Economy

LONDON (Reuters) – The European Central Bank’s plans to dial back stimulus have been upended by Russia’s invasion of Ukraine.Policymakers meeting on Thursday must now grapple with the prospect of inflation, already at record highs, rising yet further just as a new crisis threatens the economy.”Of all the major central banks, the ECB has the biggest dilemma on its hands,” Principal Global Investors chief strategist Seema Shah said.Here are five key questions for markets. 1. What will the ECB do this week?Policy decisions remain wide open and subject to Ukraine developments. Big commitments appear unlikely.Hawks, such as Germany’s Joachim Nagel, have argued for a faster tapering of bond buys, but appear to have toned down their public rhetoric. Board member Fabio Panetta believes policy moves should be postponed.The ECB was already due to cut bond buying over the coming quarters, but aimed to keep the purchases open-ended.It could still hint at the possibility of ending asset purchases later this year and drop a reference to rates rising “shortly” after bond buying ends.”It makes no sense to commit to anything right now,” said Pictet Wealth Management strategist Frederik Ducrozet. Title: ECB’s bond-buying exit complicated by Russia’s invasion of Ukraine, https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnzwdzvq/ECBMar4.PNG 2. Will the ECB hike rates this year?Markets think so and ECB President Christine Lagarde last month appeared not to rule out a move higher this year. Whether she still holds to that will be watched closely.Federal Reserve Chair Jerome Powell says the Fed will stick with plans for a March rate rise. The Fed’s dilemma is less acute, given Russia-linked growth setbacks are less likely in the United States. “Before the war, we were expecting the ECB to raise rates in September and December for a total of 50 bps,” said Generali (MI:GASI) Investments senior economist Martin Wolburg. “The first-rate hike is more likely in December.” Title: Money markets scale back ECB rate hike bets, https://graphics.reuters.com/EUROPE-MARKETS/gdpzybkonvw/chart.png 3. How does Ukraine impact the economy?It could reduce euro area economic output by 0.3%-0.4% this year in one scenario outlined by ECB chief economist Philip Lane.Europe relies on Russia for around 40% of its natural gas. Surging gas and oil prices could dent consumer spending power and corporate profits. UBS Global Wealth Management economist Dean Turner estimates a 10% rise in energy prices takes roughly 0.2% off euro zone GDP. The bigger hit may in the short-term come via inflation, already running at 5.8%, well above the ECB’s 2% target. But the crisis is negative for growth and inflation longer term, a more relevant horizon for the ECB. Another headache is tighter financing conditions, mainly due to falling share prices since mid-February. Title: Another headwind for Europe’s economy, https://fingfx.thomsonreuters.com/gfx/mkt/egvbkqlwepq/ECB22.PNG 4. Are the ECB’s inflation forecasts still relevant?The ECB gives its latest economic projections on Thursday and big upward revisions to the 2022 inflation forecast are certain. While important for markets, estimates may not fully reflect the impact of surging oil — Brent crude has jumped 20% to nearly $120 a barrel since Russia invaded Ukraine on Feb. 24.Chief economist Philip Lane says the latest inflation data will be taken into account, noting a temporary rise in inflation should be tolerated given a supply shock. Generali’s Wolburg expects euro zone inflation in 2022 at 5.5%, versus a previous forecast of 4.5%. Title: ECB set to revise up inflation forecasts, https://graphics.reuters.com/EUROPE-MARKETS/egvbklzzmpq/chart.png 5. What happens if markets wobble?The ECB will likely stress it stands ready to take any measure necessary to stabilise financial markets.European banks have been knocked by Western sanctions on Russia and the exit of Russian banks from Europe, but signs of funding stress appear contained. Euro area sovereign bond spreads are relatively stable.Further falls in the euro, trading at 21-month lows, are a worry. Deutsche Bank (DE:DBKGn) says the euro is becoming increasingly negatively correlated to oil and gas prices — a potential inflationary spiral that adds to the ECB’s troubles. Title: Oil prices in euros soars, https://fingfx.thomsonreuters.com/gfx/mkt/klvykbmoovg/OIL0403.PNG More

Russia’s invasion of Ukraine has created an unexpected crisis for investors — many of whom had been hoping for a return to economic normality after two years of the Covid pandemic.Right now, the conflict threatens to disrupt supplies of essential commodities, from both Russia and Ukraine, to western economies already beset by worries about accelerating inflation. Price rises had reached multi-decade highs in the US and Europe even before the fighting began.The ensuing geopolitical crisis has already created volatility across financial markets as investors look for ways to protect and diversify their portfolios. And flows in and out of exchange traded funds are again providing a highly sensitive barometer of investor sentiment across all asset classes in times of uncertainty.

Gold — always seen as a safe haven of value in periods of turmoil — has predictably rallied. The price of the precious metal, often held by investors via exchange traded funds, has risen by 6.4 per cent so far this year, trading last week at $1,922 per troy ounce.This spot price increase has been driven, in part, by a revival in demand for gold ETFs in the last two months.Inflationary concerns, combined with weeks of growing tensions ahead of the invasion of Ukraine, helped attract just under $4.6bn of inflows into gold ETFs in the year so far to February 25. This took total assets in the category to $221bn — the latest data available from the World Gold Council, the trade body.Capital Economics, the consultancy, expects the gold price to reach $2,000 an ounce due to “safe haven” demand prompted by the Ukraine crisis.Yet a flight to gold contains its own risks. Capital Economics is also forecasting that gold will retreat to $1,600 an ounce by the end of the year, should Russia’s central bank be forced to sell down part of its substantial bullion reserves to provide liquidity for its domestic financial market.

Followers of the precious metal will also have noted that the relative economic calm of last year, following global recovery from the coronavirus pandemic, coincided with the biggest annual withdrawal of money from gold EFTs since 2013, as the metal fell out of fashion.Oil and gas prices have predictably spiked higher, too, amid worries over disruptions to supplies from Russia. In addition, Russia’s role as a key global supplier of other industrial and agricultural commodities is likely to be curtailed by the strict international sanctions imposed on Moscow. However, at present, the scale of such disruption — and the impact on pricing — remain difficult to predict.This has triggered a rush into US-listed broad commodity ETFs, which can provide exposure to a wide range of commodities. They attracted inflows of $2.5bn in February, with $1bn in new cash arriving in the final three days of the month.“Commodity-focused ETFs are in vogue due to elevated geopolitical worries, increased inflationary concerns and the spectre of rising interest rates,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research.Meanwhile, ETFs that track the share prices of companies in the US energy sector have gathered net inflows of $4.2bn so far this year, with investors betting that higher prices will boost their earnings. But despite inflation already returning to historic highs in the US and Europe, Russia’s actions in Ukraine may now reduce the expected scale and pace of any interest rate rises by Western central banks will be reduced. That, in turn, could result in inflation rates remaining higher than policymakers would prefer.Michael John Lytle, the chief executive of Tabula, a London-based ETF provider, says investors will have to “increase their focus on more sophisticated strategies to address rising inflation”. Tabula offers a US enhanced inflation ETF (ticker symbol TINF), which combines US Treasury inflation-protected securities (Tips) with other real (inflation adjusted) bond holdings. The fund has delivered a net return, after fees, of 17.2 per cent since it was launched in October 2020.Prices of conventional US, UK and German 10-year government bonds — another asset class to have traditionally proved safer than equities in periods of market stress — all rose In the days following the Russian invasion, sending their yields down.

But Pascal Blanqué, who chairs the research institute of Amundi, the Paris-based asset manager, cautions that the “apparent renewed attractiveness of core government bonds is a trap” — because they do not reflect the risk that inflation rates will remain high.“We are in the middle of a regime shift characterised by unprecedented inflationary forces not seen in the past five decades,” argues Blanqué. He recommends that investors look for assets that are positively correlated with inflation — including commodities, value stocks, and companies paying high dividends.US companies paid out a record $522.7bn in dividends in 2021 and Janus Henderson, the asset manager, is forecasting that this will increase to $562bn this year.Matteo Andreetto, the head of State Street’s ETF business in Europe, says this strengthens the attractions of so-called dividend “aristocrat” ETFs that invest in companies with an unbroken history of payouts. He favours US mid-cap ETFs, as well, as he believes they are trading on undemanding valuations and less exposed to any Russia-related disruptions.State Street is also advising clients to consider ETFs with exposure to Chinese treasury bonds which are offering a real, inflation-adjusted, yield of around 1.7 per cent.“China’s central bank is likely to ease monetary policy to help support its economy at a time when other central banks are looking to raise interest rates,” says Andreetto. “So Chinese treasury bonds can provide a useful role in diversifying risks in fixed income portfolios.” More

LONDON (Reuters) -U.S. and European economies are facing a heightened risk of a recession this year as Russia’s invasion of Ukraine severely disrupts supply chains and causes inflation to accelerate to the fastest rate since the 1970s.Yields on U.S. government debt maturing in two years’ time are trading less than 30 basis points below notes maturing in ten years, the narrowest spread since the pandemic erupted worldwide in early 2020.Yield-curve flattening has been one of the most reliable indicators of an impending recession in recent decades since it measures the current stance of monetary policy relative to long-term interest rate expectations.The current spread is in the 77th percentile for all months since the start of 1990, up from 58th percentile at the end of December and the 33rd percentile this time last year, indicating an elevated risk of recession.In the last three decades, whenever the spread has narrowed this much it has heralded either a significant mid-cycle business slowdown or an end-of-cycle recession (https://tmsnrt.rs/3HFAGIr).Even before the invasion, prices for energy, raw materials, industrial components, consumer products and freight were rising at the fastest rate since the early 1980s.But the conflict and sanctions imposed in response by the United States and its allies have now sent prices for oil, gas, coal and other commodities surging even higher.Severe disruptions have been reported in ocean shipping, international passenger and cargo aviation and the global supply chains for chemicals and automakers, among other sectors.The result is equivalent to a massive loss of global production capacity, a supply-side shock that is simultaneously intensifying inflation while likely to depress output and employment.Businesses grappling with sanctions, supply chain problems and the rapidly escalating cost of their inputs are less likely to undertake risky investment expenditures.Households hit by higher bills for gas, electricity, motor fuels, cars and other durable items will have to trim expenditure on other goods and services.Recessionary forces are intensifying rapidly across North America and Europe as global supply chains are stretched to breaking point.POLICY DILEMMAThe U.S. Federal Reserve is impaled on the horns of dilemma, trapped between its dual goals to maximise employment and maintain price stability.The central bank is simultaneously under pressure to raise interest rates faster to restrain inflation but leave them lower to offset the heightened uncertainty arising from the conflict.For the time being, senior U.S. policymakers have indicated the need to restrain inflation outweighs other considerations and they plan to start increasing interest rates from this month.Based on the fed funds futures market, traders expect the central bank to raise interest rates by six quarter-points (or equivalent) by the end of the year to bring inflation under control, though that is down slightly from seven anticipated increases before the invasion.In the past similar contradictions between policy goals have created conditions for a sharp slowdown in the business cycle or a recession.Top policymakers and economists like to say that economic expansions do not die of old age, they are murdered. In other words, they do not end naturally and inevitably but when the Fed tightens policy too much.But that is not quite true. Policymakers do not deliberately “murder” expansions. Engineering a recession is rarely if ever the explicit aim of monetary policy.Instead, expansions end and recessions arrive when policymakers are forced to sacrifice (temporarily) their long-term goal of supporting growth to some more urgent and pressing goal such as lowering inflation.In 2022, the poisonous cocktail of supply disruptions, rapidly rising prices, heightened business and household uncertainty and slowing growth in output and employment presents policymakers with precisely this problem.Recession risks are even greater in Europe because region’s economic integration with Ukraine and Russia and greater exposure to surging international gas prices will magnify the size of the supply shock.Even before the invasion of Ukraine, the Fed and other central banks were confronted with the tricky task of engineering a soft-landing to control inflation rather than a hard landing that would bring a recession.The conflict and its massive impact on supply chains has made that task very much harder and increased the probability that the attempt at a soft landing will turn into a hard one.Related columns:- Inflation shock threatens oil consumption and prices (Reuters, Feb. 10)- Fed searches for elusive soft landing (Reuters, Feb. 2)- Escalating U.S. inflation forces macro policy rethink (Reuters, Jan. 13)- Global economy faces biggest headwind from inflation (Reuters, Oct. 14)John Kemp is a Reuters market analyst. The views expressed are his own More

BENGALURU/LONDON (Reuters) – The European Central Bank will wait until the last months of this year for its first interest rate rise in over a decade, with fewer economists in a Reuters poll taken after Russia’s invasion of Ukraine now expecting an earlier move. That consensus from a slight majority of forecasters, 27 of 45, polled March 1-4, comes despite news that inflation in the euro zone hit 5.8% in February, defying the central bank’s own expectations for a decline.Only six economists expected the first hike to come sooner, in the third quarter, down from 16 in a poll last month.Of the 33 of 45 respondents who expected the deposit rate to rise from a record low of -0.50% this year, 18 saw it at -0.25% at year-end, nine had it lower than that and six saw it higher. That fragmented view underscores the central bank’s communications challenge at its March 10 policy meeting. Indeed, expectations for ECB rates stand in stark contrast with other major central banks, which are likely to have delivered several hikes by year-end. The Bank of England has already lifted rates twice in its last two consecutive meetings.Like those other economies, the euro zone has weathered the Omicron variant of the pandemic relatively well and is in full recovery mode. Euro zone unemployment is a record low. But its economy is more exposed to the armed conflict on the continent.”The war hasn’t really changed the difficult combination of inflation and growth risks, it has only exacerbated it. Therefore, logically, it should not fundamentally change the ECB’s plans to cautiously and gradually withdraw some accommodative policies,” wrote Rabobank economists in a recent client note.”What has changed is the near-term uncertainty. We believe this may tip the balance towards a short delay in the ECB’s normalisation timeline but – crucially – not a full stop.”There was no strong consensus either on which month the ECB would end its Asset Purchase Programme (APP). The central bank is currently purchasing 20 billion euros worth of bonds a month and is set to carry on even after its pandemic-related separate programme ends in March. These bond purchases are set to double in the second quarter. But nearly two-thirds of respondents said the APP would be shut by end-September, with nearly half saying in that month. All but one economist said it would be shut by end-year. In the meantime, rising energy prices and further supply chain disruptions since the Russian invasion are likely to keep inflation higher for longer.As the conflict in Ukraine intensified, and with the ECB unlikely to raise rates until later in the year, the euro fell below $1.10 for the first time since May 2020 on Friday, raising the prospect of additional imported inflation pressure.”The war has clearly increased the risk of a stagflation scenario for the euro zone, where you will have a stagnating economy and much higher inflation on the back of high energy prices,” said Carsten Brzeski, global head of macro at ING.”The worry is we might see a squeeze of the euro zone economy from both sides. On the supply side, it will impact production due to supply chain disruptions and on the demand side in the form of higher energy prices and lower purchasing power.”Forecasts for inflation this year have risen for the ninth consecutive survey – up 0.3 and 0.6 percentage points for the first and second quarters to 5.4% and 5.3% respectively, more than double the ECB’s 2.0% target.Economic growth in the bloc was expected to peak at 1.0% next quarter and then slow to 0.8% and 0.6% in the third and fourth quarters, respectively. This is a downgrade from 1.2%, 1.0% and 0.7% predicted just a few weeks ago.On an annual basis, it was expected to grow 3.8% this year and 2.5% next, from 3.9% and 2.5% predicted last month. (For other stories from the Reuters global economic poll:) More

The Pentagon said Russia had fired 600 missiles since the start of the invasion, an increase from 500 as of Friday, suggesting an acceleration from the roughly 20 launches a day that were detected at the end of last week.A senior US defence official said Russia had moved 95 per cent of its forces that had been pre-positioned for the invasion into Ukraine. He added that there had been only “limited changes on the ground” over the past 24 hours.“Russian forces continued efforts to advance and isolate Kyiv, Kharkiv and Chernihiv across the north and east are being met with strong Ukrainian resistance,” the official said, adding that the Russian convoy north of Kyiv remains stalled.In southern Ukraine, the Pentagon continues to observe fighting near Kherson, a Black Sea city that Russian forces took last week, and Mykolaiv. US and western officials have been concerned that Russia was moving west along the Black Sea coast for a possible attack on Odesa, the critical port city. Emergency services respond to a missile strike on a building at Havryshivka Vinnytsia International Airport, in Vinnytsia, Ukraine © State Emergency Service of Ukraine via ReutersBut the US defence official said: “We have not observed an amphibious invasion in or near Odesa, nor do we assess that one is imminent.The US official said that Ukrainian air space remained contested, but that Ukraine’s air and missile defences remained intact and in use, and that the Ukrainian military continued to fly aircraft. He said the US had seen videos on social media of Russian aircraft being shot down, adding that the Pentagon could not independently verify that Russia had suffered the losses but equally was not in a position to refute them.“Both sides have taken losses to both aircraft and missile defence inventories,” he said “We assess that both sides still possess a majority of their air defence systems and capabilities.” More

Sri Lanka faces an escalating debt crisis after Russia’s invasion of Ukraine wrecked two of its largest tourist markets, with analysts warning that the economic fallout of the conflict has increased the chance of default.The south Asian island has for months struggled with power cuts and shortages as its depleted foreign exchange reserves leave it struggling to import oil and other essentials. It has an estimated $7bn in overseas debt and interest repayments due this year.President Gotabaya Rajapaksa’s government has argued that a revival in tourism and exports would help Sri Lanka replenish foreign currency reserves and navigate the crisis.Two countries have been vital to this strategy: Russia and Ukraine, the first and third-largest tourist markets this year respectively. Russia is also the second-largest market for Sri Lankan tea, the country’s main goods export.The disruption to trade and tourism, along with the surge in global oil prices, has dealt a fatal blow to this strategy, argued Murtaza Jafferjee, chair of the Advocata Institute think-tank. “The economic crisis was already full blown leading into this [war],” he said. This “has now extinguished all hope”.Sri Lanka, Asia’s largest high-yield bond issuer, owes about $45bn in long-term debt and several ratings downgrades, following tax cuts and the collapse of tourism because of Covid-19, left it unable to refinance. It is now at risk of joining countries such as Zambia and Belize in defaulting during the pandemic.Colombo had foreign currency liabilities of $1.8bn for both February and March and usable reserves of less than $1bn, according to analyst estimates of central bank data.The fallout from the conflict is an unwelcome twist, with authorities having grown reliant on tourists from Russia and Ukraine as traffic from India and western Europe was disrupted by Covid-19 travel restrictions. Sri Lankan tea growers are worried about the effects of a weaker rouble in Russia, a big tea market © BloombergAbout 20,000 Russians and Ukrainians travelled to Sri Lanka in January, accounting for more than a quarter of visitors, according to the Sri Lanka Tourism Development Authority. In January 2018 they made up less than 10 per cent.While Ukrainian airspace is closed, industry participants fear the economic disruption could weigh on visits from Russia, too. “Ukrainian and Russian tourists were coming in significant numbers as the arrivals from other nations had dropped,” said M Shanthikumar, who runs the Hotels Association of Sri Lanka. “Their absence now due to war could cause a huge slump again.”Jayampathy Molligoda, chair of the Sri Lanka Tea Board, added that a prolonged conflict would have a “severe” impact on the tea trade if the rouble weakened and Russian banks were unable to use the Swift system.

The economic crisis has become increasingly painful for Sri Lankans, with power cuts that last hours and rampant inflation, which prompted the central bank to raise interest rates last week.Rajapaksa’s government has vowed to put an end to power cuts, signing a supply deal with state-owned Indian Oil Corp, according to Reuters.But many investors believe it is only a matter of time until Sri Lanka is unable to repay. A $1bn sovereign bond is due in July, while analysts estimate Sri Lanka owes as much as $1bn to India this month in deferred payments through the Asian Clearing Union. For the hundreds of Ukrainian tourists stranded in Sri Lanka, their holiday has turned into a nightmare.Dmytro Cherednyk and Oleksandra Kovalova, a couple in their 20s who visited Sri Lanka’s southern beach resorts, watched helplessly as their families fled to Kyiv. “I hope this will end soon so that we can get back to our families,” Cherednyk said. More

Chitra Ramkrishna was arrested in New Delhi, the source at the Central Bureau of Investigation (CBI) said, without sharing further details.The market regulator penalised Ramkrishna, among others, after an investigation that showed she had sought advice for years from an outsider she described as a Himalayan yogi. The action is the latest sign the CBI is stepping up its investigation of a 2018 case involving allegations that the NSE provided some high frequency traders unfair access to speed up algorithmic trading. The additional scrutiny risks further delaying a planned NSE listing.Sunday’s arrest follows a Feb. 11 order by the market regulator that highlighted lapses at the exchange and said Ramkrishna, who quit as CEO in 2016, was “merely a puppet” of someone she described as a yogi. More

“We have no choice but to suspend livestreaming and new content to our video service while we review the safety implications of this law,” the social media company said in a series of Twitter (NYSE:TWTR) posts https:// It said in-app messaging would not be affected by the decision.The U.S. government on Saturday condemned the new law, which threatens jail terms of up to 15 years for spreading what the Kremlin describes as “fake news”. More