Raphael Stevens

Interior Design area of the Restoration Hardware store in the Meatpacking District of New York.
Source: RH

Check out the companies making the biggest moves in premarket trading:
RH — The high-end furniture chain dropped 6.2% after reporting adjusted earnings per share of $2.88 for the fourth quarter, missing a StreetAccount forecast of $3.32 per share. RH’s first-quarter and full-year guidance also missed expectations.

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Charles Schwab – Shares of Charles Schwab dipped more than 1% after Morgan Stanley downgraded the financial services giant, citing an extended earnings recovery timeline that makes the risk-reward balance for shares appear less compelling.
Philip Morris International — The tobacco maker gained 1.8% following an upgrade by JPMorgan to overweight from neutral. The firm cited the growth potential of Philip Morris’ heated tobacco technology known as IQOS Iluma.
Walmart — Shares of the retail giant rose about 1.5% in premarket trading after Evercore ISI upgraded Walmart to outperform from in-line. The investment firm said in a note to clients that Walmart is poised to see traffic and margins improve over the next two years.
Fluence Energy — The energy storage company popped 5.7% following an upgrade by Goldman Sachs to buy from neutral. The Wall Street bank said the recent pullback creates an attractive opportunity. Its price target of $29 implies 78% upside from Wednesday’s close.
Peabody Energy — Shares of the major coal producer slid 0.8% after the company confirmed a fire at its Shoal Creek Mine. All personnel were safely evacuated and an investigation is underway, Peabody Energy said.

UBS — U.S.-listed shares of the Swiss bank rose more than 2% in premarket trading, a day after UBS announced Sergio Ermotti would return as CEO to oversee the takeover of Credit Suisse.
Carnival — The cruise operator gained 2.2% in the premarket, adding to gains from the previous two sessions. Susquehanna upgraded Carnival to positive from neutral on Wednesday, citing EBITDA recovery for the cruise operator in 2024.
— CNBC’s Tanaya Macheel and Jesse Pound contributed to this report. More

Financial crises ruin and reallocate wealth. They also reallocate worry. Investors find themselves agonising about things they never used to fret about. Worse, they fret about things they never used to think about. One example is money in the bank. The collapse of Silicon Valley Bank (svb) in America has made depositors newly familiar with the nature and limits of claims they previously took for granted.America’s worries have quickly spread elsewhere, too. Emerging-market investors, for example, have begun to rethink the countries in which they invest, scrutinising them through svb-tinted spectacles. They are wondering which markets are most exposed to financial jitters and slower growth in America, and which share similar vulnerabilities. What countries, for example, are suffering from stubborn inflation, rapid monetary tightening and sharp drops in bond prices? And where in the developing world do depositors look a bit flighty? Through this lens, one emerging market looks surprisingly robust. Whisper it, but could China offer a safe haven to global investors in a time of banking turmoil? On the face of it, the question is absurd. Only a year ago prominent voices were calling China “uninvestible”. Anyone venturing their money in the country must worry about a new cold war between China and its most important trading partners. That includes the prospect of crippling financial sanctions and suffocating export controls on China’s most sophisticated firms. Needless to say, the country poses home-grown dangers as well. Uncreditworthy property developers remain a financial concern. The Communist Party’s campaign against inequality has terrified its best-known entrepreneurs and wealthiest families, many of whom are eager to move money out of the country. The appearance of Jack Ma, founder of Alibaba, in his home town this week perhaps offers some reassurance. But in a normal country investors do not crave visual proof that the nation’s most celebrated entrepreneur is welcome in his homeland. China also has banking vulnerabilities of its own. Smaller regional lenders, including more than 120 city commercial banks and thousands of rural lenders, are not as robust as the rest of the system. They struggle to compete with bigger banks for deposits and find it hard to resist pressure from local governments to lend to white elephants. Investors must also remember the country’s approach to covid-19. Policymaking managed to be both obstinate and capricious, inflexible and unpredictable. And yet China has several macroeconomic and financial peculiarities that look like strengths in the current turmoil. The eccentric commitment to the country’s zero-covid policy has thrown its economic cycle out of sync with the rest of the world. It thus represents a natural “growth hedge”, according to Xiangrong Yu, Xinyu Ji and Yuanliu Hu of Citigroup, a bank. China may be the only big economy that grows faster this year than last, they point out. This means the growth gap between China and America could widen to five percentage points, according to the Economist Intelligence Unit, our sister company. These same pandemic restrictions also kept a lid on price pressures. Consumer prices rose by only 1% in February, compared with a year earlier, a number that would seem to belong to a lost era in much of the world. China is the land that inflation forgot. Thus its central bank has not felt compelled to raise interest rates in a hurry. Indeed, it eased policy in March, cutting reserve requirements by 0.25 percentage points for most banks.Bond prices did wobble during the chaotic abandonment of the zero-covid policy. But in China, unlike in America, Europe or most emerging economies, yields remain lower now than at the end of 2020. Moreover, instead of triggering a run on the banks, the bond sell-off accelerated a run into them. People who lost money on wealth-management products, which invested in bonds, fled into deposits. The economists at Citi reckon that household deposits now exceed pre-pandemic trends by 15.4trn yuan ($2.2trn). China is not only at a different stage of the business cycle; it is also at a different stage in the financial cycle of fear and complacency. svb’s swift collapse was so damaging partly because it was so unexpected. In China the dangers posed by regional lenders are well understood, representing grey rhinos not black swans. China’s regulators are now in a cautious mood, rather than a hawkish one. They are aware of financial risks faced by regional banks but keen not to precipitate them. If another regional lender gets into trouble, they may show more forbearance than they have previously displayed. The authorities will not want to let anything interrupt an economic recovery that is still only a few months old. The central government “will likely do everything it can to evince an aura of stability”, writes Houze Song of MacroPolo, a think-tank, even if that requires “quiet, below-the-radar bail-outs” of some vulnerable borrowers. This offers an attractive window for investors. The authorities are neither blind to banking risks nor inconveniently keen to crystallise them in the immediate future. Both sides of the great wallEven the new cold war may not undermine the case for China as a hedge. In the Asia-Pacific region, the country’s onshore stocks are already among the least sensitive to American growth or financial conditions, according to Goldman Sachs, a bank. America’s efforts to decouple from China and China’s offsetting efforts to encourage self-reliance could untether the market’s fortunes from America still further. That will weaken China’s efficiency but increase its resilience. The country will become a less attractive source of growth but a more useful source of diversification.China has risks of its own. But that is the point. China’s financial risks are its own, whereas America’s quickly become everybody else’s, too. Risks with Chinese characteristics could offer some respite from risks with global characteristics. ■Read more from Free exchange, our column on economics:America’s banks are missing hundreds of billions of dollars (Mar 21st)The Fed smothers capitalism in an attempt to save it (Mar 16th)Emerging-market central-bank experiments risk reigniting inflation (Mar 9th)Also: How the Free exchange column got its name More

Over the past half-century, many promising economies have become ensnared in middle-income mediocrity. To help its biggest client avoid this fate, the World Bank published a flagship report ten years ago entitled “China 2030”. The publication warned of the “middle-income trap”, a term to describe the phenomenon. “Of 101 middle-income economies in 1960, only 13 became high-income by 2008,” it claimed. This striking statistic was illustrated with a chart similar to the one below. A decade later, how has the picture changed? Answering the question depends on the definition of middle-income employed. According to the World Bank’s official classifications, a country becomes high-income only when its gdp per person exceeds around $13,200. By that standard, China looks set to escape the middle-income trap in a year or two. But for the purposes of the “China 2030” chart, the bank adopted a more stringent definition: middle-income countries have a gdp per person, at purchasing-power parity, of between roughly 5% and 43% of America’s. The “China 2030” chart drew on historical gdp statistics prepared by Angus Maddison, an economist. His colleagues and successors have since revised and updated the estimates to 2018. We have further updated them to 2022 using figures from the Economist Intelligence Unit, our sister organisation. The result is that 23 countries which were middle-income in 1960 now qualify as high-income—more progress than one might have expected over the past difficult decade. Graduates include three countries in the Gulf (Bahrain, Oman and Saudi Arabia) and six members of the eu (Croatia, Cyprus, Hungary, Malta, Poland and Slovenia). Malaysia has joined the Asian tigers in the high-income bracket. The Seychelles, an island nation off Africa, has also crossed the threshold. Unfortunately, two other countries in the region, Equatorial Guinea and Mauritius, which were considered high-income in 2008, have moved in the other direction.The list could in fact be expanded further. Seven countries that are now high-income by the “China 2030” definition did not exist as sovereign nations in 1960, so do not appear on the chart. These include the Czech and Slovak republics, as well as several former members of the Soviet Union: Estonia, Kazakhstan, Lithuania, Latvia and Turkmenistan.The country that once dominated them, Russia, also moved from middle-income in 1960 to high-income in 2022. Its economy has withstood Vladimir Putin’s war better than expected. Yet its gdp per person could fall below the high-income threshold this year. A Russian reformer once quipped that his country had been trapped in middle-income for two centuries. Mr Putin is doing his best to return it to that state.■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The war in Ukraine has reconfigured global flows of oil and gas. Less visible has been its impact on another supply chain: that of the so-called rare gases—neon, krypton and xenon—which are used in everything from chipmaking to medicine to space propulsion. Russia and Ukraine have long been big suppliers, accounting for about 40-50% of the global supply of neon before the conflict, and 25-30% of xenon and krypton, according to John Raquet of Spiritus Consulting, an industrial-gas specialist. At times, their share of the supply of neon has been as high as 70%.Hence the concern, after Russia’s invasion, about disturbance to chipmakers, which use neon in the lasers that etch circuit patterns onto silicon wafers, and in turn supply other industries. The Joint Research Centre, the European Commission’s scientific-advisory body, warned of “severe” disruption, and noted a shortage of neon could “substantially impact industrial supply chains reliant on semiconductors”. Worse, as the war began, the semiconductor industry was seeking to ramp up output to meet post-pandemic demand. A year later, however, it is clear that chaos has been avoided. What went right?Krypton, neon and xenon are by-products of air separation, an industrial process used in steelmaking to extract oxygen and nitrogen from the atmosphere. This allows the recovery of leftover mixtures, from which the gases can be extracted at specialist purification facilities. In the 1980s the Soviet Union built air-separation plants at steel mills in Russia and Ukraine. Its aim was to produce gases for use in military lasers, to compete with America’s “Star Wars” programme. After the Soviet Union fell, Russia and Ukraine became global suppliers of rare gases. Even after Russia’s annexation of Crimea in 2014, Russian steel mills continued to send rare-gas mixtures to Ukraine for purification.This flow stopped after Russia’s invasion last year. The conflict also affected the operation of steel mills in Ukraine. As a result, rare-gas purifiers in Ukraine have been running at a fraction of full capacity. At the same time, sanctions have limited exports from Russia. The drop in supply caused a surge in wholesale prices, particularly of xenon, which went from $15 a litre in 2020 to more than $100 in mid-2022.In response, chipmakers drew on their rare-gas reserves and invested in technology that enables recycling. Other buyers cut usage or switched to alternatives. Xenon is sometimes used as an anaesthetic, for example, but less so if the price is high, when it is replaced by gases including nitrous oxide. Other gases, such as argon or nitrogen, can be used in place of krypton in triple-glazed windows. Krypton and xenon are used as propellant in satellite thrusters, but the latest Starlink satellites launched by SpaceX now use argon instead.Retrofitting air-separation plants with taps that allow rare-gas mixtures to be extracted is costly and halts production for two or three months. But new plants are being built with the taps installed, which will increase future supply. Meanwhile, Russia diverted exports to China, which then had a surplus, and began exporting its own production. In Japan, says Koizumi Yoshiki, president of Gas Review, an industrial-gas journal, efforts are under way to boost domestic production through a mixture of retrofitting and new plants. South Korea, another chipmaking hub, aims to become self-sufficient in rare gases in the next couple of years, notes Mr Raquet.Collectively, these efforts to reduce consumption and boost supply have stabilised the market. Prices have fallen from their highs; a litre of xenon now costs around $45. Media coverage of the warnings helped, says Dan Hutcheson of TechInsights, a consulting firm. Along with rising prices, it delivered a “one-two punch”, he notes, that spurred companies to take rapid action. At the same time, demand fell. By mid-2022 it was clear that the chip shortage was turning into a glut.Supply chains have been reinforced and suppliers diversified, meaning the rare-gas industry is now much less vulnerable to geopolitical risk. Companies of all kinds have been paying more attention to their supply chains lately, in response to upsets caused by trade disputes, covid-19 and the war in Ukraine. Firms make the headlines when they fail to cope with disruption. As the rare-gas industry shows, few people notice when they succeed. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The banking turmoil that has sent a handful of American and European lenders to the wall in recent weeks has a new feature. Use of social media and messaging apps, which spread information at lightning pace to an ever-larger group of panickers, marks a break from past crises. Meanwhile, new digital-finance tools let nervous depositors withdraw funds as soon as the notion strikes them, whether from offices in San Francisco or ski slopes in Saint Moritz. After the fall of Silicon Valley Bank, the idea of faster bank runs is understandably causing concern among analysts and legislators. Yet the wave of new tech in the past decade and a bit is by no means the first to change behaviour. Previous examples suggest something of a pattern: innovations initially help facilitate a boom, contributing to exuberance based on a sense of futuristic possibility, before speeding up and magnifying the eventual bust. History also suggests that recent technological changes may have a deeper impact, reshaping markets in the long run, too.From the 1840s onwards, America was blanketed by the electric telegraph, which transmitted messages by overhead wires, connecting previously disparate financial markets in Boston, Chicago, New York and Philadelphia. In 1866 reliable communication became possible between America and Europe as well, thanks to an undersea telegraph cable. Historians credit these new methods of transmitting financial information with smoothing out pricing inefficiencies. The gap between American and British cotton prices dropped by a third, for example, and volatility also declined. The new form of communication was significant enough to have left a legacy. Among currency traders, the sterling-dollar exchange rate is still known informally as “cable”.But efficiency often comes at a cost. In the 19th century, communication by cable was expensive and limited, and the information received at risk of manipulation by those transmitting it. During the panic of 1873, correspondents at The Economist went back and forth about whether the debilitating effects of new technologies, spreading panic from one market to another, outweighed the positives. A century later, new technology again provoked worries during a market crash in October 1987. The Brady Commission, which later investigated the slump in America, found that electronic communication across borders exacerbated problems. Traders and regulators believed they were in the more insulated, national markets of the past. They were not. The effect that technological breakthroughs have on banking crises is just one way they transform financial markets, however. John Handel, an economic historian at the University of Virginia, notes that increasingly widespread use of ticker tape—a more advanced form of telegraph-transmitted messaging—in late-19th-century finance enhanced the power of the institutions that monopolised it. The London Stock Exchange and the Exchange Telegraph Company, which was licensed to transmit data from the exchange, were beneficiaries. This helped formalise the role of the stock exchanges in global financial markets.Historically, banks have benefited from high transaction costs and the low financial literacy of customers, which together have kept depositors from moving too much money into higher-yielding money-market funds. Today new communications tech and digital finance mean the investing populace is both more aware of the alternatives to bank deposits and has more opportunity to invest in them. Recent research by academics at Columbia, Peking and Stanford universities notes that Chinese banks where depositors have more exposure to Yu’ebao, an online investment platform offering money-market-fund investments, see more withdrawals from customers. New tech might have helped facilitate the surge of almost $300bn into American money-market funds in March, further destabilising banks.Innovation has sped up sudden market wobbles, truncating panics that would have taken months in the 19th century to weeks. In the modern era, timelines have contracted further, from weeks to days or even hours. Yet this may turn out to be just one of the ways in which frictionless trading and freely available information, of varying quality, affect finance in years to come. The profits banks have enjoyed for decades—or centuries—thanks to high transactions costs and low financial literacy might also become harder to sustain. ■Read more from Buttonwood, our columnist on financial markets:Why markets can never be made truly safe (Mar 23rd)Why commodities shine in a time of stagflation (Mar 9th)The anti-ESG industry is taking investors for a ride (Mar 2nd)Also: How the Buttonwood column got its name More

War is tearing apart Ukraine’s economy. Last year the country’s gdp fell by 30%; a ballooning budget deficit forced the central bank to print billions of hryvnia and devalue the currency. On March 21st the imf announced Ukraine would receive the seventh-biggest bail-out in the fund’s 79-year history. The country is set to receive $15.6bn over the next four years through an emergency programme that may be approved by the imf’s board (on which Russia has a seat) next week.Although a huge sum for the fund, this is still nowhere near enough for Ukraine. The country estimates that to continue financing the war this year, it will need $39.5bn more than it expects to receive from tax and aid, a shortfall equivalent to 9% of gdp. The imf is expected to release at most $5bn this year. The rest, it says, should come from the likes of America, Europe and the World Bank. Such donors have stumped up at least $34bn in grants and loans at cheap interest rates since the war began. The hope is that the imf’s involvement, which includes a stress test of Ukraine’s economy and its debts, will coax them into providing more. Even if Ukraine cobbles enough together to fill the gap, there is the matter of repayment. Borrowing from the imf is expensive—more so than from other donors. As a middle-income country, Ukraine has to pay a basic interest rate of 3.5%. Every time it receives a disbursement, the fund charges an additional half a percentage point for administrative costs. And because Ukraine is borrowing so much, it is liable for surcharges. These are payments intended to discourage countries from seeking more than they require from the fund. By the time Ukraine has received its full package, surcharges will probably tack on an extra three percentage points to its interest bill. All told, Ukraine’s government could rack up rates of 7.5-8%.Surcharges are not the end of the attached strings. All imf loans come with economic prescriptions. On paper these should boost growth and fiscal discipline, helping the borrowing country to repay its debts. The fund has struggled to adapt its bread-and-butter prescriptions for misbehaving economies to an economy under siege. Some of its suggestions may prove useful. After getting into a scuffle with the government last year about printing money, the central bank will welcome the fund’s demand that no more printing take place. Other reforms, such as a commitment to reactivate domestic debt markets, are admirable, if a little difficult to get going while bombs fall. But the imf’s most substantial reforms typically revolve around restraining spending, which is simply not an option so long as Ukraine is at war. So far, the fund has said it plans to recommend fiscal reforms, but stayed vague on the details. Given that it has a reputation for heavy-handedness, any missteps in Ukraine could prove disastrous. Although these risks in theory should be incorporated into the imf’s stress tests, the fund’s forward-looking analysis is easily thrown off balance. Predicting the future of any crashing economy is tricky. Nailing down what Ukraine’s economy, caught in an invasion, might look like in a year, let alone at the end of the four that the programme covers, is even more difficult. At the moment, the fund has a four-percentage-point range of expectations for gdp growth in 2023, from -3% to 1%. If Ukraine’s fortunes fall at the lower end of the spectrum, or below, the worry is that the fund will have wildly overestimated its ability to repay. The nightmare would be crippling the country with debts while it is still at war, or just beginning to recover.“There needs to be economic support for Ukraine but its allies should have borne the risk, not the imf,” argues Mark Malloch-Brown of the Open Society Foundations, a campaign group, “and done so with grants instead of letting Ukraine rack up debt.” For some, the fund is bringing back memories of the last time it lent at scale in Europe: bail-outs to Greece, Ireland and Portugal in the wake of the euro-zone crisis. Just as France and Germany did too little then, Kyiv’s allies are doing too little today. Ukraine will bear the cost. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

“Greece is not Switzerland,” quipped an analyst on March 20th after the Greek central-bank governor assured investors his country’s banks would not suffer from the implosion of Credit Suisse the weekend before. Investors are anxious that troubles could contaminate euro-zone lenders. Their share prices have sunk since March 9th and are still volatile. That is a disappointment. After being struck by the global financial crisis of 2007-09 and the sovereign-debt crises shortly after, the euro zone’s big banks were brought under the supervision of the European Central Bank (ecb). As rules were toughened and dud assets flushed, banks became boring but more resilient. Now, “it seems the market is sifting through one balance-sheet after another”, frets a mover and shaker. Three risks stand out. The most immediate is a liquidity crunch. In September liquid assets held by European banks stood well above 150% of what regulators assume a deposit outflow in a crunch month would involve. But the speed at which deposits were whisked from Silicon Valley Bank and Credit Suisse suggests such assumptions are too rosy. It does not help that the data European banks disclose on the nature of their deposits is less detailed than in America, prompting some investors to assume the worst. Thankfully, a vast chunk of deposits is held by households, which are mostly insured. Those that are not tend to belong to a diverse array of firms, rather than a coterie of depositors who mimic each other, such as Swiss family offices or Silicon Valley startups. Europe also lacks money markets of the same depth and ease of access as Uncle Sam’s, so there are few liquid, lucrative alternatives to bank accounts. This is why most corporate overnight deposits that have been withdrawn—some €300bn ($325bn) since the summer—re-entered banks as “term” deposits, in less flexible accounts that offer higher returns.A second threat to European banks is deteriorating assets. Here, too, the danger seems manageable. Like bonds, the value of existing loans on banks’ books diminishes when interest rates rise. But regulators in Europe have forced banks, big and small, to buy hedges against that risk. The third is that borrowers fail to honour their dues. Investors particularly worry about credit extended to owners of commercial property. Rising interest rates and a worsening economic outlook are putting pressure on prices and rents at a time when owners have to pay more to service debts. The saving grace is that European banks are less exposed to commercial property than American ones. As the economy stalls, a wider range of loans may sour. But banks now have ample capital buffers to absorb losses. Between 2015 and September 2022, the share of core equity funding of banks increased from 12.7% to 14.7% of their risk-weighted assets, well above the 10.7% threshold required by regulators. Some made provisions for loan losses during covid-19, which could be repurposed to absorb new losses. A chunk of corporate loans also remains under government guarantee.This leaves euro-zone banks with a painfully familiar problem: they make too little money. The issue has dogged them since the 2010s, when a heap of foul assets, low interest rates, anaemic economic growth and stricter rules constrained both margins and revenues. In 2022 it had seemed as if things were finally improving, as rising rates boosted banks’ profits. That year the sector posted its first double-digit return on equity in 14 years.But these cash-filled dreams are fading. One reason for this is that rates will probably peak sooner and lower than expected just weeks ago, as central bankers adjust to banking fragility and a slowing economy. This will depress banks’ revenues. At the same time, funding costs are expected to rise. Depositors are hunting for better yields, forcing banks to offer juicier rewards. Meanwhile, investors in banks’ Additional-Tier 1 bond will demand higher premiums after some were wiped out during ubs’s takeover of Credit Suisse.These pressures will squeeze net interest margins—just when other costs threaten to dent bank profits. Wages, which represent 60% of overall bank costs, have yet to fully catch up with inflation. The premiums banks pay for deposit insurance will probably rise, too. JPMorgan Chase, a bank, predicts such costs alone could trim returns on tangible equity by one percentage point. Watchdogs may also tighten rules to make sure institutions can withstand rapid bank runs facilitated by digital banking and social media. All told, returns on equity of 10% or less are probably European banking’s future. That is not the end of the world. Such returns are enough for banks’ balance-sheets to grow at 2-3% a year, meaning customers need not expect credit to be rationed soon, says Ronit Ghose of Citigroup, another bank. Core services like digital banking should not be starved of investment. For shareholders it will be like investing in a utility—nice dividends, but little action. The downside is that racier firms, such as startups, will have to look elsewhere for funding, pushing risk to darker corners of the financial system. Punters hoping for hefty returns will be disappointed. To avoid bottom-line boredom—in both good ways and bad—investors might keep looking across the pond. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More