Aurelia Butler

Good evening,Shanghai’s shops welcomed city residents back today after a gruelling two-month lockdown that had confined 25mn people to their homes in one of the strictest anti-Covid lockdowns in China since the pandemic began.Policymakers will be hoping that the (still partial) reopening of stores and public transport in China’s biggest city and financial centre can help address the sharp slowdown in growth fuelled by the country’s zero-Covid strategy of mass testing, harsh lockdowns, travel bans and forced quarantine.The damage has been widespread, from retail sales, which were down 11 per cent in April, to manufacturing, which shrank for the third month in a row in May, according to new survey data out this morning. Fresh restrictions announced today in Hong Kong are a reminder that the virus is still far from done.During the pandemic peak periods of 2020 and 2021, Chinese manufacturing benefited from surging demand for computing and domestic tech. However, as economies reopened the emphasis shifted to services, denting demand for Chinese exports, which grew just 3.9 per cent in April, the slowest rate since July 2020. Rising inflation, fuelled by Russia’s invasion of Ukraine, makes a repeat of the previous export-led recovery, supported by domestic consumption, even less likely. The country also remains mired in a property sector crisis.

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As our colleagues at Nikkei Asia report today, big name manufacturers such as Apple are starting to move some of their production out of China after the strict lockdowns in and around Shanghai dented supply chains.The country’s leaders have acknowledged that it will struggle to record positive growth in the current quarter and potentially fall short of its annual target of 5.5 per cent as it continues to battle coronavirus outbreaks. President Xi Jinping could even become the first Chinese leader in almost 50 years to see growth fall behind that of the US.The slowdown also has serious implications beyond China’s borders. As our excellent visual representation of the country’s woes explains, its economy had been expected to continue to drive about one-fifth of all global GDP growth until at least 2026.However, the FT editorial board says the deteriorating outlook could provide an opportunity for Beijing to not only reconsider aspects of zero-Covid, but also its treatment of foreign direct investors, many of whom are planning to pivot away from the country.A focus on reducing red tape and ensuring equal treatment with local competitors could help alleviate some of the gloom, it adds. “What is good for them is good for China’s own economy.”Disrupted Times will take a short holiday break on Friday and return on Monday June 6Latest newsDelta expects second-quarter revenue to hit pre-pandemic levels Boris Johnson says it would be “irresponsible” to quit as UK prime ministerVersace and Michael Kors owner Capri Holdings pushes up profit forecastFor up-to-the-minute news updates, visit our live blogNeed to know: the economyEurozone unemployment remained at a record low of 6.8 per cent in April, official data showed today, with the relative strength of the labour market a key item on the European Central Bank’s agenda when it meets to discuss monetary policy next week. The news follows record inflation figures published yesterday of 8.1 per cent in the year to May. Meanwhile, retail sales in Germany, the bloc’s biggest economy, fell by a more than expected 5.4 per cent in April. Unhedged writer Robert Armstrong contrasts Europe’s cost-push inflation with demand-pull in the US.Crude oil prices yesterday breached the $120 mark thanks to increased global demand and disruption of supplies from Russia. EU leaders agreed to stop most imports, while Russian oil cargoes were also hit by an insurance ban. Here’s our explainer on what the measures mean for global markets.Latest for the UK and EuropeWall Street banks warned of the “grim outlook” for the pound as high inflation and an economic slowdown lead to further declines for the UK currency. Soaring energy bills are one of the biggest problems for consumers and our Money Clinic podcast offers some tips for beleaguered households. Even the seemingly unstoppable rise of house prices seems to be cooling a little.Disrupted times could well be the new slogan for UK airports. Staff shortages have led to travel chaos, just as the country’s busiest week for flying since the start of the pandemic gets under way with the school half-term break and a two-day public holiday for the Queen’s platinum jubilee. A summer strike is also looming over pay.Western sanctions and embargoes are beginning to hit Russian consumers, but buoyant revenues from energy exports and interventions from President Vladimir Putin are helping cushion the impact. Unemployment has remained steady and inflation has begun to slow.Global latestUS Treasury secretary Janet Yellen admitted she was “wrong” last year about the threat of rising inflation. US president Joe Biden told Federal Reserve chief Jay Powell that he would respect the “independence” of the central bank as it begins to tighten monetary policy and ramp up interest rates. Robert Armstrong detects a whiff of optimism in recent personal consumption data.International economy news editor Claire Jones examines the differing approaches to monetary policy among the world’s central banks and what they mean for investors. And if you’ve only got time to read one analysis today, try Martin Wolf’s latest: Twelve propositions on the state of the world.Sri Lanka has appealed for food aid from its neighbours as its debt crisis intensifies. Fears around global food supplies have sparked a rush for potash, a crucial crop fertiliser that Russia and Belarus supply 40 per cent of. Sanctions are causing collateral damage for developing countries that are unable to buy grain from Russia.Global health expert Nina Schwalbe calls for a new global compact on vaccines after Covid-19 and now monkeypox have highlighted hoarding by richer countries. Recent efforts to waive intellectual property rules for Covid jabs are a good start, but more needs to be done to spread manufacturing capacity and development plus shift the business model from charity to self-reliance, she argues.Need to know: businessPfizer will exit Haleon, its joint consumer health venture with GlaxoSmithKline, after its stock market debut next month in the largest London listing for a decade. GSK meanwhile is buying Boston-based biotech Affinivax in a $3bn deal to bolster its vaccines business. Takeda, Asia’s largest pharma company, says the risk of a global recession, the impact of Covid-19 and the war in Ukraine could force drugmakers to cut prices.Small UK businesses are struggling to cope with the spiralling costs of energy, goods and services, with more than half reporting elevated input prices, according to an official survey. Even discount retailers are finding it tough as the economic outlook weakens. B&M’s forecast of lower profits sent its shares diving 11 per cent yesterday.A senior executive at BlackRock, the world’s largest asset manager, told the Financial Times that the exodus of foreign talent from Asia was temporary and that the region remained attractive despite political tensions and repeated lockdowns.Executives are buying shares in their own companies at a rapid rate in what some analysts say is an encouraging sign for the US stock market. “Insiders are saying ‘we don’t see a massive event coming’ . . . [that] these are really good buying opportunities,” says one portfolio manager.Airbus is boosting jet production in one of the strongest signs yet that the aviation industry is overcoming the turbulence of the pandemic. But while there is clear demand for new energy-efficient planes, supply chain problems have complicated the manufacturing process, writes industry correspondent Sylvia Pfeifer.Brooke Masters, US investment and industries editor, says retailers are increasingly mining their huge customer bases to cross-sell other companies’ products and earn some useful commission, while their core businesses suffer from soaring input prices and supply chain problems.The World of WorkDiversity, equity and inclusion strategies are now commonplace in major companies, but one thing is often missing: class. Our latest Working It podcast examines why so many working-class people feel alienated and how companies can help them thrive and advance.Get the latest worldwide picture with our vaccine trackerAnd finally . . . As Britain enters a long holiday weekend of celebrations for the Queen’s platinum jubilee, art critic Jackie Wullschläger looks at 70 years of royal portraiture and the long history of regal image management.The Queen sits for a portrait by the artist Lucian Freud in 2001 © David Dawson/Bridgeman Images More

JPMorgan Chase chief executive Jamie Dimon on Wednesday warned investors to brace themselves for an economic “hurricane” as the war in Ukraine and policy tightening by the Federal Reserve roil markets.Dimon struck a gloomier tone on the economic outlook than in remarks he made just last week during JPMorgan’s first investor day in two years, when he referred to the threats as “storm clouds”.“I said they’re storm clouds, they’re big storm clouds here. It’s a hurricane,” the CEO of the largest US bank by assets said at a financial services conference organised by Autonomous Research. “That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy . . . And you better brace yourself.”The comments from Dimon, whose forecasts are closely followed on Wall Street, came as US stocks whipsaw over doubts about the health of the US economy. Dimon warned investors that the war in Ukraine would continue to put pressure on global commodity markets and that the conflict could push oil prices up to $150 or $175 a barrel. Brent crude, the international oil benchmark, is trading at about $117. The EU this week agreed a ban on seaborne oil imports from Russia as it tightens sanctions on Moscow over its invasion of Ukraine. “We’re not taking the proper actions to protect Europe from what’s going to happen in oil in the short run. And we’re not taking the proper actions to protect you all from what’s going to happen to oil in the next five years, which means it almost has to go up in price,” Dimon said. He also warned of the risk of market volatility as the Fed implements its policy of “quantitative tightening”, under which it will begin shrinking its roughly $9tn balance sheet in an effort to combat high inflation.“They do not have a choice because there’s so much liquidity in the system,” he said. “They have to remove some of the liquidity to stop the speculation, to reduce home prices and stuff like that. And you’ve never been through QT.”With the Fed retreating, the supply of US Treasury securities available to investors will balloon, resulting in market volatility, Dimon warned. “That’s a huge change in the flow of funds around the world. I don’t know what the effect of that is. I’m prepared for, you talk about a minimum [of] huge volatility,” he said. Dimon said that “bright clouds” for the US were healthy consumer spending, plentiful jobs and rising wages, and added that the banking industry “is in great shape”.“I think it’s OK to hope that it will end up OK. I hope it. That’s my goldilocks, I hope,” Dimon said. “Who the hell knows?” More

Investors are underestimating the severity of the “global food shock”, which is set to hammer public finances and stir up social unrest in emerging market countries for years to come, according to rating agency S&P Global.Food prices have soared since Russia’s invasion of Ukraine stymied the flow of agricultural produce from one of the world’s top exporters of wheat and other grains as well as sunflower oil. Combined with an accompanying surge in oil prices, this is likely to pressure the creditworthiness of a slew of emerging economies, S&P Global said in a report published on Wednesday.“Rising energy and food prices represent yet further balance-of-payments, fiscal, and growth shocks to the majority of emerging markets. This intensifies strains on their public finances and ratings, which are already impacted negatively by the global pandemic,” said Frank Gill, sovereign specialist for Europe, Middle East and Africa at the ratings firm.S&P Global said that although many of the sovereigns most exposed to the rising pressure from food prices already had low credit ratings, the negative economic or political fallout of the food shock could contribute to further downgrades. Emerging market bonds have steadied in recent days after suffering the worst start to a year in decades because of rising global interest rates.Investors in emerging market debt said food costs had become a looming problem for poorer countries since the war. “For emerging markets, food is a much more significant part of your disposable income. If you’re a big importer or a poorer country this is painful. This is an issue that can cause governments to fall,” said Uday Patnaik, head of emerging market debt at Legal & General Investment Management.Sri Lanka, which defaulted on its international debts last month, was an example of where surging food prices contributed to dwindling foreign reserves as well as a rise in protests and social instability. The government has faced severe shortages of essential goods and has appealed for food assistance from a food bank operated by the South Asian Association for Regional Cooperation.“Sri Lanka was already highly distressed before the Ukraine conflict. But [the food price shock] was the final straw that pushed them over the edge,” said Patnaik.The report said low and low-to-middle income countries in Central Asia, the Middle East, Africa and the Caucasus would be worst hit by the immediate shocks in the food commodity markets. In the Caucasus, Tajikistan and Uzbekistan have a high food import dependency, and normally buy the bulk of their wheat from Kazakhstan which has export restrictions in place. Of the Arab states, Morocco, Lebanon, Egypt and Jordan rely on Ukraine for their food supply and were susceptible to war-induced price disruption. Given that many of these countries had limited capacity to replace imports with substitutes, adjustment to the price shocks would lead to lower food availability, raising the risk of social unrest, according to the report.

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Not all emerging market debt has been affected, however, with the commodity price increases benefiting raw material producers. “For the middle eastern countries, you might be paying more for agricultural products but that is more than offset by crude prices,” said Patnaik.Brett Diment, head of global emerging market debt at Abrdn noted that, while local currency bonds in the JPMorgan GBI-EM index have delivered total returns of minus 10.5 per cent so far this year in dollar terms, there is wide divergence between countries. Brazilian debt, for example, has rallied in part thanks to its status as a leading agricultural exporter. After the invasion, Abrdn cut its exposure to large food importers such as Egypt but increased its exposure to agricultural commodity producers including Brazil and Argentina. “We’ve already seen the impact of food inflation play out in the market,” said Diment. “Egypt devalued its currency in March, but Argentina, Brazil, and Uruguay as big food exporters have all performed very strongly.” He said the movements in bond and foreign exchange markets “presupposes we don’t see another leg higher in food prices” as the issue has moved up the global political agenda leading to optimism about possible grain and vegetable oil exports being shipped out of Ukraine. Absent that, “we could see things get worse again for vulnerable countries”, he added.S&P Global said rising input costs such as fertilisers and machinery were placing additional costs on agricultural production. Russia, a leading fertiliser exporter, could continue with export controls and increasing competition for key agricultural inputs in 2022 and 2023 would limit the output rises, prolonging the impact from high food prices.“International markets appear to be viewing the fallout of the war in Ukraine on food prices as a single-year shock,” the report said. “In contrast, we believe the shock to food supply will last through 2024 and beyond.” More

The opening of Tesla’s Shanghai factory in 2019 was a breakthrough for electric vehicles and for overseas carmakers: it was the first wholly foreign-owned plant in the world’s largest car market. But it also marked the start of an even bigger trend, which promises to upend the structure of global manufacturing, bring a new wave of deindustrialisation to Europe and trigger trade tensions of an intensity to match the 1980s. That trend is the emergence of China as a car exporter.As Gregor Sebastian and François Chimits of the Mercator Institute for China Studies documented recently, China’s car exports are taking off, many of them are electric vehicles and most are going to Europe. From almost nothing a few years ago, China exported half a million electric vehicles in 2021, and its market share in Europe was second only to Germany’s. As the car market goes electric, Europe could quickly find itself running a trade deficit with China in automobiles. That would be a dramatic shift in market structure. Europe and Japan now buy consumer goods from China, and send luxury cars — or their most vital components — in the other direction. The badges on Chinese vehicles arriving in Europe do not necessarily reveal their origins. About half of them are Teslas from Shanghai; other marques include Dacia, Polestar and BMW. Tesla has recently opened a European plant in Germany, but the production decisions of other makers suggest a meaningful cost advantage for China. If batteries replace combustion engines, and China dominates car production, the disruption will be immense. Automobile manufacture underpins the prosperity of Europe and Japan. Companies such as Toyota and Volkswagen, plus their supply chains, employ millions of people in stable, skilled manufacturing jobs. They underpin national current account surpluses. A shift in the location of car manufacturing would have an even greater impact than the past migrations of steel, electronics or shipbuilding. Sebastian and Chimits argue that Europe should already be retaliating against Chinese industrial policies, which provide cheap capital to carmakers and tie electric vehicle subsidies for Chinese consumers to local production. Meanwhile, Chinese-made electric vehicles are eligible for EU subsidies to European consumers and they attract a tariff of just 10 per cent compared with the 27.5 per cent levied by the US.Europe should indeed demand fair and reciprocal treatment. Protection, however, is no substitute for competitiveness. Even if the US and Europe wall off their car markets with high tariffs, the prize in global automotive trade is to produce for the many wealthy countries — from Norway to Australia and the Middle East — that lack the scale to support a car industry of their own. For Japanese and European carmakers, the challenge is that while electric vehicles may be high-tech, they are not complex. Internal combustion engines were at the heart of 20th-century industrial prowess. A vehicle built around one is a complex assembly of crankshaft, pistons, fuel pumps, turbochargers and myriad other components, each of which must be mastered and integrated. Even after 150 years of development it is still a difficult task, calling for deep technical expertise and a vast network of suppliers, rather than access to the lowest possible labour costs. The drive train of an electric vehicle, by comparison, is extraordinarily simple: a battery, a motor and not much else. Production of the crucial component, the battery, is a business of huge scale and thin margins; the economics are similar to another green technology, the solar panel. Assembly of electric vehicles needs some of the skills of traditional carmaking, but bears comparison as well to other electrical goods. Solar panels and consumer electronics are industries where Chinese manufacturing dominates on cost. You can still buy a Philips or a Sony TV, but they are no longer made in Japan or the Netherlands. Something similar may happen to famous automotive names. Furthermore, the value in electric vehicles may migrate to the software that runs them, as it has done in consumer electronics. In that case, Europe may find itself in the familiar, depressing position of buying Chinese-made products that run American software. But in any version of this future there will be a traumatic reshaping of the global economy. The arrival of Japanese cars on global markets caused something close to a trade war in the 1980s. If China starts to absorb the global auto industry, however, the trade tensions of the 2020s will be a whole lot [email protected]

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NEW YORK (Reuters) – U.S. corporate bonds posted their first positive monthly return this year in May as easing inflation jitters alleviated pressure on rates and the possibility of a less hawkish Federal Reserve mitigated concerns over companies’ ability to repay their debt. Total returns as measured by the ICE (NYSE:ICE) BofA U.S. corporate index, which tracks dollar-denominated investment-grade corporate debt, were 0.55% in May, Refinitiv data showed – the first positive number since November. Total returns for the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, were 0.27%, the first positive monthly return since December. Total returns include interest payments and price changes.Bonds have been slammed this year with the U.S. Federal Reserve increasingly determined to tighten monetary policy to fight unrelenting inflation.But U.S. government bond yields subsided in May and market inflation expectations eased, with investors now believing fewer rate hikes may be necessary and some thinking the central bank will likely pause its tightening in September.”A large part of this return, certainly in the investment grade corporate market, is from lower interest rates in general,” said Steven Abrahams, senior managing director at Amherst Pierpont Securities.Benchmark 10-year Treasury yields on Tuesday were some 10 basis points lower than at the end of April, after a volatile month in which they hit a 3.2% multi-year high before dropping sharply.Further helping returns, investment grade bond spreads – the interest rate premium investors demand to hold corporate debt over safer U.S. Treasury bonds – were stable in May at roughly 140 basis points, after widening 17 bps in April. High-yield bonds’ duration – or their sensitivity to interest rate changes – is half that of their investment grade counterparts, which helps explain why monthly returns, whilst positive, were lower, said Abrahams.On a monthly basis, high-yield spreads have widened by about 30 bps but last week they dropped by more than 70 bps from a peak of 494 bps – the highest since November 2020.”Sentiment has definitely improved on spreads,” said Ryan O’Malley, portfolio manager at Sage Advisory, adding that some sectors in the high-yield space such as energy were helping the performance of the overall asset class. More

COLOMBO/LONDON (Reuters) – Sri Lanka is in talks with the International Monetary Fund (IMF) to borrow at least $3 billion via the lender’s extended fund facility (EEF), sources familiar with the matter told Reuters. The island state’s government expects another round of technical talks with the IMF in early June and hopes to reach to a staff-level agreement as soon as the end of this month, two of the sources said, speaking on condition of anonymity. A spokesperson for the IMF didn’t immediately reply to a request for comment. Spokespeople for Sri Lanka’s finance ministry and central bank didn’t respond to a request for comment. Sri Lanka has requested a rescue plan to overcome its worst economic crisis since independence in 1948. It defaulted on some overseas debt earlier this year and is struggling to pay for imports of basics such as fuel and medicine. An EFF programme, which would be the 17th IMF plan for the nation, requires countries to make structural economic reforms “to correct deep-rooted weaknesses,” according to the IMF’s website. These programmes normally last three years with a grace period of 4-1/2 years to start paying back the loan, once the plan is approved.A $3 billion deal would represent almost four times the country’s quota with the IMF. The IMF said last week it was in talks with Sri Lanka for a “comprehensive” reform package, but didn’t specify what type of programme was being negotiated.Prime Minister Ranil Wickremesinghe, who took office in May after mass protests forced the resignation of his predecessor, Mahinda Rajapaksa, plans to present an interim budget within weeks.The government announced on Tuesday a taxation overhaul to boost revenue, hiking corporate tax and raising the value added tax (VAT) rate to 12% from 8% with immediate effect.Sri Lanka recently appointed financial and legal advisers to kick off talks with bondholders and bilateral lenders, such as China and Japan. More