Aurelia Butler

ORLANDO, Fla. (Reuters) -The European Central Bank appears committed to start raising interest rates next month, opening the door for hedge funds to load up on euros. And that is exactly what they are doing. U.S. futures market data shows speculators are holding their biggest net-long euro position in 12 weeks, and that May marked funds’ second-most positive month-on-month change in positioning in nearly two years. The latest Commodity Futures Trading Commission report shows that funds increased their net-long euro holdings by around $2 billion in the last week, accounting for two-thirds of a $3 billion fall in the broader long-dollar position against G10 currencies. Indeed, the $5 billion decline in the net-long dollar position against G10 currencies in the past two weeks is entirely due to a corresponding $5 billion jump in net-long euro positions.In the week to May 31, CFTC funds increased their net-long euro position to a three-month high of 52,272 contracts from the previous week’s 38,930. Their bet on the euro appreciating is now worth $7 billion, up from $5.2 billion a week earlier. A long position in an asset or security is effectively a bet that it will rise in value, and a short position is the opposite.ECB EYEING 50 BPS HIKE?The shift in ECB expectations has been remarkable. Only a month ago, CFTC funds held a small net-short euro position, the euro slumped as low as $1.0350 in mid-May, and talk of parity with the dollar was rife. But euro zone inflation continues to march higher – it hit a record 8.1% in May – and the debate is no longer whether the ECB will raise rates in July for the first time in over a decade, but by how much.Several ECB officials have floated the possibility of a 50 basis-point move, and Deutsche Bank (ETR:DBKGn) economists now expect one of two rate hikes in the third quarter to be a 50-bps hike, more likely in September than July. “We wonder why the ECB has not acted already,” Societe Generale (OTC:SCGLY) economists wrote on Friday.The ECB is expected to outline on Thursday the path toward a rate rise in July. Euro money markets are pricing in 100 bps of rate hikes by October and 125 bps by year-end, and the euro has rebounded to a one-month high close to $1.08. Foreign-exchange market participants are paying heed to the ECB’s inflation-fighting talk, and pushing to the back of mind the bank’s 2008 and 2011 rate hikes, which many analysts say were major policy errors. For now, at least, hedge funds are on board too. Related columns: Hedge funds position for U.S. growth slump, rates peak (May 23)Yellen could face G7 pressure on dollar (May 18)(The opinions expressed here are those of the author, a columnist for Reuters)(By Jamie McGeever in Orlando, Fla.Graphics by Jamie McGeever and Saikat ChatterjeeEditing by Matthew Lewis) More

Hello from Brussels for the last time in a while for Trade Secrets. Alan Beattie will be up and running in London next week. Among the policy innovations he will be able to appraise is the effect on trade of readopting imperial measurements (clue: not great) and the impact of trade facilitation deals with individual US states (clue: also not great). There may also be the start of a trade war with the EU as London seeks to disapply parts of its post-Brexit trade deal. I will focus on events in Brussels — well, Luxembourg and Strasbourg actually — as explained below. Charted waters looks at the problem for the UK of securing energy supplies into the winter.As ever, if you have any thoughts to share, you can contact Alan on [email protected] Brexit helped France get its way on trade rulesThe French presidency of the EU ends this month and Paris will be very satisfied with its work. On Thursday the European Parliament plenary meeting in Strasbourg is expected to vote for the International Procurement Instrument (IPI), which will limit non-EU companies’ access to the EU public procurement market if their governments do not offer EU companies similar access to their public tenders.France has backed the measure since it was introduced by the European Commission a decade ago. But it was repeatedly blocked by the UK and the Hanseatic League of liberal, northern free traders such as Sweden and the Baltics.That member states have agreed the procurement instrument shows how the mood in Brussels has shifted towards a more defensive trade posture. France argues that others will open their procurement markets to avoid being locked out by the EU. The earlier one-way openness was an example of how “naive” Brussels had been, argues French trade minister Franck Riester.As well as the IPI, Paris has advanced the anti-coercion instrument (ACI), which would allow the EU to hit back quickly against trade sanctions by a third country without going through the World Trade Organization; a carbon border tax, which will put tariffs on imports of steel and other goods where the producer is not paying a cost for emissions; an anti-subsidy instrument, which will ban foreign companies benefiting from state aid from buying EU rivals, and an emergency export control regime.Reister said the ACI measures would act as a deterrent to third countries fearing EU retaliation. He cited China’s recent ban on imports from Lithuania after Vilnius forged closer ties with Taiwan. Brussels has challenged the move at the WTO. But Riester said that if the ACI had been in place, Brussels could have retaliated swiftly with a similar block on Chinese goods, potentially persuading Beijing to hold back. “We want our trade policy to be more assertive,” Riester told the Financial Times, welcoming a “paradigm shift” in recent years. “We have decided to create some interesting new instruments.”The classic trade defence responses are anti-dumping, anti-subsidy and safeguard measures, or to take a complaint to the WTO, which takes at least a year, said Ferdi De Ville, an economics professor at the University of Ghent who is writing a paper on the subject.“For about 60 years the EU has used only three trade defence instruments to protect itself against unfair imports or a surge in imports. All of a sudden they are acquiring one unilateral instrument after another.”It is partly a response to Donald Trump’s US administration, which slapped tariffs on steel and aluminium on national security grounds, and the block on Lithuanian imports by China under President Xi Jinping.Brussels was finally prompted to toughen its stance last year, when US president Joe Biden invoked the Defense Production Act to restrict exports of vaccine ingredients in the midst of the Covid-19 pandemic. Thierry Breton, the EU’s internal market commissioner, threatened to withhold supplies of vaccines to the US unless it lifted its de facto ban. He said he needed a similar tool to the DPA — most recently used to increase production of baby formula and airlift supplies from Europe.“It is a new world — the balance of power,” Breton told the FT. The EU’s stance had moved from “open by default” to “open with conditions”, he said. “If the UK was still here it would have been difficult” to change, Breton admitted. The French commissioner’s team is now working on a Single Market Emergency Instrument, which would allow export restrictions on five or six categories of goods, such as raw materials, in an emergency. The commission has also proposed a similar system for microchips under its European Chips Act after the pandemic disrupted global supply chains. Member states in favour of open trade, such as Baltic and Scandinavian countries, confirm the British exit in 2020 has left them leaderless. “The French propose things and the Germans go along with it,” said one diplomat. “The British provided a counterweight before.”Several diplomats and officials said Breton in particular had grown in influence, buzzing with ideas for “strategic autonomy”. “He’s full of energy, like a footballer who gets the ball and runs the length of the pitch with players standing off him. Sometimes he gets stopped by a last-ditch tackle in the box, sometimes he scores,” said one.They point out that the EU is a global winner from trade, with an annual trade surplus in goods and services of £285.6bn in 2020. France has also been effective at preventing things. In the final trade ministers’ meeting of its presidency last Friday in Luxembourg free traders such as Finland and Sweden asked when trade deals with Chile, New Zealand, Mercosur and Mexico would finally be concluded and presented for adoption.Riester made clear such deals had to promote sustainable development, save the rainforest and improve labour conditions in those countries.An employee passes rolls of steel at the Salzgitter AG steel plant in Salzgitter, Germany © Rolf Schulten/BloombergReister also said “sensitive sectors” such as farming needed protection from cheap imports — the Chile deal would mean accepting more of its chicken.There is internal opposition to Breton’s policies. The commission’s trade and competition departments, which have long championed liberal ideas, have tried to water down several of the defensive measures, with limited success.Jonathan Hackenbroich, policy fellow of the European Council on Foreign Relations, sums up their arguments. An open economy ensures competition, improving company performance. “A strong network of deep trade relations facilitates diversification — avoiding the kind of excessive dependence that another power could leverage for economic coercion,” he added.It is a point constantly made by Valdis Dombrovskis, EU trade commissioner. After the trade ministers meeting he said: “We must seek a new consensus on how to advance our bilateral partnerships. Clearly business as usual is not an option. “We need to get over the finish line agreements which have already been negotiated like Chile, Mexico and Mercosur. These are important deals with large potential for generating mutual benefits. And we need to advance ongoing negotiations for new deals, notably New Zealand, Australia, Indonesia and India.”The Czech Republic takes over the presidency on July 1, followed by fellow open trader Sweden. Do readers think they will have any success getting trade deals done?Charted watersPresident Vladimir Putin’s use of energy exports as a weapon in his battle to conquer Ukraine has been obvious for many months. So it is understandable that the UK energy industry is expressing frustration that the country’s government is only now getting round to outlining methods of securing supply from domestic production.As my colleagues Nathalie Thomas and Jim Pickard note in their analysis over the weekend, there is concern that the government is underplaying the country’s reliance on Russian gas, which ministers say accounts for less than 4 per cent of supply. Official data show about 8 per cent of total gas imports in 2021 came from undersea pipelines, or interconnectors, from the EU. But as the bloc relies on Russia for 40 per cent of its own supply there could be knock-on effects on how much gas can be pumped to the UK. (Jonathan Moules)Trade links The future of electric car manufacturing is in China, contends Robin Harding in an opinion piece. China’s electric vehicle market share in the EU is already bigger than that of any country but Germany. Just like a Philips or a Sony television, well-known brands will continue but they will not be made in the Netherlands or Japan, he contends.The EU and US are looking to increase ties with Taiwan as relations with China sour. The island is already an important source of investment and high technology goods. Since Beijing considers Taiwan to be a part of its territory, full trade deals are off the cards. But the US launched a new trade initiative with Taiwan and the EU/Taiwan Trade and Investment Dialogue was upgraded last week as both sides sought close co-operation on silicon chips. The UK is preparing legislation to disapply parts of its post-Brexit trade deal with the EU, setting the scene for a possible trade war with Brussels. Prime minister Boris Johnson wants to do away with “pointless and bureaucratic” checks on goods going to Northern Ireland. The bill to do so is expected within the next couple of weeks.Trade Secrets is edited by Jonathan Moules More

TOKYO (Reuters) – Bank of Japan Governor Haruhiko Kuroda said on Monday the central bank’s top priority was to support the economy, stressing an unwavering commitment to maintaining “powerful” monetary stimulus.Unlike its U.S. and European counterparts, the BOJ does not face a trade-off between the need to tame inflation and support the economy, as Japan’s inflation remains modest and driven by temporary factors such as rising raw material costs, Kuroda said.”Japan is absolutely not in a situation that warrants monetary tightening, as the economy is still in the midst of recovering from the pandemic’s impact,” Kuroda said in a speech.As Russia’s invasion of Ukraine pushes up raw material costs, Japanese households are becoming more accepting of higher price tags, Kuroda said, describing it as an “important change” from the perspective of meeting the BOJ’s price target.But Japan’s consumer inflation must achieve 2% on average, not in a temporary way driven by cost-push factors, Kuroda said.”For inflation to stably accelerate toward 2%, wage and price growth must mutually rise in a positive cycle,” he said.”The BOJ will be unwavering in its stance of maintaining powerful monetary easing, so that recent changes such as a rise in inflation expectations … lead to sustainable price growth,” he said.On recent yen moves, Kuroda repeated his view that currency rates should move stably reflecting economic fundamentals.While the yen’s decline hurts households and retailers by boosting import costs, it helps regional areas by attracting overseas tourists as Japan re-opens its borders, Kuroda said.”As long as the moves are stable and not very sharp, a weak yen in general is likely to have a positive impact on Japan’s economy,” Kuroda said.Japan’s core consumer prices in April rose 2.1% from a year earlier, exceeding the BOJ’s 2% target for the first time in seven years, due largely to rising fuel and food costs.BOJ officials have repeatedly stressed that such cost-push inflation will prove temporary and won’t prompt the central bank into tightening monetary policy. More

Since Russia invaded Ukraine, there has been much talk of the echoes of the second world war and the dangers of a third one. But the current global moment is much more like a return of the cold war.Once again, the US is assembling a coalition of democracies to face off against a Russia-China axis. Once again, the dangers of a nuclear war are central to international politics. And once again, there is a large bloc of non-aligned countries — now generally referred to as the “global south” — that is intensively courted by both sides.Many in the global south insist that Ukraine is a regional conflict that must not be allowed to disrupt or change the whole world. But policymakers in the Biden administration already frame the war in global terms. They see Russia and China as partners in a challenge to the “rules-based order”, upheld by the US and its allies. The battles in Ukraine are currently the central theatre of that wider struggle.Viewed from Washington, security threats in Europe and Asia are now so deeply connected that the two continents are seen by officials as a “single operating system”. That is a pattern of thinking that is very reminiscent of the cold war, when America was always mindful that what happened in Vietnam or Korea could have effects in the divided city of Berlin or in the north Atlantic.One big difference from the last cold war is that this time the Americans see China, not Russia, as their most serious rival. That belief has not been changed by the fact that it is Russian president Vladimir Putin who has launched a war. In fact, the China focus of the Biden administration intensifies the tendency to see the Ukraine war as not just about the security of Europe, but about the wider global order. While there is some glib talk in the west about attempting to “do a Kissinger” — and once again engineer a split between Russia and China, as happened in the 1970s — few in Washington believe that is a plausible near-term prospect. On the contrary, US officials see China as very firmly in Russia’s corner. Dissuading Beijing from translating its pro-Russian sentiments into direct military or economic support for Moscow remains a top American priority. US allies in Asia — in particular Japan, South Korea and Australia — are also very alive to the implications of the Ukraine war for their own security. The worst-case scenarios for them would be that Russia’s aggression emboldens China and distracts America — leading to a region-transforming Chinese invasion of Taiwan. The best case is that the Ukraine war revitalises the western alliance and US global leadership and causes China to back off in Asia.In reality, however, Biden’s people do not think that Russia’s troubles in Ukraine have changed Chinese minds about the wisdom of a possible invasion of Taiwan. The Chinese, they believe, are more interested in figuring out where Russia has gone wrong — and adjusting their own plans accordingly. The need for overwhelming force in any military action is one likely lesson. Another is the need to protect China’s economy from possible western sanctions.In late May, Biden visited Japan and South Korea — and not for the first time suggested that the US would fight to defend Taiwan. (His administration was again forced to qualify the president’s comments.) At the end of June, Nato will hold a summit in Madrid. Significantly, Japan, South Korea, Australia and New Zealand have all been invited to attend. Pulling together a coalition of democracies is meant to improve the west’s security position in both Europe and Asia. Countries such as Japan play an important symbolic and practical role in the struggle with Russia. They are vital to the sanctions effort — making it much harder for Moscow to find easy ways around sanctions. In return, the Asians are keen to see European countries play a bigger security role in Asia. Recent naval visits to the region, by the British, French, Germans and Dutch, have been welcomed.But while the Americans are happy with the response of their most important north Asian allies to the Ukraine war, they are concerned by their failure to win the battle for opinion in south-east Asia. At a recent summit meetingwith the Association of Southeast Asian Nations in Washington, some Asean leaders privately echoed Russian talking points about Nato’s responsibility for the war in Ukraine and alleged “false flag” operations. India is seen as an even more important challenge. The government of prime minister Narendra Modi has been careful to avoid taking sides on Ukraine, abstaining on the key UN votes and increasing oil imports from Russia. The Americans think that hectoring New Delhi on this subject is likely to be counter-productive. Instead, they are intent on gradually drawing India closer to them by emphasising the two countries’ shared security interests in containing Chinese power.Some historians now see the first and second world wars as two stages of the same conflict — separated by a generation of increasingly fragile peace. It may be that future historians will talk about the first and second cold wars — separated by a 30-year era of globalisation. The first cold war ended with the fall of the Berlin Wall in 1989. The second, it seems, began with the Russian invasion of Ukraine in February [email protected] More

Under the pilot scheme, companies in eight sectors including electric power, steelmaking, petrochemicals and civil aviation will issue bonds to fund decarbonisation efforts, the National Association of Financial Market Institutional Investors (NAFMII) said in a statement.Such debt instruments supplement green bonds, and are part of China’s sustainable financing, said NAFMII, which is supervised by China’s central bank. China, the world’s biggest producer of climate warming greenhouse gas, has pledged to bring its emissions to a peak before 2030 and to become carbon neutral by 2060.Proceeds from the transition bonds will be used to fund green efforts including cleaner coal production, the application of green technologies and the use of natural gas and clean energy, NAFMII said.Companies including China Huaneng Group Co, Hualu Holdings and Baosteel have already issued China’s first low carbon transition bonds, the Shanghai Securities News reported on Monday. More

Fewer than 25,000 vehicles were sold last month, according to the Association of European Businesses, the lowest since at least 2006 and less than a tenth of the monthly levels seen in peak months in the past.President Vladimir Putin’s Feb. 24 invasion of Ukraine spurred a wave of sanctions from the US and its allies, as well as disruptions of supplies from a broader range of countries. The isolation hit the foreign-dominated auto sector especially hard, with the exodus of overseas producers worsened by the industry’s heavy dependence on imported components.“A few suppliers still haven’t sold out all their stocks, so that’s what’s selling,” said Azat Timerkhanov of consultant Avtostat. “But they’re running out rapidly.”Only two of Russia’s more than 20 auto factories are operating now, a locally owned one and a Chinese plant, he said. European and most Asian producers suspended shipments of cars, while even companies from countries that didn’t join the sanctions were faced with logistics problems. “There’s a search underway for alternative suppliers — usually Chinese,” he said,  but there’s no certainty yet that it will succeed.The Russian government has taken over some major plants from foreign companies that left, including the legendary Moskvich factory in Moscow. They’ve already announced plans to sell stripped-down models without imported safety and emissions technologies. “Our auto industry relied on foreign components,” said Georgy Ostapkovich, a specialist on the sector at Moscow’s Higher School of Economics. “There were practically no factories that didn’t work on foreign platforms. Russia was just an assembly line.”“We’re facing primitivization and we’ll fall behind the rest of the world by a decade,” he said. More

Global banks have been cautiously moving into crypto for several years, some building it within existing operations and others setting up new businesses.”Currently, 52 percent of affluent investors in Asia hold digital assets of some sort. Accenture’s research indicates this could reach 73 percent by the end of 2022,” Accenture said on Monday.”Digital assets represent 7% of surveyed investors’ portfolios — making it the fifth-largest asset class in Asia — more than they allocate to foreign currencies, commodities or collectables. Yet two-thirds of wealth management firms have no plans to offer digital assets,” Accenture said.The findings were part of Accenture’s report on the future of Asia’s wealth management industry based on two surveys – one of about 3,200 investors and another of more than 500 financial advisors at wealth management firms in Asia. The surveys were done in December 2021 and January 2022.”For wealth management firms, digital assets are a $54 billion revenue opportunity – that most are ignoring,” Accenture said.”Among firms’ barriers to action are a lack of belief in (and understanding of) digital assets, a wait-and-see mindset, and – given that launching a digital asset proposition is operationally complex – choosing to prioritize other initiatives,” it said.Southeast Asia’s biggest bank DBS Group (OTC:DBSDY) launched a standalone cryptocurrency trading platform in December 2020 offering corporate investors and accredited investors crypto trading services for many digital assets.Last month, Nomura Holdings (NYSE:NMR) said it will create a digital asset company this year allowing institutional investors to trade products linked to cryptocurrencies, among others. More

The bank, which previously expected 100 bps of hikes this year, said last week’s euro zone inflation print, which came in far higher than expected at 8.1%, was confirmation that 100 bps was the minimum the bank would deliver. “Our call was already more hawkish than consensus, and is even more so now. We continue to worry this is too much too fast,” analysts said in the note. In a separate note, Barclays (LON:BARC) said on Monday that it now expects the ECB to hike in 25 bps increments at each meeting from July to December.It expects one more hike after that in the first quarter of next year, which would take the ECB’s depo rate to 0.75%.The ECB last hiked interest rates in 2011 and its depo rate is currently at -0.50%.Money markets currently price in over 130 bps hikes by year-end, with a 50 bps move at a single meeting fully priced in by October. More