Economy

SAO PAULO/BRASILIA (Reuters) – Brazilian leftist leader Luiz Inacio Lula da Silva narrowly defeated President Jair Bolsonaro in a runoff election, but the far right incumbent had not conceded defeat by Monday morning, raising concerns he might contest the result.Tens of thousands of jubilant supporters took to the streets of Sao Paulo to celebrate a stunning comeback for the 77-year-old former metalworker who, following his previous two-term 2003-2010 presidency, served prison time for corruption convictions that were later annulled.Bolsonaro is the first Brazilian incumbent to lose a presidential election and Lula has vowed to overturn his legacy, including pro-gun policies and weak protection of the Amazon (NASDAQ:AMZN) rainforest. Pitching the contest as a battle for democracy after his rival made baseless claims the electoral system was open to fraud, Lula called the election a sign Brazilians “want more and not less democracy,” in a victory speech that celebrated what he called his “resurrection.” He promised to unite a deeply divided country.”I will govern for 215 million Brazilians, and not just for those who voted for me,” Lula said at his campaign headquarters. “There are not two Brazils. We are one country, one people, one great nation.”The Supreme Electoral Court (TSE) declared Lula won 50.9% of votes, against 49.1% for Bolsonaro. Lula’s inauguration is scheduled for Jan. 1. Graphic: Lula wins Brazilian election https://graphics.reuters.com/BRAZIL-ELECTION/myvmomjrzvr/graphic.jpg The result in Latin America’s largest nation means the left will govern all the region’s major economies after a string of electoral successes from Mexico to Argentina in recent years.A source in the Bolsonaro campaign told Reuters the president would not make public remarks until Monday. The Bolsonaro campaign did not respond to a request for comment.”So far, Bolsonaro has not called me to recognize my victory, and I don’t know if he will call or if he will recognize my victory,” Lula told supporters on Sao Paulo’s Paulista Avenue.In contrast to Bolsonaro’s silence, congratulations for Lula poured in from foreign leaders, including U.S. President Joe Biden, Russian President Vladimir Putin, German Chancellor Olaf Scholz and French President Emmanuel Macron.Biden congratulated Lula for winning “free, fair and credible elections,” joining the chorus of compliments from European and Latin American leaders.Markets braced for a volatile week ahead, with Brazil’s real currency and international listings of Brazilian stocks falling as investors gauged speculation about Lula’s cabinet and the risk of Bolsonaro questioning results.One close Bolsonaro ally, lawmaker Carla Zambelli, in an apparent nod to the results, wrote on Twitter, “I PROMISE you, I will be the greatest opposition that Lula has ever imagined.”The vote was a rebuke for the fiery far-right populism of Bolsonaro, who emerged from the back benches of Congress to forge a conservative coalition but lost support as Brazil ran up one of the worst death tolls of the coronavirus pandemic.International election observers said Sunday’s election was conducted efficiently. One observer told Reuters that military auditors did not find any flaws in integrity tests they did of the voting system.Truck drivers believed to be Bolsonaro supporters on Sunday blocked a highway in four places in the state of Mato Grosso, a major grains producer, according to the highway operator. In one video circulating online, a man said truckers planned to block main highways, calling for a military coup to prevent Lula from taking office.PINK TIDE RISINGLula’s win consolidates a new “pink tide” in Latin America, after landmark leftist victories in Colombia and Chile’s elections, echoing a regional political shift two decades ago that introduced Lula to the world stage.He has vowed a return to state-driven economic growth and social policies that helped lift millions out of poverty during two terms as president from 2003 to 2010. He also promises to combat destruction of the Amazon rainforest, now at a 15-year high, and make Brazil a leader in global climate talks.”These were four years of hatred, of negation of science,” Ana Valeria Doria, 60, a doctor in Rio de Janeiro who celebrated with a drink. “It won’t be easy for Lula to manage the division in this country. But for now it’s pure happiness.”A former union leader born into poverty, Lula’s two-term presidency was marked by a commodity-driven economic boom and he left office with record popularity.However, his Workers Party was later tarred by a deep recession and a record-breaking corruption scandal that jailed him for 19 months on bribery convictions, which were overturned by the Supreme Court last year. More

By Summer ZhenHONG KONG (Reuters) – Bond fund managers with strategies focused on Asian high-yield issuers have switched to cash and other non-China assets after suffering huge losses in China’s corporate bond market.Once a sought-after investment that accounts for more than half of Asia’s high-yield corporate bond issuance, China’s property sector saw a record number of defaults in 2022 across top private developers and even some state-owned companies.Capital outflows triggered by aggressive Federal Reserve interest rate hikes struck another blow to the already fragile segment.Monica Hsiao, founder and chief investment officer of Triada Capital, an Asia-focused credit long-short fund, says she has not seen this kind of challenge in an investment career spanning more than 20 years. “We hold over 50% of cash at the moment, higher than any time historically,” said Hsiao, who founded the fund in Hong Kong in 2015. Hsiao, who managed Asia credit for London-based credit-focused asset manager CQS prior to setting up Triada, did not disclose the fund’s size and its performance.More than two dozen Chinese property developers rated by Moody’s have defaulted since the beginning of 2021 and that has pushed the number of Asian high-yield companies rated junk to a record high. Many holders of China high yield bonds have seen them trading below 20 cents on the dollar. The in-default bonds of property company Sunac China maturing in 2025 trade at 6 cents to a dollar.The average return of the top 10 Asia high yield bonds is down more than 30% this year, Morningstar data shows, of which Fidelity Funds’ Asian High Yield Fund and UBS’s SICAV – Asian High Yield (USD) had shed more than 40% as of Oct. 27.The property sector, crucial to China’s political and economic stability, has seen sharp declines in prices and sales after policymakers imposed strict curbs on borrowing by developers in mid-2020.Hsiao said investors were hoping for policy measures to prop up real estate demand this year but that didn’t happen. Hsiao kept reducing her fund’s China exposure from the first quarter and shifted to cash in the summer months, when the U.S. inflation threat and geopolitical risks increased.’UNINVESTABLE’ ASSET CLASSGordon Ip, chief investment officer for fixed income at asset manager Value Partners，says the fund has reduced overall exposure to China property and bought Indonesian and Indian bonds this year, mostly in energy or resources and renewables sectors. Value Partners’ Greater China High Yield Income Fund was down 37% as of the end of September. The fund’s assets have fallen to $611 million from $980 million at the end of April. “This has been an extraordinary year in terms of managing risks,” said Ip. “Rising rates, skyrocketing inflation, geopolitical tensions and intense sector risk (China property) have made it extremely challenging to navigate the market.”Ip said the fund has been staying liquid by trying not to “over own” a particular issue and making sure it always has a reasonable level of cash.Bond investors are generally sitting tight and already looking ahead to next year, said Nicholas Yap, head of Asia Flow Credit Desk Analysts at Nomura.Investors do not see China’s property debt markets reviving anytime soon, given not just regulatory risks but also several developers’ differentiated treatment of onshore and offshore bondholders in the restructuring process.”There is no reliable restructuring process in China that coordinates between onshore and offshore,” said Hsiao, adding she sees barely any willingness among defaulted issuers to negotiate. While there are select bonds that have upside, China high yield as an asset class is currently “uninvestable”, she said.“We’re right in the perfect storm. We hope for the best, but prepare for the worst,” she said.(This story has been refiled to clarify wording in paragraph 6) More

Hello and welcome to Prague, basking in the same autumn sunshine that seems ordered from on high to frustrate President Vladimir Putin’s plan to make Europe freeze because of its support for Ukraine.I am here for an informal meeting of EU trade ministers, which includes special guest US trade representative Katherine Tai. They will be buoyed by news from Brazil. The electoral defeat of rightwing populist Jair Bolsonaro should improve relations.Returning president Luiz Inácio Lula da Silva has pledged to reduce the destruction of the Amazon rainforest. He could sign a commitment to do so with the EU that would convince it to ratify a trade deal with Mercosur, the trade bloc dominated by Brazil. However, as we have reported, he might want to renegotiate the pact to protect domestic industry. Charted waters looks at the rising cost of living for drug users.A critical moment for US-EU trade relationsIt seems almost heresy to say it, but just two years after Donald Trump left office have we already seen the high water mark of restored transatlantic trade relations? The Biden administration has made great play of its efforts to bring back trust and good trading links with the EU. Brussels likewise has been keen to talk up the improved ties. A number of contentious disputes have been, if not solved, at least parked. They include the long-running spat over subsidies for Airbus and defence contracts for Boeing that the EU considered unfair. And the outrageous, at least in EU eyes, duties on steel and aluminium imposed by Trump using security legislation. However, the clock is ticking very fast on the section 232 metals tariffs. The US did not lift them but simply increased the duty-free quota, which still provides headaches for EU exporters. Brussels and Washington also agreed to work on a mechanism to put tariffs and quotas on imported steel from countries with more carbon-intensive production processes. Or, as President Joe Biden put it at the time, “dirty Chinese steel”. If the two fail to agree within two years — and a year’s worth of talks has made little progress given the need on the EU side to comply with WTO law — the EU could simply reimpose its reactionary tariffs on such all-American products as bourbon whiskey and Harley-Davidsons.Then there is the impact of sanctions on companies providing US technology to Chinese chipmakers that could restrict many EU businesses’ dealings with China. As if this was not enough fodder for lunch between EU trade ministers and Tai today there is something even more indigestible on the menu — the Inflation Reduction Act.This massive spending bill involves $370bn of state money to help fight climate change through subsidies to green technology. That includes electric vehicles, and tax credits for domestic clean energy initiatives, such as solar, wind, nuclear and carbon capture technologies. As the Financial Times revealed yesterday, France has told other member states it would lose €8bn in investment as factories set up in or move to North America to benefit from subsidies for local production. Other countries are quickly doing their sums so the European Commission has some evidence to take to Washington.Diplomats say US officials have played down the consequences of the act — even though Congress did listen to complaints from Canada and Mexico, its closest trade partners, and agreed to include them as domestic producers before it passed the legislation. Although trade commissioner Valdis Dombrovskis, a Latvian well-disposed to the US, is pushing for similar treatment it is far from certain the administration can deliver this.The IRA is an act of Congress that passed the Senate in August only by vice-president Kamala Harris’s casting vote. No Republican voted for it and some Democrats did partly because it promised a jobs bonanza in their states. They are unlikely to want to reopen it to send carmaking subsidies to Europe instead. The Treasury is in charge of implementation, but it is difficult to get an answer on how far it can change things. One suggestion is that it could interpret the definition of “final assembly” to mean that cars could be imported to be completed in the US and thereby qualify for tax breaks.“Would it have to go through Congress or through implementation by the Treasury? I really don’t know and nobody knows, not even on the US side,” said a senior EU diplomat. Cars are only part of the problem. Commission officials wading through hundreds of pages of text are finding new issues daily.Brussels has so far stuck with talks. First it said it would address the matter at the Trade and Technology Council, a forum where the US and EU discuss aligning regulations and avoiding subsidy competition over silicon chips and the like. (Before you ask, the US did not mention its huge subsidy bill at the last meeting, somewhat undermining its effectiveness.) Now the chief of staff of commission president Ursula von der Leyen, Björn Seibert, has set up a task force to find solutions with senior US national security officials.EU officials are hoping that the US will recognise the need for the bloc’s support when dealing with China, for example. But they accept that their hand is weak — the US is internally focused and wants to help its industry, not the Europeans, one noted. Nothing will happen before midterm elections in November, where the Democrats are fighting to keep control of Congress. EU member states such as Sweden, desperate to keep good relations with the US, are backing this approach for now. Johan Forssell, Stockholm’s new trade minister, told me in Prague: “We welcome that the EU and US have created this dialogue where these questions will be discussed. We believe in the transatlantic relationship.” Businesses are already muttering that the EU is guilty of failing to stick up for them because it values the US relationship and doesn’t want to upset a plan that is finally trying to reduce its carbon emissions. The official admitted that it would do all it could to avoid a transatlantic trade war in the current geopolitical climate. But the longer the talks drag on without a result the louder the voices of states such as France will get. It has two solutions. One would be a “Buy European” Act similar to the US one with subsidies restricted to European-made products. Germany’s finance minister Christian Lindner dismissed such, as it is hard to imagine the commission, and other multilateralists, agreeing to this. The other is to go to the WTO since the US’s discriminatory subsidies are a clear violation of its rules, trade lawyers say. Jozef Síkela, the Czech minister chairing the Prague meeting, told reporters that there would be “pretty frank” discussions with Tai and a demand for swift action.And even Forssell added that “one cannot exclude a WTO dispute”. There is a growing chorus in Brussels rubbishing the Geneva-based body. Bureaucrats roll their eyes about how slow it is, as if EU directives were built in a day. Margrethe Vestager, the competition commissioner, espoused this view to the FT and suggested the TTC as the appropriate forum. Yes, the WTO takes time, but so do competition cases. And you don’t bust a cartel by asking its members nicely to stop.It might be a year for Geneva to rule on a complaint. But in the meantime the EU could rip up its truce with the US on steel, imposing tariffs once again.Unless Washington can find a clever fix soon Jim Beam and Jack Daniel’s could be feeling the squeeze once more.As well as being the regular writer for this newsletter, Alan Beattie pens a Trade Secrets column for FT.com every Wednesday? Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersSome price rises are to be welcomed. The price of illegal drugs being produced in Afghanistan has rocketed since the Taliban outlawed narcotics exports. The chart below illustrates the surge in opium prices, up by more than 50 per cent since the ban was announced in April.The figures, gathered from across Afghanistan by UK-based Alcis, which conducts satellite imagery research for governments and NGOs, are all the more remarkable because there is limited evidence that the Islamist militants are enforcing the ban. Even in lawless Afghanistan, economic rules prevail. The rational expectation that the Taliban government will succeed in its quest to clamp down on narcotics production is driving the market price up. (Jonathan Moules)Trade linksLike many companies Apple has been moving to diversify its supply chains to other Asian countries to reduce reliance on China. Now a large site owned by iPhone assembler Foxconn is almost paralysed as workers desert. US sanctions on trading with China have hit chipmakers worldwide, with Japan’s Kioxia warning that decoupling global supply chains would be “very complicated, expensive and time-consuming”. Trade Secrets is edited by Jonathan Moules More

UK mortgage approvals fell last month and lending to consumers slowed sharply as households became more cautious about rising prices and borrowing costs, Bank of England data showed on Monday.The central bank said mortgage approvals to fund house purchases totalled 66,800 in September, down from 74,440 the previous month, while net borrowing of mortgage debt remained steady at £6.1bn.The figures point to a housing market that was slowing even before Liz Truss’s ill-fated “mini” Budget of September 23 sparked market turmoil that led lenders to withdraw home loans. Meanwhile individuals borrowed an additional £700mn in consumer credit, down from £1.2bn in August and the lowest level since December 2021. At the same time, households added £8.9bn to their savings — double the pre-pandemic average — suggesting that many people are building up cash buffers to help them weather a difficult year ahead.Mortgage approvals remained higher than analysts had expected, potentially reflecting a rush by some homebuyers to lock in mortgage offers they could afford before interest rates rose further.Daniel Mahoney, economist at Handelsbanken, said the figures suggested that the strength of mortgage approvals until now “was not due to any underlying strength in the housing market, but more to do with households seeking to get in ahead of rapidly rising mortgage rates”.The BoE said the interest rate paid on newly drawn mortgages jumped by 29 basis points to 2.84 per cent in September. That was the biggest monthly increase since December 2021, when the Monetary Policy Committee first began raising its benchmark rate as inflationary pressures became apparent.This “effective” interest rate is an average for the month; by the end of September, many mortgage providers had withdrawn products from the market or were charging more than 6 per cent. Although some lenders have now started cutting rates as fears over the UK’s fiscal position ease, borrowing costs are set to remain much higher than in the recent past. Analysts expect the MPC to deliver a further 0.75 percentage point increase in the base rate in its next policy decision on Thursday.The slowdown in consumer credit was driven entirely by lower credit card borrowing, which fell sharply from a net £700mn in August to £100mn in September, the BoE said.

Thomas Pugh, economist at the audit firm RSM, said this was “further evidence that the UK is already in recession”, with consumers reining in non-essential purchases to reduce their total spending despite the surge in prices of essentials.Gabriella Dickens, economist at the consultancy Pantheon Macroeconomics, said the rise in savings could reflect homeowners preparing “to pay off a chunk of their mortgage when they come to refinance”, or boosting them in order to be able to cover bills for a set period amid higher food and energy costs.But she noted that the rise in net saving across the economy hid stark inequalities. Separate data published last week by the Office for National Statistics showed that 30 per cent of households would now be unable to afford an unexpected but necessary expense of £850, up from 25 per cent at the end of last year. More

Israel normalised diplomatic relations with Bahrain and its Gulf neighbour the United Arab Emirates (UAE) two years ago under U.S. sponsorship. While economic ties with the UAE has since taken off, Israel’s trade with Bahrain has lagged far behind.”We’re optimistic and hopeful that we will close the deal by the end of the year,” Bahraini Minister of Industry and Commerce Zayed Alzayani said during a visit to a leading Israeli venture capital firm, Jerusalem Venture Partners (JVP).Alzayani, who discussed future cooperation with JVP founder Erel Margalit, said another round of free trade talks was expected in mid-November.Israel’s Economy Ministry told Reuters it would send a delegation to Manama for the next round “in order to conclude the negotiations as soon as possible, and hopefully no later than the end of the year.”In May, Israel forged a free trade deal with the UAE, its first with an Arab country, that officials estimate will increase trade from $1.2 billion to $10 billion over the next five years. More

The former UBS and Citigroup (NYSE:C) trader served more than five years in prison in Britain for conspiring to rig Libor (London interbank offered rate) – a benchmark used to set rates on trillions of dollars in loans, mortgages and derivatives.The U.S. decision comes after a separate U.S. ruling in August to throw out convictions for rigging Libor against two former Deutsche Bank (ETR:DBKGn) traders.Libor, once dubbed the world’s most important number, was discredited after the 2008 financial crisis when authorities in the United States and Britain found traders had manipulated it to make a profit.Hayes was released from prison in Britain in January 2021 after serving half an 11-year sentence.Hayes’ legal team is considering further legal options to clear his name, a representative for Hayes said in a statement.”The U.S. Department of Justice has seen fit to dismiss charges based on the same facts, evidence and case in law that the UK courts used to justify my 11-year prison sentence,” Hayes said.”That alone should be grounds enough for these cases to be referred back to the Court of Appeal in the UK, and if need be to the Supreme Court, which is yet to hear the case.” (This story has been corrected to fix a spelling error in the headline.) More

NEW YORK (Reuters) – Many bond investors are playing it safe on the short end of the yield curve, even as Federal Reserve officials have started to float the idea of smaller interest rate hikes as soon as the December policy meeting.Investors widely expect the Fed this week to raise its benchmark overnight interest rate by 75 basis points to a range of 3.75% to 4.00%, which would be the fourth supersized hike in a row. For December, however, the fed funds futures market has factored in a 68% probability of a 50-bps increase after hints from Fed officials of potentially slowing down the tightening pace.”Our view is that the Fed will continue to tighten policy into 2023. We view price pressures as being well above their mandate and persisting into 2023,” said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management in Minneapolis.”If our view is that inflation is a little more persistent and the Fed needs to be aggressive, then we still prefer to be on the shorter end of the curve,” he added.In a rising rate environment, bond investors tend to reduce the duration of their portfolios. The longer the duration, the higher the losses if rates rise. The Federal Open Market Committee meets on Tuesday and Wednesday, and will release its decision and policy statement at 2 p.m. EDT (1800 GMT) on Wednesday. U.S. financial conditions (FCI), which typically include borrowing costs, equity levels and exchange rates, have loosened in the latest week, according to Refinitiv data, as stock prices rebounded. But conditions are much tighter than a year ago, before the Fed kicked off its 2022 interest rate increases.Just two weeks ago, before the communications blackout period ahead of each Fed meeting, St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari, both of whom are widely perceived as policy hawks favoring aggressive tightening to combat the worst inflation in four decades, emphasized the need to stop raising rates in early 2023. In separate comments, San Francisco Fed President Mary Daly said “the time is now to start talking about stepping down.”Analysts said slowing the tightening process allows the impact of the rate hikes to feed in to the economy. The problem, however, is that the market looks at this step-down as a prelude to cutting rates, which many believe is not the case at all.Tiffany Wilding, North American economist at PIMCO, said the challenge for the Fed, which is likely preparing the market for a pause in tightening, lies in not only conveying that pause while price pressures remained elevated, but reinforcing the message that the U.S. central bank is still focused on bringing down inflation.”And … it isn’t going to quickly pivot to dropping rates in the face of what is likely to be increasingly weak economic activity,” Wilding wrote in a research note.SLOW PACE DOES NOT MEAN LOOSENING POLICYJust as important is the language and nuance in the policy statement and what Chair Jerome Powell says at the news conference following its release. Zachary Hill, head of portfolio management at Horizon Investments in Charlotte, North Carolina, noted that if Powell makes any reference to a shift in its aggressive tightening pace, he will emphasize that this does not represent a loosening of monetary policy.”It simply represents a change in the pace of tightening to assess the impact of what has been a record interest rate tightening cycle on the real economy,” he saidMuch like U.S. Bank’s Hainlin, Hill believes inflation will remain stubbornly high, citing companies, particularly those selling consumer staples, that are pushing prices higher aggressively.That said, Hill pointed out that short-term rates are getting well above long-term neutral levels, and said it makes sense to lengthen duration exposure a little bit.”But by no means, we’re loading the boat right now. We need to be cautious about getting too optimistic with respect to a change in the trajectory of Fed policy.”To be sure, some bond market participants, while still cautious, could not ignore the surge in U.S. yields which have provided value to longer-duration bonds.Since the beginning of August, benchmark Treasury 10-year yields have soared about 148 basis points. The yield hit a 15-year high of 4.338% on Oct. 21.”The chance of the Fed slowing the pace of rate hikes early next year has grown, suggesting that the majority of the overall yield rise this cycle has already unfolded,” said Chip Hughey, managing director, fixed income, at Truist Advisory Services in Richmond, Virginia.He recommended adding duration to bond portfolios. Hughey noted that long duration, high-quality fixed income such as Treasuries are in a better position to provide portfolio protection and more attractive levels of income for investors as well. More

STOCKHOLM (Reuters) -The Swedish economy is heading into a recession next year, driven by rampant inflation and the war in Ukraine, the country’s new finance minister said on Monday.The economy is now expected to contract by 0.4% in 2023, and there is significant risk that the outcome could be even weaker, Finance Minister Elisabeth Svantesson said in presenting her first economic forecast since the September election, in which a right-wing bloc secured a slim majority.The Nordic country’s previous government had in August forecast growth of 0.4% in 2023.”Sweden’s economic outlook is gloomy and we’re heading for a tough winter,” Svantesson told a news conference, adding that there was a high risk developments will be even weaker than the main scenario.The finance ministry also raised its outlook for inflation, forecasting consumer price rises at fixed rates of 7.9% this year and 5.2% next year, up from the August projection by the previous government of 7.3% and 3.9% respectively.Svantesson pledged to stick to Sweden’s fiscal policy framework under which public finances are run at a 0.3% of GDP surplus over an economic cycle. It is widely credited with having a significant impact on Sweden’s strong public finances. “For us and me, it is important that fiscal policy in this situation is well balanced, that fiscal policy does not fuel inflation. And we will stick to the fiscal policy framework, and thereby ensure that we have room for manoeuvre if next year becomes even more difficult,” she said. More