Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Eurozone property companies are being hit by surging losses and some will struggle to support their debts, which have risen to a higher level than before the 2008 financial crisis, the European Central Bank has warned.The losses, which the ECB said would have “consequences for the resilience of banks’ loan books”, stem from sharply higher financing costs, falling commercial property values, weaker rental income and rising concerns about the energy efficiency of buildings.The central bank said signs of stress in the commercial property sector, which accounts for 10 per cent of all eurozone bank loans, “have the potential to significantly amplify an adverse scenario” and would “drive large losses” in the wider financial system.The average debt of larger European property companies has risen above 10 times their earnings, “close to or above pre-global financial crisis levels”, the ECB said in part of its twice-yearly financial stability review. The full review is out on Wednesday, but the ECB published its concerns on commercial real estate a day early. Rises in ECB interest rates have hit the sector hard. It now costs 2.6 percentage points more to finance the purchase of commercial real estate assets in Europe than it did before rates started increasing last year, according to eurozone credit registry data. The central bank’s benchmark deposit rate is now 4 per cent — up from minus 0.5 per cent before the tightening cycle began. The rise in borrowing costs would pose a refinancing challenge for the most indebted companies, the ECB said, pointing out that rating agency Moody’s Analytics had cut ratings or outlooks on 40 per cent of European real estate companies in the year to March 2023.The problem is most acute in countries such as Finland, Ireland, Greece and the Baltic states, where more than 90 per cent of loans to commercial property companies are at variable rates or mature in the next two years. This compares with only 30 per cent in the Netherlands and 40 per cent in Germany. “Business models established on the basis of pre-pandemic profitability and low-for-long interest rates may become unviable over the medium term,” the ECB warned.The sharp downturn in eurozone commercial real estate is underlined by the 47 per cent drop in the number of transactions in the sector in the first half of this year, compared with the same period in 2022. The share of bank loans to lossmaking real estate borrowers is expected to double to 26 per cent, the ECB said. But it warned this could rise to half of all loans if turnover in the sector fell by a fifth and the tighter financing conditions persisted for another two years.The central bank said debt levels were likely to “deteriorate further as these firms’ earnings decline and commercial real estate prices are revalued downwards”. Shifts to homeworking and online retail have hit demand for offices and shops, weighing on rental income for property owners, while older and lower-quality buildings are suffering bigger drops in rents as tenants focus more on a building’s energy efficiency.In a sign of how investors believe the price of commercial property has fallen sharply in the past two years, the market value of listed eurozone property companies has fallen from 110 per cent of the book value of their assets to less than 70 per cent.Europe’s residential property sector has faced similar challenges. But the ECB said a strong labour market was helping to keep mortgage defaults low, while housing shortages and rising construction costs were providing support to prices. More

NEW YORK (Reuters) – The S&P 500 will end next year only about 3% higher than its current level, with a possible U.S. economic slowdown or recession among the biggest risks for the market in 2024, according to strategists in a Reuters poll released Tuesday.The benchmark index will finish next year at 4,700, according to the median forecast of 33 strategists polled by Reuters during the last week and a half. That is 3.4% higher than Monday’s close of 4,547.38.Nine of 13 strategists who also answered a question on whether U.S. stocks will hit a record high in the coming six months said yes, and most of them said they expect it to happen in the early part of 2024. Wall Street stocks have rallied strongly in recent weeks, boosted by the view the Federal Reserve is done hiking interest rates and may begin to cut them at some point next year.Investors cheered benign October inflation data last week as Americans paid less for gasoline. The S&P 500 is up about 18% for 2023 to date.The Fed earlier in November held rates steady, but, since 2022, the U.S. central bank has hiked its policy rate 525 basis points in an effort to curb inflation.Worries persist the economy could fall into a recession next year or at least slow.”We see the economy weakening further into 2024, and, at some point the consumer will break,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute.But, he said the firm thinks the U.S. economy could quickly switch to recovery mode in the second half of the year. WFII sees the S&P 500 ending next year between 4,600 and 4,800.Markets are anticipating inflation will decelerate and are currently pricing in a greater than 50% chance of a rate cut of at least 25 basis points by May, according to CME’s FedWatch Tool on Monday.Still, Goldman Sachs’s economic team wrote in a recent note the Fed will hold off cutting rates until the fourth quarter of next year, with stronger-than-expected economic growth helping to forestall a recession.Geopolitical problems are among other risks to the market heading into 2024, strategists said, with investors closely watching the war between Israel and Hamas militants in Gaza. Ten of the 13 strategists who responded to a question on the U.S. corporate profit outlook said they expect earnings to grow in the next six months.Overall S&P 500 earnings growth for 2023 is estimated at 2.3% after a weak first half of the year, according to LSEG data. Analysts expect earnings to rise 11.2% in 2024 over the previous year.But valuations have risen with recent market gains. The S&P 500 index’s forward 12-month price-to-earnings ratio is now at 19.1, up from 17 at the end of 2022 and its long-term average of about 16, based on LSEG data.For some strategists, technology, which is up 52% for the year so far and S&P 500’s best-performing sector, is still a favorite going into 2024.”The technology revolution continues,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.Based on the poll, the Dow Jones industrial average will finish next year at 38,000, up about 8% from Monday’s close. The Dow is up 6% so far in 2023.(Other stories from the Reuters Q4 global stock markets poll package:) More

TOKYO (Reuters) -A Japanese union representing small manufacturers announced on Tuesday a demand for a record monthly pay increase of 12,000 yen ($80), or 4% of base pay, for 2024, officials said.When including seniority-based automatic pay hikes, the demand from the Japanese Association of Metal, Machinery and Manufacturing Workers (JAM) tops 16,500 yen, they said.The demand follows similar demands for pay increases from other unions, offering hope for an end to the deflation that has dogged Japan for more than a decade, and for the Bank of Japan to bring policy normalisation closer.This year’s annual wage talks between labour and management have resulted in wage increases of about 3.6% at big firms, the highest in three decades. Policymakers are putting pressure on firms to raise wages even more next year.About 70% of Japanese workers are employed by small and medium enterprises (SME) so they are key to seeing extensive wage increases.”What’s important is to realise wage growth that is faster than price hikes,” JAM chairman Katahiro Yasukochi told reporters.For 2024, Japan’s largest trade union confederation Rengo has demanded pay increases of 5% or more, 3% of which consists of a base pay rise. More

(Reuters) -Kohl’s posted a bigger-than-expected drop in quarterly sales on Tuesday as cost-conscious shoppers chose to spend less at its department stores amid still high inflation, sending its shares down more than 4% before the bell.American shoppers have continued to defer non-essential purchases and instead spend more dollars on essentials as resumption of student loan repayments, rising credit card debt, and higher interest rates squeeze household budgets. The results come after retail bellwether Walmart (NYSE:WMT) last week took a cautious stance going into the holiday shopping season, which is expected to grow at the slowest pace in five years.”While Kohl’s (NYSE:KSS) is making progress in its attempt to shore up its bottom line, it has yet to find the right formula to convince shoppers to spend,” said Insider Intelligence analyst Zak Stambor.Kohl’s comparable sales decreased for a seventh-straight quarter, as its 5.5% drop missed estimates for a 3% fall, according to LSEG data.The company said it expected annual sales to fall between 2.8% and 4%, compared to a previous forecast for a 2% to 4% drop. Analysts have forecast a decline of 2.5%.Kohl’s inventories fell 13%, its third straight quarterly decline, as its efforts to trim stocks from their 2022 highs going into the holiday season began to pay off. “It is one thing for Kohl’s to adjust its inventory mix by expanding into new categories, but it is another to build awareness of its broader selection and drive consumers into its stores to buy those items,” Stambor said.The company raised the lower end of its annual profit forecast, expecting per-share earnings in the range of $2.30 to $2.70, up from its previous forecast of $2.10 to $2.70.Kohl’s reported a profit of 53 cents per share in the third quarter, beating expectations of 35 cents per share. More

The chipmaker has now received all regulatory approvals for the purchase after China approved the acquisition with additional restrictive conditions earlier on Tuesday, it said.Some investors in the companies had feared about the outcome of the deal after reports said last month that rising Sino-U.S. tensions could lead China’s regulator to scuttle the deal.Tensions between Beijing and Washington had mounted after the Biden administration introduced tougher controls on exports of high-end chips to China in October.Shares of Broadcom (NASDAQ:AVGO) and VMware (NYSE:VMW) were down more than 3% each in premarket trading. The deal was previously expected to close by Nov. 26. More

MILAN (Reuters) -Italy attracted strong interest from funds when it sold 25% of Monte dei Paschi di Siena (MPS) for 920 million euros ($1 billion) on Monday, advancing plans to re-privatise the world’s oldest bank two years after a failed first attempt. The sale is a testimony to the progress Italian banks have made in cleaning up their finances, which contributed to Moody’s (NYSE:MCO) unexpected decision on Friday to upgrade its outlook on the country’s credit rating to stable from negative.It also buys Italy time to find a more permanent solution for its fifth-largest listed bank, including via a merger deal that a dearth of buyers made hard to pursue in the near term.Strong demand led the Treasury to increase the share offering size, initially set at 20%, and to limit to 4.9% the discount compared to Monday’s closing price. The Treasury had been ready to grant a discount of up to 6%. MPS shares were down 7.8% at 2.83 euros by 1145 GMT on Tuesday, reflecting the impact of the sale.The stock closed at 3.07 euros on Monday, 50% above the price of a make-or-break capital raising a year ago that cost Italian taxpayers 1.6 billion euros, after they had already shouldered the bulk of an 8 billion euro rescue in 2017.Monday’s sale, which a person involved in the deal said brought international investment funds into MPS’ shareholder base, stands in sharp contrast with the difficulties the bank faced to raise cash a year ago, with the state itself covering nearly two thirds of that cash call.Chief Executive Luigi Lovaglio used that money to fund thousands of voluntary staff departures, bolstering income through cost cuts.With rising interest rates driving Italian banks’ profits to record highs, MPS has forecast net income will top 1.1 billion euros this year.Further improving the bank’s prospects, favourable court rulings in recent weeks have prompted MPS to downgrade to “remote” any legal risks stemming from lawsuits that have forced it set aside large sums against damage claims.EU COMMITMENTSBofA Securities, Jefferies and UBS Europe coordinated the accelerated bookbuilding for the stake sale, the Treasury said in a statement.As part of the transaction, Rome committed not to sell more shares on the market for 90 days without the consent of the global coordinators, it added.Commitments Italy agreed with European Union competition authorities at the time of the bailout bind Rome to eventually sell its entire stake in the bank. Monday’s transaction, when settled, will reduce the stake to 39%.Reuters was first to report in May that the Treasury was open to cutting its stake via a share sale on the market if conditions were favourable, as long as any significant new investor managed the holding in line with the national interest.Economy Minister Giancarlo Giorgetti and Prime Minister Giorgia Meloni have repeatedly said the government would try to increase competition among banks with the privatisation of MPS.This has raised the prospect of a potential deal with other mid-sized peers, namely Banco BPM and BPER Banca, Italy’s third and fourth largest banks respectively.Both banks have denied any interest in MPS. Two years ago heavyweight UniCredit sank the government’s privatisation efforts, forcing Rome to seek more time from the EU.The stake sale is seen as giving Italy more flexibility to pursue a long-term solution for MPS via a merger with a rival, after negotiations with UniCredit were complicated by an impending re-privatisation deadline.($1 = 0.9168 euros) More

The company’s shares, down nearly 15% this year, fell about 5% in premarket trading following a miss on third-quarter revenue estimates.Elevated interest rates, a spending shift to services from goods and a resumption in student loan repayments have further strained appetite for electronics and home-office products after a pandemic-led surge.”In the more recent macro environment, consumer demand has been even more uneven and difficult to predict,” CEO Corie Barry said in a statement.Revenue fell 8.2% to $9 billion in the U.S. as demand decline worsened across appliances, home theater, computing and mobile phones, signaling that higher discounts failed to entice shoppers.Best Buy now expects annual comparable sales to decline in the range of 6.0% to 7.5%, citing weaker November trends, compared with its prior range of a 4.5% to 6.0% drop. Revenue is forecast in the range of $43.1 billion to $43.7 billion, compared with $43.8 billion to $44.5 billion earlier.Total revenue fell to $9.76 billion in the third quarter ended Oct. 28 from about $10.59 billion a year earlier and compared with LSEG estimates of $9.90 billion. More

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