Aurelia Butler

The euro rallied and short-dated eurozone government debt came under pressure on Tuesday, as traders braced themselves for the bloc’s central bank to lift interest rates for the first time in more than a decade.The common currency rose 1.2 per cent to slightly under $1.03, after sliding to dollar parity last week for the first time in 20 years as the greenback strengthened and as concerns intensified over Europe’s dependence on Russian energy. In government bond markets, the yield on Germany’s policy-sensitive two-year bond rose 0.07 percentage points to 0.59 per cent. The yield on the 10-year German Bund, seen as a proxy for eurozone borrowing costs, rose 0.03 percentage points to 1.24 per cent. Bond yields rise as their prices fall. The European Central Bank has widely signalled that it will on Thursday raise its main deposit rate, currently at minus 0.5 per cent, for the first time since 2011. But its policymakers are likely this week to broach the possibility of raising interest rates by half a percentage point, exceeding their own guidance in the face of record-high inflation. The ECB has kept its main interest rate at less than zero to stimulate lending and spending since 2014, when the eurozone faced a sovereign debt crisis, and has lagged behind the US Federal Reserve and the Bank of England in tightening monetary policy. “The fact is that the ECB is a long way behind the curve and they have a lot to do,” said Paul O’Connor, head of the UK-based multi-asset team at Janus Henderson. “So it won’t seem unusual if they kick off with a 50 basis point rise.” The yield on Italy’s two-year bond added 0.06 percentage points to 1.45 per cent. In equity markets, Europe’s regional Stoxx 600 share index traded steadily.Futures trading indicated Wall Street’s S&P 500 would gain 0.8 per cent at the New York open after it closed 0.8 per cent lower on Monday. Global stocks have dropped about 20 per cent this year as investors debated central banks’ ability to tame surging inflation without pushing economies into contraction, while the quarterly corporate earnings season has ignited concerns about a potential recession.Wall Street banks JPMorgan and Morgan Stanley missed analysts’ earnings forecasts last week. On Monday, Goldman Sachs warned it would slow hiring while Bloomberg reported that Apple was about to do the same.

“We are going to see big downgrades to earnings forecasts and there is no monetary policy support to help markets, so it is difficult to be optimistic,” said Luca Paolini, chief strategist at Pictet Asset Management. “The only thing that might save the situation is an improvement in China.” As many as 41 Chinese cities are now under lockdowns or district-based controls, Japanese bank Nomura said, as the nation pursues its zero-Covid policy while racing to develop an effective homegrown mRNA vaccine. China’s economy expanded just 0.4 per cent in the quarter to June year on year, widely missing analysts’ forecasts, although the weak performance fuelled speculation that Beijing would launch stimulus measures. Hong Kong’s Hang Seng share index closed 0.9 per cent lower, taking its year-to-date loss to 12 per cent. The Topix in Tokyo gained 0.5 per cent. More

KARACHI, Pakistan (Reuters) – Ratings agency Fitch on Tuesday revised its outlook on Pakistan to negative from stable, citing a deterioration in the country’s external liquidity position and financing conditions as well as the risks from renewed political volatility.Fitch, however, affirmed Pakistan’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at “B-“. The International Monetary Fund (IMF) board was likely to approve a resumption in bailout payments, it said, but added there were considerable risks to the programme’s implementation and to Pakistan’s access to external finances after June 2023.Ratings agency Moody’s (NYSE:MCO) changed Pakistan’s outlook to negative from stable on June 2.. Pakistan faces economic turmoil, with fast depleting foreign reserves, a declining currency and widening fiscal and current account deficits.The economic meltdown has been compounded by political instability and a delay in the resumption of the IMF bailout since the government of Prime Minister Shehbaz Sharif took over from ousted premier Imran Khan in April. The Pakistani rupee fell heavily against the U.S. dollar, losing nearly 6 rupees early on Tuesday to 122 per dollar in interbank trading.Similarly, the Pakistan Stock Exchange Ltd KSE100 Index fell 978 points or -2.36% to close at 40,389.07 level on Tuesday, its website showed. The rupee is especially under pressure from the falling reserves and delay in foreign inflows from the IMF and other sources, Fahad Rauf, head of research at Ismail Iqbal Securities, told Reuters. Reserves have fallen to as low as $9.8 billion, hardly enough to pay for 45 days of imports.”If Pakistan is able to maintain fiscal and monetary discipline, the health of the economy would improve and an outlook upgrade would follow,” Rauf said.Fitch said the political volatility could undermine the fiscal and external adjustment, especially in the environment of slowing economic growth and high inflation, which stood at 21.3% in June.Pakistan’s central bank has already pushed policy interest rates to 15%. It forecasts gross domestic product growth in the 2022-23 financial year at between 3% and 4%, less than the government’s budget estimate of 5%. The IMF reached a staff-level agreement with Pakistan last week to pave the way for disbursement of $1.17 billion. If this is approved by the board, the scope of the original $6 billion bailout agreed in 2019 will rise to $7 billion. More

A Russian gas embargo would lead to severe recessions in eastern Europe and Italy if countries around the world hoarded their own scarce supplies, the IMF warned on Tuesday in a bid to encourage solidarity between nations. The fund predicted that unless liquid natural gas was shared and prices were artificially held down, any Russian action to stop supplying Europe would trigger economic contractions of more than 5 per cent over the next year in the Czech Republic, Hungary, Slovakia and Italy.Forty-two per cent of the EU’s gas imports come from Russia, according to the IMF. Russian flows provide more than 50 per cent of gas imports for eight EU countries. A Russian gas embargo has become increasingly more likely following its invasion of Ukraine. Moscow has restricted deliveries through its Nord Stream 1 pipeline, which runs from Russia under the Baltic Sea to Germany, by 60 per cent in June. Fears are mounting that it will not turn supplies on again this Thursday after planned maintenance.European gas consumption has already fallen 9 per cent this year, knocking 0.2 percentage points off EU GDP, according to the IMF, but its simulations warned that without mitigations, the pain could become much worse in the winter. Brussels is next week set to tell member states to cut consumption “immediately”. The IMF modelling suggested that the European economy could manage with Russia curtailing supplies by 70 per cent, but there would be shortages if there was a full embargo on exports. The worst affected European countries would only be able to access supplies between 15 and 40 per cent below their needs. Hungary, Slovakia and the Czech Republic had very high use of Russian gas, while Italy is vulnerable due to its high use of gas in electricity production, the fund said. The worst impacts would arise if gas was not shared between European countries, both because of physical bottlenecks in supply and hoarding by individual nations and if households were protected from price rises by governments and so did not limit their use over the winter for heating. The fund recommended that if governments wanted to protect vulnerable households from soaring costs, they should offer them flat rate subsidies or increases in income. This would maintain incentives for people to limit gas usage. If Europe showed solidarity between nations and integrated its market into global liquid natural gas, or LNG, supplies, Russia would not be able to push the EU into a serious recession this winter. In its most optimistic scenario, a Russian gas embargo would reduce EU GDP by just 0.4 per cent with only Hungary suffering a contraction over 1 per cent. “If EU markets remain integrated both internally and with the rest of the world, our [modelling] suggests that the global LNG market would help buffer economic impacts,” according to IMF economists from its European and commodities directorates. “This is a moment for Europe to build upon the decisive action and solidarity displayed during the pandemic to address the challenging moment it faces today.”The European Commission will next week provide countries with voluntary gas reduction targets amid fears that the requisite solidarity does not exist between member states. The concern is that countries such as Germany will be faced with the choice of shutting much of its industry or allowing households in neighbouring countries to freeze this winter. The IMF’s modelling is designed to highlight the benefits of taking steps now to share supplies. More

(Reuters) – The Vatican on Tuesday issued an overarching investments policy to ensure they are ethical, green, low-risk, and avoid weapons industries or health sectors involved in abortion, contraception or embryonic stem cells.The guidelines order Vatican departments to close their investment accounts or stock holdings in foreign banks, including in Italy, and transfer them to the Vatican Bank, to be overseen by a department called the Administration of the Patrimony of the Holy See (APSA).The investments are estimated at just under 2 billion euros ($2.05 billion).The Investment Policy Statement (IPS), a radical overhaul after years of financial scandals, strips all Vatican departments of the ability to invest their funds independently.It was this practice that allowed the Secretariat of State to invest directly in a London building that is at the centre of a corruption trial. The botched deal resulted in a loss of 140 million euros. All the defendants have denied wrongdoing.”The fundamental objective is to discipline investments and centralise them,” said a senior Vatican official, speaking on the condition of anonymity. “It is more organised, more controlled, more transparent, definitely a step forward.”The Secretariat of State, the Vatican’s most important department that oversees diplomacy and all other departments, was already stripped of control over its funds in 2020.”The decision to invest in one place rather than another, in one productive sector rather than another, is always a moral and cultural choice,” one of the principles of the 20-page IPS says.It follows the establishment last month of a committee to oversee investment ethics. It is made up of non-Italians: Irish-American Cardinal Kevin Joseph Farrell, who is based at the Vatican, and four outside lay financial experts in Britain, Germany, Norway and the United States.The IPS prioritises investments that “contribute to a more just and sustainable world”, including assets whose issuers are environmentally friendly, favouring clean and renewable energy, biodiversity and waste recovery.It bans investments in funds even indirectly associated with pornography, gambling, weapons and defence industries, pro-abortion health centres and laboratories or pharmaceutical companies that make contraceptive products or work with embryonic stem cells. The IPS frowns on speculative investments in commodities, oil, mining, nuclear energy and alcoholic drinks.ORDER TO DISINVESTIt says investments in complex financial and structured products should be avoided as well as in those that include short selling and day trading.Investment decisions should also include a “governance factor”, favouring companies with codes of ethics and transparent, prudent and fiscally responsible management.Vatican departments should disinvest from investments not conforming with the policy and liquidate holdings with ethical problems quickly.The Investment Committee will authorise portfolio managers.”It is important that portfolio managers be professionals with good reputations with known financial institutions and not just someone’s friend,” the Vatican official said.Many Vatican financial scandals in the past have stemmed from an abundance of trust in financial managers, almost always Italians, who were friends of Vatican officials.Discussing finances in an exclusive interview with Reuters this month, Pope Francis gave the example of priests who had no financial experience being asked to manage the finances of a department and who in good faith sought outside help from friends in the outside financial sector.”But sometimes the friends were not The Blessed Imelda,” the pope said, referring to a 14th century 11-year-old Italian girl who is a symbol of childhood purity. Francis blamed “the irresponsibility of the structure” for past financial scandals.The Vatican official who spoke on the condition of anonymity said there would no longer be investments in private equity funds. The Secretariat of State once invested in a private equity fund, that in turn made investments that conservative Catholics considered unethical.($1 = 0.9745 euros) More

SINGAPORE (Reuters) – Singapore’s economic growth is expected to moderate further next year, tracking a slowdown in its major trading partners, while global inflation is expected to ease in 2023, the head of the city-state’s central bank said on Tuesday.”We are seeing a surge in inflation globally because a robust demand recovery post-COVID has run into supply-side frictions and, more recently, war-related disruptions,” said Ravi Menon, the managing director of the Monetary Authority of Singapore (MAS).”Rising inflation has no doubt dented business and consumer confidence, but not yet to a degree that would lead to a severe downturn this year,” Menon told a news conference after the MAS published its annual report.Last week, Singapore tightened its monetary policy in an off-cycle move that came just after Canada’s surprise 100 basis point interest rate hike and before an out-of-cycle rate hike in the Philippines. [L1N2YV00K]”Taming inflation is like trying to slow down a speeding car on a gentle slope. It takes a combination of forcefulness and calibration,” Menon said.”Inflation is expected to ease in 2023 as major central banks withdraw policy accommodation and supply challenges are addressed,” the MAS said in its annual report.Globally, policy makers are ramping up their battle against mounting inflation, driven by supply constraints caused by the Ukraine war and the pandemic.Referring to Singapore, Menon said: “The extent of the growth moderation will depend in part on how the scenarios for the global economy will pan out. As of now, we expect neither a recession nor a stagflation in Singapore next year,” he added.The Southeast Asian financial hub, seen as a bellwether for global growth, has eased most of its pandemic-related local and travel restrictions since early April.The central bank reiterated that it expects Singapore’s gross domestic product growth to come in at the lower half of the 3-5% range forecast for 2022, while the core inflation projection was revised last week to between 3–4% for the year, higher than an earlier forecast.Singapore’s latest monetary tightening was its fourth in the past nine months.”I’m glad we moved faster, which has put us in a better position. But doesn’t mean we’re out of the woods, we too are facing an inflation problem,” Menon said. More

NEW YORK (Reuters) – Americans’ financial health held up well in the second quarter even as inflation sent gas and grocery bills higher and ate into savings for the first time since the pandemic, U.S. bank executives said.Second quarter spending and deposit data from the country’s largest lenders including JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC). and Wells Fargo (NYSE:WFC) & Co has shed new light on the health of U.S. consumers – a key indicator that offers clues on the likelihood of an economic recession.U.S. consumer prices jumped 9.1% in June, the largest increase in more than four decades, with gas surging 11.2%. Runaway inflation has led the Federal Reserve to hike rates, increasing borrowing costs and sparking recession fears. Still, bank executives across the board said consumers – who were mostly able to boost savings during the coronavirus pandemic – were financially healthy, as evidenced by strong spending and few signs of credit deterioration.”Consumers are in good shape. They’re spending money. They have more income,” Jamie Dimon, chief executive of the country’s largest lender JPMorgan, told analysts last week. Combined debit and credit card spending rose 15% from the second quarter of 2021, JPMorgan reported on Thursday, while Bank of America, the second-largest U.S. bank, said credit and debit card spending rose 10% on last year. Overall, Bank of America customers spent $1.1 trillion from April through June, making it a record spending period for the bank, said Chief Executive Officer Brian Moynihan on Monday, adding consumers are “quite resilient.” Citigroup (NYSE:C) CEO Jane Fraser said little in the data suggested the country was on the verge of a recession.”It’s just an unusual situation to be entering into this choppy environment when you have a consumer with strong health,” said Fraser.While data this month showed the U.S. economy added more jobs than expected in June, it could still be on the verge of a recession after gross domestic product contracted in the first quarter.STRONG CREDIT QUALITYExecutives said growth in consumer spending will likely slow in the second half of the year as inflation, as high interest rates and economic fears weigh on consumer confidence. They also noted the impact of inflation could be seen in the data.”We see the impact of inflation and higher non-discretionary spend across income segments,” said JPMorgan’s Chief Financial Officer Jeremy Barnum. “The average consumer is spending 35% more year-on-year on gas and approximately 6% more on recurring bills and other non-discretionary categories.”Wells Fargo said spending on discretionary categories like apparel and home improvement was down in double-digit figures. Overall credit card spending, while up 28% from a year ago, started to slow in May and June, the bank’s CEO Charles Scharf said.For now though, credit quality is still strong. Consumers for the most part continue to have more cash in their accounts and are still paying down credit card balances every month at a greater rate than before the pandemic, executives said. Moynihan, for example, said he saw “no deterioration” in customers’ credit worthiness and indeed saw quite the opposite: its average customer FICO credit score for card loans was 771 in the second quarter, well above the threshold at which borrowers are considered a safe bet. However, with shifting spending habits, inflation and the end of COVID-19 pandemic federal assistance, some consumers are starting to see savings shrink, executives said. “For certain cohorts of customers, we have seen average balances steadily decline to pre-pandemic levels following the final federal stimulus payments early last year,” said Wells Fargo’s Chief Financial Officer Mike Santomassimo. By and large, spending is growing faster than incomes, and cash buffers, while still above pre-pandemic levels, are falling, Barnum said.When pressed by analysts on early warning signs of trouble, Barnum said loan delinquencies among low-income customers were also beginning to rise, while staying below pre-pandemic levels.”But I think there’s really still a big question about whether that’s simply normalization or whether it’s actually an early warning sign of deterioration,” said Barnum. More