Aurelia Butler

LONDON (Reuters) -The punishing post-COVID wave of sovereign defaults has finally crested, with the likes of Ghana, Sri Lanka and Zambia concluding years of painful debt reworks. But the International Monetary Fund and others worry that a dangerous liquidity shortfall could take its place in many emerging economies – setting back development, stunting climate change mitigation and fuelling distrust in governments and Western institutions. The issue, and what to do about it when western countries are increasingly loath to send money overseas, is a key topic at the IMF World Bank autumn meetings taking place in Washington, D.C. this week. “It’s a challenge in the sense that for many, debt service has grown, borrowing has become more expensive, and external sources (have become) less certain,” said Christian Libralato, portfolio manager with RBC BlueBay.The U.S. Treasury’s top economic diplomat has called for new ways to provide short-term liquidity support to low- and middle-income countries to head off debt crises. The Global Sovereign Debt Roundtable – an initiative bringing together representatives from countries, private lenders, the World Bank and the G20 – has also tried to tackle the issue, and it will be on the agenda when they meet in Washington on Wednesday. But with constrained budgets and crises around every corner, Vera Songwe, chair of the Liquidity and Sustainability Facility – a group that aims to lower debt costs for Africa – said current fixes lack the scale and the speed needed. “Countries are avoiding…education, health and infrastructure expenditures to service their debt,” Songwe said. “Even in the advanced economies…there are stresses in the system.” QUESTION OF CAPITALData from non-profit advocacy group ONE Campaign shows that in 2022, 26 countries – including Angola, Brazil, Nigeria and Pakistan – paid more to service external debts than they received in new external finance. Many first gained access to bond borrowing roughly a decade prior, meaning big payments came due just as global interest rates rose, putting affordable refinancing out of reach. ONE estimates those flows turned net negative for developing countries on the whole in 2023, estimates backed by experts at the Finance for Development Lab. “The IMF-led global social global financial safety net is simply not deep enough anymore,” Ishak Diwan, research director at the Finance for Development Lab told Reuters. Diwan, who spent two decades at the World Bank, said that while full official figures are not yet available, net negative transfers for 2023 and 2024 are likely worse. Fresh funding from the IMF, the World Bank and other multilaterals failed to compensate for the rising costs, he said. World Bank and IMF officials seem to agree. The World Bank aims to boost lending capacity by $30 billion over 10 years. The IMF cut surcharges, lowering the cost for the most overstretched borrowers by $1.2 billion annually.TIDE TURNING?Bankers say many of the countries are now able to tap markets again, alleviating cash flow worries. “I don’t think there’s a limitation on access,” said Stefan Weiler, head of CEEMEA debt at JPMorgan. “The market is really wide open.”             Weiler expects bond issuance in Europe, the Middle East and Africa to reach a record $275-$300 billion this year – with more countries, even Nigeria and Angola, possibly issuing bonds next year.But the cost remains high. Kenya, scrambling to repay a maturing dollar-bond, borrowed at above 10%, a threshold seen widely as unsustainable. Finance minister John Mbadi said Kenya cannot fund infrastructure investments through the budget. “Kenyans keep on complaining about ‘we don’t have money in our pockets.’  That in a sense is just saying that we have challenges with liquidity in the economy,” Mbadi said during a news conference. China’s pull-back in lending has also hit emerging countries hard, turning what had become a large source of incoming cash into a net negative flow for those repaying old debts.SO WHAT NEXT?Development banks are already scrambling to work together to maximise lending; the Inter-American Development Bank and the Africa Development Bank are in the midst of a global campaign to get countries to donate their IMF reserve assets, so-called “special drawing rights”, which they say could turn every $1 donated into $8 in lending.But the World Bank and others are still fighting to convince western countries to cough up more cash to supercharge their lending; debt-laden France plans to cut 1.3 billion euros of foreign aid, following cuts by the previous government in Britain. A strong dollar means key donor Japan would have to significantly boost its contributions to keep at the same level. The mix is toxic for developing nations. “We see protests from Kenya to Nigeria to elsewhere. It’s a very dangerous situation,” Diwan said. “We’re losing the whole global south at this stage.” More

VILNIUS (Reuters) – The European Central Bank is likely to cut its key interest rate down to its “natural” level between 2% and 3% but it may need to reduce it even further if a fall in inflation becomes entrenched, ECB policymaker Gediminas Simkus said on Monday.”If the disinflation processes get entrenched… it’s possible that rates will be lower than the natural level,” Simkus, the Lithuanian central bank governor, told reporters in Vilnius. More

1. Futures mixedUS stock futures hovered around both sides of the flatline on Monday as investors looked ahead to a parade of corporate earnings reports this week.By 03:26 ET (07:26 GMT), the Dow futures contract had edged up by 47 points or 0.1%, S&P 500 futures were mostly unchanged, and Nasdaq 100 futures had slipped by 33 points or 0.2%.The main indices on Wall Street notched a sixth consecutive weekly gain last week, with the 30-stock Dow Jones Industrial Average and benchmark S&P 500 in particular logging fresh record closing highs on Friday.Sentiment was bolstered by a surge in shares in streaming giant Netflix (NASDAQ:NFLX), which posted better-than-anticipated subscriber growth and an optimistic outlook for the rest of its fiscal year. Apple (NASDAQ:AAPL) also advanced on data showing an uptick in new sales of its flagship iPhone smartphone in key market China, while Nvidia (NASDAQ:NVDA) inched higher after analysts at Bank of America Global Research upgraded their price target of the artificial intelligence-darling’s stock.A batch of broadly solid results from major companies has combined with positive US economic data to fuel a jump in stocks in recent days, although uncertainty still looms in the form of elevated stock valuations and the outcome of the all-important US presidential election in November.2. Major earnings aheadWith earnings season kicking into high gear, Tesla (NASDAQ:TSLA) will be one of the first big US tech companies to report, with results due after the close of trade on Wednesday.Tesla shares have taken a hit this month following the unveiling of its long-awaited robotaxi offering, which some investors viewed as lacking in concrete details. Year-to-date, Tesla shares have underperformed the S&P 500, losing around 11% compared to the broader index’s 22.5% gain.Results are also due out from semiconductor firm Texas Instruments and wafer-fabrication equipment group Lam Research (NASDAQ:LRCX) following a volatile week for the chipmaking industry.Shares in the sector slumped last Tuesday after ASML (AS:ASML), Europe’s biggest tech firm, projected lower-than-expected 2025 sales and bookings. But the segment rebounded on Thursday on a forecast-topping spike in quarterly profit from the world’s largest contract chipmaker and a major producer of advanced chips used in AI applications, Taiwan Semiconductor Manufacturing Co. (NYSE:TSM).3. Starboard takes stake in Kenvue – reportsActivist investor Starboard Value has taken a stake in Kenvue, the consumer products firm behind brands like Band-Aid and Listerine which went public last year, according to various media reports.The exact size of the stake has yet to be revealed, the reports said.Kenvue, which was spun off from Johnson & Johnson, currently has a market capitalization of around $41.6 billion. Its shares have fallen by 18% since they were publicly listed in May 2023, and have lagged the wider S&P 500.Citing a source familiar with the matter, Reuters reported that Starboard could be aiming to review how Kenvue markets and prices its brands. The hedge fund’s Chief Investment Officer Jeffrey Smith is due to present investment ideas at the 13D Monitor Active-Passive Investor Summit later this week.The Wall Street Journal was the first to report on the story.4. PBOC slashes lending ratesThe People’s Bank of China cut its benchmark loan prime rate (LPR) by 25 basis points on Monday, in the latest move by Beijing to reinvigorate activity in the world’s second-largest economy.The PBOC reduced its one-year LPR to 3.10% from 3.35%, while the five-year LPR — a key factor in determining mortgage rates — was lowered to 3.60% from 3.85%. The PBOC last cut rates in July.Chinese authorities had largely telegraphed the decision, with PBOC Governor Pan Gongsheng previously predicting that the LPR rates would be cut by between 20 and 25 basis points.The past month has seen Beijing unveil a raft measures aimed at reigniting growth, although a perceived lack of details on their implementation, timing and scale has inspired tepid investor confidence.5. Oil steadies after weekly declineOil prices edged higher Monday, stabilizing after the previous week’s sharp losses on worries about global demand growth, particularly in top crude importer China.By 03:27 ET, the Brent contract climbed 0.6% to $73.50 per barrel, while U.S. crude futures (WTI) traded 0.8% higher at $69.23 per barrel.Brent had settled down more than 7% lower last week, while WTI lost around 8% after data showed that China’s economy grew at the slowest pace since early 2023 in the third quarter.However, sentiment was somewhat lifted on Monday after the Chinese central bank cut benchmark lending rates.Meanwhile, tensions in the Middle East remain in focus, as Israel continues its campaigns against both Hamas and Hezbollah, while also potentially preparing to retaliate against Iran for an early-October strike. More

Here’s your look at what matters for markets this week from Kevin Buckland in Tokyo, Ira Iosebashvili in New York, and Naomi Rovnick, Dhara Ranasinghe and Karin Strohecker in London.1/ ELECTRIC DREAMSAs the latest earnings season goes full steam, focus is on Tesla, one of the first of big U.S. tech companies to report. Tesla shares have taken a hit this month, following a long-awaited unveiling of its robotaxis that some investors said was short on practical details. Year-to-date, Tesla’s shares have lost around 11%, compared to the S&P 500’s 22.5% gain.A weaker-than-expected Tesla earnings in late July, along with underwhelming results from Google-parent Alphabet (NASDAQ:GOOGL), sparked a U.S. stocks selloff that was a prelude to the steeper drop in early August. Though investors are more optimistic about the U.S. economy after a blowout jobs report and last month’s 50 bps rate cut from the Federal Reserve, a soft earnings report from Tesla on Oct. 23 could reignite worries about tech stock valuations, which have climbed along with the broader indexes.2/ FAR AWAYFinance officials head to Washington DC for the annual meeting of the International Monetary Fund and World Bank Group from Monday to debate how countries can navigate slowing growth and ever-rising debt.Some 5,000 miles east, in the Russian city of Kazan, President Vladimir Putin hosts a summit of BRICS leaders, seeking support in his standoff with the West. Russia says leaders from Brazil, India, China, South Africa, Egypt, the UAE and Saudi Arabia, which account for a third of global economic output, will be there. Key topics include a push to end U.S. dollar dominance. By then, there will be just days to go to the biggest political risk event of 2024: a U.S. election that is too close to call and one that could mark the start of a new global trade war if Donald Trump wins – a prospect seen as damaging to economies everywhere.3/ THINGS CAN ONLY GET BETTERWhen September business activity data were released a month ago, investors got a shock from news of a sharp euro zone contraction and ramped up ECB rate cut bets.So October PMIs on Thursday will likely be scrutinised for a sense of how rapidly rates have further to fall. PMI data from other economies are published the same day.Note, the final euro zone Sept purchasing managers index, while below the 50 mark that divides contraction from expansion, was not as dire as the initial estimate.And other data suggest tentative reasons for optimism in a bloc that has skirted recession for over a year. Q3 lending demand rose; German sentiment has improved.But tell that to the euro. It will lag as long as investors reckon the ECB will ease policy at a faster pace than the Fed. 4/ PROOFChinese stocks have been a near-perfect barometer of expectations for big bang stimulus from Beijing, and just a glance at a chart of the past two months shows how quickly hopes have been deflated.On Monday, China cut rates– as expected. Since the announcement of the biggest and broadest stimulus since the pandemic in late September, one highly anticipated briefing after another has passed without the details investors are craving – particularly the size of fiscal spending.Just how powerful the fine print can be was shown Friday, when the launch of promised swap and relending schemes sparked a stocks surge. But with further stimulus clarity not expected in any major capacity before a meeting of parliament’s standing committee, probably early next month, that leaves a weeks-long void when stoking the equity rally looks a very big ask. 5/ MONEY, MONEY, MONEYThe UK’s new Labour government presents its first budget on Oct. 30 and with the nation’s finances strained and growth stalling, investors will scrutinise fresh monthly government borrowing data this week. Public sector net debt has hit 100% of economic output and government borrowing in August, at 13.73 billion pounds, 3 billion pounds above economists’ forecasts. September’s borrowing amount will be revealed on Oct. 22. After finance minister Rachel Reeves identified a fiscal “black hole” worth 22 billion pounds, but ruled out raising taxes on working people, stock market investors suspect they are in the firing line from potential hikes to capital gains taxes. Bond market lenders are also, according to BNY, selling gilts at the fastest pace since former Prime Minister Liz Truss’ chaotic 2022 mini-budget, as speculation mounts about the UK increasing debt issuance to fund public investment. More

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The PBOC cut its one-year LPR to 3.10% from 3.35%, slightly more than expectations it would cut the rate to 3.15%. The five-year LPR, which determines mortgage rates, was cut to 3.60% from 3.85%, against expectations for a cut to 3.65%. The PBOC had last cut rates in July. The LPR is determined by the PBOC based on considerations from 18 designated commercial banks, and is used as a benchmark for lending rates in the country.The rate cut was largely telegraphed by Chinese authorities, and is the latest in a line of sweeping stimulus measures aimed at shoring up economic growth. Beijing had over the past month flagged several monetary and fiscal measures aimed at supporting infrastructure development, stemming a property market decline and keeping economic growth on track to meet the government’s 5% annual target. The government had promised interest rate cuts as part of these measures, making Monday’s cut somewhat expected.The past month saw Beijing unveil its most targeted measures yet at supporting growth. But the measures inspired middling investor confidence, given that Beijing did not provide details on the implementation, timing and scale of the planned measures. The PBOC has also consistently cut the LPR over the past two years, to limited effect. Looser monetary conditions have so far done little to offset a persistent deflationary trend in the country, with recent readings for September showing little improvement.  More

Election polls show rising odds of former President Donald Trump winning the Nov. 5 election and are boosting the dollar, since his proposed tariff and tax policies are seen as likely to keep U.S. interest rates high and undermine currencies of trading partners.Currency moves in major markets last week were driven by the European Central Bank’s dovish rate cut and strong U.S. data that pushed out expectations for how fast U.S. rates can fall, particularly if Trump wins the presidency.The yen was down 0.1% at 149.32 per dollar, staying on the stronger side of 150 per dollar, having breached that level briefly last week for the first time since early August.The dollar index measure against major rivals was at 103.45. It fell 0.3% on Friday as risk appetite picked up broadly across markets after China announced more details of its broad stimulus package, but logged 0.55% gains for the week. The euro stood flat at $1.0866 and sterling was also flat around $1.3045.Bitcoin got a lift from Trump’s improving prospects since his administration is seen as taking a softer line on cryptocurrency regulation. It was last up 0.8% at $69,400, and has risen 18% since Oct. 10.With no major economic events due this week, market focus will be on corporate earnings and U.S. election risk, and possibly a rise in costs to hedge dollar and other portfolio risks, Chris Weston, head of research at Australian online broker Pepperstone, said in a note.”With just 15 days to go until the U.S. election, traders need to decide if now is the right time to start placing election trades with greater conviction,” Weston said.The clearest way to express the Trump tariff risk was to be long dollars versus the euro, Swiss franc and Mexican peso, he said.Brad Bechtel, global head of FX at Jefferies, also noted that rising real interest rates were helping the dollar along, particularly against those three currencies.”We expect this trend to continue straight into the election and if Trump wins, likely well after the election as well,” Bechtel wrote.Last week, the yen fell 0.3%, the euro 0.6%, sterling was flat and the dollar index climbed 0.55%. The Mexican peso fell 3%.The euro is down more than 3% in three weeks and has fallen through its 200-day moving average, and is parked near a 2-1/2 month low. More