Economy

Taiwan greeted Nancy Pelosi as a true friend when the US House Speaker visited the country in August in what was seen as a demonstration of support against Chinese military threats.But when President Tsai Ing-wen hosted Pelosi for lunch at a neo-baroque palace in Taipei, two men at the table were a reminder that the friendship is coming under strain: Morris Chang, founder of Taiwan Semiconductor Manufacturing Company, and Mark Liu, chair of the world’s largest contract chipmaker.The global semiconductor industry is now dominated by Taiwan, thanks to TSMC’s meteoric rise. Chang told Pelosi in stark terms that Washington’s efforts to rebuild chip manufacturing at home were doomed to fail. “He was pretty blunt, and the esteemed guests were a bit surprised,” says one person who heard the conversation.TSMC now finds itself at the centre of both a tug of war between Washington and Taipei and the fiercest front in the new cold war between China and the US. Nicknamed the “godfather of the chip industry” in Taiwan, 91-year-old Chang is defending his life’s work: founded 35 years ago with start-up capital from the Taiwanese government and technology licensed from Dutch semiconductor company Philips, TSMC has grown into a giant with an effective stranglehold on the global chip supply chain.Taiwan sees this dominance as a crucial security guarantee — sometimes referred to as its “silicon shield”. The government believes that the concentration of global semiconductor production in the country ensures the US would come to the rescue if China were to attack. “Everyone needs more advanced [ . . . ] semiconductors,” economy minister Wang Mei-hua said during a visit to Washington this month. Being a key global player in this way will “make Taiwan [ . . . ] safer and [secure] peace”, she added. But Taiwan’s determination to keep as much of the industry as it can on the island is clashing with US strategic goals and its fears of China.As competition between the US and China heats up and the risk of a military conflict over Taiwan increases, Washington is seeking to both cut Beijing off from supplies of key advanced semiconductors and reduce its own dependency on Taiwan for chip supplies. Both of those objectives potentially undermine TSMC, whose success is built on serving customers in all markets and on doing so from a cost-efficient cluster of plants almost entirely in Taiwan. “The silicon shield is becoming a tripwire,” says Jason Hsu, a former Taiwanese lawmaker and now a senior fellow at the Harvard Kennedy School. House Speaker Nancy Pelosi met President Tsai Ing-wen during a visit to Taiwan in August to show US support in the face of threats from China © Taiwan Presidential Office via Reuters“On the one hand, the US pressures TSMC to move to the US. On the other, it is waging technology war on China, pushing tension to a higher level that puts Taiwan at risk,” he adds. “If you have something that both sides want, you have leverage. But if you don’t play that card, you become a pawn. We are kind of playing along with what the US wants.”The US stepped up its campaign to hamper China’s economy earlier this month, introducing sweeping controls that block exports of some chip manufacturing equipment and restrict sales of certain semiconductors to the country — measures clouding the future of China’s entire chip industry. Although TSMC says the impact on its business is limited for now, chief executive CC Wei told investors it was too early to assess the true influence in the longer term.The problem for TSMC is that Washington is simultaneously pushing to diversify chip manufacturing away from Taiwan.The Pentagon has long been concerned that US dependency on Taiwan could put its defence industry’s chip supplies at risk. Last year, Eric Schmidt, the former Google CEO who chaired a national commission on artificial intelligence, said the US was “very close to losing the cutting edge of microelectronics which power our companies and our military because of our reliance on Taiwan”.Now, the chip shortage triggered by disruptions during the pandemic, Washington’s desire to slow down China in its pursuit of technology leadership, and fears that Beijing could seize Taiwan by force are all catalysing US efforts to revive semiconductor manufacturing at home. Europe, Japan, Singapore and India are making similar efforts.US President Joe Biden speaks at the September groundbreaking ceremony for the $20bn chip fab being built in Ohio, part of US efforts to rebuild its semiconductor manufacturing capability © Saul Loeb/AFP via Getty ImagesWearing his trademark aviator sunglasses on a bright Ohio day in early September, President Joe Biden bragged that “America is back” as he attended the groundbreaking ceremony for a $20bn chip fabrication plant, or “fab”, that Intel will build.“Folks, the future of the chip industry is going to be made in America,” Biden said, one month after the US Congress passed legislation to provide $52bn to help rebuild US semiconductor manufacturing. The geopolitical and business implications of the new US strategy are starting to become apparent. “Everyone realises that there is a big watershed moment here for the whole industry,” says Peter Hanbury, a partner and expert in semiconductor and technology supply chains at Bain, the consultancy. “But it kind of snuck up on people.”Global dominationThe relentless rise of TSMC is one of the most important and least told chapters in the era of globalisation.Different from peers such as Intel and Samsung, which continue to both design and manufacture chips, TSMC is a contract manufacturer that produces semiconductors designed by other companies. The efficiency and cost savings of this foundry model have convinced so many other chipmakers to outsource fabrication to TSMC that Taiwan now accounts for 20 per cent of global wafer fabrication capacity, the single largest concentration in one country, and a staggering 92 per cent of capacity for the most advanced chips. The US share in global chip manufacturing has dwindled from 37 per cent in 1990 to 10 per cent in 2020.The risks are clear: Credit Suisse analysts estimate that if the world were to lose access to Taiwan’s chip plants, the production of everything from computers to cars would be severely disrupted. A major disruption in that capacity would be “massive” compared with recent incidents such as a 2021 outage in a Samsung fab due to power cuts in Texas, Covid-related disruption in south-east Asian factories and earthquakes in Japan, according to Credit Suisse. TSMC’s capacity footprint by the end of 2023 could reach $171bn, “over 3x the scale of the US Chips Act allocations through the next decade”, it adds.Breaking up this hub challenges not only TSMC but the global ecosystem that has formed around the company. Chang started TSMC in 1987 after the Taiwanese government recruited him from the US to help create an electronics industry. Industry executives credit the company’s success to its single-minded focus on technological detail, customer needs and execution.TSMC founder Morris Chang says Washington’s efforts to rebuild chip manufacturing at home are doomed to fail © Sam Yeh/AFP via Getty ImagesChang started honing those skills when semiconductors were still in their infancy. Born in China and educated as an engineer at MIT, he began working alongside the pioneers of the industry in the 1950s and showed his knack for improving manufacturing processes from the very beginning.At US chipmakers Sylvania and Texas Instruments, Chang became an expert in increasing the yield — the proportion of non-defective transistors on a production line — according to Chris Miller, an economic historian at Tufts University and author of Chip War, a book about the industry. That became a core strength that boosts both TSMC’s profits and reliability for its customers.TSMC’s foundry services spawned an entire new breed of “fabless” chip companies, such as Nvidia, the graphics chip design house founded in 1993. The increasing technical difficulty of chip manufacturing and the ballooning cost of building fabs also convinced ever larger numbers of chipmakers to go fabless.One of them was AMD, Intel’s rival in the market for central processing units, the chips that power PCs. After falling behind Intel, AMD sold its fabs in 2008. It now relies almost completely on TSMC, a strategy that helped it recover.TSMC is the exclusive manufacturer of chips for iPhones, making Apple dependent on what happens in Taiwan © Brittany Hosea-Small/AFP/Getty ImagesThe next boost came when Apple started designing chips for the iPhone in-house and picked TSMC to manufacture them. Its iPhone chips are now exclusively made by TSMC in Taiwan.“I have been surprised by Apple and AMD deciding to allow themselves to get so reliant on one supplier,” says Dan Nystedt, vice-president at TriOrient, an Asia-based private investment company. “That’s risky. Even without geopolitics, there are earthquakes, power shortages. Why does Apple accept that their whole company would have to shut down if TSMC were shut down?”Some fabless companies’ decision to put all their eggs in one basket reflects the efficiency of the symbiotic system TSMC has built. “There has been an unwillingness to even think about shifting away from TSMC for a lot of the industry [because] it was inconceivable for the business model that was functioning so well,” Miller says.TSMC was further strengthened when Intel stumbled. The company, long focused on CPUs, missed both the rise of the smartphone and of artificial intelligence applications, letting TSMC grab much of the market for chips used by cloud services providers such as Google. Then Intel struggled to master mass production in two consecutive process technology generations. This allowed TSMC to pull ahead not only in scale but also in technology.“That, combined with the geopolitical tension, led to a crisis of confidence in the US: if something were to go wrong in the Taiwan Strait you could not credibly tell yourself that you could rely on US technology solely to build up the capacity you need if, in fact, by some key metrics TSMC had leaped ahead of Intel in terms of technology,” Miller says.By the time Barack Obama prepared to hand the presidency over to Donald Trump, concerns over the US’s heavy dependence on Taiwan-made chips had spread from the Pentagon to the commerce department.Although it took a trade war with China, a pandemic and an escalation in China’s threats against Taiwan, Washington is now moving quickly. In 2019, Trump administration officials leaned on TSMC to place some advanced capacity in the US, its largest market.The company complied — it is building a fab in Arizona that is scheduled to start mass production in 2024. But the plant has neither the scale nor the technological level of TSMC’s newest fabs — in Taiwan, the company is building a fab for N2 chips, the newest generation of chips that is expected to follow the N3 one about to go into mass production. “Progress on reducing the dependence on TSMC . . . for the most advanced processes will not be reduced significantly until TSMC, Samsung and Intel all site advanced facilities at scale in the US,” says Paul Triolo, a China and technology expert at Albright Stonebridge Group.Even then, only part of the supply chain will benefit. The fabs that Intel, TSMC and Samsung are building in the US are all for advanced chips, so they will mostly support the PC, smartphone and server industry. However, automakers, which saw production disrupted due to chip supply bottlenecks, use less advanced chips that struggle to be viable in the US, where costs are higher. “A lot of the investment will not help with the defence supply chain either,” says Hanbury. “The only government applications that run on advanced nodes are AI, cryptography and supercomputers, and those account for less than 5 per cent of bleeding-edge chips.”An uphill struggleDespite Biden’s upbeat rhetoric, the Chips and Science Act may fall far short of what is needed.“The way the fab funding section has evolved and is now playing out is a train wreck waiting to happen,” says Dick Thurston, former general counsel for TSMC and now a consultant in the US. “There will be a lot of disillusionment — actually, US semiconductor manufacturing will suffer because of it. In order for this to succeed, you need several multiples of the money committed over a period of 10 to 15 years at least.”Underlining the size of the challenge, the Semiconductor Industry Association and Boston Consulting Group estimate that upfront investment of up to $1.2tn would be needed for each region to have fully localised supply chains at 2019 levels, followed by continuous spending of up to $125bn a year. Edlyn Levine, chief science officer at America’s Frontier Fund, which aims to invest in companies that will help the US stay ahead in critical technologies, says it is “a fantasy” to think that the US could completely decouple from TSMC. “The idea . . . is technically not feasible,” says Levine.Despite its Arizona investment, TSMC is trying to sit things out as the concentration of its fabs and suppliers in a tight cluster in Taiwan has enhanced its efficiency. “There are a lot of benefits to the way they are running things — especially the close connection between R&D and high-volume manufacturing where you can send an engineer to a fab just an hour away,” Hanbury says. “The cost savings and benefits of expertise are part of the TSMC model.”The company refuses to discuss how the push for change affects it. “We recognise that there has been increased attention on geopolitical issues between China and Taiwan, which are not new and go back decades,” says TSMC. “However, we do not see these tensions affecting TSMC operations at the current time. The current plan of TSMC operations is also sustainable in Taiwan. The success and functioning of the highly complex and diverse semiconductor ecosystem require global collaboration, as all nations and corners of the technology industry know.”Still, the heightened sensibility over global dependence on Taiwan is certain to force change.A TSMC engineer works in a clean room. The concentration of its fabs and suppliers in a tight cluster in Taiwan has enhanced the company’s efficiency © TSMC“There have been some concerns among TSMC customers since two years ago,” says Sebastian Hou, managing director at Neuberger Berman, an investment management company. “It was the time when in Taiwan we started to have more fighter jets from China hovering around the Taiwan Strait, and that has become a daily routine.”Wireless chip company Qualcomm said in August it was more than doubling manufacturing orders to GlobalFoundries under a strategic co-operation with the TSMC rival, specifically at a plant the foundry is expanding in New York.Nvidia is splitting its product portfolio with data centre chips being produced at TSMC and some of its personal gaming chips by Samsung.Hanbury says it will take years to see whether more TSMC customers follow that example because changing manufacturing partners is so difficult and risky. “The big question is if Apple is also going to do a split,” he adds.A decisive factor will be how smoothly TSMC’s rivals can scale up capacity in the US. Both Intel and Samsung are planning much bigger US fabs than TSMC’s initial Arizona commitment, theoretically allowing for a better cost structure and market share gains. However, TSMC has acquired enough land to build several more fabs.China’s threats against Taiwan have escalated over the past two years, with fighter jets now patrolling the Taiwan Strait on a daily basis © Li Bingyu/Xinhua via APIndustry experts believe that diversifying its footprint might become necessary for TSMC for reasons beyond geopolitics. It is already getting harder for the company to find the thousands of engineers for its larger and larger fabs. Another question is whether Taiwan will be able to provide enough water and power to keep expanding chip manufacturing.Some analysts argue that Taipei’s reliance on TSMC for its security is flawed in the first place.Brad Martin, director of the National Security Supply Chain Institute at the Rand Corporation, warns that instead of functioning as a “silicon shield”, Taiwan’s dominance in the semiconductor market could make it more vulnerable.If China were to impose a quarantine — a limited, non-violent blockade — on Taiwan, other countries could shy away from supporting the country out of concern that an escalation would lead to permanently cutting off or even destroying their chip supplies, Martin says. “The monopoly in semiconductor production creates instability,” he adds. “If the US is faced with a need to make a decision between protecting its economy and defending Taiwan, that starts to become a very stark decision.” More

The head of one of the world’s largest air cargo handlers has brushed off the deteriorating outlook for global trade, arguing that the rise of ecommerce and growing demand for faster deliveries are driving a long-term shift towards moving goods by plane.Worldwide Flight Services chief executive Craig Smyth said that air cargo, historically a relatively small part of the global supply chain, was playing an increasingly significant role as more shipping groups invested in aircraft fleets. “We’re pretty excited about [that] growth,” he said.“Because of ecommerce . . . there’s definitely a shift that is structural, that is permanent,” he said. Online shopping deliveries now account for a fifth of the cargo that WFS is moving in some parts of the world. Paris-based WFS, which provides ramps, cargo handling and other on-the-ground services to airlines, is one of several companies involved in a dealmaking spree in the air cargo sector.In September, Singapore ground handling business Sats announced a €1.2bn takeover of WFS, a move that the companies said would create the industry’s largest group in terms of cargo volume handled. Meanwhile, the world’s biggest shipping container group, Geneva-based Mediterranean Shipping Company (MSC), is preparing to launch its first air cargo service in the coming months following a bid earlier this year to acquire a majority stake in ITA Airways, successor to bankrupt Alitalia.

Worldwide Flight Services chief executive Craig Smyth: ‘Because of ecommerce . . . there’s definitely a shift that is structural, that is permanent’ © Franck Beloncle

Ecommerce giant Amazon, which Smyth said was a WFS client, has also been expanding its own air fleet, running an average of 164 flights a day towards the end of last year.These investments follow a boom in demand during the Covid-19 pandemic for deliveries by air, a faster but more costly option than sea transport that in the past was generally reserved for high-value goods. With the increase in online shopping during lockdowns, many retailers turned to airlines to circumvent logjams at seaports. In 2021, the volume of goods moved by air jumped 18.7 per cent compared with the previous year, according to the International Air Transport Association. Volumes reached the highest level since 2010, measured in terms of cargo tonne-kilometres, a unit for freight traffic calculated by multiplying freight weight by the distance travelled.However, demand has since plunged, with cargo volumes falling below pre-pandemic levels in recent months. Continuing lockdowns in China have hit demand for goods, while Russia’s invasion of Ukraine had also grounded airlines in the region, IATA said. Smyth dismissed these hits to global trade as “temporary effects”. He conceded that WFS was starting to see some impact from consumers reining in spending and that profits in the second half of 2022 are expected to be flat compared with the previous year. But he added that the long-term view for the company was up.“There’s some structural changes through Covid,” he said. “Whether it’s 10 per cent, 15 per cent or 5 per cent, there’s still going to be [permanent] growth in ecommerce.” More

It has been a tough year for emerging market bonds. Investors pulled a record $70bn from funds investing in EM debt between January and the end of September — a period that included only seven weeks of net inflows.Those relentless outflows signal how badly markets have been battered in 2022, with the soaring US dollar and rising global interest rates sucking money out of EM assets. The question now is whether inflation and interest rates are near their peak, creating an opportunity for bond prices to rise again.Many emerging economies had a promising start to the year. A recovery from the pandemic seemed well under way and several EM central banks had acted quickly to get inflation under control, raising interest rates from as early as the first quarter of last year.But Vladimir Putin’s war on Ukraine changed that.“If the war hadn’t happened, we would have seen inflation peaking in the first quarter and, by now, it would be falling across the board,” says Simon Quijano-Evans, chief economist at Gemcorp Capital Management. “But, thanks to the invasion, energy and food prices skyrocketed, catching everyone by surprise.”Soaring food and fuel prices are especially toxic for consumers in developing countries, where staples make up a bigger proportion of household spending than in advanced economies.Price rises forced many EM central banks to act early and aggressively in an attempt to contain inflation, raising interest rates and making bonds less attractive.Some commodity-producing economies were able to offset the damage thanks to the rise in earnings for their exports. But then they, too, were hit by the surge in US inflation and the sharp upswing in global interest rates.The result has been an extraordinary turnround in the bond market. In the six years to 2021, money poured into both local currency and foreign currency EM bond funds at an average of more than $50bn a year. During the first three quarters of this year, money flowed out at the fastest rate since JPMorgan began reporting the data in 2005.There is no immediate sign of change. Milo Gunasinghe, emerging markets strategist at JPMorgan, says he expects US and global financial conditions to tighten for the foreseeable future, keeping the bar high for inflows into EM bonds.He notes that the balance sheets of central banks in the US, the eurozone, Japan and the UK surged by about $8tn during 2020 in a massive injection of liquidity into global financial markets during the pandemic.Since early 2021, that stimulus has been almost entirely reversed, pulling the rug from under bond markets. JPMorgan expects a further $1.7tn contraction in those central bank balance sheets over the coming year.For many emerging and so-called frontier economies — the smallest of the emerging markets — financial markets are already, in effect, closed. This year, at least 20 low- and middle-income countries have seen their foreign currency bond yields rise to a level more than 10 percentage points above those of comparable US Treasury bonds.Spreads at such high levels are often seen as an indicator of severe financial stress and default risk. Zambia defaulted early in the pandemic. Sri Lanka followed this year. Lebanon, Russia, Belarus and Suriname have also defaulted. More defaults and debt restructurings are likely — the World Bank and others have warned of a coming wave of defaults.One result is that the number of sovereign and corporate bonds being issued by emerging markets has collapsed.Sergey Dergachev, head of EM corporate debt at German asset manager Union Investment, says sovereign and corporate bond issuance was worth about $670bn during the full year of 2021 but fell to $270bn in the nine months to September this year. With many issuers retiring their outstanding bonds rather than refinancing with new issues, he says total foreign currency bond issuance from emerging markets will be negative this year, by about $200bn, compared with last year.However, this has its advantages for investors, says Dergachev. “First, there is not the huge oversupply of previous years. As an investor, that means you can look at issues more carefully and be more selective,” he says.In addition, bond investors have been able to capture significant premiums on new issues in 2022, with prices of many issues this year rising about 0.4-0.5 per cent before falling back, says Dergachev.But, for a meaningful turn in the bond market to take place, inflation and interest rates globally will have to fall.Quijano-Evans believes the peak in inflation is getting close. If so, the potential for currencies and bond prices to recover will be that much greater in emerging than in developed markets, he notes, because the falls in the former have been so much larger.He also expects a concerted effort to rein in the dollar’s destabilising surge.“It is in everybody’s interests to stop this massive appreciation of the dollar,” he says. Quijano-Evans expects global central banks, including the US Federal Reserve, to act together to stem its rise.“When that news comes out, we will see a huge turn in the dollar and obviously EM currencies and assets will benefit.” More

Banks have withdrawn 60 per cent of mortgages for borrowers with small deposits since the start of the year, making it harder for first-time buyers to get a foot on the property ladder.A number of lenders have either pulled home loans or have yet to return with their 95 per cent loan-to-value products following former chancellor Kwasi Kwarteng’s “mini” Budget on September 23, according to data from consumer site Moneyfacts.The sell-off in UK government bonds in the wake of the chancellor’s statement pushed up the cost of fixed-rate mortgages, with most banks withdrawing products for new customers across a range of deposit sizes. Home loans requiring small deposits have been hit the hardest, as lenders have sought to retreat from the riskiest part of the market.“The reason why the number of deals in this space has fallen in recent weeks is because when there’s increasing uncertainty in the market, lenders will stop offering their highest risk products,” said Ray Boulger, analyst at mortgage broker John Charcol.He added that banks would also be concerned about the ability of new borrowers to afford large mortgages when interest rates are rising. “Lenders will be even more stringent on affordability, or will require borrowers to have a higher credit score,” he said.Simon Gammon, founder and managing partner at mortgage advisers Knight Frank Finance, said the prospect of house prices dropping made 95 per cent loan-to-value products unattractive for lenders.“Seeing where the property market is going, it doesn’t take much for a high loan-to-value mortgage to get into the red,” he said. The number of mortgages at a 95 per cent loan-to-value dropped from 347 at the start of the year to 283 by September 23, the day of the “mini” Budget, according to Moneyfacts. The number plummeted even faster in the weeks after the fiscal statement, declining to 135 on Friday — a 60 per cent fall since the start of the year.The number of mortgage deals requiring a 10 per cent deposit fell by nearly half, while those asking for a 15 per cent deposit declined by nearly 40 per cent. Mortgages requiring 40 per cent deposits have also been reined in, with the number of available products falling 45 per cent since the start of the year.The chief executive of one of the “big four” banks (Lloyds Banking Group, NatWest, HSBC and Barclays) said: “If you’re forecasting stress on house prices, we’ll see some pullback from the high loan-to-value mortgages.”David Hollingworth, director at mortgage broker L&C, said many lenders were yet to return to the high loan-to-value market in the wake of the “mini” Budget. Accord Mortgages, a subsidiary of Yorkshire Building Society, only returned to offering 95 per cent loan-to-value mortgages on Wednesday. “It’s slightly higher risk lending, and lenders are looking where bigger demand is likely to be [which is] in remortgaging,” he said. Eleanor Williams, a finance expert at Moneyfacts, said: “First-time buyers are likely to feel the impact of the current circumstances keenly as the cost of living crisis shows no sign of abating. “Not only may they be more likely to be looking for a low-deposit mortgage product, but they may also have concerns about meeting mortgage affordability requirements.”

Rising rates have added to the pressure on lower-income borrowers. The average rate for a 95 per cent loan-to-value mortgage is 6.64 per cent, up from 3.06 per cent at the start of the year, according to Moneyfacts.Aaron Strutt, a mortgage broker at Trinity Financial, said: “There are fewer 95 per cent loan-to-value mortgages and they’re more expensive. At a time when first-time buyers’ incomes may be suffering more than others, we have a perfect storm of rates causing higher pricing.” More

SINGAPORE (Reuters) – The Japanese yen made a thumping 4 yen jump for a second straight session on Monday on suspected early intervention by the Bank of Japan, but struggled to hold its gains against a robust U.S. dollar.The yen hit a low of 149.70 per dollar in early deals before being swept to a high of 145.28 within minutes in a move that suggested the BOJ had stepped in for a second successive day. The currency, however, dropped back to near 148 soon.”It’s blindingly obvious that the BOJ is intervening,” said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY) in Sydney. “Dollar-yen wouldn’t be moving like this otherwise.”Friday’s intervention, which policy sources confirmed, came as the dollar hit a fresh 32-year high of 151.94 yen and triggered a rally of more than 7 yen for the Japanese currency to 144.50 per dollar.That was the second confirmed instance of Japanese intervention, although traders suspect the BOJ had stepped in on other occasions in the past month to shore up a currency that has tumbled 22% this year against the dollar.Analysts at Goldman Sachs (NYSE:GS) said the intervention helps the BOJ limit yen depreciation and gives it time on its ultra-low interest rates’ policy, which is at odds with a global wave of tightening and has widened the gap between U.S. and Japanese interest rates.”The yen’s beta to U.S. rates has fallen since the first intervention operation, and repeated intervention steps will likely keep it that way for a while, in part by inducing two-way volatility into dollar/yen,” Goldman wrote last week.”While sub-optimal and unsustainable in the medium term, we think this policy mix could be in place for some time.” The dollar index was up 0.063% at 111.87, with the euro down 0.02% to $0.9858.Sterling was last trading at $1.1343, up 0.36% on the day, helped in part by weekend news that former prime minister Boris Johnson has withdrawn from Monday’s contest to replace Liz Truss, who was forced to resign after she launched an economic programme that triggered turmoil on financial markets.Former Chancellor Rishi Sunak has emerged as the clear frontrunner to become Britain’s next prime minister.The Australian dollar was down 0.4% versus the greenback at $0.6370, while the kiwi was up 0.16% on its U.S. peer at $0.576.In cryptocurrencies, bitcoin last rose 2.08% to $19,578.40.(This story has been corrected to fix garbled words in fourth paragraph) More

Budget papers are set to show gross domestic product (GDP) for fiscal 2023-2024 will be downgraded to 1.5% from the 2.5% forecast in April. GDP is also due to be downgraded to 3.25% from 3.5% for 2022-2023, according to draft figures from the Treasury. The drop-off is blamed on a slump in consumer spending as rising prices and the biggest jump in interest rates in decades cut into household budgets. Officials are also warning that a slowing global economy, in particular the sputtering Chinese property sector, will hit growth in Australia which is enjoying its lowest unemployment rate since the 1970s.”While we have plenty of things going for us, Australians have not been immune from rampant global inflation, heightened uncertainty and cost of living pressures here at home,” Chalmers said in a statement on Monday.”These headwinds will inevitably impact our growth outlook, and Australians are already feeling the pinch from higher prices and rising interest rates.”Record commodity prices and a booming labour market are expected to provide budget relief and analysts expect the deficit to shrink to between A$25 billion and A$45 billion, lower than initially feared.But Chalmers has repeatedly warned Australians to expect a “responsible budget” and said the government can only provide limited cost-of-living support for fear of adding stimulus that works at cross purposes to the Reserve Bank of Australia’s rate hikes.”The best defence against these economic headwinds is a responsible budget … along with responsible cost-of-living relief that won’t make the job of the Reserve Bank more difficult,” Chalmers told the Australian Financial Review. More

BENGALURU (Reuters) – Turmoil in global sovereign bond markets is set to persist for another six months to a year as central banks carry on raising interest rates to bring down inflation, according to a Reuters poll of market strategists.More than a year after inflation started to become a worry and a little over six months since the U.S. Federal Reserve finally made its first interest rate hike from near zero, there is scant sign of price growth becoming less of a threat.Since the Fed first moved, bond markets have been subjected to high levels of volatility and deep sell-offs, jolting many bond investors out of their complacency.The ICE (NYSE:ICE) BofAML U.S. Bond Market Option Volatility Estimate Index, which began rising late last year, hit its highest level since March 2020 last week. This trend of great uncertainty is set to continue.Over 65% majority of bond strategists, 14 of 21, who answered an additional question in a Reuters Oct. 19-21 poll said the current turmoil in sovereign debt markets will persist for at least another six to 12 months, including one who said it would last one to two years. The remaining seven said less than six months.”We’re probably in for at least another year of significant volatility in bond markets…(and) it could definitely be more,” said Elwin de Groot, head of macro strategy at Rabobank.”Volatility is not going to go away anytime soon. Even when central banks are starting to move closer to that pivot point, so to speak, we may have other sources of uncertainty keeping volatility in markets high. And high volatility means higher risk premiums.”With most major government bond yields up more than 200 basis points since the start of the year and most central banks well past the half-way point of their expected tightening cycles, yields may come down over the next 12 months.The benchmark U.S. 10-year Treasury yield was expected to drop from its 14-year high of 4.27% hit on Friday to 3.89% by year-end. It was then forecast to fall further to 3.85% and 3.58% in the next six and 12 months respectively.But those median forecasts were higher than in September’s poll, suggesting yields are still facing upside risks.That is largely down to the U.S. Fed’s unrelenting effort to tamp down inflation, which is currently running multiple times higher than its 2.0% mandate.”In the current paradigm, inflation is simply too high for them (the Fed) to show any reluctance in being very, very hawkish,” said Benjamin Jeffery, rates strategist at BMO Capital Markets.Despite the marked difference in hawkishness between the Fed and its nearest peers like the European Central Bank and the Bank of England, benchmark yields on German bunds and UK gilts have risen in tandem with U.S. Treasuries.German bunds hit a fresh 11-year high of 2.49% on Friday, as worries over rising interest rates weighed on debt markets, with the ECB expected to deliver a jumbo 75 basis-point hike again this week.The poll expected bund yields to drop slightly from their current levels to 2.10% by end-2022 and then rise slightly to stay around 2.20% in the following six months. They were then forecast to fall back to 2.10% in a year.The UK gilt market was subjected to a severe thrashing when the government announced a wave of unfunded tax cuts on Sept. 23, stoking fears of fiscal imprudence and sending benchmark borrowing rates to a 20-year high.Investor confidence has been somewhat restored with most of those measures now reversed. The then finance minister was fired and the prime minister has resigned.Gilt yields were expected to rise from 3.90% currently and trade above 4.00% over the next six months. They were forecast to ease back to 3.80% in a year. More

Chinese chipmaker Yangtze Memory Technologies Corp has asked American employees in core tech positions to leave, as it rushes to comply with new US export controls that are disrupting the country’s chip industry.Four people close to the company said it was unclear how many US citizens and green card holders would be forced to leave YMTC, but that several in China had already left the memory chip producer. A senior YMTC engineer said some of the Americans were key to the company’s breakthroughs on Nand memory chip production. “But there’s no other way around [them leaving],” the person added. The departures come as chip companies in China, US and Europe are rushing to ensure they are compliant with the tough export restrictions unveiled by Washington this month. Leading US chip equipment suppliers Lam Research, Applied Materials and KLA Corporation have suspended sales and services to semiconductor manufacturers in China. Netherlands-based ASML has told its US staff to stop serving all Chinese customers while it assesses the sanctions.The new rules require any US citizen or entity to seek permission from the Department of Commerce for providing support to fabrication plants, or fabs, upending a key pipeline of talent for China’s chip industry that relies in part on American engineers and scientists’ expertise to advance its tech. This includes hundreds of ethnic Chinese who were educated and trained in the US before returning to their country of birth. YMTC’s longstanding chief executive Simon Yang, a US passport holder, stepped down from his post just ahead of the sanctions announcement, in a move two people said was triggered by Washington’s increasing pressure on the company.

Yang transformed YMTC into China’s leading memory chip producer with the backing of Rmb220bn ($30bn) in funding primarily from the government. The company was on the verge of clinching a spot for its semiconductors in Apple’s iPhone this summer until political pressure and the new US sanctions clouded its prospects. Three YMTC employees say Yang transitioned out of the chief role in late September to become the company’s deputy chair. The latest US restrictions leave his status at the company unclear, the people said. Chinese corporate records show Yang remains at YMTC for now. Yang and YMTC did not respond to requests for comment. A person briefed on the turmoil at YMTC said Washington’s export controls left the company with little choice. “Asking staff to resign is necessary for the company and the right move for employees’ personal risk as well,” the person said. Lawyers say the US commerce department is unlikely to hand out licences to bypass the rules.“You either give up your citizenship or quit your job,” said one Chinese semiconductor executive. A different Chinese executive at a Shanghai-based state-backed chipmaker said the company was negotiating the exit of several Americans who were unwilling to give up their US passports. “For now we’ve asked our US staff to work from home until everyone’s situation is finalised,” the person said, noting they had also rescinded a job offer to an American passport holder. “Now we are not just trying to build up ‘US-free’ manufacturing lines but also de-Americanise the teams,” said the executive. Industry headhunters said the rules would cut down the pool of talent available for Chinese semiconductor companies, which are already struggling to find experienced staff.The rules “have halved the number of available candidates for senior positions in chipmakers and toolmakers”, said a Shanghai-based headhunter, who asked not to be named. Corporate records in China show Americans dot the top ranks of leading Chinese semiconductor manufacturers and suppliers. Wayne Dai sits atop VeriSilicon. Chonghe Yang leads memory chip designer Montage Technology.

Naturalised US citizen Gerald Yin founded the equipment supplier Advanced Micro-Fabrication Equipment (Amec) more than a decade ago. The company, one of China’s best hopes for taking on California based Lam Research, has a Rmb61bn ($8bn) market capitalisation on the Shanghai bourse.The US export controls have led Amec’s shareholders to post questions on the company’s website message board to demand answers to whether its top American executives will be choosing their US passport or China’s semiconductor development. An Amec representative last week posted a response, declining to answer and saying Yin and others were “normally fulfilling their duties” for now. More