Aurelia Butler

Good morning. Thanks for all the replies to yesterday’s letter. We discuss them below, along with some thoughts on the current bout of market illiquidity. Are we missing something important? Email us: [email protected] and [email protected] to the market matrixYesterday we presented this matrix of possible economic scenarios for the next 12 months, and asked readers to weigh in with probabilities and preferred asset classes for each cell: 

Anyone who offered hard numerical probabilities is included in the chart below, alongside the Unhedged house opinion:Mostly everyone seemed in agreement that soft landing (C) and growthflation (D) are lower probability. Readers see a two-in-three chance of recession in the next 12 months. Stagflation (B) was the most divisive cell. Some were completely certain that we are, as reader Todd Foley put it, “on the precipice of a stagflation tsunami”. Others thought it unlikely. Unhedged tends toward a successful inflation-fighting campaign that sinks us into recession (A). We figure that the Federal Reserve is dug in on bringing down inflation — but both growth and inflation are showing signs of peaking already. The Fed may push on an opening door, hard. Housing inflation will ease as wages continue moderating, and bloated inventories will prove disinflationary. Unfortunately that will spell a recession.Our friend/nemesis John Authers at Bloomberg offered a probability distribution very much in line with Unhedged readership (in alphabetical order, 40/40/15/5). He thinks inflation is a bigger threat than we do: “I see more of an inflation risk than you do, partly for reasons beyond the Fed’s control.” Oil and food commodity inflation may indeed prove decisive.What about asset class picks? Here’s ours:A (low inflation and recession): keep it simple and own longish-duration Treasuries.B (stagflation): high-quality, dividend-paying staples stocks for relative price stability and a little return. All assets may perform badly under stagflation, but we’d rather own Pepsi, Johnson & Johnson, Kimberly-Clark, Bristol-Myers et al than sit and watch our cash lose its earnings power. We wish these stocks were cheaper; we can only stand to own so many Treasury inflation-protected securities at zero-ish yields.C (soft landing): equities and corporate credit.D (growthflation): commodities.Several of our picks overlapped with those of Matthew Klein at The Overshoot. He picked Tips under stagflation; John says buy precious metals.Readers were even more imaginative. In scenario A, John Clardy notes an out-of-fashion pick that could come back into vogue: emerging market equities. He expects the dollar to weaken, which could help growth in EMs as the US sags. Dominic White at Absolute Strategy Research disagrees. He picks EMs in scenario C instead. Or if the future seems too unsure, Hans Ole Lørup suggests looking for promising growth stocks positioned for decarbonisation.Several readers proposed buying value stocks as the best all-weather pick. We’re not so sure. Value stocks tend to be cyclical, and get whipped heading into a recession.Keep sending your probabilities and picks our way. If there’s interest, we’ll keep updating the reader average. There is wisdom in the crowd. (Wu & Armstrong)A few words in praise of illiquidity The FT’s Eric Platt, Joe Rennison and Kate Duguid have written a nice piece about falling liquidity in US markets:Liquidity across US markets is now at its worst level since the early days of the pandemic in 2020 . . . Relatively small deals worth just $50mn could knock the price or prompt a rally in exchange traded funds and index futures contracts that typically trade hands without causing major ripples.Slowing growth, rising rates, and high inflation don’t support trading volumes. And then there is the old chestnut about post-crisis regulation:The trading landscape changed dramatically after policymakers in Washington and Brussels sought to safeguard Main Street from Wall Street in the wake of the 2008 financial crisis. Through a series of regulations introduced over the past 12 years, banks are now required to hold bigger capital cushions to protect their balance sheets against major swings. It has meant banks now hold far fewer assets, like stocks and bonds, making them less nimble at responding to investors’ requests to buy or sellThe result has been lot of days where prices swing more than 2 per cent:Stable prices are nice and we all like being able to trade things when we want to trade them. All else equal, liquidity is good. But all else is not equal, so a few words should be said in praise of illiquidity.But note, first, that liquidity in the Treasury market is a special case. When the risk-free asset is hard to transact in, the zillions of credit instruments it collateralises and all the balance sheets it anchors become suspect, and bad things happen. Second, market liquidity (broadly, the ability to trade significant volumes of whatever security without big price disruption) and system liquidity (roughly, how much cash-like stuff there is washing around the financial system) are different (but related) concepts. We blather on quite a bit here about the relationship between system liquidity and asset prices, driven by investors’ preferred allocation to cash and risk assets. Market liquidity and prices are of course related, too. Illiquidity can radically change prices in the short run, but this is different from the portfolio allocation effect.The reason that silky-smooth market liquidity and low volatility are not an unalloyed good is that they are easily mistaken for, but are not indicative of, the absence of risk. In the hyperliquid low-vol world it is tempting to leverage everything to the hilt and otherwise push the risk envelope, leading to a proper mess when something really goes wrong. The metaphor is forest fires: if you don’t get lots of little ones to clear the underbrush, you get one big one, which kills the trees, too. There are advantages to a world where institutions must be able to hold the things they buy. The Platt/Rennison/Duguid piece mentions one:The Vix index, a gauge of volatility in the US stock market, had jumped more than 5 points on a single trading day nine times in the 15 years before the financial crisis. In the 15 years after the crisis, it has happened 68 times. And yet during that period, trading losses incurred by major US banks have been manageable and not threatened the overall financial system. It is a fact not lost on traders and investors, particularly after the fallout from the collapse of family office Archegos last year was broadly contained.Risk markets exist for two reasons. They let companies raise capital efficiently, and let individuals earn fair risk-adjusted returns on their savings over the long run. Illiquidity is a problem only if it interferes with those two activities. The market does not owe speculators a nice, predictable living. One good readMaking guns may or may not be an evil business. It is undoubtedly a bad one: commoditised, low growth, and risky.  More

Bridgewater is betting on a sell-off in corporate bonds this year as the world’s largest hedge fund takes a gloomy view on the trajectory of the global economy.The wager against US and European corporate debt underscored Bridgewater’s view that weakness across financial markets will not be shortlived. “We’re approaching a slowdown” — Greg Jensen, one of Bridgewater’s chief investment officers, told the Financial TimesJensen warned that inflation would be far stickier than economists and the market have predicted, and that could put pressure on the Federal Reserve to raise interest rates higher than expected by Wall Street.Bridgewater had already been positioning for a sustained sell-off in the $23tn US government bond market and has wagered similarly on equity prices falling further even after collectively shedding $9tn in value this year.High-grade US corporate bonds are down about 13 per cent this year on a total return basis, while those in Europe have fallen 15 per cent, according to ICE Data Services indices.Thank you for reading First FT Americas — do share your feedback with us at [email protected]. Five more stories in the news1. Yellen urges Congress to do more on inflation US Treasury secretary Janet Yellen has pressed Congress to help ease price surges. The call came as pressure mounts on Joe Biden’s administration to contain the highest inflation in four decades. “Congress can do a lot to mitigate some of the most important and burdensome costs that households face,” Yellen said, although she acknowledged that inflation was running at an “unacceptable” level.2. Zelenskyy: Stalemate with Russia ‘not an option’ Ukraine’s president Volodymyr Zelenskyy told FT editor Roula Khalaf that pushing Russian forces back to positions occupied before the invasion would amount to a “serious temporary victory”. Speaking at the FT Global Boardroom conference, he added that full territorial sovereignty remained his ultimate goal. “We are inferior in terms of equipment and therefore we are not capable of advancing,” he said, appealing for western military support.More on the war: Angela Merkel denied that she “appeased” Vladimir Putin as German chancellor in her first interview since stepping down last year.

Video: Volodymyr Zelenskyy: ‘No one is humiliating Ukraine. They are killing us’

3. Billionaire to face congresswoman in race for mayor The billionaire property developer Rick Caruso — who only recently switched to the Democratic party — will face California congresswoman Karen Bass in a November run-off election to be mayor of Los Angeles. The contest is likely to be dominated by debate over how to fight rising crime and homelessness, and both contenders can boast a host of celebrity backers.4. OECD: UK economic growth to grind to a halt next year Only Russia, hobbled by western sanctions, will perform worse among the G20 leading economies in 2023, the OECD forecast today. The Paris-based organisation forecast that the UK economy would record growth of 3.6 per cent this year, but that growth would fall to zero next, as households were increasingly squeezed. The economy was described as “stagnating in 2023 due to depressed demand”.5. Bolsonaro tries to burnish diplomatic credentials with Biden meeting Joe Biden and Jair Bolsonaro, the leaders of the western hemisphere’s two most populous nations, will try to set aside their differences in a first bilateral meeting. Their meeting, during this week’s Summit of the Americas in Los Angeles — which several Latin American leaders are boycotting — will be a chance for each to boost their standing, analysts said. Bolsonaro, who is fighting for re-election, confirmed his summit attendance only after the White House agreed he could meet Biden — Felipe Loureiro, a professor of international relations at the University of São Paulo, said that what the president wanted was “the picture opportunity.” Brazilian army launches search for missing journalist and researcher The Brazilian army is searching for a British journalist, Dom Phillips, a contributor to the Guardian and FT, and Bruno Pereira, an expert on indigenous peoples, who disappeared on Sunday deep inside the Amazon rainforest. The men were last seen leaving a village by boat en route to Atalaia do Norte, a regional town. They never arrived.The day aheadFootball corruption trial The fraud trial of former Fifa president Sepp Blatter and ex-Uefa chief Michel Platini over a 2011 payment of SFr2mn ($2.19mn) begins in the Swiss Federal Criminal Court.Quarterly earnings Campbell Soup Company and Brown-Forman will report quarterly earnings before the bell.Spotify investor day The audio streaming company holds its investor day today. Spotify, which has invested heavily in its podcast business this year, has seen its shares drop 55 per cent in the past 12 months and below its initial list price.US primaries California, New Jersey, Iowa, Mississippi, Montana, South Dakota and New Mexico are holding primaries today.Wholesale inventories Economists expect wholesale inventories to rise 2.1 per cent month on month in May, matching the rate of increase in April.Today is day two of the FT Global Boardroom, with speakers including Gina Raimondo, the US Secretary of Commerce, and the Bank of Japan governor Haruhiko Kuroda. Find out more.What else we’re reading and listening toHow space debris could threaten modern life After 65 years of space flight, the area around Earth is littered with 9,000 metric tonnes of debris, according to Nasa, all zooming uncontrollably around at 25,000km an hour. Check out our impressive interactive on the increasing threat posed by space junk.The FT’s Investing in Space conference begins today, online and in person at the Pan Pacific hotel in London. It includes an interview with astronaut Samantha Cristoforetti from the International Space Station. You can register here.Why the US must start caring about Latin America Irene Mia argues that although some steps have been taken by the Biden administration to re-engage with Latin America after years of neglect, the reality is that the region’s importance in US foreign policy remains “painfully low”. Mia explains why this may prove a strategic miscalculation.Who rules porn? Stoya is a porn star who saw first-hand how free pornography online transformed the adult industry. She sends the hosts of our new Hot Money podcast, Alex Barker and Patricia Nilsson, on a quest: find out who’s in charge and get to the bottom of how the business works.

TikTok Shop’s troubled UK expansion A culture clash between the social media group’s Chinese owners and some of its London employees has triggered a staff exodus and complaints about a “toxic” corporate culture that runs counter to typical working practices in Britain.Johnson’s hollow victory is a bad outcome for Britain Despite his nominal win in a confidence vote, the magnitude of the protest against Boris Johnson is a bad result for him and, above all, the country as it faces momentous challenges at home and abroad, writes our editorial board.OpinionDon’t miss Janan Ganesh on the bright side of Anglo-American populism and how the invasion of Ukraine succeeded in forcing both the British conservative party and American Republicans into a choice between pushing back or seeming weak. “It triggered their national egoism, their dread of losing face in front of foreigners, even their machismo,” Ganesh writes, in this must-read piece. More

Within hours of the Bank of England raising its main interest rate to 1 per cent in May and warning there would be more to come, mortgage lenders got busy pulling some of the crazy-low rates they had been offering. Twitter was alive with people boasting they had secured a five-year deal at 1.2 per cent just days earlier. Almost overnight rates doubled, with financial markets judging the central bank would raise its main interest rate to 2.5 per cent within a year.Even 2.5 per cent will still be a very low rate. Since the Bank of England was founded in 1694 its Bank Rate (under various names) has been 2.5 per cent or below for only about a sixth of the time it has existed. Most of that was due to the emergency rate of 2 per cent that began with the second world war and ended more than a decade later. Almost all the rest occurred in the past 13 post-banking crisis years, when it was under 1 per cent. My own calculations show the BoE’s official rate has a daily average of 4.66 per cent since the bank was founded. Omitting the past few peculiar years pushes that up slightly to 4.83 per cent.My current bedtime reading is A History of Interest Rates by Sidney Homer and Richard Sylla. It explains that in 1694 the new Bank of England set its first rate at 6 per cent, chosen to match the maximum allowed for private loans under the Usury Act 1660. That rate was cut to 5 per cent in 1714 and Bank Rate followed it there for 100 years. Throughout the reign of Queen Victoria (1837-1901), money was lent at 5 per cent and borrowed by the government at 3 per cent — despite the uncertainty created by frequent wars and the occasional banking crash. That safe, guaranteed return on “consols” — The Funds as they were known — supported the income of aristocrats and the growing wealthy middle classes. Over most of the 19th century inflation was fairly flat and wages doubled. The poor were allowed to get richer — even if the rate of growth was relatively slow. So the market’s predicted 2.5 per cent Bank Rate for 2023 would barely be half the typical rate over most of the BoE’s 328 years. If the economy returns to what used to pass for normal, we should expect a Bank Rate of 4 per cent or 5 per cent. That can only make borrowing more expensive, which would be normal too.Homer and Sylla also go much further back, revealing that the maximum rates allowed in Mesopotamia from 3,000 to 400 BCE were between 20 and 33⅓ per cent. These are not bank rates, of course, but the actual interest charged to individuals when they borrowed money to buy silver or grain. Our banks today lend like Mesopotamians — the average credit card rate for April was 26.6 per cent (annual percentage rate), according to finance website Moneyfacts. That is five times a rate that would have been banned until the Usury Acts were repealed in 1854. Even the Romans banned lending at rates above 12 per cent. In Renaissance Europe, where modern banking was invented, money was lent out at between 10 and 15 per cent.Never for the past 5,000 years were rates as low as 1 per cent — until February 2009. In 2012, when the Bank Rate was 0.5 per cent, the BoE ensured low rates were passed on to borrowers by lending money to retail banks at 0.75 per cent through the Funding for Lending Scheme. Four years later the Term Funding Scheme lent £192bn to banks and others at as little as 0.25 per cent, the same as Bank Rate at that time. The banks dutifully cut rates on mortgages, leading to the borrowing enjoyed recently by homebuyers at rates beginning with a 1. They also slashed rates on savings, which are only just beginning to show the first hints of recovery.All this is being brought to an end by inflation which is now 11.1 per cent, 9 per cent or 7.8 per cent depending on which you believe of the three main measures (yes, there really are more than that) published by the Office for National Statistics.Unlike Victoria’s reign, where prices at the end of her rule were lower than at the start, Elizabeth II’s 70 years on the throne have seen prices rise every single year bar one by an average 5.14 per cent. The Monetary Policy Committee (MPC) was created in 1997 to hold inflation at 2.5 per cent as measured by the Retail Prices index excluding mortgage interest (RPIX) — later changed to 2 per cent measured by the CPI.Since its first meeting in June 1997, the nine MPC members have solemnly sat down every six weeks wondering whether to raise or cut rates and then — whichever way that vote went — deciding almost every time that a quarter of one percentage point would be adequate. Over those 25 years CPI inflation has averaged 2.0 per cent. Job done.That was partly due to a new lever given to the MPC called quantitative easing (QE). This mechanism magicked money out of thin electrons and in a little over 10 years created £895bn that was used almost exclusively to buy back government debt. In that decade the MPC invented the one thing most politicians tell us does not exist, becoming the Money Tree Policy Committee.Whatever QE did to economic activity — it was supposed to increase it but in March this year growth was minus 0.1 per cent after being flat in February — printing that much virtual money inevitably boosted inflation. Now, as inflation takes off, the only way the BoE can try to control it is by raising the Bank Rate. And the cost of money lent to us can only go one way — up, up and, probably, up.Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney More

At the end of this month, household negotiations over buying a PlayStation 5 will enter their 600th day of deadlock. Arrival at this milestone may well bring all parties back to the table, but a breakthrough still feels a long way off.Part of the delay is that global economic forces are playing havoc with stock, of course. But this is by no means our first version of this argument. As each enchanting generation of console (particularly those of Sony and Nintendo) has come along, the question of the new machine’s cost-to-justifiability ratio blazes around several talking points. Is it really that much better than the one you’ve already got? (Absolutely, yes, the existing model is now decade-old tech and just look at game X.) OK, but is it worth $500 when the games also cost $60? (Well, yes. See previous answer.) Really? And yet you whinge about the cost of the kids’ trainers. (Yes, but that’s totally different.) And so on. The support, this time, of a naggy 12-year-old in my lobbying effort has been useful, though not decisive.

But the core difference between this and previous iterations of the argument has been the PS5 itself. In Japan, Sony’s home turf, its games machine has been very difficult to buy from a mainstream retailer. Normally, there is an initial post-launch stampede and ensuing shortages that all form part of the hype (and fun). Within a year, though, the casual buyer can generally find one without too bruising a quest. Not so with this iteration of the PlayStation. Launched in November 2020, despite the well-known headwinds of a global semiconductor shortage, it has been buffeted by supply chain difficulties. Sony, which has a real battle on its hands against Microsoft’s Xbox, has been funnelling its machines to particular markets, principally the US, where it believes victory will be decided. Japan supplies have thus been unusually thin and, since the start of the year, there have only been three weeks where Sony sold more than 30,000 units here. In one extraordinary week in May, Sony sold only 2,693 PS5s in Japan — an indication, say analysts, that the supply crisis could actually be getting worse. Those Japanese gamers determined to secure a machine are left relying on store lotteries, luck or a secondary market where “as new” used PS5s trade at 70 per cent above the official retail price.

This absurdity has killed the debate in our house. Since its launch, the PS5 has sailed through two Christmases and multiple Lewis family birthdays both hotly desired and defiantly unpurchased.It may be that Sony has an interest in keeping its Japan sales low. Calculated globally, it makes little money on the hardware sales of PS5 units — no problem, given that the real money is made on the software. In Japan, says one analyst who has covered the company for decades, it is probably making a loss of about ¥2,000 on every machine sold.Pelham Smithers, another veteran Sony-watcher, suspects the spew of red ink could be even more severe, with material costs rising significantly amid global inflation and high energy prices, and with the yen plunged to a 20-year low. That combination, says Smithers, could mean that Sony is losing about ¥15,000 on every PS5 it sells in Japan. That could be an incentive for it to ensure that stores and online retailers are not flooded with machines. Sony’s gaming chief did recently announce “a significant ramp-up” in PS5 production this year, but for now, I’ll have to make do with our PS4 — itself the result of a successful round of household negotiation. Leo Lewis is the FT’s Asia business editorFollow @FTMag on Twitter to find out about our latest stories first More

When Christine Lagarde on Thursday sets out the European Central Bank’s plans to end eight years of bond-buying and negative interest rates, she can count on the support of the vast majority of her fellow rate-setters. Record-high inflation in the eurozone has left even the most dovish of the 25 members of the governing council supporting the need for higher borrowing costs in the coming months. However, the president will be aware of the scale of the challenge facing the ECB, hoping to regain control of prices without tipping the economy into recession or triggering a bond market panic in the more vulnerable countries of southern Europe. “Lagarde is in the hot seat and she is feeling it,” said Klaus Adam, an economics professor at the University of Mannheim who advises Germany’s finance ministry. “The ECB seems to think it can bring inflation back to target with relatively timid increases in rates. But what if that doesn’t work?” Only one of the ECB’s 25 governing council members — Klaas Knot — was on the rate-setting body the last time the bank raised rates in 2011. Lagarde had just become president of the IMF.Concerns abound among economists that the council lacks the economics expertise to get the balance right between fighting inflation and avoiding an economic and financial meltdown. Lagarde, a lawyer by training and France’s finance minister before making the switch to Washington, has relied on ECB chief economist Philip Lane for guidance. But he has been criticised for being too slow to predict the recent surge in inflation, which shot above 8 per cent in May, quadruple the ECB’s target. Other western central banks, such as the US Federal Reserve and Bank of England, have already raised rates and stopped buying bonds. “Who can she rely on now?” said Adam. “She is no expert herself and her chief economist has been so wrong on inflation.”While the council members, meeting in Amsterdam for a change from Frankfurt this week, are in unison on the need for rate raises — and to commit to a backstop for bond markets — there is less consensus on the pace of tightening. Lagarde and Lane have signalled rate rises of a quarter of a percentage point as the benchmark for its meetings in July and September — the two that follow the June decision. But the pace at which price pressures have intensified over recent months has left hawks calling for a more aggressive pace of tightening, in line with the Fed’s strategy of hiking by 50 basis points at a time. “The hawks smell blood,” said a more dovish council member.Most economists still think the ECB is likely to stick to a quarter-point rate rise in July, partly because of the worry that a more aggressive move could trigger a sell-off in the bond markets of heavily indebted countries, such as Italy.Paul Hollingsworth, chief European economist at BNP Paribas, said a 50-basis point rate rise “would be a hawkish surprise and could increase risks for peripheral bond markets earlier than the ECB would like”.The spread between Italy’s 10-year borrowing costs and those of Germany, a key measure of perceived financial risk in the euro area, has recently risen to its highest level since the start of the pandemic. “Some investors are fretting about where spreads could go once the ECB starts to remove its stimulus,” said Annalisa Piazza, fixed-income analyst at MFS Investment Management. The ECB has already said it expects to raise the rate at which it lends to many banks by half a percentage point this month. It will end the special discount rate of minus 1 per cent on three-year loans made under its quarterly targeted longer term refinancing operations, or TLTROs. This rate will return to the deposit rate of minus 0.5 per cent.Oliver Rakau, an economist at Oxford Economics, said the TLTRO change could make the ECB reluctant to compound the impact by also raising its deposit rate by half a percentage point in July. “We are already seeing a tightening of bank lending conditions in the eurozone and [the ECB] would risk a steeper tightening than they can stomach, particularly in weaker countries,” he said.At this week’s meeting, the ECB will also issue new forecasts. They are expected to outline slower growth and higher inflation over the next three years. Its 2024 forecast for inflation is likely to rise to its 2 per cent target — fulfilling a key criteria to raise rates.For now business surveys, as well as data on exports, industrial production and retail sales, indicate the eurozone is heading for a slowdown rather than a recession this year. However, the bloc is being hit particularly hard by the fallout from Russia’s invasion of Ukraine, which has sent European energy and food prices soaring, crimping the spending power of consumers whose wages have risen more slowly. Goldman Sachs economist Sven Jari Stehn warned that if the war deepens and Russian gas supplies to Europe are cut off, it could plunge the region into a “short, but sharp, recession”. This stagflation scenario of a shrinking economy with persistently high inflation is one that worries many rate-setters. “It is not going to be easy for the ECB,” said Hollingsworth. “There are a number of hurdles for them to overcome.”This story has been amended to reflect the fact that one of the ECB’s current governing council members had joined the council when interest rates were raised in July 2011. More

Europe is at risk of energy rationing this winter, particularly if cold weather coincides with resurgent economic demand in China, the head of the world’s watchdog for the sector has warned.In some of the toughest comments yet about the possible scope of energy shortages in the wake of Russia’s invasion of Ukraine, Fatih Birol, executive director of the International Energy Agency, said rationing could be introduced for industrial gas users and others if steps were not taken quickly to improve efficiency. “If we have a harsh winter and a long winter and if we do not take [demand side measures] . . . I wouldn’t exclude the rationing of natural gas in Europe, starting from the large industry facilities,” he said in an interview with the Financial Times.Birol said governments needed to drive down energy demand by improving efficiency, but added that potential gas shortages would be less severe “if the Chinese economy doesn’t perform at the usual pace”. In recent months restrictions imposed as part of Beijing’s zero-Covid policy have slowed economic growth and cut energy demand but the country is now reopening.Many continental European nations are heavily dependent on Russian gas and are concerned the Kremlin is using energy to put pressure on countries that back Ukraine. Gazprom, the state-controlled Russian energy giant, has already cut off countries including Poland, Bulgaria and Finland, and as of last week, the Netherlands and Denmark, for allegedly failing to comply with its demands to use a new rouble payment mechanism.

Birol, pictured in 2020, says rationing could be introduced for industrial gas users © Simon Dawson/Bloomberg

The IEA chief’s comments about possible rationing for Europe follow moves by Germany and Austria. Germany said in March that if there was an acute shortage it would cut off parts of industry from the gas network to ensure that households retained energy. Birol’s warning was amplified by Denmark’s climate minister Dan Jørgensen, who said in an interview that emergency plans, which could include energy rationing, might become necessary if Europe stopped importing Russian gas. Kadri Simson, the EU’s energy commissioner, has also said the bloc is developing contingency plans for a complete halt to Russian gas imports, which people familiar with the proposals said would include rationing for industry. At an IEA conference in Denmark attended by ministers and government representatives from at least 20 countries, the agency said the world could reduce yearly energy consumption by 2030 by the equivalent of China’s current annual use through steps such as better building insulation and other efficiencies including better air conditioning.

Birol said that energy security should be achieved through increased efficiency, more use of renewable energy and “making the most of existing [oil and gas] fields” — rather than new, large fossil fuel projects, which could last into the 2040s and 2050s and could mean “saying goodbye to our international climate policy”.But he warned sky-high oil prices were likely to cause pain for many economies. The price of Brent crude jumped close to its high of the year at the end of May after the EU announced a ban on most Russian oil imports, and has remained elevated since. More

The west’s mobilisation to address the global food crisis caused by the war in Ukraine is recognition that millions could face starvation in Africa, the Middle East and Asia, as the conflict shakes commodity markets and leaves vulnerable grains importers on the verge of catastrophe. But it is also a tacit acknowledgment of the geopolitical risks of letting Moscow blame sanctions for surging food prices.Those versed in the complex process of co-ordinating international initiatives say western allies have shown solidarity and resolve to tackle food insecurity and possible social unrest in poorer countries. The US and European governments have announced various initiatives and measures alongside spending commitments from multilateral organisations. Germany, which holds the G7 presidency, and the World Bank are co-ordinating those efforts under the Global Alliance for Food Security. More details will be outlined ahead of the G7 heads of state meeting in Germany this month to address the immediate financial and humanitarian needs of poorer countries as well as longer term measures for sustainable agriculture.“There has been an unprecedented amount of political attention to the food security impact of the war,” says Caitlin Welsh, director of global good security at the Center for Strategic and International Studies.Easing food insecurity has become paramount for European countries, which faces the possibility of hunger-related migration from the African continent and the Middle East, where countries including Tunisia and Lebanon rely on the Black Sea region for food staples — especially wheat. But partly western countries are also seeking to win over hearts and minds of nations concerned about their wheat inventories and which have mostly been reluctant to pick a side since Moscow’s February invasion of Ukraine.Apart from mitigating a food crisis among poorer countries, and to show that the west is standing in solidarity with affected countries, a co-ordinated initiative “is also a means by which we make clear: We have not caused this crisis, it is caused by Putin and his war on Ukraine”, says a German development ministry official.After a meeting with Vladimir Putin last week, Senegal’s president Macky Sall, also chair of the African Union, called for the lifting of western economic sanctions against Russia. He embraced Moscow’s narrative that Russia was ready to “facilitate the export of Ukrainian cereals” and was “ready to ensure the export of its wheat and fertiliser” even though Ukrainian ports are under a Russian blockade.“Some countries are saying ‘we don’t care [who is to blame for the war], we just want the wheat and to feed our people’,” said David Laborde, senior research fellow at International Food Policy Research Institute.

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In presenting the international measures, policymakers also need to avoid being seen as window dressing. After the 2007-08 crisis which was caused by a spike in energy prices and droughts in crop-producing countries, the G8 and G20 announced a $22bn aid package. However, there was widespread scepticism over the amount of new money provided for food security. Much of the funding was recycled, some aid agencies said.In order to widen backing, G7 countries have invited Indonesia, India and African countries as well as NGOs to participate in the GAFS discussions. Another big question is whether the measures can take effect before crunch time for poor food importers, especially those in Africa, which will see their inventories depleted around September. Some including Cameroon and Kenya have been leading a hand-to-mouth existence, only buying when it is absolutely needed, say grain traders. Ukrainian farmers also need to empty their silos before the next harvest next month.In parallel with the G7 measures, the EU and UN have been trying negotiate with Putin to create a humanitarian corridor for the passage of wheat. But the mistrust runs deep between Russia and Ukraine and its western allies.Even if there were to be some sort of compromise to shift food out of Ukraine both sides may not strike an agreement until the last minute. The danger is that it turns into a game of chicken, says Ilana Bet-el, political analyst and senior fellow at King’s College London. “At a certain point, with so [many countries] depending on grain out of Ukraine, [the west] will have to take the risk and [come to an agreement with Russia].” More

Bridgewater is betting on a sell-off in corporate bonds this year as the world’s biggest hedge fund takes a gloomy view on the trajectory of the global economy.The wager against US and European corporate debt underscores Bridgewater’s assessment that recent weakness across major financial markets will not be shortlived. “We’re in a radically different world,” Greg Jensen, one of Bridgewater’s chief investment officers, told the Financial Times. “We’re approaching a slowdown.”Jensen, who helps lead investment decisions alongside co-CIO Bob Prince, warned that inflation would be far stickier than economists and the market currently predict, which could pressure the US Federal Reserve — the world’s most influential central bank — to raise interest rates higher than expected by many on Wall Street.He added that if Fed policymakers were committed to bringing inflation down to its target of 2 per cent, “they may tighten in a very strong way, which would then crack the economy and probably crack the weaker [companies] in the economy”. He added: “We think nominal growth will hold up. The real economy will be weak, but not a self-reinforcing weakness.”Bridgewater had already been positioning for a sustained sell-off in the $23tn US government bond market, and has similarly wagered on Wall Street equity prices falling — even after they have already collectively lost $9tn in value this year. High-grade US corporate bonds are down about 12 per cent this year on a total return basis, while those in Europe have fallen 10 per cent in local currency terms, according to ICE Data Services indices. Higher interest rates have led to a jump in mortgage rates for consumers and higher borrowing costs for companies securing new debt. Should companies fail to clinch fresh financing they could fall into financial distress or face bankruptcy, and Jensen said the bearish position on corporate bonds reflected Bridgewater’s belief that “it’s going to start to get much more expensive to borrow money”.Top Fed officials have signalled their intent to slow the economic expansion as they attempt to rein in the highest inflation registered since the 1980s. To do that, policymakers have started to aggressively raise interest rates from historic lows and this month they will begin to reduce the size of the Fed’s nearly $9tn balance sheet.Jensen said the Fed’s decision, coupled with tighter policy from a panoply of central banks across the globe, would drain liquidity from the financial system. In doing so, he said the prices of many assets that rallied last year would come under pressure.“You want to be on the other side of that liquidity hole, out of assets that require the liquidity and in assets that don’t,” he said.Bridgewater in April used baskets of credit derivatives in Europe and the US to make the bet against corporate bond markets, according to people familiar with the trade. The spread on the main high-yield CDX index, which tracks insurance like products that protect against defaults on riskier corporate bonds, has surged from around 375 basis points at the beginning of April to 475 basis points this month, indicating an increased cost to protect against issuers reneging on their debts. Jensen declined to say how Bridgewater had structured the short bet on credit or how large the position was.Even with the Fed’s current hawkish rhetoric, Jensen said he ultimately believed that the Fed would blink and accept inflation above its 2 per cent target. Policymakers, in his view, will be unable to tolerate a stock market sell-off and the high unemployment that would probably result from raising rates high enough to bring inflation down to that threshold. Otherwise he estimated stocks could “crash” a further 25 per cent from current levels if the Fed was unrelenting in its push to tackle inflation.The year’s earlier investments have paid off handsomely for Bridgewater, which is best known for its global macro approach in which it attempts to profit by making bets based on economic trends. The fund managed $151bn in assets at the start of the year and its flagship Pure Alpha investment fund is up 26.2 per cent this year through the end of May, according to a person familiar with the matter, compared with a 13.3 per cent decline for the benchmark S&P 500 over that period.Jensen blamed current volatility in the US stock market in part on the Fed’s conclusion of quantitative easing. Without the central bank in place to absorb the large supply of Treasury bonds, other investors have had to step in, and in doing so, sold off other holdings such as stocks. “So you’re seeing this see-saw between bonds selling off or equities selling off,” he said. As for areas where the fund is bullish, Jensen said he favoured commodities and inflation-indexed bonds. Both asset classes would, he said, benefit in a stagflationary environment — a toxic combination of low growth and rising prices. More