Aurelia Butler

European shares and US stock futures fell on Tuesday, while the euro hit its weakest level against the dollar in two decades, as fears intensified about the health of the global economy.The regional Stoxx Europe 600 equity index lost 0.5 per cent, after opening higher, while the FTSE 100 dropped 0.9 per cent. In Asia, Hong Kong’s Hang Seng closed up 0.1 per cent, trimming earlier gains, while mainland China’s CSI 300 slipped 0.1 per cent. In a sign of worsening sentiment about the growth outlook, the euro dropped almost 1.4 per cent against the dollar to $1.0279 — its lowest point since 2002. Vasileios Gkionakis, head of European FX strategy at Citi, said on Tuesday that euro-dollar parity “looks almost inevitable now”, noting that the deterioration in the euro was driven by the prospect of further falls for European stocks and a sharp rise in natural gas prices. Futures contracts tied to TTF, the European wholesale gas price, rose 8 per cent to a four-month high as it emerged that Norway’s Equinor was temporarily shutting three oil and gasfields after workers went on strike.Guilhem Savry, head of macro and dynamic allocation at Unigestion, suggested stock markets still had further to fall. “The recessionary theme has made a comeback,” he said. “Although markets are now starting to price in a cooling of inflation and central bank hawkishness, we have yet to reach the lows in equity markets where we would be comfortable to re-engage risk.”Futures contracts tracking Wall Street’s S&P 500 and the Nasdaq 100 lost 0.5 and 0.7 per cent, with US markets set to reopen on Tuesday after a holiday. In government debt markets, the yield on the 10-year German Bund — seen as a proxy for borrowing costs across the eurozone — dropped 0.05 percentage points to 1.29 per cent. The two-year yield slipped 0.09 percentage points to 0.54 per cent. Bond yields fall as their prices rise.Yields on Bunds and Treasury notes had marched higher earlier this year, as the European Central Bank and the US Federal Reserve signalled aggressive interest rate rises and the planned withdrawal of large bond-buying programmes in a bid to tackle scorching inflation. The Fed lifted its benchmark rate by 0.75 percentage points in June, its largest such increase since 1994.But investors have in recent weeks scaled back their expectations of how high the world’s most influential central bank will raise borrowing costs in the coming months, amid mounting evidence of an economic slowdown.Details of the Fed’s most recent monetary policy meeting, due to be published on Wednesday, may give further clues about the extent to which the central bank is willing to tighten monetary policy. A closely watched US jobs report on Friday will also signal the level of heat in the country’s labour market, a criterion that may also influence Fed decision-making. The S&P had closed higher on Friday, its last trading day before the long weekend, and bond markets had rallied after a gloomy report on America’s factory sector intensified worries about the economic outlook. More

The Bank of England has issued a stark warning on the financial outlook for the UK and global markets, but told financial institutions that it would be “counterproductive” to shore up their balance sheets by withholding new loans.The warning on Tuesday, contained in the BoE’s quarterly financial stability update, comes as the UK faces its highest inflation rates in 40 years, adding to concerns that households and businesses will struggle to pay their debts.“Since the last financial stability report, the global economic outlook has deteriorated markedly,” said Andrew Bailey, the BoE’s governor. “Developments in the Russian invasion of Ukraine have been a key factor affecting the global outlook.”The BoE also noted the recent turmoil in global markets and cautioned that “risky asset prices remain vulnerable to further sharp adjustments” against a backdrop of additional supply shocks, faster than expected increases in global interest rates and slower than expected economic growth.Capital ratios of UK banks — effectively a measure of the war chests from which they can grant loans and absorb losses — have already begun falling “in line with expectations” and there were “tentative signs” that banks were “reducing their risk-taking at the margins”, the central bank said. It also noted that financial institutions had “considerable capacity” to continue lending, even in a deteriorating environment.“Restricting lending solely to defend capital ratios or capital buffers would be counterproductive and could prevent creditworthy businesses and households from accessing funding,” said the BoE. “Such excessive tightening would harm the broader economy and ultimately the banks themselves.” The central bank also announced that the buffer banks are required to build up and then release during a crisis must be increased to 2 per cent by July 2023. It added that it would begin work on the next set of stress tests, which assess individual banks’ ability to withstand future crises, in September. The exercise will include “deep simultaneous recession in the UK and global economies, real income shocks, large falls in asset prices and higher global interest rates”. There will also be a separate stress test of misconduct costs.Bailey said the BoE would support a review of “ultra long” mortgages of up to 50 years, which could stretch across generations. UK prime minister Boris Johnson last week told reporters that the government was looking into the idea.Longer-term mortgages would protect customers from fluctuations in interest rates far better than the relatively short-term fixed mortgages that are prevalent in the UK. Forty per cent of which are set to expire in 2022 or 2023.The BoE report also noted that while the extreme volatility in cryptocurrencies does not yet pose a risk to overall financial stability, systemic risks would emerge if regulation was not put in place.The market capitalisation of digital assets has collapsed from a peak of $3tn in November to less than $1tn, as the failures of the interlinked cryptocurrencies Terra and Luna caused ripples through the wider sector.“I think for me [the collapse] underlines the fact that we now need to bring in a regulatory system that manages the risks in the crypto world,” said Sir Jon Cunliffe, the BoE’s deputy governor for financial stability. “I wouldn’t take the lesson that we don’t have to do anything because [the problem] has gone away.” More

LONDON (Reuters) -The Russian government will be able to compel businesses to supply the military with goods and make their employees work overtime under two laws to support Moscow’s war in Ukraine that were approved in an initial vote in parliament on Tuesday.The measures will effectively place Russia on a war economy footing, nearly 19 weeks into the invasion which it describes as a “special military operation”.”The load on the defence industry has increased significantly. In order to guarantee the supply of weapons and ammunition, it is necessary to optimize the work of the military-industrial complex and enterprises that are part of cooperation chains,” Deputy Prime Minister Yuri Borisov said.Russia invaded Ukraine on Feb. 24 but was repelled in an initial attempt to take the capital Kyiv and has sustained heavy losses in men and equipment while making only gradual progress in the east of the country, where it completed the capture of the Luhansk region on Sunday.The West has responded with successive waves of sanctions, stepped up weapons supplies to Ukraine and bolstered NATO forces in eastern Europe – all moves that Moscow sees as part of a “proxy war” against Russia.”Right now, when the countries of the collective West are building up their military presence on the border with Russia, intensifying sanctions pressure, increasing arms supplies to Ukraine, the importance of passing the bills cannot be overestimated,” Borisov told lawmakers.One of the two bills, both passed unanimously in a first reading by the State Duma, the lower house of parliament, said the state could impose “special economic measures” during military operations, requiring firms to supply goods and services to the military.The second bill would amend the labour code to grant the government the right to regulate working hours and determine off-days at given companies. Employees of businesses providing goods to the military could be compelled to work at night, on weekends and holidays, and without annual leave.Borisov said the overtime requirement would not be used on a massive scale, and employees would receive extra pay.Both bills still need to undergo second and third readings in the Duma, where speaker Vyacheslav Volodin said discussion would continue behind closed doors on Wednesday. They must then be reviewed by the upper house of parliament and signed by President Vladimir Putin to become law. More

LONDON (Reuters) -The Bank of England warned on Tuesday that the economic prospects for Britain and the world had darkened since the start of the year and told banks to ramp up capital buffers to ensure they could weather the storm.International institutions, such as the International Monetary Fund and OECD say Britain is more susceptible to recession and persistently high inflation than other Western economies, which are all grappling with global energy and commodity market shocks.”The global economic outlook has deteriorated markedly. Global financial conditions as a whole have tightened significantly,” Bank of England Governor Andrew Bailey told a news conference after the BoE published its half-yearly Financial Stability Report (FSR). Developments around the war in Ukraine would also be key, the BoE added.British banks were well-placed to weather even a severe economic downturn, the central bank said, although it said their capital ratios – while still strong – were expected to decline slightly in the coming quarters.Members of the Financial Policy Committee confirmed that the BoE will double the counter-cyclical capital buffer rate to 2% of risk weighted assets in July next year, and said it could vary the rate in either direction depending on how the global economy pans out.The rate represents an extra buffer for banks such as HSBC, Barclays (LON:BARC), Lloyds Banking Group (LON:LLOY) and NatWest that varies depending on the economic outlook.Increasing the buffer to 2% means banks will need an additional 11 billion pounds ($13.2 billion) of capital, the BoE said.Despite a worsening cost-of-living crunch, with inflation heading towards double digits, the BoE said banks were resilient to debt vulnerabilities among households and businesses.The central bank also expressed unease over the health of core financial markets – such as U.S. and British government bonds – which were the subject of the March 2020 “dash for cash” when the COVID-19 pandemic prompted panic selling.”Amid high volatility, liquidity conditions deteriorated even in usually highly liquid markets such as U.S. Treasuries, gilts and interest rate futures,” the BoE said.It said core British markets – while still functional – had become more expensive to trade, with bid-ask spreads on short-dated gilts more than doubling compared with their 2021 average.”(Conditions) could continue to deteriorate, especially if market volatility increases further,” the BoE said.The central bank also said it would conduct an in-depth analysis of the functioning of the commodities market, with metals trade severely disrupted in March by Russia’s invasion of Ukraine.The central bank said it would begin its 2022 stress test of banks – delayed due to the war – in September, with the results likely in mid-2023.($1 = 0.8307 pounds) More