Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The junk bond market has become “complacent” over the risks facing corporate America after a sharp drop in debt funding costs, some investors and economists warn, with high interest rates and a possible economic downturn still posing a threat to low-grade, highly indebted borrowers. A feverish rally across financial markets on hopes of rapid interest rate cuts later this year has sent companies’ borrowing costs plunging in recent months. Even after a partial reversal in the first few days of January, the average yield on an index of US junk bonds still hovers at roughly 8 per cent, according to Ice BofA data, compared with 9.4 per cent as recently as early November. Yields move inversely to prices.That drastic shift in sentiment has fuelled concerns among some strategists and investors that market pricing has reached overly-optimistic territory. Companies must still contend with funding costs much higher than they were just two years ago, the lingering possibility of an economic downturn that hurts sales and profits, and rising wage costs.“The market is trading as if zero interest rates have come back — and they have not,” said Torsten Slok, chief economist at investment firm Apollo.The so-called spread, or premium, over Treasury notes paid by junk-rated borrowers to issue new debt has also fallen since November 1, from 4.47 percentage points to 3.59 percentage points. That is well below the median figures of 4.55 percentage points and 8.39 percentage points respectively for historical non-recession months and recession months going back to 1996, according to analysis by Marty Fridson, chief investment officer of Lehmann, Livian, Fridson Advisors.“I do think that the market is a little complacent,” said Kevin Loome, a high-yield portfolio manager at T Rowe Price. He added that the rally had been driven by many fixed income investors simply finding 8 per cent yields on sub-investment-grade bonds — and even higher yields on loans — “really attractive”. The decline in financing costs reflects growing conviction among investors that the Federal Reserve has completed its cycle of monetary policy tightening, after jacking up interest rates from near-zero in early 2022 to a range of 5.25 to 5.5 per cent in a bid to curb inflation. Investors’ convictions grew in mid-December when Fed policymakers gave their strongest signal yet that rate rises were over and pointed to three quarter-point cuts in 2024. In response, investors poured money into US government bonds and riskier asset classes.“The fourth quarter [of 2023] was a shock to everybody about how strongly the market rallied,” said Loome. A survey on Thursday by the International Association of Credit Portfolio Managers, whose members include big banks and fund houses, showed that many participants “believe the euphoria seen in global financial markets the last two months of 2023 was overdone”.Respondents think that “while credit conditions look better today, the fight against inflation will probably take longer than expected”, the survey added.Those concerns among credit market participants come as new data this week showed US corporate bankruptcies reached a 13-year peak in 2023, according to an S&P Global Market Intelligence report, with 642 filings in total and 50 in December alone. The biggest bankruptcies of last year included retailer Rite Aid, helicopter ambulance group Air Methods and co-working company WeWork. “Although investors expect the [Fed] to cut interest rates as early as March, companies will still have to contend with relatively high interest rates and robust wage growth in the near term,” S&P’s analysts wrote.“The run-up in bankruptcies and default rates last year is a very important reminder that the cost of capital matters,” said Apollo’s Slok. There are “still a lot of companies that were created during the ‘free money’ period, that will remain vulnerable to the cost of capital staying high”, he added.Investors and analysts also highlighted an apparent contradiction between the futures market’s expectation of almost six US rate cuts this year and the corporate bond market’s optimism over the outlook for junk borrowers.While the Fed’s projection of three cuts signals a belief that it can achieve a “soft landing” — quelling inflation without inducing a recession — the need for more cuts would typically reflect a greater deterioration in economic conditions. Such a scenario would, in turn, potentially cause further pain for lowly-rated US companies with already weak cash flows.“I do think that markets are complacent,” said Slok, “because the other two scenarios — either a hard landing or no landing [no downturn in the economy] — are still not unlikely.“The [central bank] would not cut six times unless the economy is slowing quite sharply,” he added. “If the Fed is cutting six times . . . What are fundamentals going to look like? What are earnings going to look like?” More

1. Crucial inflation data aheadHeadline U.S. inflation is expected to have sped up marginally in December, while the annual underlying reading is seen slowing, as Federal Reserve officials search for signs of easing price gains before rolling out possible interest rate cuts this year.Economists estimate that the year-on-year consumer price index (CPI) from the world’s largest economy accelerated to 3.2% last month, up from 3.1% in November. Month-on-month, the pace is projected to increase to 0.2%.But the rate of the so-called “core” measure, which strips out volatile items like food and energy, is tipped to drop to 3.8%, down from 4.0% in the prior month. On a monthly basis, core CPI is anticipated to match November’s figure of 0.3%.Fed policymakers will likely be closely watching the data, which could factor into how they approach rate reductions later in 2024. In a speech on Wednesday, New York Fed President John Williams argued it is still too soon to call for cuts because inflation is well above the bank’s stated 2% target.Williams’ comments echoed sentiments from other rate-setters, who have recently moved to temper soaring market enthusiasm for potential reductions early this year. This optimism, fueled in part by a dovish Fed outlook last month, drove a rally in stocks in the final weeks of 2023 that has since lost some steam.2. Futures edge higherU.S. stock futures inched higher on Thursday, with traders gearing up for the publication of the inflation data at 08:30 ET (13:30 GMT).By 05:04 ET (10:04 GMT), the Dow futures contract had gained 40 points or 0.1%, S&P 500 futures had increased by 8 points or 0.2%, and Nasdaq 100 futures had added 59 points or 0.4%.The main indices on Wall Street closed in the green on Wednesday. The benchmark S&P 500 rose by 0.6% and the tech-heavy Nasdaq Composite climbed by 0.8%, while the 30-stock Dow Jones Industrial Average advanced by 0.5%.In individual stocks, shares in Nvidia (NASDAQ:NVDA) touched a fresh record high after peer TSMC posted fourth-quarter revenue that beat expectations, while Facebook-owner Meta Platforms (NASDAQ:META) hit its highest intraday level since 2021 following a price target upgrade from anaysts at Mizuho.Along with inflation, investors are awaiting a raft of financial results from major U.S. banks later in the week.3. SEC approves first spot Bitcoin ETFsBitcoin was trading higher on Thursday after the top U.S. securities regulator approved the first exchange-traded funds tracking the spot price of the cryptocurrency.By 05:04 ET, Bitcoin had risen 1.4% to $46,283.4.In a decision that is anticipated to have sweeping implications for the wider crypto industry, the U.S. Securities and Exchange Commission gave the green light on Wednesday to 11 applications from a range of issuers, including BlackRock (NYSE:BLK) and Fidelity as well as digital currency asset manager Grayscale.Some proponents of Bitcoin, the world’s most popular cryptocurrency, have claimed that the SEC’s approval would spark a rush of demand into the token. Through a spot Bitcoin ETF, investors will have the chance to gain exposure to the digital asset without directly owning it. Detractors have, however, flagged that ETFs could persuade retail traders to pour money into a sector that has been beset with a spate of fraud-related scandals and huge volatility.The decision, which was backed by SEC Chair and known crypto-skeptic Gary Gensler, marked a U-turn for a commission that has largely been reticent to sign off on a spot Bitcoin ETF for much of the past decade. It also comes after hackers temporarily took control of the SEC’s account on social media platform X on Wednesday and falsely claimed that the regulator had already approved the applications, sparking wild fluctuations in the price of Bitcoin.4. Google announces lay-offs across multiple teams – reportsAlphabet’s (NASDAQ:GOOGL) Google is dismissing hundreds of its employees across several divisions to decrease costs and support an ongoing push into artificial intelligence, according to media reports.Citing a Google spokesperson, the reports said the lay-offs will impact workers at the search giant’s core engineering division. Hundreds of roles at its Voice Assistant division, as well as the hardware team behind its Pixel phone, Nest smart home devices, and Fitbit watches, will be eliminated.The exact number of employees losing their jobs was not immediately specified by Google, the reports said. Google’s cuts extend a continuing trend of job reductions in the tech industry. On Wednesday, e-commerce group Amazon (NASDAQ:AMZN) reportedly laid off several hundred employees at its live-streaming unit Twitch, Prime Video service and MGM studios.5. Oil rebounds following U.S. inventories buildOil prices rose Thursday, rebounding after the previous session’s weakness as attacks on shipping through the Red Sea persisted.By 05:04 ET, the U.S. crude futures traded 1.9% higher at $72.75 a barrel, while the Brent contract climbed 1.8% to $78.18 per barrel.Both benchmarks settled lower on Wednesday after official data showed an unexpected weekly build of 1.3 million barrels in U.S. inventories, contrasting with earlier industry data that signaled a weekly draw.While the build was minimal, the data also showed a second straight week of large product inventory builds, pointing to softness in U.S. fuel demand. This notion was exacerbated by a severe winter storm on the east coast of the country, which further disrupted road travel in the world’s largest fuel consumer.However, the market remained supported by ongoing concerns about disruptions to Middle East supplies after Yemen-based Houthis mounted their largest attack yet on commercial shipping lanes in the Red Sea on Wednesday. More

The beleaguered lira has fallen some 37% against the U.S. benchmark over the past year, as monetary policymakers try to combat double-digit inflation by steadily raising interest rates.
Inflation in Turkey rose to 64.8% on an annual basis in December, up from 62% in November.
A new finance team was appointed in June last year, and Turkey’s central bank embarked on a sharp pivot, pulling rates higher under new governor Hafize Gaye Erkan.

Vanishing Turkish Currency: 1 Turkish Lira with the Portrait of Kemal AtatürkTurkish
Manuel Augusto Moreno | Moment | Getty Images

The Turkish lira hit a fresh record low against the U.S. dollar on Thursday, trading at 30.005 to the greenback just before noon local time.
It marks the first time that the lira has broken 30 against the dollar, which was up 0.17% against the Turkish currency from the previous day’s session.

The beleaguered lira has fallen some 37% against the U.S. benchmark over the past year, as monetary policymakers try to combat double-digit inflation by steadily raising interest rates.
The more conventional approach follows several years of unorthodox policy during which Ankara refused to tighten rates despite ballooning inflation, while Turkish President Recep Tayyip Erdogan routinely called interest rate rises “the mother of all evil.”
Inflation in the country of roughly 84 million rose to 64.8% on an annual basis in December, up from 62% in November. It’s still an improvement on the prior year, after Turkish inflation hit a peak of 85.5% in October 2022.
The lira’s weakening comes as Turkey’s top finance officials gather at J.P. Morgan’s Wall Street headquarters in New York for investor presentations focused on the country’s monetary policy, banking, assets, and financial markets.

Dubbed “Investor Day,” the inaugural event will feature question-and-answer sessions and will include presentations from new Turkish central bank governor Hafize Gaye Erkan, who was appointed in June 2023, on a range of topics, such as the country’s disinflation path. Turkish Finance Minister Mehmet Simsek will deliver presentations virtually on the outlooks for Turkish financing and fiscal policy.

Turkish outlet Daily Sabah reports the event will be attended by more than 200 senior executives from major finance institutions, including Vanguard, BlackRock, Goldman Sachs, Morgan Stanley, and J.P. Morgan.
The Turkish lira has lost more that 80% of its value against the dollar over the last five years, increasing import and foreign debt costs and dramatically weakening the purchasing power of ordinary Turkish people.
A new finance team was appointed in June last year, and Turkey’s central bank embarked on a sharp pivot, pulling rates higher under Erkan’s supervision. The country’s benchmark interest rate has since been lifted from 8.5% to 42.5%. More

The competition watchdog imposed the fines after it considered the lenders, which also included Caixabank and Sabadell, had fixed above market rates the price of derivatives that were used to hedge the interest rate risk associated with syndicated loans for project finance.”The court considers that it has not been accredited that during the entire period under investigation from 2006 to 2016 there was a common plan between the sanctioned entities that justifies the legal classification of a single and continuous infringement”, the court said in a statement.The court upheld the appeals filed by Santander, BBVA Sabadell and Caixabank against the watchdog’s rulings of Feb. 13, 2018.The CNMC watchdog had imposed fines of 31.8 million euros on Caixabank, 23.9 million on Santander, 19.8 million on BBVA and 15.5 on Sabadell.The High Court decision is not final and can be appealed.CNMC declined to comment.($1 = 0.9121 euros) More

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The Gravity-1 rocket blasted off from a ship off the coast of eastern Shandong province and delivered three remote-sensing satellites into orbit, Orienspace said in a statement.Founded in 2020 by veterans of China’s state space agencies, Orienspace had planned the first launch of Gravity-1 for the second half of 2023.The rocket can send a payload of up to 6,500 kg (14,330 lb)into low earth orbit, making it the most powerful launch vehicle developed by a private Chinese enterprise.Gravity-1’s debut may help pave the way for more commercial launches of satellites into low- and mid-altitude orbits in the nascent private sector. Orienspace’s CEO said last year that the company had already secured orders for the launches of hundreds of satellites.Gravity-1 can place as many as 30 satellites into orbit in a single launch, according to Orienspace. The company also says it can organises a launch in under seven days and in some cases, just 24 hours.Gravity-1’s ability to be launched from a mobile sea platform increases the number of potential launch sites. China launched its first commercial rocket at sea – a Long March 11 developed by the state – in 2020.Sea launches would reduce the risk of rocket stages endangering inhabited areas as they fall back to Earth.Gravity 1’s inaugural flight made Orienspace the fifth private Chinese firm to operate its own carrier rocket, following i-Space, Galactic Energy, Space Pioneer and LandSpace, according to Chinese state media. More

SHANGHAI/SINGAPORE (Reuters) – China’s real estate investment products are tumbling, extending last year’s slump as investors lose hope for a recovery in the economy and property assets such as industrial parks and logistics hubs.Chinese real estate investment trusts (REITs), which issue shares to investors against a portfolio of real estate holdings, have hit successive lows in the first few days of 2024.After tumbling 28% in 2023, the CSI REITs Index has dropped another 6.4% this year through a rare, seven-day losing streak driven by one REITs manager’s disclosure of cuts in warehouse rental prices and broader fears of falling yields.The selloff reflects tumbling confidence in an economy where a deepening property crisis, weakening consumption and sputtering business activities have sapped demand for office buildings, warehouses and shopping malls.It also complicates Beijing’s efforts to lure investors into a nascent REIT market designed to channel badly needed cash to indebted local governments and property developers.”In an economic downtrend, it’s getting harder and harder for REITs to make money,” said Xia Chun, chief economist at Forthright Holdings Co.Although REITs derive yields from relatively stable fee or rental incomes generated by underlying assets such as office towers or warehouses, Xia said REITs trade more like stocks than bonds, with big ups and downs, particularly in China. After some initial excitement after its 2020 launch, China’s REIT market has witnessed an eye-watering bubble burst. The REITs index has nearly halved from its early 2022 peak. Most of China’s 29 listed REITs are backed by infrastructure assets such as industrial parks, tollways and sewage treatment plants. Other REITs backed by shopping malls and supermarkets will be launched this month.BIGGEST CASUALTIESIn the latest bout of relentless selling, REITs backed by logistics properties were among the biggest casualties.The Harvest Jingdong Warehousing and Logistics REIT has tumbled roughly 30% this year, taking a hit after its Jan. 4 disclosure that leasing fees at an underlying warehousing project in central Wuhan city had been cut by 13% in the new year. CICC GLP Warehousing Logistics also plunged to record lows on fears it would be similarly affected.Investors also dumped REITs backed by industrial parks amid signs vacancy rates are soaring. Vacancy at retail properties climbed to 9.1% at the end of September, from less than 6% in 2019, according to CBRE, showing the lingering impact on consumption from the COVID pandemic. The Hua An Zhangjiang Industrial Park REIT has plunged 24% this year. Only 61% of space at an office building in Shanghai was rented out at the end of 2023, down from 94% six months earlier, its asset manager disclosed, citing the loss of a key tenant.Another REIT, CCB Principal Zhongguangcun Industrial Park, whose income is composed of office rents from tech start-ups in Beijing, has said government crackdowns on the internet sector and economic hardship had raised vacancy rates.The meltdown has triggered a slew of stabilisation measures by REIT managers, including trading suspensions, increased transparency, and investments by underlying properties’ biggest owners.Fu Lei, senior executive at Tebon Asset Management, said China’s REIT market is dominated by risk-averse institutional investors.That means volatility “triggers a rush for the exit … which in turn magnifies mood swings and invites more volatility”, he told an online roadshow on Wednesday.Some investors, however, sense opportunity. With most Chinese REITs trading below book value, and their cash dividend ratio climbing above 4.5%, “REITs are more appealing now than most of China’s equity or bond assets”, said Liu Xianyu, researcher of FoF investment at E Fund Management Co. More

BEIJING (Reuters) – China’s 2023 vehicle sales rose 12% year-on-year to 30.1 million vehicles, the China Association of Automobile Manufacturers (CAAM) said on Thursday.Vehicle sales in December including exports jumped 23.5% on the year, CAAM said. More