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    Dollar’s surge sparks biggest fall in emerging market currencies in 2 years

    A surging US dollar and a “confluence of bad news” have sparked the biggest sell-off in emerging market currencies since the early stages of the Federal Reserve’s aggressive rate-raising campaign two years ago.A JPMorgan index of EM currencies has fallen more than 5 per cent over the past two and a half months, putting it on course for its biggest quarterly decline since September 2022. The decline has been broad, with at least 23 currencies tracked by Bloomberg falling against the dollar this quarter.The greenback has been on a tear since late September as one of the most prominent “Trump trades”, fuelled by expectations that US president-elect Donald Trump will impose sweeping trade tariffs and loosen fiscal policy when he takes office next month.“The dollar is absolutely front and centre” as the driver of weakness in EM currencies, said Paul McNamara, lead manager on emerging market bond and currencies at fund firm GAM. Trump announced last month he would impose levies of 25 per cent on all imports from Mexico and developed market peer Canada, along with an additional 10 per cent on Chinese goods. The Mexican peso has fallen 2.1 per cent this quarter, while China’s offshore renminbi is down 3.7 per cent.More broadly, the South African rand — usually seen as a proxy for sentiment across EMs because it is easier to trade than other currencies — has fallen about 2.4 per cent since the end of September. Even when the interest earned from holding assets in a local currency is factored into foreign exchange returns, only the currencies of countries considered very risky by investors, such as Turkey and Argentina, were in the green for investors this quarter.The breadth of the post-election sell-off has also hit so-called carry trades, when investors borrow in lower interest rate currencies such as the dollar or yen to buy the higher-yielding EM currencies.A basket of popular EM carry trades tracked by Citi has returned only 1.5 per cent this year, or roughly its 10-year average, versus 7.5 per cent in 2023, the US bank said.EM currencies last posted a quarterly decline of this scale in 2022, when the US Federal Reserve turned the screws on monetary policy to curb runaway inflation. As US interest rates leapt higher, the widening gap with rates in EMs piled pressure on those countries’ currencies.The latest fall puts JPMorgan’s EM currency gauge on course for its seventh annual decline in a row. Analysts said weakness in the Mexican peso could be attributed in large part to tariff developments. But the picture is more complex for a number of other EM currencies, with some also coming under pressure from country-specific challenges, they added.“There’s been a confluence of bad news in the emerging markets,” said Thierry Wizman, global foreign exchange and rates strategist at Macquarie. He highlighted China, noting “concerns about the slump in the domestic economy [and] the prospect that the central bank is going to continue to ease policy”, and Brazil, citing “concerns about deficits and debt sustainability”.Yields on China’s benchmark 10-year bonds have fallen below 2 per cent to their lowest level in 22 years, as traders bet the central bank would cut interest rates further to help stimulate growth.Brazil’s real has also fallen to record lows in recent weeks, breaking through the threshold of six to the dollar for the first time as a new government promise to find R$70bn (US$12bn) in cost savings did little to soothe worries about its public finances.“Brazil has a fiscal crisis on its hands,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investments. “Mexico has exceptionally low levels of productivity, growth and investment for an economy that is America’s largest trading partner,” he said, while there are also issues with the quality of its constitution and its institutions following recent judicial reforms.While noting EMs in general “have not been attracting capital flows”, he added that “all these countries have some idiosyncratic issues and what’s striking is very few of those idiosyncratic issues are positive”.Meanwhile, South Korea’s won was hit after President Yoon Suk Yeol declared martial law — a decision he later retracted.The surging dollar has also pushed the euro lower in recent months. This, according to Mark McCormick, head of FX and EM strategies at TD Securities, is bad news for EM currencies that “orbit the euro”, including the Polish zloty and the Hungarian forint.Macquarie’s Wizman said the sell-off in developing market currencies had helped revive the “Tina” investment narrative — that there is no alternative to investing in the US.“There aren’t any emerging markets these days that stand out as having robust economic stories,” he added.Additional reporting by Joseph Cotterill in London More

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    The state intervention that’s not destroying trade

    $75 per monthComplete digital access to quality FT journalism with expert analysis from industry leaders. Pay a year upfront and save 20%.What’s included Global news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print edition More

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    Trump has options to mitigate the rising US budget deficit

    Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe writer is a managing director and economist at PimcoAs the US prepares for a new administration under Donald Trump, the long-term outlook for the national deficit and debt is coming into sharper focus.At Pimco, we have already been making adjustments in response to the rising trajectory of US deficits. Specifically, we’ve been less inclined to lend to the US government at long maturities, favouring opportunities elsewhere. But the potential for some incremental improvements in near-term deficits relative to already dire expectations, could provide some modest relief to the bond market. The Congressional Budget Office forecasts that the US debt-to-GDP ratio could exceed 200 per cent in the coming decades, primarily driven by demographic shifts. An ageing population will significantly increase healthcare costs, particularly for Medicare and Social Security, which are projected to be the main contributors to rising government spending. Both major political parties have historically avoided making substantial changes to these mandatory spending programmes, which limits the scope for meaningful budget reforms.Trump’s campaign promised to reduce the current 6.5 per cent deficit to 3 per cent, while also extending the 2017 Tax Cuts and Jobs Act, implementing further tax cuts and achieving 3 per cent real GDP growth. Achieving these goals simultaneously will be difficult if not impossible. Reaching a 3 per cent deficit would require identifying about $875bn in budget cuts, a task that would require bipartisan support in Congress. Such cuts could have serious implications for US growth, making a 3 per cent growth target difficult to reach. According to the US National Income and Product Accounts, Federal government expenditures were about $1.8tn in fiscal year 2024. A reduction of $875bn would necessitate nearly a 9 per cent nominal growth in all other GDP expenditure categories to meet the administration’s 3 per cent growth targets. Historical data suggests that achieving such growth rates is unlikely, given that average nominal GDP growth rates have hovered about 3.5 per cent in the post-financial crisis era.Politically, the challenge is even greater. The discretionary spending budget, excluding interest payments, was roughly $900bn in 2024. Cutting $875bn from discretionary spending alone would leave virtually no funding for essential services, including defence and education. Even significant reductions in spending areas mandated by legislation like Medicaid would likely fall short of the administrations goals.However, a combination of rolling back parts of the Inflation Reduction Act, spending improvements, tariffs, and a temporary extension of tax cuts could mitigate further deficit expansion.One feasible approach involves extending the TCJA provisions for a shorter duration. The estimated 10-year cost of extending the TCJA is about $4tn, but limiting the extension to four years could reduce that figure to about $1.8tn. Additionally, repealing some of the tax credits for investment in clean energy projects under the IRA could yield $100 to $400bn over the next decade’s savings.Congress could also pursue reforms aimed at reducing fraud and waste in government spending. The Government Accountability Office has identified potential savings of between $400bn and $500bn annually through addressing inefficiencies in healthcare and defence. While implementing these reforms may require additional staffing and bipartisan co-operation, even modest efficiency gains of $100bn per year could lead to a $1tn reduction in deficits over a decade.Another avenue for raising revenue will probably involve increasing tariffs on imports from China and other countries. Doubling current effective tariff rates could generate an estimated $400bn over 10 years.For bond investors, this scenario is not entirely negative. The government’s efforts to finance tax cuts with a mix of economically feasible tariffs and government spending restraints could signal just enough recognition of fiscal constraints. This balance may also foster a favourable environment for equity markets, as more painful near-term fiscal adjustments are avoided.In conclusion, while the US faces a daunting longer-term debt dilemma, the potential for incremental reforms and strategic fiscal measures could provide a near-term pathway to at least stabilise the deficit. While this isn’t a panacea, maybe it’s not a terrible outcome relative pretty downbeat US fiscal expectations.  More

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    Trump invites China’s Xi Jinping to attend inauguration, CBS News reports

    The invitation to the Jan. 20 inauguration in Washington occurred in early November, shortly after the Nov. 5 presidential election, and it was not clear if it had been accepted, CBS reported. The Chinese embassy in Washington did not immediately respond to a request for comment. Trump said in an interview with NBC News conducted on Friday that he “got along with very well” with Xi and that they had “had communication as recently as this week.”Trump has named numerous China hawks to key posts in his incoming administration, including Senator Marco Rubio as secretary of state. Trump has said he will impose an additional 10% tariff on Chinese goods unless Beijing does more to stop the trafficking of the highly addictive narcotic fentanyl. He also threatened tariffs in excess of 60% on Chinese goods while on the campaign trail.In late November, China’s state media warned Trump that his pledge to slap additional tariffs on Chinese goods over fentanyl flows could drag the world’s top two economies into a mutually destructive tariff war. More

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    Stunning rally in Big Tech drives Nasdaq to 20,000

    NEW YORK (Reuters) – The Nasdaq Composite Index hit 20,000 for the first time on Wednesday, putting an exclamation point on a year in which excitement over artificial intelligence and expectations of falling interest rates fueled a searing rally in technology stocks. The tech-heavy index is up more than 33% on the year, driven by a cluster of giant technology-focused companies including Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), Google-parent Alphabet (NASDAQ:GOOGL) and in recent weeks, electric carmaker Tesla (NASDAQ:TSLA). Wednesday’s gains came after a U.S. inflation report that cemented expectations of a Fed rate cut next week.The index closed on Wednesday at 20,034.89, up 1.8% on the day.While the rally has rewarded investors who went big on growth and tech, it has also stirred unease over rising valuations and the dominance of megacap stocks, which now have an increasingly heavier weighting in the index. “There is clearly an aspect of a chase into year-end, where the winners … keep winning,” said Cameron Dawson, chief investment officer at NewEdge Wealth. “The question is if this momentum can persist into 2025, where stretched valuations, positioning, sentiment, and growth expectations could all present high bars to jump over to keep above-average returns going.”After plummeting in early 2020 when the pandemic brought global economic activity to a standstill, the index mounted a swift rebound as the Federal Reserve cut interest rates to near-zero and the U.S. unleashed waves of fiscal stimulus to help the economy. It endured a sharp drop in 2022, falling 33% as inflation surged to 40-year highs and the Fed was forced to deliver a series of jumbo rate cuts. But higher rates did not bring on a widely-expected recession, and the index has soared by about 90% since then, stoked in part by increasing excitement over the business potential of AI. Shares of Nvidia, whose chips are considered the industry’s gold standard, are up more than 1,100% from their October 2022 low. “The AI story still rings true and appeals to investors,” said Alex Morris, chief investment officer of F/m Investments. “These are the go-go stocks.”While the Nasdaq’s valuation has climbed, it is still far from levels it reached during the dot-com bubble more than two decades ago.The index trades at roughly 36 times earnings today, a three-year high and well above its long-term average of 27, according to LSEG Datastream. That is still well below the roughly 70 times the index’s P/E ratio reached in March 2000, bringing a measure of comfort to investors comparing the two periods.”The Nasdaq Comp’s latest rally pales in comparison to the late 90s/early 2000 experience, rising more gradually and does not yet look unsustainable as a result,” Jessica Rabe, co-founder of DataTrek Research, said in a note on Wednesday. Megacap stocks increasingly dominate the index. The top 10 companies by market value account for 59% of the Nasdaq, compared to 45% in 2020. The three biggest companies by weight are Apple, Microsoft (NASDAQ:MSFT) and Nvidia, which account for 11.7%, 10.6% and 10.3% of the index respectively.While their surging share prices have buoyed the Nasdaq, the heavy concentration could present a problem for investors should Big Tech fall out of favor. The selloff in 2022, for instance, saw shares of index heavyweights Meta and Tesla fall 64% and 65% for the year respectively.The Nasdaq has topped the other major U.S. stock indexes this year, propelled by big gains in heavily weighted names such as Nvidia, Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META). The tech-heavy index’s 33% climb in 2024 compares with over 27% for the S&P 500 and 17% for the Dow Jones Industrial Average.Over the past decade, the Nasdaq has gained more than 320%, against a 200% rise for the S&P 500 and a 150% increase for the Dow. More

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    UK housing market gathers pace despite cloudy outlook, RICS survey shows

    RICS’ monthly house price gauge jumped to +25 in November from +16 in October, its highest level since September 2022. A Reuters poll of economists had pointed to a reading of +19.Mortgage lenders Nationwide and Halifax also reported a sharp pickup in house prices during November and Bank of England data showed lenders in October approved the most mortgages for house purchases since August 2022.However, RICS said sales might slow next year as consumer and business confidence appeared to be weakening and markets had scaled back their expectations of BoE rate cuts, pushing up mortgage costs.”Although the latest survey results continue to signal a steady improvement in buyer demand across the residential market, the broader macro environment is likely to pose additional headwinds moving forward,” RICS senior economist Tarrant Parsons (NYSE:PSN) said.”The recent rise in mortgage interest rates may curtail the recovery in market activity before long, and this is reflected in the slightly less optimistic sales expectations data coming through this month,” he added.Online property portal Rightmove (OTC:RTMVY) said on Thursday it was more positive about the outlook for 2025. It expected asking prices to rise by 4% in 2025, its highest prediction since 2021.”We expect a busier year in 2025, with around 1.15 million transactions completed,” said Rightmove property expert Tim Bannister. Increases to stamp duty land tax in April were likely to boost activity in the first half of the year, while further reductions in Bank of England interest rates are also likely to support the market, he said.The BoE cut interest rates in November for only the second time since 2020 and said future reductions are likely to be gradual as it predicts the new government’s first budget will lead to slightly faster inflation and economic growth next year. More

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    Brazil’s central bank hikes more than expected, signals more tightening ahead

    BRASILIA (Reuters) -Brazil’s central bank raised interest rates by a greater-than-expected 100 basis points on Wednesday and pointed to matching hikes for the next two meetings, signaling a shift to a new government-named governor will not weaken its determination to battle inflation. If the proposed roadmap is followed, the benchmark borrowing rate could soar to 14.25% as early as March – more than an eight-year high – reflecting policymakers’ determination to curb rising inflation expectations amid robust economic activity, a tight labor market and a weaker currency.The bank’s rate-setting committee, known as Copom, unanimously increased the benchmark Selic rate to 12.25%, noting a recent government-announced package of budget measures had impacted Brazil’s real currency, asset prices and inflation expectations.The highly-anticipated spending cut package from President Luiz Inacio Lula da Silva’s administration fell short of expectations, straining confidence in the government’s ability to manage the rising public debt​.”The committee judges that these impacts contribute to more adverse inflation dynamics,” said policymakers in the decision statement, the last under governor Roberto Campos Neto’s leadership at the central bank.Campos Neto, who will be succeeded in January by the current monetary policy director, Gabriel Galipolo, had been emphasizing that a positive fiscal shock, such as less government spending, would have a significant impact on markets if it changed the outlook for Brazil’s public debt, as interest rate futures have surged amid growing fiscal concerns.”Our interpretation is that the statement was quite harsh, with explicit guidance for at least another 200 basis points,” said Alexandre Espirito Santo, chief economist at Way Investimentos.While he deemed the committee’s actions appropriate, he noted that managing expectations is an extremely challenging task at the moment, with focus shifting to the central bank’s incoming leadership in January.Jose Francisco Goncalves, chief economist at Fator, said “the Copom’s choice for a shock approach reintroduces the additional risk of fiscal dominance, as the only guarantee for now is the increase in interest expenses.”In so-called fiscal dominance, central bank rate hikes increase government debt servicing costs and worsen fiscal conditions, deteriorating market expectations and ultimately driving inflation higher.Policymakers began tightening in September, stressing that the overall magnitude of the cycle would be determined by the firm commitment to reaching the 3% inflation target — a message that remained unchanged on Wednesday.Only four of 40 economists surveyed in a recent Reuters poll had anticipated a hike this size, while the majority had projected a smaller 75 basis-point increase. But bets embedded on the yield curve already pointed to a steeper full percentage-point hike, which had not been seen since May 2022, following a sharp weakening of the currency after the fiscal package was unveiled.The Brazilian real has depreciated nearly 20% year-to-date against the U.S. dollar, among the worst emerging market performances. Minutes before the rate decision, policymakers announced plans to hold a U.S. dollar auction with a repurchase agreement of up to $4 billion on Thursday. The view that the central bank should adopt a more hawkish stance gained momentum after the bank’s weekly survey of economists showed a sharp deterioration in expectations for consumer prices extending into 2027.This occurred despite expectations for a more aggressive tightening cycle, reflecting a loss of confidence in interest rates effectively curbing inflation. The central bank itself revised on Wednesday its inflation estimates, now projecting inflation of 4.9% this year, up from 4.6% previously, and 4.5% in 2025, up from 3.9%. For the second quarter of 2026, which is part of a 18-month horizon affected by current monetary policy decisions, it forecast annual inflation of 4.0%, up from the prior 3.6%. More

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    Brazil’s Lula to undergo new surgery to minimize further brain bleeding

    Doctors operated on the leftist leader for about two hours on Tuesday to drain bleeding between his brain and meningeal membrane, which doctors said was linked to a late October fall at his home. Thursday’s endovascular procedure will help minimize the risk of future bleeding, his personal doctor, Roberto Kalil Filho, told reporters on Wednesday.Doctors will hold a press conference following Thursday’s surgery, the hospital said.Kalil said the procedure – a middle meningeal artery embolization – is “relatively simple” and “low risk,” adding it should take approximately one hour.The follow-up procedure had been discussed by doctors since Tuesday’s surgery, and does not represent a worsening of Lula’s health situation, according to Kalil. “We waited to see that the president was recovering well before deciding to go ahead with the procedure,” he said.Sao Paulo’s Sirio-Libanes Hospital said in its update note that the 79-year-old president was in intensive care but had no complications during the day, when he walked, received visits from family members and did physiotherapy. The emergency surgery added to health concerns about the elderly president, an icon of the Latin American left who is halfway through his latest term after previously serving in the role from 2003 to 2011.Earlier in the day, a previous medical note said Lula was lucid and talking following the overnight hospital stay and had experienced no post-surgery complications. More