Economy

“The economy is showing signs of picking up,” the government said in its May economic report.Looking ahead, it was necessary to pay attention to downside risks amid worries about the pandemic’s impact in China and a prolonged Ukraine crisis, the government said.The government cut its assessment of imports after a sharp drop in shipments from China, while raising its views on the employment situation and housing investment.On imports, the government said they were showing weakness, against describing them previously as being mostly flat.Japan’s imports from China declined 20.8% in April from the month before as heavy COVID-19 curbs in major mainland cities such as Shanghai disrupted supply-chains and paralysed economic activity in Asia’s top economy.Authorities raised their view on employment conditions after the jobless rate edged down to a near two-year low of 2.6% in March, saying they were showing signs of picking up, against previously describing them as showing weakness.They also raised their assessment of housing investment, saying it was largely flat due to an improvement in apartment construction. The government had previously said housing investment was weakening.Analysts forecast Japan’s economy will recover on stronger consumption in the coming months after it posted an annualised 1.0% dip in January-March due to spiking COVID-19 cases and pressure from surging commodity prices. More

WASHINGTON — The Biden administration will start blocking Russia from paying American bondholders, increasing the likelihood of the first default of Russia’s foreign debt in more than a century.An exemption to the sweeping sanctions that the United States imposed on Russia as punishment for its invasion of Ukraine has allowed Moscow to keep paying its debts since February. But that carve-out will expire on Wednesday, and the United States will not extend it, according to a notice published by the Treasury Department on Tuesday. As a result, Russia will be unable to make billions of dollars of debt and interest payments on bonds held by foreign investors.The move represents an escalation of U.S. sanctions at a moment when the war in Ukraine continues to drag on, with Russia showing few signs of relenting. Biden administration officials had debated whether to extend what’s known as a general license, which has allowed Russia to pay interest on the debt it sold. By extending the waiver, Russia would have continued to deplete its U.S. dollar reserves and American investors would have continued to receive their guaranteed payments. But officials, who have been trying to intensify pressure on Russia’s economy, ultimately determined that a Russian default would not have a significant impact on the global economy.Treasury Secretary Janet L. Yellen signaled how the Biden administration was leaning at a news conference in Europe last week, when she said that the exemption was created to allow for an “orderly transition” so that investors could sell securities. It was always intended to be for a limited time, she said. And she noted that Russia’s ability to borrow money from foreign investors has already essentially been cut off through other sanctions imposed by the United States.“If Russia is unable to find a legal way to make these payments, and they technically default on their debt, I don’t think that really represents a significant change in Russia’s situation,” Ms. Yellen said. “They’re already cut off from global capital markets, and that would continue.”Although the economic impact of a Russian default might be minimal, it was an outcome that Russia had been trying to avoid and the Biden administration’s move represents an escalation of U.S. sanctions. Russia has already unsuccessfully tried to make bond payments in rubles and has threatened to take legal action, arguing that it should not be deemed in default on its debt if it is not allowed to make payments.“We can only speculate what worries the Kremlin most about defaulting: the stain on Putin’s record of economic stewardship, reputational damage, the financial and legal dominoes a default sets in motion and so on,” said Tim Samples, a legal studies professor at the University of Georgia’s Terry College of Business and an expert on sovereign debt. “But one thing is rather clear: Russia was keen to avoid this scenario, willing even to make payments with precious non-sanctioned foreign currency to avoid a major default.”Sanctions experts have estimated that Russia has about $20 billion worth of outstanding debt that is not held in rubles. It is not clear if the European Union and Britain will follow the lead of the United States, which would exert even more pressure on Russia and leave a broader swath of investors unpaid, but most of the recent sanctions actions have been tightly coordinated.The prospect of a Russian default has already saddled some big U.S. investors with losses. Pimco, the investment management firm, has seen the value of its Russian bond holdings decline by more than $1 billion this year and pension funds and mutual funds with exposure to emerging market debt have also experienced declines.In the near term, Russia has two foreign-currency bond payments due on Friday, both of which have clauses in their contracts that allow for repayment in other currencies if “for reasons beyond its control” Russia is unable to make payments in the originally agreed currency.Russia owes about $71 million in interest payments for a dollar-denominated bond that will mature in 2026. The contract has a provision to be paid in euros, British pounds and Swiss francs. Russia also owes 26.5 million euros ($28 million) in interest payments for a euro-denominated bond that will mature in 2036, which can be paid back in alternative currencies including the ruble. Both contracts have a 30-day grace period for payments to reach creditors.The Russian finance ministry said on Friday that it had sent the funds to its payment agent, the National Settlement Depository, a Moscow-based institution, a week before the payment was due.The finance ministry said it had fulfilled these debt obligations. But more transactions are required with international financial institutions before the payments can reach bondholders.Adam M. Smith, who served as a senior sanctions official in the Obama administration’s Treasury Department, said he expected that Russia would most likely default sometime in July and that a wave of lawsuits from Russia and its investors were likely to ensue.Although a default will inflict some psychological damage on Russia, he said, it will also raise borrowing costs for ordinary Russians and harm foreign investors who were not involved in Russia’s invasion Ukraine.“The interesting question to me is, What is the policy goal here?” Mr. Smith said. “That’s what’s not entirely clear to me.”Alan Rappeport reported from Washington, and Eshe Nelson from London. More

All 18 surveyed analysts see the BOK hiking its seven-day repurchase rate by a quarter percentage point to 1.75%. The central bank’s updated economic outlook is also expected to show a sharp upward revision to inflation, after it earlier said consumer prices would hold at around double the 2% target for some time.Korean policy makers are under pressure to step up tightening to combat inflation, which shows little sign of abating despite four rate hikes since late last summer. Russia’s war on Ukraine and supply chain disruptions from China’s virus lockdowns are further fueling prices, while outsized rate hikes by the Federal Reserve have the BOK on alert for capital shifting offshore.“The risks to growth are rising, but I think the BOK is unlikely to look through the upward pressures on prices,” said Lloyd Chan at Oxford Economics. “Capital outflows pressures due to U.S. Fed monetary tightening is another pivotal factor in the BOK’s calculus.”Rhee is walking a fine line as he seeks to rein in prices without derailing the economy’s recovery from the pandemic. Since taking office last month, he has said inflation remains more of a concern than headwinds to growth.Rising import prices have been among factors pushing Korea’s trade balance into deficit this year. These have been exacerbated by the currency, which has been among the weakest performers in Asia over the past 12 months.Last week, the governor said he couldn’t completely rule out the need for an outsized hike as he met with Finance Minister Choo Kyung-ho. The duo agreed to ramp up cooperation to counter inflation.Rhee, a former Asia-Pacific director at the International Monetary Fund, began his term just as President Yoon Suk Yeol took office and highlighted inflation as the most pressing concern Korea faces.Yoon unveiled the nation’s largest-ever extra budget upon taking office, hoping to provide a fillip to an economy that he pledged to help expand rapidly.“A policy mix of expansionary fiscal policy and tightening monetary policy will likely continue in the rest of the current year,” according to Citigroup Inc (NYSE:C). economists Kim Jin-Wook and Yoon Jeeho, who forecast back-to-back hikes in May and July.South Korea’s economy slowed in the first three months of the year as cases of the omicron variant surged. But signs are now emerging that consumption is picking up quickly. The jobless rate remains at a record low and restrictions on public activity have now largely been lifted.Both President Yoon and Governor Rhee have signaled that they may resume efforts to boost economic growth once the immediate challenge of inflation is contained.In his inauguration speech, Yoon pledged to fuel an economic expansion that he said would create opportunities and bridge social and economic disparities. Rhee has described himself as a “dove” in the long run, seeking ways to revitalize economic growth amid an aging population.©2022 Bloomberg L.P. More

Shares in some of Britain’s biggest power companies fell sharply on Tuesday as Rishi Sunak drew up plans for a windfall tax on the energy sector to help offset spiralling domestic fuel bills.The chancellor is rushing to complete an emergency energy package to offer relief to households struggling with a spiralling cost of living crisis and the prospect of an £800 increase in fuel costs in the autumn.Drax, owner of the UK’s biggest power station, tumbled 16 per cent, Centrica dropped 10 per cent and SSE fell almost 9 per cent in London. The sell-off came after the Financial Times revealed that Sunak’s officials were working on a possible windfall tax on electricity generators, as well as North Sea oil and gas producers.Electricity generators responded furiously to the possibility that they might be included. They argued that they had not benefited from surging electricity prices, saying that the power they generated was sold under fixed, long-term contracts. One chief executive of a big electricity generator called the proposal “unbelievable” and said it came “completely out of the blue”. He added that it was “completely damaging to investor confidence” at a time when the government wanted them to back big new renewables projects such as offshore wind.Government insiders said on Tuesday night that no decisions had been taken on whether to extend the windfall tax beyond oil and gas groups and the policy was “not straightforward”, but that it remained on the table.Boris Johnson, under intense pressure over the partygate scandal, has been distracted by the imminent release of Sue Gray’s official report into the scandal over parties in Downing Street, which is expected to be published on Wednesday. The prime minister is said by allies to be keen to change the subject by quickly bringing forward the package of measures on Thursday. However, he has yet to sign it off.Jonathan Brearley, head of the energy regulator Ofgem, set the stage for Sunak’s emergency package by telling MPs that he expected the price cap, which limits the amount most British households pay for gas and electricity, to rise more than 40 per cent to about £2,800 a year in October.Government insiders say windfall profits by electricity producers, including wind farm operators, are more than £10bn this year. High gas prices have a knock-on effect for producers of all forms of electricity.Sunak is looking to design the levy to include incentives for companies to step up investment in renewables. He had previously opposed a windfall tax, arguing that it would hit investment in new energy projects, and Tory rightwingers are scathing of the idea. “Maybe the ‘low tax chancellor’ will cut taxes one day,” said one.Kwasi Kwarteng, business secretary, asked by MPs if he backed a windfall tax on power generators, said: “We are asking generators to deploy record amounts of capital to build the infrastructure we need to hit the net zero target so I think that is a challenging proposition.”

But Kwarteng is said by allies to be resigned to Sunak imposing a windfall tax on energy companies, which could raise considerably more money than the £2bn levy proposed for oil and gas companies by Labour. “If he feels that these extraordinary times require extraordinary measures, that’s up to him,” Kwarteng said. Analysts said a levy on electricity generators would also hit several large foreign-owned energy companies, including ScottishPower, a subsidiary of Spain’s Iberdrola; France’s EDF Energy; and Germany’s RWE.The proposed wider windfall tax would also include smaller generators that benefited from an early subsidy scheme to encourage the construction of low-carbon energy generation, which are thought to have profited handsomely from high wholesale power prices.Treasury officials are working on a windfall tax model for North Sea oil and gas producers similar to the one introduced by then chancellor George Osborne in 2011, according to those briefed on the policy. Osborne increased the “supplementary charge” levied on oil and gas production and raised £2bn. Shell chief executive Ben van Beurden told the company’s annual shareholders meeting that there were “good ways and bad ways of designing a tax structure, and if you do it in a bad way it can discourage investment”. More

NEW YORK (Reuters) – Demand for the Federal Reserve’s reverse repurchase (RRP) facility has surged in the last few weeks, as the U.S. Treasury Department’s reduced supply of short-term bills left investors few options to park excess cash.Reverse repos are conducted by the New York Fed’s Open Market Trading Desk. In a reverse repo, market participants lend cash to the Fed, usually overnight, at an interest rate of 80 basis points, in exchange for Treasuries or other government securities, with a promise to buy them back.”We continue to see a grind higher in RRP balance,” said Gennadiy Goldberg, senior rates strategist at TD Securities in New York.”That’s a function of two things: first, the extreme high demand for front-end assets, and second, the amount of bills outstanding has continued to decline as Treasury has cut back supply because of fairly strong tax collections,” he added.The Fed’s reverse repo window attracted a record $2.045 trillion on Monday, as financial institutions continued to flood the facility with liquidity in exchange for Treasury collateral. Monday’s volume was one of a string of record highs for RRPs.Investors are guaranteed 80 basis points for overnight cash without counterparty risk.This compares with the current 51 basis point yield of U.S. one-month bills, whose longer maturity carries more risk.On Tuesday, the RRP volume slipped to $1.987 trillion amid the outflow of cash from government-sponsored enterprises Fannie Mae and Freddie Mac (OTC:FMCC). The repo market is largely affected by the flow of cash from GSEs.Cash from Fannie Mae and Freddie Mac typically enters the repo market on the 18th of each month when they receive principal and interest mortgage payments from home lenders. GSEs then pay mortgage-backed security holders around the 24th to the 25th of the month, withdrawing that cash from the repo market to pay MBS holders.SHRINKING BILLS SUPPLYAs the U.S. budget deficit shrinks amid robust tax revenues, the Treasury will have to aggressively shrink bill issuance through Sept. 30, analysts said.”A sharp decline in bill supply will push much of the money fund cash into the Fed’s RRP, draining bank reserves by more than $1 trillion this year,” said Joseph Abate, managing director, fixed income research, at Barclays (LON:BARC).He expects bill supply to shrink 15% between April 1 and Sept. 30.”It’s really a double whammy on the front end because of too much demand and not enough supply, leaving the RRP facility as the option of last resort for many investors,” said TD’s Goldberg.The soaring RRP volume does not seem to be a concern for the Fed given that quantitative tightening will only begin next month. But it could be a problem if demand persists even after the Fed’s asset portfolio starts to shrink, said Lou Crandall, chief economist at money market research firm Wrightson.He noted that a number of Fed hawks last winter cited the bloated RRP facility as a reason to start cleaning up the Fed’s balance sheet through asset runoffs sooner rather than later.”Individual FOMC (Federal Open Market Committee) members might start to weigh in on the topic if RRP volumes move north of $2 trillion this summer,” Crandall said. More

NEW YORK (Reuters) -Hedge funds that bet on bonds, currencies, stocks and commodities are among the industry’s biggest winners this year easily outpacing growth and tech funds’ returns and preparing to see significant inflows of capital as the stock market hovers near bear market territory.So-called global macro funds returned 10.3% in the first four months of the year while the average hedge fund inched up 1.9%, according to data from Hedge Fund Research. The Standard & Poor’s 500 index tumbled 13% in that period.Over the last three years, global macro funds on average delivered positive returns but they also trailed behind the hedge fund industry’s stronger returns.Now with inflation surging and volatility ticking higher as central banks reverse years of monetary stimulus, the environment looks to be especially good for global macro funds.”This environment will most likely lead to new inflows of capital to the strategy at the expense of other funds,” said Eamon McCooey, head of prime services at Wells Fargo (NYSE:WFC).Global macro funds invest only about 17% of the industry’s $4 trillion in assets, less than the roughly 30% invested by equity-focused hedge funds and the 28% invested by funds that bet on corporate events, Hedge Fund Research data show.Through the first quarter, the latest available data, flows were picking up as investors sent $3 billion in new capital into these strategies, compared with $1.9 billion going into equity oriented funds. Overall $19.8 billion was added in the first quarter, HFR data show.Scott Bessent, who runs Key Square Group after having cemented his reputation as a top global macro investor by helping billionaire George Soros engineer his famous bet against the British pound 30 years ago, told investors he is even more enthusiastic about the environment now than in early January.”We are now seeing a series of longstanding economic, political, monetary and portfolio management systems breakdown,” Bessent said in his letter. “What we see for the remainder of the 2020s is a cascading series of system collapses.” This is opening the way for a “large pipeline of vast opportunities,” Bessent said, adding that events with a small probability of occurring are “becoming more numerous” as central banks are reversing ultra-loose monetary policies.The firm declined to comment further on the letter. Individual funds’ returns are making the case, with the blue chip Brevan Howard Master Fund up 12.04% this year through April while the tiny Trium Larissa Global Macro fund is up 30.9% in the first four months of 2022.Bridgewater’s Pure Alpha posted a return of 26.37% in the first four months. The firm told investors it is approaching capacity limits, according to excerpts of a letter seen by Reuters. A source familiar with the situation said the firm is considering returning capital to investors in the near term. AQR’s Global Macro Strategy is up 21% and told investors its strategy has benefited from high inflation and also from the end of fiscal stimulus.Graham Capital Management’s Quant Macro rose 21.7%, helped by commodities and foreign exchange. “We are finally in an environment that we expect to stay really conducive for the macro strategy,” said Darren Wolf, global head of investments, alternative investment strategies at global investment company abrdn, which is headquartered in Edinburgh.To position themselves to take advantage of the shift in tastes and capital, some firms are adding strategies. Cinctive Capital Management hired former Brevan Howard trader Giles Coppel this year to build out a team as clients were asking for it. Earlier in the year Schonfeld Strategic Advisors earmarked $5 billion to the strategy. Investors believe macro managers are likely to keep the momentum going, given that markets are expected to both bounce higher and lower with volatility. But there could be some pitfalls. “You can have a problem when many managers are crowded in like trades,” said Christian Lee, head of international alternative investments Itau USA Asset Management, which oversees $11 billion in a fund of funds. “One example is the commodity trade. It’s become quite popular and it’s worked very well. Commodities can be some of the most volatile assets out there so one might want to be a bit cautious.” COLUMN-If Fed has to choose, markets could get much uglier :Mike DolanANALYSIS-Rare double whammy hits retail investors: steep slumps for both stocks and bondsANALYSIS-Wall Street ‘fear gauge’ offers no silver lining as bear market loomsANALYSIS-Pain not over for U.S. bond market but some see yields nearing their peaks More

WASHINGTON (Reuters) – The United States will not extend a key waiver set to expire on Wednesday that allows Russia to pay U.S. bondholders, which could push Moscow closer to the brink of default as Washington ramps up pressure on the country following its invasion of Ukraine.The U.S. Treasury Department said on its website on Tuesday it would not extend a license, set to expire at 12:01 am ET (0401 GMT) on Wednesday, allowing Russia to make payments on its sovereign debt to U.S. persons. The waiver had allowed Moscow to keep paying interest and principal and avert default on its government debt.Russia has almost $2 billion worth of payments falling due up to the year-end on its international bonds. Russia has so far managed to make its international bond payments despite Western sanctions over the Ukraine conflict and countermeasures from Moscow, which have complicated the movement of money across borders. On Friday, Russia had rushed forward payments on two international bonds – one euro-denominated and one-dollar denominated issues – a week before their due date.The country has $40 billion of international bonds outstanding. There has been debate on whether or not to extend the license. Deputy U.S. Treasury Secretary Wally Adeyemo has previously said the payments siphoned funds away from Russia’s Ukraine war effort and were a “sign of success” for U.S. sanctions policy.But Treasury Secretary Janet Yellen last week said Washington was unlikely to extend the license.While the license only applies to U.S. persons, its lapse will make it very challenging for Russia to make the payment to other holders given the integral part U.S. financial institutions play in the global financial system and the complexity of such payment processes.Unlike in most default situations, Moscow is not short of money. Russia’s debt repayment dues pale in comparison to its oil and gas revenues, which stood at $28 billion in April alone thanks to high energy prices.WAR IN EUROPEWashington and its allies have imposed heavy sanctions on Russia for launching the largest land war in Europe since World War Two.Moscow calls its nearly three-month-old invasion a “special military operation” to rid Ukraine of fascists, an assertion Kyiv and its Western allies say is a baseless pretext for an unprovoked war. Russia was previously rated as investment grade by credit rating agencies, but since the Ukraine conflict major ratings agencies have stopped assessing the country. If a country fails to make bond payments within their pre-defined timeframes, or specified currencies, it is seen as a default. If funds do not reach their intended recipients due to circumstances rather than inability or unwillingness to pay, this could constitute a technical default.Russia has a 30-day grace period on the two payments due on May 27. Russia is already locked out of the international borrowing markets due to the sanctions, but a default would mean it could not regain access to those markets until creditors are fully repaid and any legal cases stemming from the default are settled.Other defaults, such as in Argentina, have prompted creditors to go after physical assets such as a navy vessel and the country’s presidential aircraft. It could also throw up barriers to trading with Russia if countries or companies that would normally transact with Russia have self-imposed rules that bar them from doing business with an entity in default. More

Qatar has pledged to invest £10bn in the UK, including the technology, healthcare, infrastructure and clean energy sectors, as British government steps up its efforts to woo sovereign wealth fund investment from oil-rich Gulf states. Sheikh Mohammed bin Abdulrahman Al-Thani, the Gulf state’s foreign minister, told the Financial Times that the funds would be channelled through the Qatar Investment Authority over the next five years. “We hope this will bring a big deal of opportunities to the UK and Qatar in the near future,” said Sheikh Mohammed, who is chair of the QIA, which has an estimated $450bn under management. “Especially in the areas of technology, fintech, sustainability, there’s great potential with zero-net happening,” he added, referring to the UK’s plans to cut the UK’s net carbon emissions to zero by 2050. UK prime minister Boris Johnson welcomed the deal with Qatar as a vote of confidence in British business. “The new UK-Qatar strategic investment partnership will create quality job opportunities across the country in key sectors, delivering on our vision of economic growth through trade and investment,” he said.The investment agreement was announced during talks between Johnson and Sheikh Tamim bin Hamad al-Thani, Qatar’s emir, on Tuesday. Last year, the UK signed a similar deal with Mubadala, the Abu Dhabi sovereign wealth fund, to invest £10bn. The oil and gas producing Gulf states have seen their revenues soar as energy prices have remained high over the past year.Qatar has a long record of investing in the UK and has already invested £5bn in Britain since 2017. It also owns several trophy assets, including Harrods and the Shard skyscraper in London.The UK and Qatar also signed a memorandum of understanding “to work together to boost innovation and collaboration, supporting the security of global energy supplies”.As the world’s top exporter of liquefied natural gas, Qatar’s importance to the UK and the rest of Europe has increased in the wake of Russia’s invasion of Ukraine. The Gulf state supplies about 40 per cent of the UK’s LNG and is in talks to increase its exports to the country. Qatari officials have been holding talks with numerous governments and energy companies in Europe, including Germany, France, Italy and Spain, to agree long-term LNG contracts and increase exports to the continent as it attempts to reduce its dependency on Russian energy. In the UK, Qatar is the majority owner of South Hook LNG terminal in Wales, which has the capacity to supply a fifth of the UK’s gas needs. Last year it also secured rights for storage capacity at the LNG terminal on Isle of Grain in Kent, for 25 years from 2025. More