Economy

India’s top trade official said that talks with the UK on a trade agreement were “moving very well” and downplayed remaining hurdles on easing temporary work visas for Indians and opening up industries including automotive and spirits. Piyush Goyal, minister of commerce and industry, also said that India was pushing for transition periods or more market access in some sectors because its economy, currently slightly larger than the UK’s, would far outgrow it in the decades to come. “There are one or two areas that were a little slow and we are speeding that up,” Goyal said in an interview with the Financial Times. He added that he had spoken to his UK counterpart, Kemi Badenoch, on Tuesday, “and my own sense is that we will see a good outcome soon”. The proposed trade deal would be one of the most significant concluded by Britain since it left the EU. It would also be significant for India, which last year overtook the UK as the world’s fifth-largest economy and, according to some forecasts, could surpass Germany and Japan to become the third-largest by 2030. “India will grow from a $3.5tn economy to $35tn,” Goyal said, referring to a target he has said India should aim for by 2047, its centenary of independence. “But with a small population, largely satisfied, what would the UK economy be 25 years from now?” Officials and diplomats in India have speculated that talks on the proposed trade deal might be concluded by early September, when India will host a G20 summit in New Delhi. Both sides have already missed an agreed deadline of October last year to finalise the deal. Goyal would not be drawn on a new target date for wrapping up the talks but said there was “nothing which is a deal-breaker” remaining between the sides. “I’ve given a good deal on Scotch whisky, I’ve given a good deal on automotive,” Goyal said. “We have been very, very open.”Nigel Huddleston, UK minister of state for international trade, is currently in India meeting businesspeople to discuss the potential merits of a trade agreement, according to two people briefed on his activities.“Both nations have come to the table with an ambitious set of asks and a willingness to work together towards a mutually beneficial deal,” said a Department for Business and Trade spokesperson. “We continue to negotiate and we will only agree to a deal that is fair, reciprocal, and ultimately in the best interests of the British people and the economy.” The proposed trade pact has stirred political sensitivities in both countries about migration. Comments by home secretary Suella Braverman last year about immigration by Indians to the UK angered Narendra Modi’s government and temporarily slowed progress on the talks, which began in January 2022. 

“I think there was some misunderstanding amongst your political leadership,” Goyal said. “No trade deal talks about immigration.”He said that India was seeking easier access to the UK for workers in “certain services which can only be done locally”, such as nurses, caregivers and consultants. “We are working together to find solutions.”Goyal added that India was already offering visas to British businesspeople “to come and run their companies”, giving them access to an Indian economy that is expanding at 6-7 per cent a year. The official said that given the expected divergence between the economies’ sizes in coming years, India was pushing Britain to bring more “equity and fairness into the deal”, including in the form of transition periods or “disproportionate opening up” for India in some sectors. “Without that, the deal won’t happen,” Goyal said. More

It must have caused some rolling of eyes in European board rooms when Germany’s chancellor Olaf Scholz last week told companies it was up to them to manage de-risking from China. Multinationals have been deafened for years by a cacophony of conflicting exhortations from EU governments, the European Commission, Joe Biden’s White House and Xi Jinping’s administration — increasingly backed by open-ended subsidies — advising them where to invest.Scholz’s words, which were strikingly similar to what Li Qiang, China’s premier, told German corporate executives a week earlier, were surely disingenuous. Even in less fraught times, highly politicised trade disputes mean that business and official decisions in certain sectors are intertwined — particularly in Germany, given its powerful government-corporate-trade union nexus.And these days, national and economic security imperatives are rising. Some parts of German industry in particular are already locked too far in to a model of engagement with China not to expend political capital arguing for trade and investment to be kept open. Reluctantly, we should probably wish them at least some luck. But along with that needs to come a more far-sighted view about building a diverse and competitive economy.Companies operating in sensitive areas like high-end semiconductors may not like disengaging from China — the American chip company Nvidia warned recently about the cost of decoupling — but those exposed to the coercive powers of the US administration, even those in Europe, don’t have much choice. Last week, the Dutch government announced the new export control regime for semiconductor equipment that Washington has bullied it into creating. By creating a case-by-case licensing requirement, it essentially forces every export deal by the Dutch chip machine manufacturer ASML with a Chinese entity to run the gauntlet of the US government, which may deem the sale a national security threat.There is more corporate room for manoeuvre in less sensitive technologies such as, say, electric vehicles. But here too it’s going to be impossible to take business decisions without heavy input from the political process.Indeed, there’s currently an escalating debate within the EU over what role to allow China in Europe’s expanding electric vehicle market. Thierry Breton, the French internal markets commissioner, recently threatened an antidumping investigation into Chinese EV manufacturers exporting to Europe, which could in theory also hit European companies selling into the EU from their Chinese plants. And if the commission is really hell-bent on decoupling, it could use its new regulation against state-subsidised companies to deter Chinese car businesses from building plants in the EU. But German (and especially Volkswagen) investment in China’s car sector, both for sales in China and exports elsewhere, mean the traditional German instinct for avoiding trade disputes and remaining open to China persists — even though Scholz’s coalition government is tacking away from his predecessor Angela Merkel’s alignment with Beijing.Grudgingly, we should concede that German industry probably has a point here. China has established such a strong global lead in EV technology and production capability that trying to exclude it from the EU market is counterproductive. As my colleague Martin Sandbu has written, if the EU wants to build its own green tech industry, then encouraging domestic take-up (as did China with EV purchase as well as production incentives) is a better route than trying to disengage from China. In any case, the “distance effect” in trade for EVs seems to be rising: the cars are likely to be built close to where they’re bought, a good sign for the prospects of expanding production inside the EU.I say grudgingly because here we’re in a world of corporatist mercantilism rather than a competitive market, and the European business-government nexus has shown a woeful lack of foresight in shifting towards EVs. German car manufacturers and their friends in government have spent far too long trying to extend the use of conventional engines, including failing to clamp down on the faking of emissions tests in the Dieselgate scandal, rather than embracing change and encouraging the take-up of EVs.For all Scholz’s talk of a clear division between government and business, the idea of a company like VW making decisions divorced from official influence is absurd. VW is a part publicly-owned enterprise (the state of Lower Saxony holds a stake and has important veto rights) with a powerful trade union presence and longstanding influence on German trade and investment policy. There’s a strong argument for weakening those links, but for the moment it’s pointless to pretend they don’t exist.Some sectors will always come under more government influence than others, but companies operating in an increasingly politicised environment need sharper awareness of the potential for official interference. Taking EVs as an example, the extent of interference remains uncertain, while companies’ own reactions to technological and market developments have been dilatory and reactive. De-risking trade with China has to proceed from a realistic appraisal of what governments can and should be doing, not promulgating the illusion that they have no role to play at [email protected] More

© Alberto AntoniazziA common view in the financial industry is that carbon prices are detrimental: by reducing the profitability of companies, a higher price will lower share prices. But, while this may be true in the long run if carbon taxes permanently rise at a constant rate, it can be argued that, in the short to medium term, a price on carbon emissions can reduce macroeconomic risk — and hence benefit financial markets. One key condition is that carbon pricing needs to respond to economic fluctuations.Financial markets have entered a new era that incorporates sustainability. They have become central to the global effort to address climate change and build a more sustainable future. As the world shifts to a low-carbon economy, carbon pricing policy is increasingly important in investment decisions. It is creating new opportunities for sustainable investments and driving the growth of green finance.Climate policy also raises important macroeconomic challenges. Reaching net zero by 2050 requires a permanent increase in the price of carbon. To comply with stringent emission reduction targets, companies will either have to pay a carbon price or reduce their emissions by investing in greener production facilities.As underlined in our latest research, Green Asset Pricing, carbon price policies will play a central role in shaping market fundamentals. Indeed, the world cumulative sum of investment spending to reach net zero represents half of current GDP, while carbon tax revenues could represent 5 per cent, according to Jean Pisani-Ferry of the Peterson Institute for International Economics. Carbon policies will therefore not only affect the earnings and growth prospects of companies but also governments’ ability to finance deficits. Our main contention is that, if well-designed, carbon policies can play the role of automatic stabilisers by cooling down the economy during booms and stimulating it during recessions. Indeed, a government that reduces the price of carbon during a recession provides relief to companies by supporting their profitability. Lowering the price of carbon in downturns not only stimulates production but also supports investment as well as employment precisely when it is most needed. Over the cycle, this policy reduces macroeconomic volatility, as it weakens economic activity and profits during booms.How would a time-varying carbon price affect financial markets? Risk premiums, which in turn affect stock prices, are related to the uncertainty surrounding the economy. Macroeconomic volatility, being a main source of uncertainty for investors, it is a key determinant of risk premiums. A more volatile economy depresses valuations of risky assets by inducing investors to demand higher risk premiums to compensate for this uncertainty. Consequently, well-designed carbon policies can stabilise financial markets and lower risk premiums if they are used to reduce macroeconomic volatility.Reducing the burden of carbon pricing in a recession also makes sense from an environmental perspective. Since carbon emissions are very strongly correlated with the business cycle, they typically decline abruptly during major economic downturns, such as the global financial and Covid-19 crises. The need to curb emissions to preserve the environment is therefore less pressing during periods of major recessions.

Increasing the price of carbon during booms creates strong incentives for companies to adopt greener technologies. Such a policy also lowers procyclicality — variations broadly linked with the wider economic cycle — by reducing investments in “brown” projects that worsen the climate crisis. Given the costs associated with the green transition, however, our results suggest that this transformation should mainly happen during booms, when the economy is strong.These gains are also not limited to financial markets. A reduction in the price of carbon during recessions results in lower energy costs for consumers, which can support spending and provide a further boost to the economy. Such a policy would also help ease political opposition and social unrest linked to higher energy prices, such as those witnessed during the French “yellow vest” protests.But how to implement this policy in practice? Schemes that are connected to economic activity, such as the cap and trade systems implemented in Europe and California, could in principle reconcile economic, financial and environmental objectives. While still imperfect, the EU’s Emissions Trading System in recent years delivered the positive correlation between the price of carbon and economic activity that is needed to achieve these gains.In summary, if connected to economic activity, a price on carbon emissions can have beneficial effects on financial markets by reducing economic procyclicality. A reduction in macroeconomic volatility not only lowers the premiums demanded by investors for holding risky assets but also stabilises financial markets. Moreover, the examples of Europe and California suggest that time-varying carbon policies can be successfully implemented in practice. Ghassane Benmir of the London School of Economics and Political Science, Ivan Jaccard of the European Central Bank, and Gauthier Vermandel of CMAP, Ecole Polytechnique, Paris, and PSL Research — Université Paris Dauphine, are authors of Green Asset Pricing (ECB working paper, 2020). The views expressed in the paper and this article are those of the authors and do not necessarily reflect those of the ECB. More

The outflows highlight deep-seated concern about the state of China’s economy as its much-awaited pandemic recovery stalls. Consumer spending is flagging, the property market and stock markets are in the doldrums and cash is piling up in savings.Brokers say individuals are responsible for the surge and it shows no sign of letting up, which analysts warn could put further pressure on the yuan as it teeters at eight-month lows. Mainland Chinese holdings under a nascent scheme allowing investment in Hong Kong and Macau wealth products have more than doubled since the end of last year to 814 million yuan ($110 million). New premiums collected on Hong Kong insurance policies leapt a staggering 2,686% to $9.6 billion in the first quarter of 2023.”More and more people realise they cannot put their eggs in one basket,” said Helen Zhao, an insurance broker busy helping mainland clients sign Hong Kong deals, citing Sino-U.S. frictions and pessimism about China’s outlook as motivating factors.Hong Kong insurance has long been a channel for Chinese buying assets abroad, with the policies providing more protection than what’s available on the mainland, and attendant savings and investment products mostly denominated in dollars with a global remit.AIA Group (OTC:AAGIY), Prudential and Manulife all reported a jump in business, citing contributions from mainland investors. A wealth manager at Noah Holdings (NYSE:NOAH) said he recently arranged a group of mainland clients to sign insurance contracts in “long queues”, many unsettled by the abruptness of China’s lurch in December from COVID-19 zero-tolerance to living with the virus.”Some clients were a bit of shocked by the policy U-turn, and they grow pessimistic about China’s economy,” he said. “The burst of insurance buying in Hong Kong reflects a gloomy domestic outlook, and worries about an uncertain future.” Savings insurance products in Hong Kong offer a minimum yield of 4.5%, he said, better than 3% offered on the mainland. He requested anonymity as he isn’t authorised to speak publicly.Noah Holdings said in an emailed statement that offshore insurance is a convenient tool for global asset allocation, while Hong Kong’s location makes it a natural destination for mainland investors. Dollar deposits in Hong Kong, meanwhile, offer a hedge against movements in the yuan and, for a one-year term, yield 4%, according to Bank of China. On the mainland, one-year dollar deposits yield 2.8%, while yuan deposits yield 1.65%. OFFSHORE DEMAND Such returns are the pull factor. The gap between two-year U.S. and Chinese government bond yields is its widest in 16 years, in favour of the U.S., and global stocks are going up while China’s are going sideways.”Offshore demand for policies denominated in Hong Kong dollars is low – U.S. dollar-denominated policies are more prevalent, to provide access to global asset allocation,” said Lawrence Lam, chief executive officer at Prudential Hong Kong.To be sure, total demand remains below pre-COVID levels, and a surge in interest was expected to coincide with China’s borders reopening, since signing policies requires a visit to Hong Kong.Yet it comes as the yuan is looking increasingly fragile. A previous, and larger, rush of outflows in 2016 prompted Beijing to ratchet up capital controls and unveil other measures to curtail insurance buying.The wealth manager at Noah fears that a sustained rush into Hong Kong insurance risks inviting Beijing’s policy tightening. Chinese authorities have already stepped up efforts in the last few weeks to shore up the yuan, with state banks selling dollars and the central bank warning it would guard against the risks of large exchange rate movements.Hao Hong, chief economist at GROW Investment Group, notes the outflows also coincide with exporters’ reluctance to repatriate dollar proceeds – another weight on the currency and sign of low confidence in the economy.The yuan’s real exchange rate, he points out, is below the nadir seen during China’s 2015-16 stock market crash and capital flight.While that makes for a possible source of a yuan rebound later in the year, according to Tan Xiaofen, professor at the School of Economics and Management of Beihang University, caution is likely to drive individual outflows ahead. “We’ve seen some changes to the risk attitudes of mainland visitors, which has moderated to a more balanced approach to their investments,” said Sami Abouzahr, head of investments and wealth solutions at HSBC in Hong Kong.”They remain interested in investment opportunities but are also paying greater attention to their health and legacy needs through medical and legacy planning insurance solutions.” ($1 = 7.2513 Chinese yuan renminbi) More

Attorneys in the regulator’s enforcement unit determined that Celsius misled investors and should have registered with the regulator, according to the report, citing people familiar with the matter. If majority of the CFTC’s commissioners agree with the conclusion, the agency can file a case in federal court as soon as this month, the report said. Celsius and the CFTC did not immediately respond to a Reuters request for comment. Last year’s market turmoil after the collapse of TerraUSD led to the failure of several major crypto companies including Celsius Network. The company filed for bankruptcy last year, leaving its customers with large losses. As part of Celsius’ bankruptcy case, an independent examiner was appointed to investigate accusations that Celsius had operated as a Ponzi scheme and report on how it handled crypto assets. New York’s attorney general sued Celsius founder Alex Mashinsky early this year, claiming he defrauded investors out of billions of dollars in digital currency by concealing the failing health of the lending platform. More

BENGALURU (Reuters) – The U.S. dollar will hold its ground against most major currencies for the rest of the year despite expectations of narrowing interest rate differentials as the U.S. economy stays resilient, according to FX strategists polled by Reuters.Although the greenback is still down around 0.5% against major currencies this year, it has gained nearly 1.3% over just the past week thanks to receding calls for a federal funds rate cut and wilting expectations for a U.S. recession this year.Several U.S. Federal Reserve officials, including Chair Jerome Powell, have argued in favour of at least two more rate hikes, against market expectations of one more, which also helped underpin the currency. The dollar will not give up those recent gains anytime soon, according to the June 30-July 5 poll of 80 FX strategists despite some major central banks, like the European Central Bank and Bank of England, set to keep raising rates for longer. “The tightness of the U.S. labour market may help the economy and the dollar in the very short term,” said Kit Juckes, chief FX strategist at Societe Generale (OTC:SCGLY). “Even if we see (interest) rate convergence, it seems unlikely a new major euro uptrend will start without stronger growth.”Indeed, a majority of common contributors showed the dollar view against most major currencies for the coming six months has been either upgraded or kept unchanged from a month ago.Meanwhile, net USD short positions have eased since hitting a two-year high in May, according to data from the Commodity Futures Trading Commission.Recent data showed the world’s largest economy has remained stronger than expected and has fared better than the euro zone, which slid into a recession earlier this year.”We see room for a dollar rebound in the near term. The U.S. economy looks in better shape than Europe and Asia, which suggests ‘higher for longer’ is somewhat more credible coming from the Fed than most others,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.After rising over 2% in June, the euro, currently at $1.09, was expected to gain a little less than 1% and trade at $1.10 in six months.Sterling, one of the best-performing G10 currencies this year, was forecast to change hands at $1.26, slightly lower than the current level of $1.27.A double whammy of high interest rates and sticky inflation has already dragged on economic activity in Britain.When asked how the dollar would perform against major currencies over the next three months, 45% of strategists, 27 of 60, said it would remain rangebound and 19 said it would strengthen. Only 14 said it would weaken.”The dollar is getting a tailwind from the Fed … the current strength is on a repricing of the Fed (rate) higher,” said John Hardy, head of FX strategy at Saxo Bank.”But at the same time, we have extremely strong global risk sentiment and liquidity and financial conditions are very easy. That normally associates with the dollar weakness. Those two things are balancing each other out.” More

BENGALURU (Reuters) – Australia’s central bank will likely deliver a 25 basis point interest rate increase on Aug. 1 following a pause on Tuesday according to economists in a snap Reuters poll who were split on when and where the cost of borrowing would peak.The Reserve Bank of Australia (RBA) decided to pause again this week after two 25 basis points hikes at its May and June meetings, leaving analysts and market traders guessing on what to expect next.The RBA began tightening policy in May 2022 and had raised rates at every meeting since, other than a pause in April. But it left them unchanged again on July 4 to assess the economic impact of its increases.Inflation slowed to 5.6% on a monthly basis in May from 6.8%, well above the 2.0% target. Along with a still-strong job market and a rebound in house prices, expectations have strengthened for a rate increase at the August meeting.Detailed quarterly inflation data is due on July 26, just days before that meeting.More than 90% of respondents, 23 of 25, in a July 4-5 poll expected the RBA to increase its official cash rate by 25 basis points to 4.35% at the Aug. 1 meeting.”We suspect that the coming forecast update from the RBA staff will likely tip the balance in favour of an August rate hike. The timing of a follow-up move is uncertain, but we’d favour September or October,” said Adam Boyton, head of Australian economics at ANZ.Boyton said he expected a peak cash rate of 4.60% but the outlook was uncertain following the central bank’s recent pause.All major domestic banks, ANZ, CBA, NAB and Westpac forecast a quarter-point increase in August.However, there was no consensus among economists on when and where rates would peak in this cycle.More than 45% of respondents, 10 of 22, expected the central bank to raise rates once more in September, taking rates to 4.60% by the end of this quarter. The other 12 said rates would stay at 4.35%. Of those who had a longer-term view, 11 out of 20 of them expected rates to peak at 4.60% or higher by end-2023, largely in line with market pricing.”Given this pause looks to be more around slowing the pace of tightening than a shift in the view of what is ultimately required, we retain our view of two more hikes and a 4.60% terminal rate,” said Chris Read, Australia economist at Morgan Stanley (NYSE:MS). More

WASHINGTON (Reuters) -A united U.S. Federal Reserve agreed to hold interest rates steady at the June meeting as a way to buy time and assess whether further rate hikes would be needed, even as the vast bulk expected they would eventually need to tighten policy further, according to meeting minutes released on Wednesday.While “some participants” wanted to move ahead with a rate hike in June because progress in cooling inflation had been slow, “almost all participants judged it appropriate or acceptable to maintain” the federal funds rate at the existing 5% to 5.25%, the minutes said.”Most of those participants observed that leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress,” toward returning inflation to 2% from its current level more than twice that.The minutes added detail to the policy statement and economic projections issued after the June 13-14 session, when the Fed ended its 10-meeting streak of rate hikes with a decision to hold the benchmark federal funds rate steady.Markets were little changed after the minutes, with traders in futures tied to the Fed policy rate continuing to price in a rate hike in July and about a one-in-three chance of another increase before the end of the year.While Fed staff still saw a “mild recession” beginning later this year, they now viewed avoiding a downturn as only a little less likely than their baseline. Meanwhile policymakers wrestled with data showing a continued tight job market and only modest improvements in inflation. Officials also tried to reconcile headline numbers showing continued economic strength with evidence of possible weakness – of household employment figures that pointed to a weaker labor market than the payroll numbers indicated, or national income data that seemed weaker than the more prominent readings of gross domestic product. The logic of waiting, whether it amounted to a “skip” of one meeting or turned into a longer pause, reflected what officials said was still deep uncertainty around whether the Fed had already raised rates enough to tame inflation — and only needed to wait for the impact of tighter policy to be realized — or still needed to lean on the economy harder.”Most participants observed that uncertainty about the outlook for the economy and inflation remained elevated and that additional information would be valuable for considering the appropriate stance of monetary policy,” the minutes said.The projections issued after the June meeting showed 16 of 18 officials still expected the policy interest rate would need to rise at least another quarter of a percentage point by the end of the year.In that context, Fed Chair Jerome Powell at a press conference after the June meeting said the decision marked a switch in strategy, with the central bank focused more on just how much additional policy tightening might be needed and less on maintaining a steady pace of increases.”Stretching out into a more moderate pace is appropriate to allow you to make that judgment” over time, Powell said.Investors in contracts tied to the overnight federal funds rate feel the Fed is highly likely to raise the benchmark rate by a quarter point, to a range between 5.25% and 5.5%, at its July 25-26 meeting. More