Aurelia Butler

The brokerage cut its GDP estimate to 2.7% from 2.9% for 2022 and said its forecast implies that the region, while clearly slowing down, would narrowly avoid a technical recession. “Together with high inflation, this scenario qualifies as stagflation,” analyst Reinhard Cluse wrote in a client note. The region’s economy grew much faster in the first quarter of the year than in the previous three months, but the negative impact of the Ukraine war is expected to be felt in the second quarter.UBS expects Germany to come closest to a recession, with zero growth in the second half, closely followed by Italy. In contrast, growth in France and Spain should hold up slightly better, Cluse said.It also expects a limited rebound in 2023 as inflation decelerates and confidence recovers.The brokerage said persistently high inflation would be a drag on household consumption, while higher input costs, uncertainty about energy supplies, the tightening of financial conditions and weakening global demand would likely weigh on corporate activity. More

(Reuters) – If dramatic losses seen in the first half of 2022 are maintained over the coming months, U.S. and European government bond markets are set for their worst year in decades in another sign the long bond bull-run may be over.Central banks, after dismissing high inflation as transitory until late 2021, have switched to panic mode, cranking up the speed of policy tightening to stamp out galloping price growth. U.S. Treasuries, the global fixed income benchmark, have delivered total year-to-date losses of 11%, setting them on course for the worst year on record, according to an ICE (NYSE:ICE) BofA index tracking seven- to 10-year Treasuries since 1973. That also marks the worst first half performance since 1788, Deutsche Bank (ETR:DBKGn) estimates.German bonds are down 12.5% and overall euro zone government bonds 13%, seven- to 10-year ICE BofA indexes going back to 1986 show.”(The bond sell-off) has been completely driven by the shift in central banks’ policy and in their rhetoric,” said Camille de Courcel, BNP Paribas (OTC:BNPQY)’s head of strategy for G10 rates in Europe.Bonds of top-rated U.S. and European companies are also deep in the red, down 14% and 12.5% respectively, their biggest losses on record going back to 1997. Their “junk” peers – rated sub-investment grade – have endured their worst drop since 2008.U.S. Treasury returns https://fingfx.thomsonreuters.com/gfx/mkt/zdpxoegwlvx/OJmQN-u-s-treasuries-set-for-worst-year-on-record.pngThose moves have blindsided analysts and investors, forcing them to revise forecasts repeatedly. While it’s tricky to predict what happens next, most suggest the worst is over for U.S. Treasuries.BofA and JPMorgan (NYSE:JPM) expect 10-year Treasury yields to rise to 3.50% by year-end from around 3.05% currently, following the year-to-date 155 bps surge.Others, like Goldman Sachs (NYSE:GS) and BNP Paribas, see yields closer to current levels, at 3.30% and 3.20% respectively. Even if inflation continues to surprise, BNP’s Courcel reckons yields may not rise much further, “because at the same time, the market would price larger rate cuts down the line”.Money markets are already pricing in the Fed cutting rates next year..Asset manager PIMCO also points out yields have reset at levels attractive to long-term investors, and notes the risk that the U.S. Federal Reserve could ignite a recession.The German outlook is harder to read. The European Central Bank is yet to start raising rates and policy guidance has been far less clear. BofA expects 10-year Bund yields to end 2022 around current levels, at 1.45%, while JPMorgan, citing the eventual impact of ECB tightening and the fragility of the euro area, expects a fall around 50 bps to 1%.Goldman Sachs on the other hand expects a rise to 2%, noting that a planned anti-fragmentation tool would allow the ECB to hike rates higher than otherwise and ease the safety premium on Bunds.10-year bond yields https://fingfx.thomsonreuters.com/gfx/mkt/zgvomdldrvd/bond%20yields%20H1%20june%2029.pngFor some, even recession prospects won’t make bonds attractive.Alex Brazier, deputy head of the BlackRock (NYSE:BLK) Investment Institute, expects policymakers to ultimately cave in and salvage economic growth even before inflation, stemming from production constraints and supply squeezes, is tamed.Bond yields will rise in coming months as central banks tighten policy, says Brazier, a former member of the Bank of England’s financial policy committee. “But it is possible markets are yet to price the persistence of inflation if the Fed changes course,” he said, noting either situation meant a poor outlook for bonds. More

A deal to end Russia’s blockade of Ukrainian seaports and grain exports remains distant because Moscow is using talks to push its war aims and ambition to dominate the Black Sea, Kyiv’s top negotiator said.Turkey and the UN are trying to broker an end to Russia’s naval blockade in the Black Sea, which has crippled Ukrainian commodity exports and triggered fears of global food shortages. But Taras Kachka, Ukraine’s deputy minister for the economy and lead trade negotiator, said Russia’s efforts to conquer the country’s south were preventing a deal and rumours of a breakthrough were “more optimistic than reality”.“If there are talks, we will participate. But that doesn’t mean we will agree to any option that is on the table,” Kachka said. “Any attempts to base a food security solution on the goodwill or grace of Russia will not work or be trusted.”Kachka’s comments came days after G7 leaders implored Vladimir Putin to lift the Black Sea blockade ahead of Ukraine’s imminent summer harvest, with fears that the country’s grain storage capacity could be quickly exhausted unless space is cleared. Ukraine accounts for about 13 per cent of global grain exports.

Taras Kachka, Ukraine’s deputy minister for the economy: ‘If there are talks, we will participate. But that doesn’t mean we will agree to any option that is on the table’ © Fabrice Coffrini/Pool/AFP/Getty Images

Kachka said the blockade was part of Russia’s plan to dominate the Black Sea and exert power over global commodity markets, as it had done in Europe using its natural gas exports. “Grain as a commodity is better than gas because the demand is not flexible. For gas, you can just switch to coal. Everyone needs bread,” he added.Among Russia’s conditions to end the siege is that it be allowed to inspect vessels entering and exiting Ukrainian ports. Kachka likened the idea to piracy. “What does it mean, that Russia has the right to inspect? Is it a right to veto [ships]? Or is it just some kind of additional payments to corrupt Russian military officers . . . like to Somali pirates?” he said. Other “technical solutions”, including what he said was a Turkish proposal to co-ordinate shipments, did not deal with the underlying insecurity caused by the war, Kachka added.Russian missiles struck Odesa, Ukraine’s biggest port, on Monday, part of a wave of aerial attacks across the country. Ukraine has also attacked Russian-occupied Black Sea natural gas platforms and Snake Island, which lie close to shipping lanes.On Thursday, Russia said it was withdrawing its forces from Snake Island in a “gesture of goodwill” that could bring a deal to unblock the ports closer. Ukrainian officials claimed victory, saying Russian forces had been forced to surrender the island under heavy bombardment. Russia has said that if Ukraine removes mines placed in its waters following the invasion it will allow vessels out of the ports. But Kachka said Ukraine could not disable its coastal defences as long as Russia remained in a position to invade again in the south.“They are trying to use [the talks] as a way of legitimising their military presence there. This is impossible for us as well.”Kachka said Ukraine would accept a third country’s naval presence to escort vessels, including “Her Majesty’s fleet or the US or Turkey”. But western countries are opposed to direct confrontation with Russia, despite their financial and weapons support for Ukraine. Russian smugglers have already been exporting grain looted from Ukrainian territory in recent weeks.

Ukraine has stepped up some overland exports of goods and is sailing barges through a section of the Danube and on to Romania’s Black Sea port of Constanța. But shipment volumes are a fraction of prewar totals. “Russia is strangling Ukraine by blockading its ports. There is no substitute to the Black Sea ports in delivering 50mn tonnes of soft commodities to global markets,” said Andy Hunder, president of the American Chamber of Commerce in Ukraine. Even if a deal to allow escorted vessels through waters could be agreed, commercial shippers would be wary about sailing through waters controlled by Russia’s military, Hunder added. “Russian missiles and military ships are a risk too big to bear for commercial vessels and insurance companies.” More

Balls, speaking at a media webinar, put the probability at close to 50% or slightly higher. “A recession is not the only important thing. You’re clearly going to see a significant growth slowdown,” Balls said. “The inflation profile in the short term is very important. Central banks are focused on inflation credibility”.The probability of a recession is similar in Europe, possibly a bit higher, he added. Balls also said that he sees market pricing of U.S. Federal Reserve rate hikes as “reasonable”.”In the European case I think they will hike as they’ve laid out this year and get to positive rates, but it’s really not clear that they get as far as the market is pricing in.”He expects a European Central Bank terminal rate of around 0.75%-1%, “which will be a lot given the negative starting point”. More

Investing.com — The U.S. releases the latest updates for personal income and spending, as well as the Federal Reserve’s preferred measure of inflation. Stocks are expected to open in fragile mood. Europe’s natural gas prices surge as Uniper, a big German energy group, says it needs a bailout. China’s economy returns to growth in June, but there are more signs of weakness in Europe, where Sweden jacked up its key interest rate by half a point. Oil drifts as OPEC meets with allies, but the meeting is seen as a foregone conclusion. Here’s what you need to know in financial markets on Thursday, June 30.1. PCE prices, spending and income dataThe U.S. will release figures for the Federal Reserve’s favored gauge of inflation in May. Core personal consumer expenditures, which reflect more accurately than the Consumer Price Index the real-time changes in the cost of living, are expected to have risen by 0.4% in May, a modest acceleration from April, while the annual increase is expected to moderate to 4.8% from 4.9% due largely to base effects.Also of interest will be personal income and spending data for May, with spending growth expected to show a clear slowdown from April. Those numbers will be an important cross-check of the consumer confidence numbers that made the market fall out of bed on Friday.Rounding off the day’s data excitement will be weekly jobless claims numbers. These have been trending gently, but nonetheless clearly, upwards for the last few weeks.  2. China returns to growth; Europe weakens and Sweden hikes ratesChina’s economy returned to growth in June, if its official purchasing managers index is a reliable guide. The PMI, which covers mainly the large state-owned enterprises, rose to 54.1 from 48.4 in May, with both manufacturing and services rising back above the 50 line that typically separates growth from contraction.The economic news was less upbeat from Europe, where German unemployment leaped by 133,000 as Ukrainian refugees looking for work were added to the jobless rolls for the first time. German retail sales fell 3.6% on the year in May, while French inflation rose to 5.8% on the year.Outside the Eurozone, U.K. house prices grew at their slowest rate in nine months, according to the lender Nationwide, while Sweden’s central bank raised its key rate by 50 basis points and said it would run down its asset purchases faster than planned to stop inflation becoming entrenched.  3. Stocks set to open lower on caution ahead of data dump; Spirit postpones takeover voteU.S. stocks are set to open lower again, amid the usual angst around higher inflation and higher interest rates, which was hardly eased by comments from Fed Chair Jerome Powell and other central bank chiefs on Wednesday. That’s left few in a mood to take risks ahead of the morning’s data dump.By 06:15 AM ET (1015 GMT), Dow Jones futures were down 382 points, or 1.2%, while S&P 500 futures were down 1.5%, and Nasdaq 100 futures were down 1.8%. The S&P is on course to close out its worst first half to a year since the 1970s.Stocks likely to be in focus later include chipmaker Micron (NASDAQ:MU), brewer Constellation Brands (NYSE:STZ), and Walgreens Boots Alliance (NASDAQ:WBA), all of which report earnings. WBA is likely to draw particular interest after its efforts to sell U.K. pharmacy chain Boots ran into trouble earlier this week.Elsewhere, Spirit Airlines (NYSE:SAVE) has postponed its planned shareholder vote on rival offers from JetBlue (NASDAQ:JBLU) and Frontier Group (NASDAQ:ULCC) for another week. Xerox (NASDAQ:XRX) will also be in focus after announcing the death of its CEO John Visentin at 59.4. Crypto slides as SEC rejects Grayscale’s application for ETF statusBitcoin slid further below $20,000 and Ethereum flirted with the $1,000 level after the Securities and Exchanges Commission again rejected Grayscale’s efforts to register its Bitcoin Trust as an Exchange-Traded Fund. Grayscale has sued the SEC in response.ETF status would have set a precedent that could have greatly expanded the potential investor base for both the trust and crypto investment funds in general.A decent amount of speculation on SEC approval had been baked into Bitcoin’s price for months, despite increasing signs of a tougher line toward crypto from the SEC under chairman Gary Gensler.5 Oil drifts but European gas prices spike again as Uniper seeks bailoutCrude oil prices drifted ahead of a meeting of OPEC and its allies that is widely expected to be a formality, paving the way for an increase in output of 648,000 barrels a day from August.Whether the so-called OPEC+ bloc can actually deliver that is, of course, another question, given the lack of spare capacity in the market and the increasing problems experienced by various members of the bloc due to past mismanagement of their oil industries.TTF prices, meanwhile, surged another 5% to a new three-month high after German energy giant Uniper (F:UN01) said it is in talks for a government bailout, unable to cover the cost of replacing Russian gas shipments that have been cut by 60%. More

The UK’s trade performance fell to its worst level since records began in the first quarter of 2022, heaping more pressure on sterling in international currency markets. Although the Office for National Statistics warned that the figures it published were “subject to higher levels of uncertainty than normal”, the new system it used to collect the trade data based on customs records was chosen because it was thought to be more accurate. The weak performance of UK exports and a surge in imports will add to pressure on the government over the damaging economic effects of Brexit as the official figures corroborate academic studies showing a rupture in UK exports since the new border controls were imposed in 2021. The data showed that the UK’s current account deficit was 8.3 per cent of gross domestic product in the first quarter of 2022, a deterioration from an average of 2.6 per cent across all the quarters of 2021. That was the worst figure on record since quarterly balance of payments data was first published in 1955.Part of the decline arose from movements of gold and other precious metals, which have little to do with normal trading relationships. Excluding these volatile elements, the current account deficit rose from an average of 2.4 per cent of GDP in 2021 to 7.1 per cent in the first quarter of this year. Most of the current account deficit stems from a record imbalance of imports and exports, but there were also deficits in investment income and transfers of money between countries. The ONS said it was investigating the big rise in imports it had recorded along with foreign direct investment and advised caution on interpreting the very poor data. Paul Dales, chief economist at Capital Economics, said the most noteworthy elements in the figures was a 4.4 per cent fall in real exports and a huge 10.4 per cent leap in real imports. “At the start of this year, the ONS started to measure imports between the UK and the EU in a slightly different way” which resulted in a “large step change upwards” said Dales, adding the figures were “really hard to interpret”. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, identified “a surge in energy prices” as the primary cause of the UK’s difficulties.He echoed the former Bank of England governor, Mark Carney, who warned repeatedly after the Brexit referendum that the value of the pound depended on the “kindness of strangers”. Tombs said: “The adverse consequences of the UK dependence on external finance that stems from the large current account deficit have been clear over the last month, with sterling depreciating sharply as global investors have collectively shunned risky assets”. The pound, which was stable in currency markets on Thursday morning, has lost more than 10 per cent of its value against the US dollar over the past year, while remaining broadly stable against the euro. More

Investing.com — Germany’s biggest engineering union will seek a pay raise of between 7% and 8% in benchmark pay negotiations with employers, to stop their incomes from being eroded by the highest inflation in over 30 years, German media reported on Thursday.Public broadcasters in two of Germany’s largest states, Bavaria and Lower Saxony, cited local union officials as saying that they will strive for a settlement in the 7%-8% range, despite the pressure on corporate profit margins from surging energy costs and other disruptions linked to the pandemic and Russia’s invasion of Ukraine. Regional wage commissions at IG Metall across various states are making their proposals to the union’s national headquarters on Thursday. The national HQ in Frankfurt will then adopt a formal decision on July 11th. Formal negotiations with employers will then take place after the summer.Settlements tend to be typically considerably lower than the union’s initial claims. As such, it’s unlikely that the final figure will match the 7.1% average inflation figure that the Deutsche Bundesbank is forecasting for the German economy this year.  Negotiators for the glass-workers’ chapter of IG Metall recently agreed to a 4.7% increase for the coming year.IG Metall’s wage settlements are important because they serve as a benchmark for others in the private sector in Germany. They thus have a significant influence on overall wage inflation in Europe’s largest economy, even though that significance has weakened during two decades of extraordinary restraint due to deindustrialization and the offshoring of many manufacturing jobs to central Europe. The pace of change in German wages is in turn a key consideration for the European Central Bank’s assessment of overall inflation dynamics in the Eurozone.IG Metall is preparing to present its demands at a time when the German economy is coming under increasing stress with regard to energy supplies. Russia has cut its shipments of natural gas to the country by 60%, causing the government to declare a state of ‘alarm’ and initiate emergency planning for the coming winter. Uniper (F:UN01), one of Germany’s biggest energy suppliers, said late on Wednesday that it is in talks with the federal government for a bailout, as it is losing money due to its inability to pass on the cost of gas that it is buying at record high prices to cover its shortfall from Gazprom (MCX:GAZP). More

COLOMBO (Reuters) -The International Monetary Fund reported constructive talks with Sri Lankan authorities on Thursday, raising hopes it could soon grant preliminary approval for a credit facility to alleviate a crisis in which the country is struggling to pay for imports.”The discussions will continue virtually with a view to reaching a staff-level agreement on the EFF arrangement in the near term,” IMF said, referring to the credit arrangement, called an extended fund facility.A staff-level agreement must precede final approval by the IMF’s executive board, but so too must cooperation from Sri Lanka’s creditors, which is not expected to come quickly.”Because public debt is assessed as unsustainable, Executive Board approval would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability will be restored,” the IMF said.Sovereign dollar bonds issued by Sri Lanka slipped as much as 1.8 cents after the International Monetary Fund statement. The 2025 bond took the biggest tumble and hit a fresh record low at just over 34 cents in the dollar, Tradeweb data showed.Analysts say debt restructuring would be a protracted process, even after IMF staff-level agreement.The financial crisis is the worst in decades for the island of 22 million people, which has defaulted on some foreign debt.With little money available for imports, the country has dangerously low fuel reserves. The government on Tuesday restricted allocations to essential services, such as trains, buses and the health sector, for two weeks.The IMF said the high fiscal deficit had to be reduced while ensuring adequate protection for the poor and vulnerable. Since revenue was weak, far-reaching tax reforms were urgently needed to achieve these objectives.”The statement indicates staff-level agreement will come in very soon and could activate bilateral and multilateral lenders to look at Sri Lanka positively,” said Udeeshan Jonas, chief strategist at equity research firm CAL.”IMF support will help Sri Lanka get commitments from creditors. The government has made a lot of progress on things which are generally supposed to be in favor of an IMF staff level agreement,” he added.The IMF said other challenges that needed addressing included containing rising inflation, attending to severe balance of payments pressures, reducing the country’s vulnerability to corruption, and undertaking growth-enhancing reforms. More