Economy

By Saqib Iqbal Ahmed and Ira Iosebashvili(Reuters) – Plummeting stocks, soaring commodity prices and tightening global financial conditions following Russia’s invasion of Ukraine are clouding the outlook for markets already unsettled by the prospect of a hawkish Federal Reserve.Dramatic moves are everywhere you look, from a bear market in the Nasdaq Composite Index and wild rallies in oil and other raw materials to surges in popular haven assets such as gold and the U.S. dollar.Hanging over it all is the Fed, which is widely expected to raise rates at its monetary policy meeting next week for the first time in more than three years. Some investors now worry that the U.S. central bank will have to keep raising rates to contain rising inflation despite an expected hit to growth from geopolitical instability, risking a recession. “Traders are not used to this kind of volatility in markets,” said Michael O’Rourke of Jones Trading. “Everyone is trying to figure out what is the next threat and where the next distortion is.” RAW MATERIALS RALLYSanctions against commodity-export giant Russia by the United States and its allies have stoked a rally in the price of oil, metals, wheat and other commodities, a move investors fear will exacerbate already high inflation while weighing on global growth – a condition known as stagflation.Brent crude is up more than 25% since the beginning of March while nickel prices more than doubled on Tuesday, forcing the London Metal Exchange to halt trading in the metal. “For the U.S. economy, we now see stagflation, with persistently higher inflation and less economic growth than expected before the (Ukraine) war. A recession can no longer be ruled out,” strategist Ed Yardeni of Yardeni Research wrote in a recent note to clients.BEARS EMERGINGThe Nasdaq slipped 3.6% on Monday, taking it more than 20% below its recent peak, confirming that the index is in a bear market, according to a common definition. Germany’s DAX is in bear territory as well, while the benchmark S&P 500, down nearly 12% this year, recently confirmed a correction.CREAKY PLUMBINGFinancial indicators are showing increasing signs of stress throughout markets. One of these is the so-called FRA-OIS spread, which measures the gap between the U.S. three-month forward rate agreement and the overnight index swap rate. It was recently at its highest level since May 2020.A higher spread reflects rising interbank lending risk or banks hoarding U.S. dollars, meaning that it is widely viewed as a proxy for banking sector risk.The rush for dollars has been a major contributor to the greenback’s advance against the euro over the last two weeks, according to Huw Roberts, head of analytics at Quant Insight in New York.More broadly, global financial conditions – the umbrella phrase for how metrics such as exchange rates, equity swings and borrowing costs affect the availability of funding in the economy – are at their tightest in around two years. GYRATIONSVolatility in stocks, currencies and rates is at multi-year highs, as investors calibrate their portfolios for higher commodity prices and a potentially prolonged conflict in eastern Europe.The Cboe, known as Wall Street’s fear gauge, was recently at 33 and has shot up by about 16 points this year.Sharp (OTC:SHCAY) rises and falls in Treasury yields – fueled by bets on how aggressive the Fed will be in raising rates in 2022 as well as a flight to safety in U.S. government bonds, have taken the ICE (NYSE:ICE) BoFAML MOVE Index to its highest level since March 2020.Meanwhile, gyrations in currencies and a rally in the U.S. dollar has lifted the Deutsche Bank (DE:DBKGn) Currency Volatility Index to a near-two-year high.FLIGHT TO SAFETYNot surprisingly, investors have been sheltering in gold, the dollar, the Swiss franc and other so-called safe havens, driving up their prices to multi-month highs. Prices for the yellow metal are up more than 10% this year. More

NEW YORK (Reuters) – A rate hike cycle that started last year and low valuations had already made Latin America a darling destination for investors in 2022, and the Russian invasion of Ukraine is likely to keep cash flowing to the commodity-exposed region.The risks are country-specific, and mostly coming from electoral exposure or a further spike in inflation, analysts said.Latin American stock markets measured in dollars are outperforming larger economies by close to 25 percentage points this year, with MSCI’s Latam index up 11% YTD while the developed world index is down close to 13%.So far this year, foreign flows to Latam stock and bond portfolios totaled about $18 billion through February, while the rest of EM pulled in a net $7.5 billion.The Ukrainian invasion, dubbed a “special operation” by Moscow, has heightened risk aversion across emerging Europe but could add to the ongoing outperformance from Latin America. “Amid all the current volatility, Latin America may have some opportunities. Some markets may be positively impacted by higher commodity prices, and also by a higher volume of investment flows by Emerging Market portfolio managers,” said Alfonso Eyzaguirre, CEO of JPMorgan Chase (NYSE:JPM) Latin America and Canada.He added that investment restrictions in Russia, Ukraine and neighboring countries can increase Latin America’s weight in emerging market portfolios.U.S. President Joe Biden on Tuesday announced a ban on Russian oil and other energy imports and a barrel of oil hit this week its highest price since mid 2008. Regional currencies have also performed better this year. The four best-performing across emerging markets against the dollar are from Brazil, Colombia, Peru and Chile. Alongside spikes in the price of oil and food, the currency moves have added to the regional tailwind.”The main impact on Latin America is coming via commodity price moves – this seems to have supported currencies like the Brazilian real and Colombian peso. Insofar as there are clearer beneficiaries from these commodity price moves, it’s the oil exporters like Colombia.” said William Jackson, chief emerging markets economist at Capital Economics.”But there will be a cost across the region from higher commodity prices – it’s likely to lift inflation, and central banks are likely to hike interest rates more aggressively.”The rate hike cycle that started in Latam ahead of a hawkish turn from the Federal Reserve has also boosted bond performance in relative terms.Even as sovereign and quasi-sovereign spreads have widened across EM, emerging markets in Latin America have seen a 72 basis point widening this year, while Asia is wider at 92 bps, Africa at 161 bps and Europe at 778.”My overall view that if you’re a long-term fundamental bull it probably has to be Chile,” said Boris Schlossberg, managing director of FX at BK Asset Management.”If you’re looking for a short-term bounce, or a really strong reversal, it’s Brazil. And Argentina has a long-shot trade here on the commodity boom – it’s so hated by everybody, and is basically so oversold, that there’s little risk of downside at this point.”He said Brazilian stocks, already up 7% in local terms YTD and near 20% in dollars, “are going to be probably the most sensitive to the upside.”But political uncertainty, as well as overall risk aversion, could get in the way of the region’s outperformance.Colombia’s congressional election this weekend will give a clearer picture of the odds on the May presidential race, which so far points to a sharp move towards the left.Similar expectations exist for Brazil’s election in October, while Chile is set to ratify the re-writing of the constitution made by a majority center- and left-leaning convention.”Latam remains a difficult region to allocate to structurally given several idiosyncratic risk events such as upcoming elections in Colombia and Brazil, domestic political tension in Peru and a re-drafting of the constitution in Chile,” said Morgan Stanley (NYSE:MS) analysts in a client note on Monday.”In Mexico, the currency and local rates are likely to be negatively impacted by a more hawkish Fed and higher inflation pressures.” More

WASHINGTON (Reuters) – More than $25 billion from the U.S. Treasury Department’s Emergency Rental Assistance program has been spent or obligated over the past year through January 2022, Deputy U.S. Treasury Secretary Wally Adeyemo said on Tuesday.In prepared remarks at a housing agency in Memphis, Tennessee, Adeyemo said that he expects the “vast majority” of the remaining funds in the $46.6 billion COVID-19 relief program to be deployed to households or paid to local grantee agencies by the middle of 2022.The program was funded by two COVID-19 relief acts passed by Congress – a $900 billion aid package in December 2020 under former president Donald Trump and the $1.9 trillion American Rescue Plan signed into law a year ago this week by U.S. President Joe Biden, marking his first major policy victory.In January, the Treasury said that about $1.95 billion was spent on rent, utilities and arrears to 431,717 households. That represents a slight decline from December 2021, when 559,280 households received $2.44 billion in assistance.The program’s monthly payouts peaked in the fall of 2021 and have tapered off since then as U.S. employment has recovered.In Memphis and Shelby County, Tennessee, Adeyemo said that the program has made some 16,000 payments totaling $43.1 million to keep families in their rented homes. The city and county partnered with local courts and non-profit groups to divert eviction cases to the rental assistance program.Adeyemo said the Treasury also was encouraging state and local governments to use their share of another federal funding source – the $350 billion State and Local Fiscal Relief Fund – to invest in building more affordable housing. New guidance from the Treasury issued in January clarified affordable housing projects as a qualified use for those funds. Adeyemo said increased supply of affordable housing can offset recent increases in rent and other prices in the economy.”The American Rescue Plan provided a historic sum of money to state local governments that we’re hoping that they will use to help address the challenges of affordable housing because they’re core to solving and addressing challenges we face in communities all over the country,” he said. More

Americans in the last week have witnessed an unprecedented weekly surge in gasoline prices, now up to $4.17 a gallon based on American Automobile Association data. Prices are likely to go up even more as President Joe Biden details plans to ban imports of Russian energy. Economists at Credit Suisse (SIX:CSGN) Group AG and Barclays (LON:BARC) Plc say that’ll incentivize greater domestic production, which should help alleviate some of the economic fallout. “We do believe that higher oil prices will lead to increased domestic energy production which could help offset higher oil prices or any potential U.S. embargo on imports of oil from Russia,” said Michael Gapen, managing director and head of economic research at Barclays. At the same time, “increases in domestic oil production are likely to take time and most producers are exercising greater capital discipline than before. It may take six to nine months to see a more meaningful increase in U.S. shale output,” Gapen said.Before the start of war in Ukraine, producers were gradually adding to rig counts amid shareholder demands of capital discipline and government policy geared toward green energy. Moreover, supply and labor constraints have also been headwinds to a faster pace of production.Production may ramp up in response to higher prices, according to Credit Suisse. While investment in energy makes up a smaller share of gross domestic product than consumer spending, which accounts for about two thirds, investment “already had significant upside even before the current shock,” economists Jeremy Schwartz, Xiao Cui and Justin Guo said in a note.A sustained 1% contraction in global oil supply boosts prices by about 8%, representing a $15 billion hit for U.S. consumers, JPMorgan Chase & Co. (NYSE:JPM) economist Peter McCrory said in a March 4 note. As a result, the firm lowered its estimate of gross domestic product by 0.25 percentage point annualized in each of the first two quarters of the year.“Overall, we see higher oil prices as posing a modest drag on GDP growth, which we still expect to be above-trend this year,” McCrory said in an interview.Barclays economists said in a March 3 note that consumption growth could be about 0.5 percentage point lower by the fourth quarter as consumers generally absorb higher fuel prices by cutting back spending in other areas. Still, since the U.S. exports just about as much petroleum as it imports, and given the enhanced development of U.S. shale production, the country has the ability to ramp up its own production, the economists said. That’ll help offset the drag on reduced household spending, they said.“The U.S. economy has become much more resilient to changes in oil prices versus decades past; the share of gasoline in U.S. household spending remains near all-time lows and the revolution in shale has changed persistent net petroleum deficits to small net surpluses in recent years,” Barclays economists said in the note.While boosting domestic production would bolster energy security for the U.S. and its allies, it’s not without challenges. For one, exploration and production firms have been trying to hold the line on expenditures and return more cash to shareholders. Second, supply and labor constraints may be standing in the way of a big production push.The Permian Basin is suffering from labor shortages, according to Occidental Petroleum Corp (NYSE:OXY). Chief Executive Officer Vicki Hollub. Companies also don’t have enough rigs to support strong growth, and they’ve already used up most of the drilled-but-uncompleted wells that provided a quick uplift in growth in previous up cycles.“The call for increased production from the U.S. at this point, especially with supply-chain challenges, can’t happen at the level that’s needed,” Hollub said Tuesday during CERAWeek by S&P Global (NYSE:SPGI), one of the energy industry’s biggest annual gatherings.What Bloomberg Economics Says…“The Biden administration has a powerful tool that could both maximize the cost to Russia for invading Ukraine and lower domestic inflation, and it’s not sanctions. We estimate that increasing U.S. shale production could replace U.S. oil imports from Russia, and even a substantial share of Russia’s exports to Europe.”– Anna Wong, economistClick here to read the full note.Also, a larger push toward domestic oil production runs contrary to the Biden administration’s efforts to shift away from fossil fuels. Toby Rice, chief executive officer at shale driller EQT Corp (NYSE:EQT). said Monday on Bloomberg Television that there has been no direct dialogue between the White House and U.S. producers.“It’s now time to build those channels of communication, and it has to come from the government reaching out in a non-confrontational way,” energy historian Daniel Yergin said in a Bloomberg TV interview Monday at CERAWeek.Read more: Biden Is Banning Russian Oil. These Producers Could Fill the Gap“Energy security fell off the table in the U.S. as we became self-sufficient in energy, and in fact it was like amnesia,” Yergin said. “It was not only taken for granted; it’s just forgotten.”©2022 Bloomberg L.P. More

WASHINGTON (Reuters) – U.S. Senate Majority Leader Chuck Schumer said on Tuesday he aimed to pass an omnibus government spending bill by the end of the week that will include more than $12 billion in emergency aid for Ukraine and more than $15 billion for COVID preparedness.”Republicans and Democrats are very, very close to finalizing the agreement. I expect there will be text released in a few hours,” Schumer told reporters at the Capitol. More

Evil exists. It sits in the Kremlin consumed by resentment and lust for power. It marches into a country whose crime was to dream of freedom and democracy. How is such evil to be defeated? Might economic sanctions, combined with the resistance of the Ukrainian people, force Vladimir Putin into retreat? Or might they even lead to his overthrow? Alternatively, might he risk escalation up to use of nuclear weapons?Beyond doubt, the sanctions the west has used are powerful. Putin has even called them “akin to an act of war”. Russia has been largely cut out of the global financial system and more than half of its foreign reserves have been rendered useless. Western businesses are frightened of continuing to engage with Russia, for reputational and prudential reasons. Neil Shearing, chief economist of Capital Economics, forecasts a peak-to-trough fall in gross domestic product of 8 per cent, followed by a lengthy period of stagnation. The jump in the central bank’s interest rate to 20 per cent will on its own be costly. Shearing may well be too optimistic. (See charts.)Restrictions on energy exports are an obvious next step, as the Biden administration argues, against German opposition. It is, to say the least, objectionable that the high energy prices caused by Putin’s crimes also finance them. The Ukrainian economist Oleg Ustenko has argued strongly for such a boycott. Harvard’s Ricardo Hausmann proposes a neat alternative: a tax of 90 per cent on Russia’s exports of oil and gas. Since supply elasticity is low, he argues, the costs would fall on Russian producers, not western consumers, and so scarcity rents would also be transferred to the latter.On feasibility, Hausmann argues that in 2019, 55 per cent of Russia’s exports of mineral fuels went to the EU, while a further 13 per cent went to Japan, South Korea, Singapore and Turkey. If all these countries agreed to tax its oil, Russia might try to sell it elsewhere, especially to China. But how much would China take, given the logistical challenges and risk of western retaliation of some kind?A big question is how well the world could cope with the energy adjustment. An analysis by Bruegel concludes that “it should be possible to replace Russian gas already for next winter without economic activity being devastated, people freezing, or electricity supply being disrupted”, though this would take a determined effort. With Hausmann’s import taxes, oil and gas prices in the rest of the world should even fall.The purpose of sanctions is, however, to change policy and possibly even the regime in Moscow. Is this feasible? Experience suggests that breaking an autocratic regime willing to impose huge costs on its people is hard: Venezuela is a recent failure. Against this, one can point to the fact that Putin has not mobilised the Russian people for a long war against Ukraine and the west. He even euphemistically called it a “special military operation” against “neo-Nazis”. These lies might start to unravel. Yet, as Sergei Guriev, an economist of Russian origin who teaches at Sciences Po in Paris, noted in a dialogue with Princeton’s Markus Brunnermeier, Putin is moving from a dictatorship of spin to one of fear. So long as his entourage stays loyal, he may well retain power, however badly his war goes and however painful the sanctions.Broad sanctions of this kind are a double-edged weapon, since they work by imposing significant costs on ordinary people. Among the biggest losers will be the aspiring middle classes. The regime might find it easy to convince the victims that their pain merely proves western hostility. So, yes, some Russians might blame Putin. But, especially given Putin’s control over the media, a huge number might blame the west, instead.The evidence on the performance of sanctions is also depressing. Dursun Peksen of Memphis university offers these conclusions: aim for major and immediate damage to the target economy; seek international co-operation; expect autocracies to be more resistant to sanctions than democracies; expect allies to be more responsive than enemies; and, finally, expect sanctions to be less effective in achieving large objectives than modest ones. The west is in good shape on the first two points in this list, though further curbs on energy exports might be needed for the first and co-operation with China for the second. But it is dealing with a hostile autocrat and also trying to reverse a war he considers a vital national and personal interest. Omens for success do not look good.

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It is also possible that successful support for the Ukrainian resistance, combined with sanctions that inflict huge costs on Russians, without ending the regime, might make Putin willing to take even more desperate risks. This could even include resort to use of weapons of mass destruction against Ukrainian or other targets further west.In retrospect, there should probably have been less ambiguity over western support for Ukrainian independence. Now, we must do everything we can to support Ukraine’s fight for survival, short of taking what seems the excessive and possibly futile risk of direct injection of Nato air forces into the war. We should strengthen sanctions, though they may ruin Russia’s economy without changing its policy or its regime. We should state that our war is not with Russian people, though they may not forgive us for the pain we are inflicting upon them. We should ask China and India to persuade Putin to end his war, though we must recognise that such an effort is highly likely to fail. Only bad choices exist. Yet Ukraine cannot be abandoned. We must go on. [email protected] Martin Wolf with myFT and on Twitter More

Made.com has warned that profits will remain under pressure after its losses doubled last year, as the UK online furniture retailer grappled with global supply chain disruption and rising transport costs. The furniture sector has been one of the hardest hit by the steep inflation in freight costs as many of its big, bulky items — or the raw materials they are made from — are sourced from China and elsewhere in Asia.Made, which targets design-conscious millennials, listed in London last June. Its market value has since dropped from £775mn to £285mn. Its shares were up more than 6 per cent by lunchtime on Tuesday.The company also announced that it had appointed interim chief executive Nicola Thompson as its full-time boss, less than three weeks after Philippe Chainieux resigned citing family reasons. Thompson was previously chief operating officer.Delays to deliveries caused by supply chain issues have weighed on Made’s revenue, as payments are only recognised when the furniture is delivered to the customer. The company said that roughly £56mn of sales had been pushed from the previous financial year into the current one, up from a previous estimate of £45mn.Freight costs rose more than fivefold in the year to December 31, compressing gross margins. Pre-tax losses widened from £14.6mn in 2020 to £31.4mn, worse than the consensus forecasts for a £24mn loss. Adrian Evans, Made’s chief financial officer, said: “There’s been a really significant movement in freight costs through the year, we’ve managed that really well and we’ve got flexibility through the model. That’s set us up well to make sure gross margin is in line with midterm guidance.”Yet Made pointed to a “softness in consumer demand” and said that earnings before interest, taxes, depreciation and amortisation would be between £5mn and £15mn in 2022, compared with analyst expectations for roughly £17mn.Despite the lower than expected outlook, the company said it remained on track to achieve its 2025 guidance of £1.2bn in gross sales.Wayne Brown, an analyst at house broker Liberum, highlighted that Made’s revenue of £371mn for 2021 was 80 per cent higher than before the coronavirus pandemic.Compared with rivals such as DFS, Made had “absolutely taken market share”, said Brown, adding that while the company had pared back growth predictions “a little”, its medium-term objectives remained unchanged.Made said it had expanded its warehousing facilities to meet increased customer demand and planned to sell more products from stock rather than making them to order. This will cut average lead times to roughly three or four weeks by the end of the first half of the year, compared with seven to eight weeks during the pandemic, but will tie up more cash in inventory.“We’re on track to reduce our lead time,” said Thompson. “We’ll naturally pick up more sales from stock. Previously, 60 per cent of sales came from stock that was not on hand, that’s now flipping to 60 per cent of stock that is on hand.” More

Leading insurers have said that a big overhaul in UK insurance pricing that came into force in January is having the impact predicted by the regulator, with those shopping around taking the hit of a reform designed to protect loyal customers.The rules sought to eliminate unfair price hikes at the annual renewal, by ensuring existing customers pay the same amount as they would if they were a new sign-up.Direct Line’s chief executive, Penny James, said on Tuesday that the impact of the changes was so far within the “guard rails” of what the insurer had anticipated, pushing prices up for new customers as insurers adjust for the loss of differential pricing.In motor insurance, that meant mid-single digit percentage price increases for new customers. “You can’t see it in the market data yet, but the offset to that will be in the renewal book — most customers will have a renewal price that is benefiting from this change,” James told the Financial Times, as Direct Line released its full-year results.In home insurance, new business price rises were reaching double digits, she added, while indications were that switching had reduced.Admiral’s chief executive, Milena Mondini de Focatiis, said last week that the initial price moves were “in the range” of what it had expected. “Probably, it is going to take months or a year to understand [the impact on] competitiveness,” she added, speaking at the publication of the group’s full-year results. It will be key to see how customer retention and distribution channels such as price comparison websites are affected over the longer term, Mondini de Focatiis said.The pricing overhaul has come at a difficult time for motor insurers, as the frequency of claims returns to normal after the pandemic — another factor that is pushing prices higher from their lowest point in half a decade — while inflation and supply-chain issues are increasing payouts.Admiral’s share price has fallen more than 15 per cent since its results, which revealed that claims inflation was accelerating and included guidance that 2022 group profits would not match up to the previous two years. The effects of higher used car prices and repair costs are likely to be felt into 2022, Mondini de Focatiis said. “It is very difficult to say . . . when this will return to a more normal level of inflation.”Direct Line’s shares were also dragged lower, and fell another 4 per cent on Tuesday.For the insurer, rising damage costs meant inflation remained above target during 2021. For the year, the business produced £582mn of operating profit, up from £522mn in the previous year and beating analyst expectations for the second half. James said Direct Line could mitigate some of the inflation pressure by using its repair network to reduce the time customers needed a replacement car, for example; and has a team set up to address supply-chain shortages at its sites. “We are not immune, but we do have mitigants,” she said. More