Aurelia Butler

Stocks have bounced sharply since mid-May’s lows and credit spreads have tightened back to levels seen ahead of the March liftoff of interest-rate hikes while the Bloomberg Dollar Spot Index has cooled from two-year highs reached earlier this month. Taken together, a Bloomberg measure of US financial conditions — a cross-asset measure of market health — has returned to levels seen before March’s hike. That potentially poses a problem for policy makers. Fed chief Jerome Powell has repeatedly said that financial conditions will compress as the central bank removes monetary support in a bid to combat the hottest inflation readings in four decades. Should price pressures build and growth remain robust while markets continue to rally, the Fed may need to tighten the reins even more, according to 22V Research founder Dennis DeBusschere.“The mechanism through which the Fed is impacting the real economy is through the financial conditions channel,” DeBusschere said on Bloomberg Television. “If the data doesn’t slow, financial conditions will need to tighten more.”The easing in conditions follows a week in which practically everything from speculative to blue-chip stocks rose as traders scaled back rate-hike expectations, fueling a drop in Treasury yields. The S&P 500 snapped its longest weekly losing streak in a decade en route to its biggest rally since 2020, while a basket of unprofitable tech shares ended a seven-week decline. To strategists at Morgan Stanley (NYSE:MS), last week’s jump in stocks is a little more than a hiccup amid a broader decline, especially with a Fed eager to cool demand. “The more equity prices rise, the more hawkish the Fed will be,” Morgan Stanley’s Michael Wilson wrote in a report Tuesday. “Investors may be underestimating the Fed’s willingness to shock markets if necessary to achieve its inflation goals.”©2022 Bloomberg L.P. More

Signs that China’s economy, the world’s second largest, may flirt with recession in the second quarter of this year are worrying for global growth. But they provide Beijing with an opportunity. It could use these sobering indications to reconsider not only aspects of its “zero-Covid” policy but also its treatment of foreign direct investors; what is good for them is good for China’s own economy.Foreign investors have poured hundreds of billions of US dollars into China’s economy since the mid-1980s, helping to foster a transformational economic boom that has lifted 850mn people out of poverty. Foreign companies have also transferred technology to Chinese counterparts, trained staff in crucial roles and assisted in opening overseas markets to Chinese-made goods.Some came spectacularly unstuck in the world’s biggest potential market. But many multinationals made handsome profits — and became the strongest pro-China political lobbyists back in their home countries. Now, surveys are showing rising disillusionment among foreign investors, many of whom plan to shift investment out of China.Such sentiments do not derive solely from China’s muscular zero-Covid policies, though cancelled flights, visa complications and lengthy quarantines have contributed to the frustrations of foreign executives. The deeper roots of disaffection lie in a sense that doing business in China has become harder as Beijing’s rivalry with the west intensifies. While the US screens some selected investments through the Committee on Foreign Investment in the US (Cfius), would-be investors in China must navigate a labyrinth. They must check the business they wish to start is not on either of two negative lists and then seek regulatory approval if it falls into one of a further 550-plus different categories. Once a foreign business is up and running, it may receive pressure to transfer technology to Chinese counterparts, sometimes as part of the “Made in China 2025” strategy, which envisages boosting the market share of domestic competitors over time. Under the Foreign Investment Law of 2020, a national security review may be required for a project that “affects or may affect national security”. Other recent laws have added to the complexity. The Data Security Law and Personal Information Protection Law, both passed last year, sharply restrict the handling of customer data and its transfer overseas.Add to that the current slump in growth amid strict Covid policies, and it is no surprise that some leading foreign investors are sounding gloomy. Michael Hart, president of the American Chamber of Commerce in China, has warned of a potentially “massive decline” in investment “two, three, four years from now”. Joerg Wuttke, president of the EU Chamber of Commerce in Beijing, has said unpredictability is prompting Europe’s business community to put investments in China “on hold”. Understandably, the welfare of foreign investors may not be uppermost in the minds of Beijing’s leaders. In April, retail sales were down 11.1 per cent year on year, industrial production fell by 3.2 per cent, unemployment rose, exports slowed significantly and credit extended by the banks also slid back.Shanghai’s limited reopening after two months of lockdown is a welcome signal that China may be easing its zero-Covid mantra, and there are signs activity may be ticking up in response. But Beijing should also take steps to demonstrate that foreign investors remain a valued part of the economy. Official statements to this end would set a positive tone. But a real focus on reducing red tape and ensuring equal treatment with local competitors would alleviate some of the gloom descending upon China’s foreign business community. More

(Reuters) -South Africa’s Gold Fields (NYSE:GFI) Ltd’s is set to become one of the four biggest gold miners in the world after agreeing to acquire Canada-based Yamana Gold (NYSE:AUY) in a $6.7 billion all-share deal, the biggest in the region in years. Shares in the South Africa-listed mining company fell 20%, though, and investors voiced concern about dilution on a call with Gold Fields CEO Chris Griffith and Yamana CEO Peter Marrone. Yamana shares rose as much as 8.6% on the deal, and were last up 4.2%.Credit Suisse analysts said the premium Gold Fields agreed to pay for Yamana – 31% above Yamana’s latest close – was “considerably higher” than in other recent gold deals.”We are asking you to invest in this future value at what we think is a very, very attractive premium,” Griffith told investors. “We don’t expect the market instantaneously to have the same level of appreciation for this deal as we do.”The acquisition is the largest mining deal in the Europe, Middle East and Africa (EMEA) region in a decade, and the third-largest South African transaction since 2014 — all in a sector that analysts say needs consolidation to reduce costs.The deal gives Gold Fields a coveted foothold in the Americas, Griffith told Reuters in an interview. Gold Fields will be propelled to fourth place in terms of gold production, behind Newmont, Barrick and Agnico Eagle (NYSE:AEM).The transaction will see Gold Fields shareholders owning about 61% of the combined group, while Yamana shareholders will own around 39% after the deal completes.Marrone said Gold Fields was the best custodian for Yamana’s assets. Yamana, which produced 884,793 ounces of gold and 9.2 million ounces of silver in 2021, owns 50% of Canada’s biggest gold mine, Canadian Malartic, and has operations in Chile, Brazil and Argentina.Gold Fields has long eyed Canada, Griffith said, as it looked for assets that would complement its growth strategy and provide synergies.”That’s what the Yamana assets do, they tick all those boxes for us. They bring high quality assets in Canada, Chile and Brazil, with great pipeline projects in both Canada and Argentina in particular,” Griffith said.Apart from mines in South Africa, Australia and Ghana, Gold Fields operates the Cerro Corona mine in Peru and is developing the Salares Norte project in Chile, which it expects to start production in the first quarter of 2023.”We will have some synergy savings in overheads and some savings by bulking up and putting our assets together in South America around supply chains,” Griffith said.After a pandemic-induced lull, merger activity in the gold industry is bouncing back, driven by a need to grow and prop up share prices that have suffered from poor performances. Canada’s Agnico Eagle Mines Ltd bought rival Kirkland Lake Gold (NYSE:KL) Ltd for more than $10 billion earlier this year.Gold Fields said both companies’ boards had unanimously approved the deal and recommended shareholders give their green light in a vote expected by the end of September.Yamana shares will be delisted, while Gold Fields will continue trading in Johannesburg, where the combined group will have its headquarters. More

Western sanctions on Russian banks have made it difficult or impossible for African countries to buy grain from Russia to help solve a global food crisis triggered by the invasion of Ukraine, the head of the African Union has told EU leaders. Macky Sall, Senegal’s president, made the complaint by videoconference at an EU summit on Tuesday, the latest sign of concern in developing countries about the economic and humanitarian impact of the Ukraine war and the surge in energy and food prices that has been exacerbated by sanctions aimed at Moscow.“Our countries are very worried about the collateral impact of the disruptions caused by blocking the Swift payment system as a result of sanctions,” Sall said. He was speaking after the EU endorsed a sixth package of sanctions that will curb 90 per cent of Russian oil imports to the EU and added Sberbank to the list of Russian banks excluded from the Swift messaging system for financial transfers. “When the Swift system is disrupted, it means that even if produce exists, payment for it becomes difficult or even impossible,” Sall said. “I would like to insist that this question be examined as soon as possible by our relevant ministers to find suitable solutions.” Russia and Ukraine are among the world’s biggest grain exporters, and about 20mn tonnes of wheat are stranded and awaiting shipment from the Black Sea port of Odesa because of a Russian naval blockade of the Ukrainian coast. Faced with complaints by Sall and other African governments about the difficulties of importing grain and fertiliser from Russia, EU leaders have laid the blame squarely on Russian president Vladimir Putin while simultaneously trying to arrange the export of Ukrainian wheat stocks by sea or overland. “The fact that there is a severe food crisis developing is only the fault of Russia’s unjustified war,” European Commission president Ursula von der Leyen said at the conclusion of the summit, noting that there were no EU sanctions on Russian exports of food or fertiliser. Olaf Scholz, German chancellor, said: “There are many stories that are a distraction from Russia’s war in Ukraine — we shouldn’t accept that.” Last week a senior French official said it was important to “deconstruct” the Russian narrative that it was the retaliatory sanctions rather than the invasion itself that lay behind the growing international food crisis.But Scholz acknowledged that there were some issues with payments for fertilisers and an EU official said that there was a “glitch” in the sanctions regime given the difficulty of paying for produce that was not supposed to be affected by the EU’s measures against Moscow. In much of Africa, the Ukraine war threatens not only to increase food prices but also to push the cost of fertiliser beyond the means of millions of farmers, threatening next year’s harvest. “Eastern African countries are fully dependent on fertiliser imports and the rising fertiliser costs are expected to have severe implications of food availability and prices,” the UN said.A senior Ethiopian official has argued that the war in Ukraine and Swift sanctions on Russia — which make it hard to pay for Russian grain and fertilisers — are “bringing significant shocks” to the economies of east Africa, as inflation spiked.President Emmanuel Macron of France, which holds the rotating presidency of the EU, said he hoped that in the coming days and weeks an agreement with Russia could be found for Ukrainian food exports, saying that recent talks between the Russian and Turkish presidents on the matter were a “positive sign”.Additional reporting by Valentina Pop and Javier Espinoza in Brussels and Andres Schipani in Nairobi More

How do we make sense of the world? Time spent in Davos last week crystallised my answers in the form of twelve propositions.Proposition one: the world is menaced “by the sword, by famine and by pestilence”, as Ezekiel warned: first Covid, then war on Ukraine and then famine, as exports of food, fertilisers and energy have been disrupted. These remind us of our vulnerability to unpredictable — alas, not unimaginable — shocks.Proposition two: “it’s the politics, stupid”. James Carville, Bill Clinton’s campaign strategist famously said that it’s “the economy, stupid”. The primacy of economics can no longer be assumed. Ours is an age of culture wars, identity politics, nationalism and geopolitical rivalry. It is also, as a result, an age of division, within and among countries.Proposition three: technology continues its transformative march. The Covid shock brought with it two welcome surprises: the ability to carry out so much of our normal lives online; and the capacity to develop and produce effective vaccines with amazing speed, while failing to deliver them equally. The world is divided in this way, too.Proposition four: the political divides between the high-income democracies on the one hand and Russia and China on the other, are now deep. Prior to Russia’s invasion of Ukraine, the survival of an overarching concept of “one world” seemed at least conceivable, however difficult. But wars are transformative. China’s offer of a “no limits” partnership to Russia may have been decisive in Putin’s decision to risk the invasion. His war is an assault on core western interests and values. It has brought the US and Europe together, for the moment. It should be decisive for Europe’s attitude to China: a power that supports such an assault cannot be a trusted partner. The march towards totalitarianism in both of these autocracies must also widen the global split.Proposition five: despite the rise of China, the west, defined as the high-income democracies, is hugely powerful. According to the IMF, these countries will still account for 42 per cent of global output at purchasing power parity and 57 per cent at market prices in 2022, against China’s 19 per cent, on both. They also issue all the significant reserve currencies. China holds more than $3tn in foreign currency reserves, while the US holds almost none. It can print them, instead. The ability of the US and its allies to freeze a large proportion of Russia’s currency reserves shows what this power means. Yet western power is not just economic. It is also military. How would Russia’s vaunted military have fared against Nato’s? Proposition six: yet the west is also deeply divided within countries and among them. Plenty of its politicians were enthusiastic supporters of Putin: Marine Le Pen was one of them. In Europe, Viktor Orbán is the most vocal survivor of this troupe. In the US, xenophobic authoritarianism — “Orbanism” — remains a leading set of ideas on the right. Donald Trump’s assault on the fundamental feature of democracy — a transfer of power through fair voting — is also very much alive. Many of these people view Putin’s nationalist autocracy as a model. If they get back into power, western unity will collapse.Proposition seven: over the long run, Asia is likely to become the dominant economic region of the world. The emerging countries of east, south-east and south Asia contain half of the world’s population, against 16 per cent for all high-income countries together. According to the IMF, average real output per head of these Asian economies will jump from 9 per cent of that of high-income countries in 2000 to 23 per cent in 2022, mostly, but not only, because of China. This rise is likely to continue.Proposition eight: the high-income democracies will have to up their political game if they are to persuade emerging and developing countries to side with them against China and Russia. Few countries like these autocracies. But the west has lost much support with its failed wars and inadequate help, notably during Covid. Most emerging and developing countries will try hard to stay on good terms with both sides.Proposition nine: global co-operation remains essential. However deep the rifts become, we share this planet. We still need to avoid cataclysmic wars, economic collapse and, above all, destruction of the environment. None of this is at all likely without at least a minimum level of co-operation. Yet is that at all likely? No.Proposition ten: The rumours of globalisation’s death are exaggerated. Americans are inclined to think their perspective is the global norm. Frequently, it is not, as on this. Most countries know that extensive trade is not a luxury but a necessity. Without it, they would be miserably impoverished. The more likely prospect is that trade will become less American, less western and less dominated by manufacturers. Trade in services is likely to explode, however, driven by cross-border online interaction and artificial intelligence.Proposition eleven: given the immense political and organisational challenges, the chances that humanity will prevent damaging climate change are slim. Emissions fell in 2020 because of Covid. But the curve remains unbent.Proposition twelve: inflation has been unleashed in a way not seen for four decades. It is an open question whether central banks will maintain their credibility. High inflation and falling real incomes are a politically noxious combination. Upheaval will follow.We in the west have to manage profound changes and lethal conflicts at a time of division and disillusionment. Our leaders have to rise to the occasion. Will they do so? One can only hope [email protected] Martin Wolf with myFT and on TwitterThis article has been amended to remove a chart that contained an incorrect figure on military spending More

Brussels is willing to propose tariffs on Russian oil imports as a fallback option if any EU member states refuse to implement its newly announced embargo on crude.Leaders agreed at a summit on Monday night to impose a ban on Russian seaborne oil imports, while granting a temporary exemption for Russian oil delivered via pipeline to prevent Hungary from blocking the embargo. The carve-out from the ban, which benefits Hungary and other landlocked member states, did not come with any agreed time limits, raising questions about whether Budapest in particular could continue using Russian crude for as long as it wished. Russian oil transported via the Druzhba (friendship) pipeline, which serves Hungary, Slovakia and the Czech Republic, is about 20 per cent cheaper than the alternatives other member states are forced to use. A senior European Commission official said if Hungarian prime minister Viktor Orbán did not ultimately commit to a cut-off date then Brussels could seek to propose tariffs on the oil. This would make the Russian crude less competitive, potentially forcing Moscow to discount its crude or Hungary and others to pay more. The imposition of tariffs on Russian oil would require a qualified majority vote among the 27 member states, rather than the unanimity needed for normal sanctions, so Orbán could not veto the move. But it is seen as very much a last resort by some member states if talks with Hungary on an end date do not bear fruit, and it could spark a fierce debate at EU leaders’ level. Singling out Russian oil is possible because the EU has lifted the “most favoured nation” status it conferred on Russia under World Trade Organization rules. Hungary’s prime minister, Viktor Orban © Johanna Geron/ReutersEU leaders including Orbán agreed on Monday to “revert to the issue of the temporary exception for crude oil delivered by pipeline as soon as possible”.Ursula von der Leyen, the commission president, said on Monday night there were ways of returning to the topic, as well as means to “accelerate this procedure”, without giving details.One crucial question is whether extra EU money will be available for Hungary to incentivise investments to wean it off Russian oil. However Budapest is hampered by the refusal of the commission to sign off on its application for the EU recovery plan, a key source channel for extra EU energy spending.Von der Leyen said on Monday that Croatia was ready to expand the Adria pipeline, which runs from the Adriatic Sea into neighbouring states, to replace the Russian crude flowing into Hungary and other landlocked countries via the southern branch of the Druzhba pipeline. “The preferred option is the import ban,” said the senior commission official. But tariffs are an “alternative possibility we can look into”. Orbán’s position seems weaker, the official said. “I am not so worried that we won’t finally find a solution.” Brussels has previously discussed longer phaseout periods for landlocked member states, extending the deadline for terminating deliveries of crude to 2024 for some countries, and these are still under consideration, the official added. “We agreed to quite extensive transition periods for Hungary and Slovakia and still stand ready to go with these longer wind-down periods.” The official said talks on possible tariffs could be initiated if “we get the sense that [Hungary] is just buying time”. The risk of permitting an indefinite carve-out of crude delivered by pipeline is that it creates a distortion to the single market as some economies will enjoy cheaper oil supplies. Refineries connected to the Druzhba pipeline have an advantage because Russian oil prices have fallen since European traders started shunning the country’s crude following Vladimir Putin’s invasion of Ukraine. The commission estimates the cost of converting Hungary’s refineries to handle non-Russian crude, which is lighter, to be about €500mn-700mn.

Seaborne Russian Urals crude is trading around $93 a barrel compared with $120 a barrel for Brent, the international oil benchmark. While Russian oil delivered via the Druzbha pipeline may not carry the full discount of seaborne cargoes, depending on how contracts are structured, Hungary’s MOL has said it has enjoyed “skyrocketing” margins for its refineries since March because of the “widening Brent-Ural spread”.Despite the carve-out for Hungary and other landlocked states, Germany and Poland have voluntarily committed to phasing out imports of Russian crude via the northern branch of the pipeline.With these commitments in place, the EU’s oil ban will in effect cover 90 per cent of Russian crude by the year end, officials including von der Leyen have said. Germany’s offer was seen in Brussels as paving the way to a wide-ranging import ban that will cover the vast majority of Russian crude deliveries to Europe.Hungary did not immediately respond to a request for comment.Additional reporting by Marton Dunai in Budapest More