Aurelia Butler

PARIS (Reuters) – All the main candidates are now on the starting line for France’s April presidential election, after Emmanuel Macron confirmed on Thursday that he was running for a second term.* WHO WILL WIN?Macron is the favourite in opinion polls. But the projected margin is narrower than when he was elected in 2017 and he is facing stiff competition from the right.Even if he succeeds, Macron will need his centrist La Republique en Marche (LaRem) party – which has failed in all recent local elections – and its allies to win a parliamentary election in June if he is to have a strong platform to implement his policies. * WHAT TO WATCH FOR: – The race between Valerie Pecresse of the conservative Les Republicains and the far-right’s Marine Le Pen and Eric Zemmour to be Macron’s challenger in the likely second-round run-off.- Will Macron trip up and lose his lead? In 2017, the early favourites lost the election to then-outsider Macron.- Voter uncertainty. Opinion polls show many are unsure who they will vote for, and turnout could be lower than usual, adding more uncertainty.* WHAT WILL THE ELECTION BE FOUGHT OVER?- The election campaign starts amid a war in Ukraine. Polls show that could impact the vote’s outcome, with initial surveys indicating a boost for Macron.- Immigration and security issues had long been at the forefront of the political debate, but opinion polls show purchasing power as one of voters’ top concerns. – Economic recovery, and whether it holds. Opinion polls show voters are unhappy with Macron’s economic policy, but unemployment is at its lowest in years and those surveyed don’t think any of his opponents would do better. * WHY DOES IT MATTER?- Russia’s invasion of Ukraine has sent shockwaves through Europe and beyond. The winner of France’s election will have to deal with the fallout.- Now that Britain has left the European Union, France is the bloc’s main military power. It’s also the undisputed second biggest economy in the EU, and Angela Merkel’s exit as German chancellor has given Macron a more prominent role in Europe.- The next president will face soaring public deficits to tackle the impact of the pandemic, a pension system many say needs reforming, and moves to re-industrialise France.* KEY DATES April 10 – Presidential election first roundApril 24 – Second round held between the top two candidates if none wins a simple majority of votes cast in the first round.May 13 – The latest day the new president takes office. June 12 and 19 – Parliamentary election. More

OTTAWA (Reuters) – The Bank of Canada has “considerable space” left to raise interest rates this year, Governor Tiff Macklem said on Thursday, and did not rule out a rare 50-basis-point move if needed to rein in hot inflation.The central bank, increasingly concerned about spiking prices, hiked rates for the first time in more than three years on Wednesday and said it was prepared to act aggressively if need be to keep inflation expectations grounded.”There is certainly considerable space to raise interest rates over the course of the year,” Macklem said in a question and answer session after a speech to a business audience. “If we have to move more quickly, we are prepared to do that,” he added. “I am not going to rule out a 50-basis-point move in the future.”He did not elaborate when asked what conditions would merit such a hike.The Bank of Canada last hiked by 50 basis points in May 2000. Inflation in Canada hit a 30-year high of 5.1% in January and price pressures are broadening, making buying necessities like gas and groceries more expensive.Earlier, Macklem told the CFA Society of Toronto the bank would act “with determination” to rein in soaring prices, saying a failure to act decisively would make it much more painful to bring inflation back to target.Even with food and gas prices rising quickly, inflation expectations remain well-anchored, Macklem said. “Canadians can expect us to use our tools with determination to keep them that way,” he said. “The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target.”The central bank made clear interest rates remained its primary monetary policy tool, to be complimented by its first-ever quantitative tightening program, a reference to the process of allowing the government bonds purchased during the pandemic to roll off its balance sheet. Macklem said the central bank did not intend to actively sell bonds, nor did he give a timeframe for starting QT, saying only that it “would be a natural next step” following Wednesday’s rate increase.In the current reinvestment phase, the Bank of Canada buys roughly C$1 billion ($789 million) worth of government bonds each week to keep the size of its balance sheet constant.The Canadian dollar was trading 0.4% lower at 1.2675 to the greenback, or 78.90 U.S. cents.On Wednesday, the central bank raised its policy rate to 0.5% from a record low 0.25%, its first increase since October 2018. ($1 = 1.2672 Canadian dollars) More

NEW YORK (Reuters) – With surging oil prices, concerns about the hawkishness of the Federal Reserve and fears of Russian aggression in Eastern Europe, the mood on Wall Street feels like a return to the 1970s. Other than bell-bottoms, the only thing missing so far is stagflation, which occurs when an economy experiences rising inflation and slowing growth at the same time. Yet some investors now think that it is not far off.They are recalibrating their portfolios for an expected period of high inflation and weaker growth. Sanctions on top commodity exporter Russia have helped lift the price of Brent crude by some 80% in the last year to around $116 a barrel, stoking concerns that higher energy costs will continue pushing up consumer prices while pressuring global growth.At the same time, market volatility stemming from geopolitical strife has made investors less certain over how aggressive the Federal Reserve will be in tightening monetary policy to tame soaring inflation. Investors now expect the Fed to take rates from zero to 1.5% by February 2023, compared with 1.75% or higher just a few weeks ago. [FEDWATCH] The percentage of fund managers who believe stagflation will set in within the next 12 months stood at 30%, compared with 22% last month, a survey from BoFA Global Research showed. “Our base case is still not 1970s stagflation, but we’re getting closer to that ZIP code,” said Anders Persson, chief investment officer of global fixed income at Nuveen. The threat of stagflation is especially worrisome to investors because it cuts across asset classes, leaving few places to hide. A diversified portfolio of global equities, bonds and real estate could end up losing 13% in the event that rising oil prices cause stagflation, according to a stress test model by MSCI’s Risk Management Solutions research team. The last major stagflationary period began in the late 1960s. Spiking oil prices, rising unemployment and loose monetary policy pushed the core consumer price index up to a high of 13.5% in 1980, prompting the Fed to raise interest rates to nearly 20% that year.The S&P 500 fell a median of 2.1% during quarters marked by stagflation over the last 60 years, while rising a median 2.5% during all other quarters, according to Goldman Sachs (NYSE:GS). With bond prices hit by recent market volatility, Persson is looking for opportunities to position in high-yield debt, which he believes may be a good hedge against future stagflation-fueled declines. Worries that stagflation may hit Europe harder due to its heavier reliance on energy imports will likely cause some investors to edge away from the region’s assets, said Paul Christopher, head of global market strategy at Wells Fargo (NYSE:WFC) Investment Institute. Moving out of U.S. assets and into European ones became a popular trade near the end of 2021, as U.S. stocks rose to comparatively high valuations. OPPORTUNITY IN COMMODITIES Stagflation in Europe would likely resemble the long period of low growth and high inflation the United States experienced in the 1970s, Christopher said. “In Europe, if energy prices go too high then factories will have to shut down,” he said. Nuveen’s Persson estimates that a Brent crude price of $120 per barrel will sap 2 percentage points from the economy of the EU. Rising oil prices will likely shave 1 percentage point from the U.S. economy, due in part to the country’s greater domestic supply and lower taxes. U.S.-focused equity funds have gained $44.5 billion in inflows since the start of February, while world stock funds have pulled in, losing $2 billion in outflows, according to ICI data. Funds focused on commodities have notched $7.7 billion in inflows since the start of the year, including the largest one-week net gain since August 2020, ICI data showed. Those inflows have come amid sharp price gains in raw materials that have benefited assets linked to commodity exporters such as Australia, Indonesia and Malaysia.”We see a long wave of opportunity in commodities that we haven’t seen in a long time,” said Cliff Corso, chief investment officer at Advisor Asset Management. His fund has been building positions in commodities and emerging market equities from oil-rich countries such as Mexico as a hedge against the potential of higher inflation or stagflation. A robust job market and domestic sources of energy should leave U.S. equities, especially dividend-paying companies, more attractive than other global assets even in the face of rising inflation, said Lindsey Bell, chief markets and money strategist at Ally. “The consumer remains healthy and has been able to absorb higher inflation thus far,” she said. More

Western sanctions against Russia have already prompted banks around the world to halt business in the country. International money-transfer firms have followed suit. Companies including Remitly Global, Wise (formerly known as TransferWise) and Zepz, have all suspended service to Russia. The retreat is unlikely to have a material effect on the companies’ revenue, for now. But for those which still operate in the country, business has been brisk. MoneyGram, which agreed to be taken private last month, said transfers to Russia were up more than 50 per cent compared with the 30-day average during the week of the invasion. Nearly $10bn in remittances flowed into Russia in 2020, according to the World Bank, nearly double the amount ten years earlier. Getting money into Ukraine — where remittances account for about 10 per cent of the country’s gross domestic product — gets trickier as Russia’s attacks on Ukraine intensify. Although Wise still functions in Ukraine, it has capped transfers to GBP 2,500. Those looking to move money in and out of Russia have found workarounds. Chinese payment networks Alipay and UnionPay offer one way to bypass western sanctions. Cryptocurrency offers another. Crypto exchanges such as Coinbase have thus far resisted calls to bar Russian users.While remittance companies’ direct exposure to Russia is modest, there are ripple effects to consider. Tajikistan, Kyrgyzstan and Uzbekistan rely heavily on cash transfers sent home by migrant workers in Russia. Remittances accounted for 26 per cent of Tajikistan’s GDP and 31 per cent of Kyrgyzstan’s GDP in 2020. The collapse of the rouble and deteriorating economic conditions in Russia could disrupt these flows.The bigger threat to the industry would be the effect of Russia’s invasion on the global economy. Spiralling inflation, the possibility of rising interest rates, could put the brakes on America’s economic recovery. The country is one of the world’s largest sources of remittances. A slowdown there would too mean bad news for those enterprises whose business model depends upon helping immigrants move money around. More

The writer is a research fellow at the Hoover Institution, Stanford UniversityOf all the sanctions the west imposed on Russia last week, sanctioning Russia’s central bank is by far the most fateful. “We will cause the collapse of the Russian economy,” said Bruno Le Maire, France’s finance minister. This is not hyperbole. And if managed smartly by the west, these sanctions can also stop the war in Ukraine and beyond.The possibility stems from an unsung feature of any modern central bank. The Russian central bank is, like others, not only the lender of last resort to commercial banks in its domestic currency, the rouble, but also the lender of last resort in foreign exchange. FX reserves support the exchange rate and the value of the rouble, ensure the stability of the banking system and its deposits, prevent runs on banks, bail out the foreign debt of state and private corporations and manage the sovereign wealth fund.Western sanctions strike at these foundations of the Russian economy. And this has become possible because of the digitalisation of international finance.Unlike in times past, most components of FX reserves are not physical certificates of government bonds or piles of cash in dollars, euros, pounds and yen. In the 21st century, they are electronic book entries on the computer ledgers of the Federal Reserve Bank of New York, the European Central Bank, European national central banks, the Bank of England, the Bank of Japan and Swiss commercial banks. This digitalisation separates ownership and control of FX reserves. Russia owns them but western issuers and computerised holders of these assets control access to them. At the end of February, they collectively closed Russia’s access to these assets, froze them and banned all private transactions with the Russian central bank so that it cannot sell securities and cannot withdraw cash from western banks. From a source of economic strength during peacetime, FX reserves turned into the source of a crash during war. Within a fateful 24 hours, the Russian central bank and Russians lost access to 60 per cent of FX reserves, $388bn out of a total $643bn. They lost access to entire arrays of assets: securities and deposits in western central banks ($285bn) and in western commercial banks and brokerages ($103bn). The Russian central bank is left with $135bn worth of gold in its vaults, $84bn of Chinese securities denominated in renminbi, a $5bn position in the IMF and a residual $30bn in actual cash, dollars and euros. (These are my calculations from central bank data).With 60 per cent of FX reserves out of commission, Russia has to rely on the remaining 40 per cent, but there is no freedom to operate there either. The central bank cannot sell gold for dollars and euros because all transactions with it are prohibited and foreign bankers and dealers do not want to invite western wrath. The IMF reserve position is untouchable. Some $84bn in Chinese securities could, hypothetically, have been sold back to China, with a discount, to be paid in dollars, cut to $50bn, but China’s state banks have already refused financial deals with Russia. Which leaves only $30bn in cash — too little to prevent financial and economic ruin. The rouble is already in freefall and the run on banks in full swing. Russian corporate and individual depositors have $280bn in dollar and euro denominated account balances with Russian commercial banks. Banks cannot have that much foreign cash on hand and the central bank doesn’t have cash to save them. Now people want to withdraw rouble deposits, not because they are afraid that next time the roubles won’t be there but because they expect that next time their bank won’t be there. The Russian people saw bank failures during the default of 1998 and expect no less. The final implosion will be over supply chains. Businesses will demand dollars for payments. The successful part of the economy, producers of natural resources and high-value goods, will operate in dollars. The rest will have to resort to barter and endure supply interruptions, work stoppages and unemployment. The government may ban foreign currency transactions and demand that businesses trade only in roubles. This is unenforceable. The economy will break and a GDP contraction follow. These developments will weaken the Russian war effort but, alas, may not be sufficient to stop the war. But something else may. The west can offer the Russian government a deal: cash for peace. This is akin to the IMF practice of conditional loans. The west has frozen $388bn in Russian assets. We can offer to unfreeze assets in tranches, say, $50bn a piece to save their economy in exchange for withdrawing forces from Ukraine, pledging not to ever use nuclear weapons and, generally, starting a return to humanity. More