying more attention to these risks than they have for at least five years. Among the 10 biggest risks it lists by likelihood is emerging markets political risks that threaten political institutions.Kicking off its conference on the markets outlook for 2023 on Tuesday, Goldman Sachs focussed on geopolitics as the dominant theme.Goldman adviser and former head of Britain’s MI6 intelligence service Alex Younger said the recent past may not be a good guide to how things pan out from here.”Maybe economics does win out in the end, but at the moment geopolitics is ascendant,” he said. “The past 30 years were likely the aberration. Get away from the idea of some mean reversion.” Graphic: Emerging Market central bank policy rates https://fingfx.thomsonreuters.com/gfx/mkt/movakjkbwva/Four.PNG Graphic: Brazil USD bond spreads steady after weekend violence https://www.reuters.com/graphics/BRAZIL-ECONOMY/FISCAL/gkplwxgzzvb/chart.png The opinions expressed here are those of the author, a columnist for Reuters. (By Mike Dolan in London; Editing by Matthew Lewis) More

MELBOURNE (Reuters) -The developer of a $21-billion project aiming to deliver solar power to Singapore from Australia has collapsed as its two main backers, Australian billionaires Mike Cannon-Brookes and Andrew Forrest, failed to agree on a new round of funding.Singapore-based Sun Cable said it had appointed voluntary administrators less than a year after raising A$210 million from the two billionaires for the Australia-Asia PowerLink project.”While funding proposals were provided, consensus on the future direction and funding structure of the company could not be achieved,” Sun Cable said in a statement.Tech billionaire and climate activist Cannon-Brookes, who became chairman of Sun Cable in October, said he remained confident in the project.It involves building a 20 gigawatt (GW) solar farm, 42 gigawatt hours (GWh) of energy storage in northern Australia and the world’s longest undersea cable to deliver power to Singapore, and eventually, Indonesia.Construction was due to begin in 2024.”I fully back this ambition and the team, and look forward to supporting the company’s next chapter,” he said in the statement.The statement offered no comment from iron ore magnate Andrew Forrest’s privately owned Squadron Energy, Sun Cable’s other big stakeholder.It is still possible Squadron could put together a funding deal for the administrators, said a person familiar with the company’s thinking who sought anonymity because of confidentiality provisions.Last year’s capital raising of A$210 million included milestones that have not been met yet, meaning that not all of that funding was made available.Future steps are likely to involve voluntary administrators FTI Consulting (NYSE:FCN) seeking fresh capital or selling the business entirely, Sun Cable said. ($1=1.4499 Australian dollars) More

Gold prices have ripped higher over the past two months as expectations that the US Federal Reserve will slow its interest rate rises boosted the precious metal.Prices of the yellow metal have risen 15 per cent since November 3 to almost $1,900 per troy ounce, reaching the highest level since April 2022. The rally comes as the market increasingly expects that the Fed will slow the pace of its increases in borrowing costs as inflation eases off its highs. Higher interest rates make gold, which unlike bonds provides no regular returns, less attractive.“Broad financial market expectation that the Federal Reserve will need to pull back on aggressive monetary tightening is helping to support the gold market even as Fed speakers show no sign of turning yet,” said analysts at Emirates NBD. Analysts also said slower Fed rate rises compared with other central banks, such as the European Central Bank, could put downward pressure on the US dollar, which rose sharply last year. A weaker dollar tends to benefit commodities, including gold, since it makes them less expensive for buyers outside the US.Gold’s latest 50-day run marks its best since the coronavirus pandemic shook global markets in 2020, which sent prices above $2,000 per troy ounce.Gold prices slid sharply last year after hitting a record high in March as central banks around the world moved to raise interest rates to stymie inflation and the dollar was boosted by the strength of the US economy.That weighed on investor appetite for gold with a second consecutive year of decreasing demand for gold ETFs. Investors sold $3bn worth of physically backed gold ETFs in 2022, a 3.4 per cent decrease to $202.7bn of global holdings at the end of December, according to the World Gold Council, a trade body.Analysts say gold prices were still resilient given how fast the US central bank moved to rate rises thanks to record levels of central bank buying and strong retail investor demand as cryptocurrencies and tech stocks dropped.The People’s Bank of China revealed at the weekend a further 30 tonne purchase of gold in December, following on from its first reported monthly purchase of 32 tonnes in more than three years in November.Traders are now looking for signs on how persistent inflation will be to gauge the outlook for monetary policy. Phillip Streible, chief market strategist at Blue Lines Futures, a brokerage, said that gold could break through $1,900 per troy ounce if the US consumer price index data on Thursday are weaker than expected. “Once you get in the 1900s, it becomes a gravitational pull towards $2,000,” he added.MKS PAMP, a precious metals group, predicts an average price of $1,880 per troy ounce this year with the potential for an even higher price in the case of continuing volatility in the financial markets, lower global growth or faster cooling of inflation. “Gold has been down on a hawkish Fed fighting inflation but it is not out with upward trajectory from here on out,” it said.

However, James Steel, HSBC’s veteran precious metals analyst, added that retail investor demand for gold, particularly for jewellery, begins to bite when prices rise above that level, capping gold’s potential rise.And some are cautioning that a less aggressive Fed policy has already been largely priced in. RBC analysts warned that market expectations of Fed rate cuts from mid-year “are not yet a foregone conclusion”.Additional reporting by Chris Flood More

Inflation is finally cooling. But the ghost of sky-high inflation continues to haunt fund managers.The genuine possibility that the peak in global inflation may be behind us started to emerge in the US last month, when data showed the annual rate dropped to 7.1 per cent in November, a decent fall from 7.7 per cent in the previous month and even a little below forecasts. Certainly, the “old you” from, say, three years ago, would laugh at the suggestion that 7-ish per cent inflation is good for risky assets. But then, “old you” had not been through the mincing machine of 2022 — a year that fund managers of almost all stripes are desperately keen to forget. That reading marked the slowest rate of inflation in almost a year and meant the pace of consumer price rises had fallen back for two months in a row. It enabled investors to dare to hope that the long nightmare of endlessly soaring inflation and an endlessly hawkish Federal Reserve might finally be coming to an end. In January, data from the eurozone suggested the US inflation figures were not a blip, when its December rate also dropped back into single figures. US figures for December are due out this week.So why are investors not dancing in the streets? Instead, party-poopers, perhaps humbled by a cruel 2022 marked by the killer combo of both sliding stocks and bonds, express nagging doubts when you ask how this year will pan out. “Honestly, I don’t know,” says Andrew Lake, head of fixed income at Mirabaud Asset Management, with the hint of a sigh. “I have no idea.”One factor holding back the enthusiasm is that a pullback in inflation was already embedded in markets. Investors had done what they are supposed to do and anticipated the next big shift in the global macro environment. Global stocks, as measured by the MSCI World index, climbed by some 20 per cent from the lowest point of October to mid-December, despite the lack of any meaningful brightening in economic growth or geopolitical tensions. That rally “took a lot out of returns from [2023]”, Lake says. The really big worry for Lake, and for lots of other fund managers, is that sure, the Fed will probably hit pause quite soon. It has already chopped the size of its rate rises down to a half point, a break from the three-quarter point increments that we saw several times over 2022. Early this year it is likely to want to sit back and see how that rapid pace of tightening filters through the economy.

But can we be certain that the next move is down? What if the pause is not so much of a pivot but a plateau, a brief breather to reload and start again? After all, it turns out no one in policymaking or investing circles really understands inflation quite as well as they thought. “If inflation doesn’t come down and unemployment is not high, then they will feel comfortable raising rates again,” Lake says. This is the notion really keeping investors awake at night. Deep down, they want to get back to the good old days of low inflation, low rates and central bankers who see a virtue in supporting highfalutin-sounding financial conditions (for which, read buoyant asset prices).But central bankers want to get back to a different sort of good old days when inflation was housebroken. If they remain single-minded in this mission and fire up the rate rises all over again, then some of the nastier features of portfolios in 2022 could reassert themselves in 2023. “The worst-case scenario for next year is if the Powell Fed becomes another Volcker Fed, if it becomes more hawkish,” says Flavio Carpenzano, fixed income investment director at Capital Group. Not only would that continue to throttle higher-risk assets such as tech stocks that thrive when money is cheap and profits are a worry for another day, but it would also be likely to force the US economy into a recession. “My biggest worry is that the Fed has to start again,” says Andrew Pease, head of investment strategy at Russell Investments. It is easy to imagine the Fed pausing, markets shooting higher, the economy picking up, Pease says, followed by a resurgence in the inflation that policymakers are so desperately keen to hold down. And then the pain restarts. “My worry is not that we get a big recession, it’s that the Fed starts tightening again at the end of 2023,” he says.A mild recession might in fact be the best outcome for investors, he says — mild enough not to inflict too much pain but bad enough to keep the Fed’s end point for benchmark rates well under 6 per cent. Otherwise, the horror show of 2022 will just keep rolling. Last year was “seen as the year of the reset”, Pease says. “What if it’s not?”[email protected]

Video: Fractured markets: the big threats to the financial system More

SINGAPORE (Reuters) – The dollar held its ground on Wednesday, in spite of downward pressure from lower bond yields and higher stocks, as traders waited on this week’s U.S. consumer price data to see whether it will confirm that inflation is in retreat.The Australian dollar nudged about 0.3% higher to $0.6912 after data showed the annual pace of inflation increased to 7.3% in November, leaving room for more rate hikes. The New Zealand dollar also crept up 0.2% to $0.6380. [AUD/]The U.S. dollar was steady elsewhere, loitering just above a seven-month low on the euro at $1.0737 in the lead-up to U.S. inflation data due on Thursday.The greenback has lost about 11% against the common currency since hitting a 20-year peak in September, as investors have started to anticipate easing inflation and with it a falling dollar as the need for more interest rate hikes wanes.But for the past month or so the common currency has struggled to make headway, and traders have been cautious in selling dollars while the U.S. Federal Reserve continues to promise hikes and the global economic outlook is bleak.”It’s becoming harder to argue a stronger dollar story, very clearly,” ING chief economist Rob Carnell said.”But it still remains a difficult one to argue a really strong euro story,” he said, which is holding back wider losses for the dollar as the euro/dollar pair sets the broad tone.The dollar was steady at 132.23 Japanese yen and $1.2161 per British pound. U.S. government bond yields, which have been attracting investors to the dollar, fell overnight and upbeat sentiment in equities lifted stockmarkets.Federal Reserve chair Jerome Powell did not give any policy clues during a panel discussion in Stockholm overnight, and with other Fed officials saying their next moves will be data-dependent, investors are keenly focused on U.S. CPI data.”Another downward surprise to the core CPI would cement the deceleration trend,” Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso said.”The U.S. dollar would ease further because another soft core CPI would encourage markets to continue to shift pricing for the (Fed’s) 2 February meeting from a 50 basis point increase to a 25bp increase.”Futures pricing has been bumpy, but indicates markets’ now lean toward a 3/4 chance of a 25 bp hike next month.China’s re-opening has also supported sentiment and lifted Asia’s currencies against the dollar. China’s yuan was a whisker short of a five-month high at 6.7814 in offshore trade early on Wednesday.The Singapore dollar has scaled 19-month highs this week and the Thai baht nine-month tops in anticipation of tourism picking up as China’s borders open. More

MEXICO CITY (Reuters) – After two years of record outflows of foreign capital, Mexico’s economy bounced back in 2022 in large part due to attractive yields compared to other destinations, though some analysts doubt last year’s performance will set a new trend.A major factor will be Mexican borrowing costs, as the central bank is expected to end a bullish cycle of rate hikes. Mexico’s government debt market attracted 73.5 billion pesos ($3.9 billion) last year in foreign capital, following a drop of 515 billion pesos in 2020 and 2021, according to official data released on Tuesday.Last year, the amount of government debt in foreign hands increased nearly 5% to reach 1.71 trillion pesos – the largest percentage increase since 2014.International demand grew after the central bank, known as Banxico, sped up interest rate hikes in a bid to tackle inflation. Mexico’s early tightening of monetary policy outpaced other nations and boosted the peso. The currency was up 5% in 2022 versus the U.S. dollar.Banxico has increased its benchmark rate by 650 basis points since June 2021, raising it to a record 10.5% – well above yields for U.S. government debt of between 4.25% and 4.50%. “For this year, we believe that differential will hold, although not necessarily through the whole year,” said Juan Rich, analyst with brokerage Ve por Mas.Banxico will likely decouple its rate policy from the U.S. Federal Reserve in coming months, Rich added.Some analysts argue the pace of capital flows into Mexico this year will probably depend on investor appetite for riskier assets even despite a narrower rate differential with the Fed. But even as Latin America’s second-biggest economy is seen benefiting from less restrictive monetary policy this year, stubborn inflation combined with meager growth could tame expectations.”I don’t see a lot of additional money coming in,” said CI Banco analyst Jorge Gordillo. ($1 = 19.0601 Mexican pesos) More

Nick Khan will serve as the new WWE CEO, the entertainment firm added. Vince McMahon, 77, returned to the board last week and elected himself and two former co-presidents and directors Michelle Wilson and George Barrios to the board. McMahon’s daughter Stephanie announced her resignation in a statement posted on Twitter. “I look forward to cheering on WWE from the other side of the business, where I started when I was a little kid, as a pure fan,” she said. Vince McMahon, who ran the company for four decades, said last week that the only way for WWE to fully capitalize on growing demand for content and live entertainment was for him to return as executive chairman.The company also announced at the time that it would explore strategic alternatives. McMahon retired in July last year, as the company’s CEO and chairman, following an investigation into his alleged misconduct. Later, WWE said that it found some unrecorded expenses tied to McMahon. More

BENGALURU (Reuters) – The Bank of Korea will raise interest rates by another quarter percentage point on Friday, likely its last move in an aggressive tightening cycle aimed at quelling inflation running at more than twice its 2% target, a Reuters poll has found.One of the first major central banks to kick off a hiking cycle back in August 2021, the BOK has lifted rates by a total of 275 basis points to 3.25% but is under pressure to ensure a soft landing for the economy.BOK Governor Rhee Chang-yong said in November the central bank was ready to slow the pace of policy tightening and suggested the rate would peak in this cycle at around 3.50%.A strong majority of economists, 36 of 40, in the Jan. 5-10 poll forecast the BOK to raise rates by 25 basis points to 3.50% at its Jan. 13 meeting, which would be the highest since 2008. The other four expected no change.”We are looking for one last rate hike of the cycle on Friday. We think it will be non-unanimous where one dissenter calls for a no change,” said Kathleen Oh, economist at BofA.”That would send a message there is less chance of an additional rate hike from there,” she said. “Recent developments, especially on the inflation front, have come down to the point where the members can take a little bit of comfort, that there is a sign of stabilizing inflation.”Policymakers worry South Korean households, already among the world’s most indebted, were more susceptible to interest rate rises because of the prevalence of variable mortgage rates. Real estate prices are already falling.Three quarters of respondents, 30 of 40, forecast the key interest rate to remain unchanged at 3.50% until end-March. But seven expected another hike by 25 basis points to 3.75% and three predicted rates to still be at 3.25%.However, median forecasts predicted the base rate to stay at 3.50% until the end of this year.”Inflation is still a concern … and is likely to stay above 4% until 1Q23,” wrote Lee Seung-hoon, chief economist at Meritz Securities. “Like the Federal Reserve, (the) BOK will now move to higher for longer strategy instead of conducting further rate hikes beyond January. With household debt service elevated, further hikes beyond 3.50% may cause additional downsides for the economy with limited impact on inflation.”The poll forecasts inflation to average 3.3% and 2.0% this year and next, compared to 3.0% and 2.0% predicted in an October poll.With inflation expected to fall within target next year, median forecasts from economists who had a long-term view showed rates falling to 2.75% in the third quarter of 2024.South Korea’s economy was expected to grow 1.3% in 2023 and 2.3% in 2024, down from 1.9% and 2.5% forecast in the previous survey.(For other stories from the Reuters global long-term economic outlook polls package:) More