Economy

Bond market upsets aren’t a typical feature of Canadian finances, but one revolt appears to have begun there recently. Buried in a 96-page economic update late last year, Canada’s finance ministry led by Chrystia Freeland killed off its inflation-protected bond issuance programme — even as the country battles its worst price pressures for 40 years. Fast-rising prices and their impact have been the dominant theme across world markets in the past year, putting a spotlight on bonds that promise protection against inflation’s value-eroding effects. They pay out fixed interest like regular government bonds but regularly adjust the principal — the lump sum repaid at the end — in line with inflation rates.Ottawa’s decision is thus a real rebellion in the slow-moving world of bond fashions, where government debt managers usually prize gradual, well-signalled moves that don’t upset bond buyers. They also tend to watch their peers closely: when one succeeds in opening a market for, say, ultra-long 50-year bonds or finds demand for “green” debt to fund environmentally friendly projects, others follow. Canada, an early adopter of “real return” bonds in 1991, has dropped its programme with immediate effect, and is now an exception among G7 nations. Even Japan, still mostly concerned about deflation, sells some protection. Ottawa cited low demand as a factor in its decision and pointed to the results of industry consultations in earlier years. Still, the move has prompted howls from pension funds and others who use the products to help meet liabilities stretching out over decades. “Wrong signal, bad timing,” said the Canadian Bond Investors’ Association, representing fund managers holding some $900bn in assets. It called for a rethink. “Now more than ever investors have greater interest in inflation-protection products.”Bond investors are powerful players given their financial heft and role in financing governments. A committee advising the Bank of Canada also voiced disquiet, with some members fretting that the move might create a perception that the government feared it could not fully contain inflation. Beyond the decision by Freeland’s ministry and investor misgivings, there’s an uncomfortable truth about how about inflation-linked bonds work.Take performance. The US offers the largest inflation-linked market with its Treasury inflation-protected securities. Investors tracking Bloomberg’s total return Tips index lost almost 12 per cent last year, while one following regular US bonds on the same basis lost 12.5 per cent. In other words, Tips’ short-term performance fell victim, and almost as badly, to the same factors as their regular cousins — namely, the Federal Reserve’s unusually sharp series of interest rate rises. The Fed pushed bond prices down faster than could be countered by pricing in rocketing inflation. “Inflation-linked bonds generally performed last year exactly how they should have done given the environment,” says Michael Pond, global head of inflation market research at Barclays. “There’s been a lot said in the last year about using them as protection against inflation but they only guarantee you that real return if you hold them to maturity. They’re not protection over short-term horizons.” That buy-and-hold rationale suits those with distant horizons such as pension funds and insurers, but the resulting lack of liquidity can push up the costs for smaller issuers by widening the gap between the prices buyers and sellers will pay.“Debt management offices are charged with issuing bonds that minimise expense. Inflation-linked bonds probably aren’t the most efficient for smaller borrowers like Canada on that basis,” said Darrell Duffie, Stanford professor and bond markets specialist. Around 2 per cent of Ottawa’s borrowing was in real return bonds before it dropped the programme, while Tips account for roughly 8 per cent of Washington’s issuance.For example, the US Treasury on Thursday sold $9bn in 30-year Tips, garnering more in one deal than Canada did from its combined sales of real return bonds for the past five years.Despite Ottawa’s revolt against bond market orthodoxy, others are holding the inflation-protected line. Investors took up a record 90.1 per cent of this week’s US deal, leaving dealers — banks which trade in the bonds — with far fewer bonds than average.Still, buying inflation protection seems likely to remain somewhat of a niche market and demand is unlikely to spike suddenly. That may leave Ottawa comfortable in its decision. But with its peers facing far larger debut burdens, the rebellion is unlikely to [email protected] More

MUNICH (Reuters) – French President Emmanuel Macron signaled on Friday that he would discuss concerns about U.S. electrical vehicle subsidies with Vice President Kamala Harris as they met during the Munich Security Conference.”We are working hard,” on the issue, Macron said before their meeting.While EU countries welcome the U.S. commitment to energy transition, they fear the U.S. Inflation Reduction Act’s (IRA’s) $369 billion of subsidies for electric vehicles (EVs) and other clean technologies could put companies based in Europe at a disadvantage.Harris said they were also going to discuss their commitment to supporting Ukraine against Russia’s invasion but offered no comment about the subsidy issue before reporters were ushered out of a meeting between the two leaders.The bill is a key part of Biden’s vision to deal with climate change, reinvigorate American manufacturing and compete with China, but it has rankled allies from Brussels to Seoul.Macron, who U.S. President Joe Biden celebrated with a lavish state dinner in December, announced around that time that the two leaders had agreed to “fix” issues about the made-in-America EV law. But a solution from Washington that would be acceptable to France has not been forthcoming in the months since. More

Tesla has been speaking with potential advisers about a bid, the report said, citing people with knowledge of the matter, and added that Sigma Lithium is one of the many mining options the electric-vehicle maker is exploring as it mulls its own refining.Tesla and Sigma Lithium did not immediately respond to Reuters requests for comment. Sigma is finishing construction of a hard rock lithium mine in Brazil that it expects to open by April. The mine will produce spodumene concentrate, which can be used to make lithium hydroxide, a type of the metal preferred by some automakers including Tesla and BMW.The project would use hydroelectric power, thus helping to greatly reduce its carbon footprint. U.S. stock of Sigma Lithium, which has a market capitalization of $3.21 billion, nearly trebled in value last year.Chief executive Elon Musk said last year Tesla was open to buying a mining company if producing its own supply of electric vehicle metals would speed up worldwide adoption of clean energy technologies.Tesla and other automakers routinely talk to mining companies of all sizes about potential supplies of lithium and other EV metals without necessarily signing contracts.Last month, Tesla signed an agreement with Piedmont Lithium Inc for supply of spodumene concentrate from Quebec, starting later this year.Tesla also has supply contracts for nickel, lithium and a range of other EV metals from suppliers across the globe. More

FRANKFURT (Reuters) – Germany’s Allianz (ETR:ALVG) on Friday swung to a fourth-quarter net profit, rebounding after taking big charges a year earlier for a U.S. funds scandal and as a higher investment margin boosted its life and health insurance business.But its asset management division – which includes bond giant PIMCO – saw lower revenues and fees as total assets under management dropped 18% during the year.Its shares dropped 3.2% in morning trade in Frankfurt, though analysts at DZ Bank, who rate the company a “buy”, said the results were overall “good”.The bounce-back in profit marked a return to business as usual for Allianz, which has been trying to restore its reputation after one of its funds units, Allianz Global Investors, was dogged with a fraud case in the United States that resulted in $6 billion in settlements and fines in May. Graphic: Allianz results- https://www.reuters.com/graphics/ALLIANZ-RESULTS/zgpobkomevd/chart.png”Allianz has consolidated its position as one of the world’s largest, most resilient, and trusted global financial institutions,” Chief Executive Officer Oliver Baete said.Net profit attributable to shareholders of 2.007 billion euros ($2.13 billion) in the three months through December compares with a loss of 292 million euros a year earlier. Analysts had expected a net profit of 2.034 billion euros. On top of the $6 billion in fines and settlements announced last year, Allianz agreed to a guilty plea for its U.S. Allianz Global Investors (AGI) business that oversaw the funds at the center of the fraud. Allianz’s own lawyers described the plea as the equivalent of a “death penalty”, and AGI had to shut its U.S. operations.A global insurer, Allianz ranks as one of the world’s biggest money managers, but its assets under management dropped 18% to 2.1 trillion euros in 2022 from 2021, figures on Friday showed.Allianz said the decline was mainly because of market developments, though outflows resulting from the closure of its U.S. AGI business also played a role.Asset management was the only major division at Allianz that saw a drop in 2022 operating profit from a year earlier. ($1 = 0.9403 euros) More

(Reuters) – Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) said they expect the U.S. Federal Reserve to raise interest rates three more times this year, lifting their estimates after data pointed to persistent inflation and a resilient labor market.Producer prices accelerated in January by the biggest margin in seven months, according to data on Thursday, while a Labor Department report showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week.”In light of the stronger growth and firmer inflation news, we are adding a 25bp (basis points) rate hike in June to our Fed forecast, for a peak funds rate of 5.25%-5.5%,” Goldman Sachs economists led by Jan Hatzius said in a note dated Thursday.Meanwhile, money markets are currently pricing in a terminal rate of 5.3% by July.BofA Global Research also expects a 25bps hike in the Fed’s June meeting, pushing the terminal rate up to a 5.25%-5.5% range. It had earlier pencilled in two rate hikes of 25 bps each in the March and May meetings.”Resurgent inflation and solid employment gains mean the risks to this (only two interest rate hikes) outlook are too one-sided for our liking,” BofA wrote in a client note.After the recent U.S. data, European investment bank UBS said it was expecting the Fed to raise rates by 25 bps at its March and May meetings, which may leave the Fed funds rate at the 5%-5.25% range.In sharp contrast to its U.S. peers, however, UBS estimated that the Fed would ease interest rates at the September meeting this year.Before the recent U.S. data, J.P. Morgan had forecast the terminal rate at 5.1% by the end of June.A majority of economists polled by Reuters before the latest data said they expected the Fed to raise rates at least twice more in the coming months, with the risk of them going higher still. None of them are expecting a rate cut this year. More

NEW YORK (Reuters) – Signs of strength in the U.S. economy have buoyed stocks in the face of rising Treasury yields and hawkish Federal Reserve expectations, though some investors believe the rally may be on borrowed time. Stronger-than-expected reports on employment, retail sales and inflation have pushed up expectations for how much higher the Federal Reserve will need to raise rates and ignited a surge in Treasury yields – typically a negative development for stocks. Yet the robust data has also dispelled fears of an impending recession that plagued Wall Street at the end of 2022, giving investors a reason to hold on to equities, at least for now. The S&P 500 is up 6.6% for the year-to-date, even as benchmark 10-year Treasury yields have risen nearly 50 basis points from their lows of the year. Only 24% of global fund managers now expect a recession, down from 77% in November, a recent survey by BofA Global Research showed.“Everyone came into the year thinking that there’s an imminent recession in the first half of 2023,” said Charlie McElligott, managing director, cross-asset strategy at Nomura Securities. “They got caught off guard because there’s much more resilient domestic and global growth.” Graphic: Yields vs stocks: https://fingfx.thomsonreuters.com/gfx/mkt/znvnbkwnlvl/Pasted%20image%201676580956813.png Investors’ resolve can be seen in the resilience of the Nasdaq Composite Index, home to many of the tech and growth stocks that were particularly sensitive to higher yields last year, when it registered a 33% loss.Based on historical regression, the Nasdaq should have sold off between 5% and 10% based on the increase in two-year yields since the Fed meeting earlier this month, according to a report from analysts at JPMorgan (NYSE:JPM), including chief global markets strategist Marko Kolanovic. Instead, the index is up 0.3% over that time, and is up 13.3% for the year to date.Some investors say the market’s resilience is unlikely to last much longer, especially if yields keep rising. Higher Treasury yields can weigh on stocks as they offer equities investment competition, increase companies borrowing costs and hurt valuations. Many also believe that a recession has been delayed but not avoided. A severe downturn could await in the second half of the year, especially if rebounding inflation forces the Fed to keep rates at a higher level for longer to cool prices.“The market in equities is just not appreciating that there will be more stepping on the brakes from the Fed and more earnings at risk of going lower,” said Torsten Slok, Chief Economist at Apollo Global Management (NYSE:APO). “Everyone wants to buy the dip in the stock market but the risk is that with inflation at 6.4% the Fed is just not done.”There are already signs that investors may be growing nervous over the economy’s strength. The S&P 500 dropped 1.4% on Thursday, helped in part by a stronger than expected U.S. producer price index reading.Bearish investors also note other factors that tend to weigh on stocks have reared their heads in recent weeks. Real yields – which measure return on Treasury yields after inflation – have turned higher, taking the yield of the U.S. 10-year Treasury Inflation Protected Security near its highest level since early January. That can dull the allure of stocks, which are seen as far riskier than U.S. government bonds.Rising yields have also arrested a decline in the U.S. dollar, which tumbled from a two-decade high in the latter half of 2022 but is now up nearly 3% from its low of the year against a basket of currencies. A stronger dollar tends to hurt the profits of U.S. multinationals and exporters.In BoFA’s survey, 66% of fund managers said the move in stocks, which began in October and has seen the S&P 500 rise 14% from that month’s lows, was a bear market rally rather than a new bull market.Still, some investors believe risks are tilted in favor of stocks, with the bulk of the Fed’s monetary policy tightening likely in the rearview mirror and valuations broadly lower after last year’s 19.4% selloff in the S&P 500.Lara Reinhard, senior portfolio strategist at Janus Henderson Investors, is avoiding technology and growth stocks but focusing on shares of companies that pay out dividends as a hedge against inflation.“We are starting at more normal valuations and in some cases cheaper valuations than in the last few years,” she said.Meanwhile, stocks are getting strong support from retail investors, who pumped a record net average of $1.51 billion per day into U.S. stocks over the last month, according to Vanda (NASDAQ:VNDA) Securities.”Retail investors have plenty of dry powder in the form of capital parked in money market funds that could be deployed in the equity space once confidence about future market returns increases more broadly,” the firm’s analysts wrote. More

“Contingent on the completion of repairs and testing, we anticipate the start of limited operations at Terminal 1 on Saturday,” the Port Authority of New York and New Jersey, JFK’s owner, told Reuters in a statement on Friday.Terminal 1 represents 5% of all JFK scheduled passenger flights, and of today’s 64 scheduled Terminal 1 arrivals and departures, 39 have been canceled, the Port Authority said.The outage, disrupting inbound and outbound flights at one of the world’s busiest airports, began after an electrical panel failed and caused a small, isolated fire that was immediately extinguished overnight on Thursday. The terminal serves several international carriers, including Air France and Lufthansa. Amongst other disrupted flights, the outage forced a JFK-bound Air New Zealand airplane to return to Auckland about eight hours into a trip, returning to its departure point about 16 hours after the flight began.Air New Zealand said “diverting to another U.S. port would have meant the aircraft would remain on the ground for several days, impacting a number of other scheduled services and customers.” The airline said all passengers on the flight have been accommodated on flights leaving Auckland. The Federal Aviation Administration declined to comment about the disruption to air travel.As of 1:30 p.m. on Friday, JFK’s website showed 120 inbound and outbound flights were either delayed or canceled at the airport. About half were international flights. In all, about 3% of flights at the airport had been canceled on Friday, according to flight-tracking website Flightaware.com. “We apologize there are no new updates at the moment. Please continue to check with your air carrier for flight status,” JFK said in a tweet on Friday afternoon. The Port Authority of New York and New Jersey, JFK’s owner, was working with the terminal’s operator to restore flight operations as quickly as possible, it said earlier. JFK said it was working to accommodate affected flights using some of the other four terminals at the airport. More

WASHINGTON (Reuters) – U.S. Trade Representative Katherine Tai on Friday met with European Union Executive Vice President Valdis Dombrovskis and discussed the U.S. Inflation Reduction Act, Tai’s office said in a statement. EU countries fear the U.S. legislation’s $369 billion of subsidies for electric vehicles and other clean technologies could put companies based in Europe at a disadvantage.The subsidies, largely for manufacturers based in North America have local content requirements that EU leaders fear may lure companies away from Europe. The legislation excludes electric vehicles assembled outside of North America from tax credits in the United States.”Ambassador Tai expressed her optimism that the United States and European Union could continue working closely together on their shared goal of strengthening the clean energy sector globally,” Tai’s office said after the meeting on the margins of the Munich Security Conference.The EU wants the same treatment as U.S. trade partners Canada and Mexico, whose production is largely included in the subsidy schemes but any revision of the act by the U.S. Congress is out of the question.European nations are not the only ones who have raised concerns with the Inflation Reduction Act. South Korea has also sought talks with the United States over it.The European Commission and the White House have set up a high-level task force to discuss the issue.Tai and Dombrovskis also discussed the ongoing negotiations for a global arrangement on sustainable steel and aluminum and agreed to remain in close contact as negotiations continue in 2023, the USTR office added. More