Economy

Reinsurers such as Swiss Re (OTC:SSREY), Munich Re and the Lloyd’s of London market help insurers share the risk of disasters in return for part of the premium.They have been raising rates in the past few years to recoup losses from natural catastrophes such as hurricanes and wildfires, the COVID-19 pandemic and from sanctions on Russia and countermeasures due to the Ukraine war.”We do expect rate rises to continue,” S&P Global (NYSE:SPGI) lead analyst for insurance Ali Karakuyu told a media briefing.”Depending on the segments that you are looking at, the rate rises will vary, but on average, I’d say mid-single digit (percent).”A survey of reinsurance buyers published by ratings agency Moody’s (NYSE:MCO) on Tuesday showed most respondents expect reinsurance rates to rise next year.Property rates in the United States and Caribbean market – exposed to natural catastrophes – were expected to rise particularly strongly, in the “high-single to low-double” digit percent range, the survey showed.But pressure on reinsurance premiums in the energy sector may lessen as reinsurers have pulled back from underwriting Russian firms due to sanctions, Helena Kingsley-Tomkins, senior analyst at Moody’s, told Reuters by phone.”Demand from Russian companies is obviously disappearing from the market.”Reinsurers meet in Monte Carlo next week for their annual conference for the first time since 2019, after the event was halted during the COVID-19 pandemic. They will be discussing rates with their insurer clients ahead of the Jan. 1 reinsurance renewal season.Reinsurers’ capital dropped by 11% in the first half to $647 billion, hurt by financial market declines, broker Gallagher Re said in a report on Tuesday. More

LONDON (Reuters) – One of British politics’ firmest critics of China became prime minister on Tuesday as Liz Truss, a self-styled defender of the post-war western world order, replaced Boris Johnson whose policy towards Beijing failed to harden fast enough for many in his party.Relations between London and Beijing have worsened in the last decade as Britain has grown worried that an open door to Chinese investment could pose national security risks, and that China’s military and economic assertiveness may be acting against its post-Brexit free trade agenda. Truss views China as a threat to the rules-based international order that has governed post-World War Two trade and diplomacy, and she sees it as her role to build a bulwark against that. “Countries must play by the rules and that includes China,” she said in a high-profile speech earlier this year, adding that Beijing was “rapidly building a military capable of projecting power deep into areas of European strategic interest”.Truss warned that if China failed to play by global rules it would cut short its rise as a superpower and it should learn from the West’s robust economic response to Russia’s invasion of Ukraine. She said that China’s rise was not inevitable and the West should ensure that Taiwan, which Beijing says is its own territory, can defend itself.The Global Times, published by China’s Communist Party’s official newspaper the People’s Daily, has dubbed Truss a “radical populist” and said she should drop the “outdated imperial mentality”.Chinese Foreign Ministry spokesperson Mao Ning said on Tuesday that she hopes relations with Britain will remain “on the right track”. James Rogers (NYSE:ROG), co-founder of the London-based Council on Geostrategy think tank, said Truss would impose more restrictions on China buying up British companies and would do more to bind together countries to counter China’s rise.”She understands the way short-term economic benefits may have a long-term strategic and political impact, and will try to balance those more effectively than in the past,” he said.    ‘TYRANNY OF THE LARGEST’Under Prime Minister David Cameron, Britain and China forged what he called the “golden era” of relations. He said in 2015 he wanted to be Beijing’s closest friend in the West. But in the last seven years, with three changes of prime minister along with growing criticism of Beijing’s trade practices and rows over freedoms in Hong Kong and Xingang, Britain has moved from being China’s greatestsupporter in Europe to one of its fiercest critics.The Conservative Party has become more hostile to China even as Johnson called himself “fervently Sinophile”.The government has recently moved to limit China’s involvement in Britain’s nuclear power sector. Truss also signed the defence pact to supply Australia with the technology to build nuclear submarines to help push back against China’s growing power and influence. Last year as trade secretary, Truss warned that the West could lose control of global trade unless it got tough with Beijing and drove through World Trade Organization reform.”If we fail to act, then we risk global trade fragmenting under the tyranny of the largest,” she said.Later in 2021, she convinced fellow G7 foreign ministers to include a line in their closing communique that condemned China’s economic policies – a reference to Beijing’s global investment policy that critics say can leave poorer countries caught in debt traps.    Truss is expected to appoint a foreign secretary aligned with her world view – with ally James Cleverly tipped to be in line for the job and assisted by Tom Tugendhat, a known China hawk, as security minister.Charles Parton, a former UK diplomat who spent 22 years analysing China and is now an associate fellow at the Royal United Services Institute think tank, said although China was likely to make threats about withdrawing investment this is unlikely to happen.”China is not a charity. It doesn’t invest because it likes the colour of our eyes. It does it with very specific reasons,” he said. “It will continue to invest, and our job is to see if that investment continues to suit our interests.” More

Look, we’re not going to lie. The UK has had a rough decade, and the outlook is even worse. It has the highest inflation rate of any G10 country, the weakest growth forecasts, and an external deficit that would make Argentina blush.That has led to an outpouring of angst over the UK. Just yesterday, Deutsche Bank warned that the country faced a balance of payments crisis that could send sterling hurtling down 30 per cent against other major currencies. Just to moderate the current account deficit back to its 10-year average would require a 15 per cent drop. Here’s DB’s Shreyas Gopas. A balance of payments funding crisis may sound extreme, but it is not unprecedented: a combination of aggressive fiscal spending, severe energy shock, and a slide in sterling ultimately resulted in the UK having recourse to an IMF loan in the mid 1970s. Today, the UK does retain some key lines of defence against a sudden stop, but we worry that the risks are rising nevertheless.FTAV went through the DB note yesterday, and although we’re also (very) worried about the UK, we’re wondering whether people aren’t getting a little overwrought?First of all, as our colleague Adam Samson pointed out earlier today, while sterling has been jittery lately, in trade-weighted terms its still well above the lows seen after Brexit and the coronavirus nadir in 2020. Sterling is definitely having a terrible time. But it’s worth noting that it is still significantly above its historic lows of 2016 and 2020 on a trade-weighted basis. (EUR is a rly big weight and while it’s up against GBP this year, it’s not up nearly as much as USD). pic.twitter.com/vjaGUp8qfv— Adam Samson (@adamsamson) September 6, 2022
Of course, sterling can and probably will have to fall further. But the UK does have some important advantages that makes chatter over an IMF bailout seem a bit preposterous. There are two classic ingredients in a vintage emerging-markets crisis: managed exchange rates and borrowing in an overseas currency. When the local currency depreciates, that overseas debt burden mounts, weakening the currency further and triggering a spiral that can end in sovereign bankruptcy, an IMF bailout and dreaded “structural reforms”. But the UK has an entirely floating exchange rate and zero foreign debt, which allows it to absorb the necessary external adjustment without things spiralling into insolvency. The overall result is likely to be economic pain, faster inflation as the cost of imports climb, fewer overseas holidays for Brits and more English football clubs “owned by dubious oil states”, as former IMF economist Chris Marsh said in an excellent Twitter thread on the situation. Not great, but not a cataclysm. Is the UK experiencing a balance of payments crisis? There is some chatter about this given the deteriorating fiscal position and sterling weakness. Indeed, the @FT’s @alphaville point us to Deutsche Bank note that a “sudden stop” is not a mere tail risk.A thread…— General Theorist (@GeneralTheorist) September 5, 2022
Barring a truly atrociously bad policy response — like stripping the Bank of England of its independence — the idea that investors will refuse to fund the UK is simply fanciful. UK government debt remain a popular haven among central bank reserve managers. Indeed, their gilt holdings have climbed in recent years to $580bn worth at the end of the first quarter. The UK also has a large domestic buyer base that can be cajoled into buying gilts, and international buyers that simply need greater compensation for the risks of the currency falling further. At the moment, 10 year gilt yields are still below 3 per cent, and credit default swap prices indicate a de minimis fear of any UK creditworthiness problems. They’ve nudged up, but the UK is not Greece-on-Thames quite yet. So we need to get a grip. Things are bad. Really bad. But not IMF bad. More

Germany has announced plans to press ahead with a key element of the OECD’s global tax deal, in a move that piles pressure on Hungary to drop its resistance to EU proposals that set a 15 per cent floor on the tax that big businesses pay on profits. Attempts to pass an EU directive to introduce part of the OECD deal, signed in 2021 and aimed at stamping out use of tax havens by multinationals, have been blocked twice — first by Warsaw, and then by Budapest. In a bid to break the impasse, Berlin said on Sunday that it would start preparing domestic rules to enforce the tax floor. The move, which comes ahead of an informal meeting of the region’s finance ministers later this week, is seen by tax insiders as an attempt to force Hungary to agree to the EU rules or risk losing out on potential revenue. Sven Giegold, a secretary in the federal ministry for economic affairs and climate action in Germany’s coalition government, said on Twitter “we must no longer stand idly by and see how a veto by [Hungary’s prime minister Viktor] Orbán costs the German state billions.” “If we do not make progress with the implementation of the global minimum taxation of large companies in Europe, the hard-won deal risks slipping. We cannot permit that. That is why we are now acting on our own to ultimately enforce European law.”To eliminate tax avoidance and end a race to the bottom in corporate taxation, 136 countries agreed to implement the global tax floor on companies with revenues of more than €750mn at an OECD meeting last October. Progress at the EU level is viewed as key to making the global minimum tax work owing to the number of large multinationals headquartered in the region. The position of the major European economies became even more important last month after the US abandoned one of the tenets of the deal — to clamp down on tax havens — when it introduced a minimum tax of 15 per cent that would not apply on a country-by-country basis. “This is a big moment for the global minimum tax,” said Pascal Saint-Amans, director of tax administration at the OECD. “I would not be surprised if the French follow soon or co-ordinate with the Germans.”The European Commission produced a draft directive for the tax in December but progress is currently being blocked by Hungary. The next opportunity for a vote on the directive will be at the Ecofin meeting of EU economic and finance ministers on October 4.“The fact that Germany is forging ahead with minimum taxation could be the breakthrough at European level,” said Rasmus Andresen, a member of the European Parliament’s committee on economic and monetary affairs.“Germany’s decision . . . puts pressure on Hungary blocking the EU agreement,” Andresen said. “We can’t wait for the laggards or be thwarted by national vetoes . . . others could and should follow suit.”Changes to tax rules usually require unanimity among EU member states. However, Andresen has called for an implementation of the global minimum tax via a process called “enhanced co-operation”, meaning that other member states could press ahead even without Hungary’s approval. The global minimum tax only needs a critical mass of countries to implement it for it to succeed. Beyond the EU, the UK has already published draft legislation for the global minimum tax, known as ‘Pillar Two’ of the global tax deal. However, the government of new prime minister Liz Truss has yet to decide whether to block its implementation. “That would complicate things for Germany but not decisively,” said Grant Wardell-Johnson, global tax policy leader at KPMG. “I don’t think Germany would change its position because of the UK”.Additional reporting by Sam Fleming More

Bangladesh is India’s largest development partner and the largest regional trade partner, Modi said after talks with his Bangladeshi counterpart Sheikh Hasina, who is on a four-day visit to India.”We also decided to increase cooperation in sectors such as IT, space and nuclear energy,” Modi said.Both countries have been involved in a joint study on the economic partnership, which has been in discussions between the two neighbours for many years.Tuesday’s announcement comes at a time when Bangladesh has sought loans from global agencies, including the International Monetary Fund, prompted by its dwindling foreign exchange reserves caused by rising import bills. However, Hasina has said that Bangladesh’s $416 billion economy remained strong.The United Nations, which classifies Bangladesh among the least developed countries, said last year it was expected to make enough progress towards its development goals to reach the developing nation status by 2026.India’s Foreign Secretary Vinay Kwatra said the goal was to finalize the agreement, with talks due to start this year, by then.Tuesday’s discussions between Modi and Hasina also focused on security cooperation, infrastructure projects, including railway lines, and strengthening supply chains, Kwatra told reporters.”There is further headroom for bilateral trade to grow,” he said.India has extended nearly $9.5 billion to Bangladesh in preferential loans in recent years and has taken up several connectivity projects, the Indian foreign ministry’s spokesperson, Arindam Bagchi, wrote on Twitter (NYSE:TWTR). More

LONDON (Reuters) – The European Central Bank is expected to make a jumbo 75 basis point refinancing rate increase on Thursday, according to a slim majority of economists polled by Reuters, as it battles to contain inflation running at more than four times its target.That is a change from a Friday poll which showed the choice between 50 and 75 basis points on a knife’s edge. But the latest consensus shows the ECB’s key rate rising to 1.25% this week.Thirty-four of 67 economists now expect the bigger move on Thursday, compared to 30 of 61 last week. Twenty-nine said the Bank would go for 50 basis points, while four expected the ECB to only add 25 basis points to its key rate.Euro zone market makers were more convinced about the bigger move, with 19 of the 29 who participated saying 75 basis points and only nine expecting 50. One said 25 basis points.The updated survey shows that while markets are pricing in about an 80% chance of the bigger move, the decision for policymakers is much more nuanced. “In all honesty there is a case for an even bigger move than a 75 basis point hike if you look at where policy rates are, but I think that might be a bit much for policymakers,” said Jack Allen-Reynolds at Capital Economics.”The talk is if it is 50 or 75 and it wouldn’t be a big shock if it was 50, but I think given where inflation is and where we are starting off, with policy rates so low, there is a very strong case for a very big rate hike.”Having initially said it would move very gradually, the ECB only just raised rates for the first time in this cycle a few months ago by half a point. Waiting so long has made it have to consider an even bigger move just as the economy enters a downturn.The refi rate is expected to rise to 2.00% next quarter. The median forecast points to it remaining steady there through 2023, but there is a wide range of views. Friday’s poll gave a 60% chance of a recession within a year and, adding to the region’s economic and inflationary woes, Russia has closed its main gas supply pipeline to Europe indefinitely, particularly damaging to heavily industrialised Germany, Europe’s largest economy.Inflation is forecast to peak at an average 9.0% this quarter and next before gradually declining, but wasn’t seen at the ECB’s goal across the forecast horizon through next year.Despite those changing expectations for a bigger move the euro has had a torrid time, slipping below $0.99 on Monday for the first time since late 2002 as the region’s energy crisis deepens.The weakening in the currency, down around 13% this year, is highly likely to add to record high inflation, and analysts are not convinced even the supersized move would do much to stop the rout. More

The Commerce Department issued guidelines for companies angling to receive federal funding aimed at bolstering the domestic semiconductor industry.WASHINGTON — The Department of Commerce on Tuesday unveiled its plan for dispensing $50 billion aimed at building up the domestic semiconductor industry and countering China, in what is expected to be the biggest U.S. government effort in decades to shape a strategic industry.About $28 billion of the so-called CHIPS for America Fund is expected to go toward grants and loans to help build facilities for making, assembling and packaging some of the world’s more advanced chips.Another $10 billion will be devoted to expanding manufacturing for older generations of technology used in cars and communications technology, as well as specialty technologies and other industry suppliers, while $11 billion will go toward research and development initiatives related to the industry.The department is aiming to begin soliciting applications for the funding from companies no later than February, and it could begin disbursing money by next spring, Gina Raimondo, the secretary of commerce, said in an interview.The fund, which was approved by Congress in July, was created to encourage U.S. production of strategically important semiconductors and spur research and development into the next generation of chip technologies. The Biden administration says the investments will lessen dependence on a foreign supply chain that has become an urgent threat to the country’s national security.“This is a once-in-a-lifetime opportunity, a once-in-a-generation opportunity, to secure our national security and revitalize American manufacturing and revitalize American innovation and research and development,” Ms. Raimondo said. “So, although we’re working with urgency, we have to get it right, and that’s why we are laying out the strategy now.”Trade experts have called the fund the most significant investment in industrial policy that the United States has made in at least 50 years.It will come at a pivotal moment for the semiconductor industry.Tensions between the United States and China are rising over Taiwan, the self-governing island that is the source of more than two-thirds of the most advanced semiconductors. Shortages of semiconductors have also helped to fuel inflation globally, by increasing delivery times and prices for electronics, appliances and cars.Semiconductors are crucial components in mobile phones, pacemakers and coffee makers, and they are also the key to advanced technologies like quantum computing, artificial intelligence and unmanned drones.With midterm elections fast approaching, the Biden administration is under pressure to demonstrate that it can use this funding wisely and lure manufacturing investments back to the United States. The Commerce Department is responsible for choosing which companies receive the money and monitoring their investments.In its strategy paper, the Commerce Department said that the United States remained the global leader in chip design, but that it had lost its leading edge in producing the world’s most advanced semiconductors. In the last few years, China has accounted for a substantial portion of newly built manufacturing, the paper said.The high cost of building the kind of complex facilities that manufacture semiconductors, called fabs, has pushed companies to separate their facilities for designing chips from those that manufacture them. Many leading companies, like Qualcomm, Nvidia and Apple, design chips in the United States, but they contract out their fabrication to foundries based in Asia, particularly in Taiwan. The system creates a risky source of dependence for the chips industry, the White House says.The department said the funding aimed to help offset the higher costs of building and operating facilities in the United States compared with other countries, and to encourage companies to build the larger type of fabs in the United States that are now more common in Asia. Domestic and foreign companies can apply for the funds, as long as they invest in projects in the United States.To receive the money, companies will need to demonstrate the long-term economic viability of their project, as well as “spillover benefits” for the communities they operate in, like investments in infrastructure and work force development, or their ability to attract suppliers and customers, the department said.Projects that involve economically disadvantaged individuals and businesses owned by minorities, veterans or women, or that are based in rural areas, will be prioritized, the department said. So will projects that help make the supply chain more secure by, for example, providing another production location for advanced chips that are manufactured in Taiwan. Companies are encouraged to demonstrate that they can obtain other sources of funding, including private capital and state and local investment.The Commerce Department is setting up two new offices housed under the National Institute of Standards and Technology to set up the programs.One of the department’s biggest challenges will be ensuring that the government funds add to, rather than displace, money that chip making companies were already planning to invest. Companies including GlobalFoundries, Micron, Qualcomm and Intel have announced plans to make major investments in U.S. facilities that may qualify for government funding.The chips bill specifies that companies that accept funding cannot make new, high-tech investments in China or other “countries of concern” for at least a decade, unless they are producing lower-tech “legacy chips” destined to serve only the local market.The Commerce Department said it would review and audit companies that receive the funding, and claw back funds from any company that violates the rules. The guidelines also forbid recipients from engaging in stock buybacks, so that taxpayer money doesn’t end up being used to reward a company’s investors.“We’re going to run a serious, competitive, transparent process,” Ms. Raimondo said. “We are negotiating for every nickel of taxpayer money.”In addition to the new prohibitions on investing in chip manufacturing facilities in China, officials in the Biden administration have agreed that the White House should take executive action to scrutinize outbound investment in other industries as well, Ms. Raimondo said.But she added that the administration was still working through the details of how to put such a policy in place.Earlier versions of the chips bill also proposed setting up a broader system to review investments that U.S. companies make abroad to prevent certain strategic technologies from being shared with U.S. adversaries. That provision, which would have applied to cutting-edge technologies beyond the chips sector, was stripped out of the bill, but officials in the Biden administration have been considering an executive order that would establish a similar review process.The United States has a review system for investments that foreign companies make in the United States, but not vice versa.The Biden administration has also taken steps to restrict the types of advanced semiconductors and equipment that can be exported out of the United States.In statements last week, Nvidia and Advanced Micro Devices, both based in Silicon Valley, said they had been notified by the U.S. government that exports to China and Russia of certain high-end chips they produce for use in supercomputers and artificial intelligence were now restricted. These chips help power the kind of supercomputers that can be used in weapons development and intelligence gathering, including large-scale surveillance. Ms. Raimondo declined to discuss the export controls in detail but said the department was “constantly evaluating” its efforts, including how best to work with allies to deny China the equipment, software and tooling the country uses to enhance its semiconductor industry. More

After initially rising, by 1030 GMT yields were down sharply across the bloc. German yields were down between 6 and 20 basis points DE2YT=RR, with the 2-year as low as 0.96%, its lowest since Aug. 26.Other yields were down between 5 and 10 basis points, with several hitting their lowest since late August Jan von Gerich, an analyst at Nordea, said media reports, including one that pointed to ECB policymakers debating a 60 basis point move instead of 75 bps, were behind the drop in yields, although he wasn’t persuaded by them.”The market had decided clearly it was going to be 75 basis points but it is more open based on these reports,” he said.”I don’t think it’s been planted by the ECB to talk the market down. I still think that the hawks are in control and they will deliver 75 basis points,” he added, noting that before a blackout period ended ECB policymakers had plenty of chances to push back on rising expectations for a supersized hike. Money markets are now pricing in a 67% chance of a 75 bps rate hike, down from almost 90% earlier on Tuesday. Markets also anticipate a further hike worth at least 50 bps at the ECB’s October meeting as investors position for front-loaded rate increases before the economic outlook deteriorates further due to the energy shock. Bond yields have been very volatile in recent weeks. They had jumped on Monday, led by a rise in the Italian 10-yield towards 4%, after Russia’s decision to keep its main gas pipeline to Germany shut exacerbated inflation and ECB rate-hike fears.In Tuesday trade, the Italian 10-year yield was down 10 bps higher at 3.85% .In a busy day for government bond sales, Italy’s Treasury started marketing a new green government bond via a syndicate of banks on Tuesday, in a deal closely watched by the market against a backdrop of a looming snap election and new ECB tightening. France started the sale of a 20-year syndicated bond and has seen 23 billion euros of demand, according to a lead manager memo seen by Reuters. U.S. markets reopen after Monday’s public holiday, with a rise in U.S. Treasury yields pushing higher in London trade. More