Finance

Stock futures fell in overnight trading Thursday following a sharp reversal on Wall Street as investors continued to assess the risks stemming from Russia’s invasion of Ukraine.
Futures on the Dow Jones Industrial Average dipped 120 points. S&P 500 futures fell 0.4% and Nasdaq 100 futures traded 0.5% lower.

The market was initially spooked by Moscow’s invasion against neighboring Ukraine early Thursday morning local time, using land, air and naval forces. The S&P 500 was down as much as 2.6% during the session but closed up 1.5% higher despite the outbreak of violence.
The blue-chip Dow ended the day about 90 points higher after losing 859 points at its session low. The tech-heavy Nasdaq Composite rallied 3.3% in a stunning comeback after dropping nearly 3.5% at the lowest level of the day.
“Russia invading Ukraine has added to an already tense year, with investors selling first and asking questions later,” said LPL Financial Chief Market Strategist Ryan Detrick. “But it is important to know that past major geopolitical events were usually short-term market issues, especially if the economy was on solid footing.”
Oil prices settled well off their highs alongside the recovery in equities. Global oil benchmark Brent crude gained 2.3% to settle at $99.08 per barrel, after hitting the $100 level for the first time since 2014. The U.S. oil benchmark, WTI, settled the day 71 cents, or 0.77%, higher at $92.81 per barrel. 
President Joe Biden rolled out a new wave of sanctions against Russia Thursday afternoon in a broad effort to isolate Moscow from the global economy. The White House has also authorized additional troops to be stationed in Germany as NATO allies look to bolster defenses in Europe, Biden said.

Despite Thursday’s wild intraday reversal, major averages are on track for their third negative week in a row amid escalated geopolitical tensions. The Dow is down 2.5% this week, on pace for its worst weekly performance since Jan. 21. The S&P 500 and the Nasdaq have fallen 1.5% and 0.6% this week, respectively.
All three averages are still in correction territory, or down 10% or more from their respective record highs. The Nasdaq opened Thursday’s session in bear market territory, down more than 20% from its record high in November
“While there may be some additional volatility in the short term, these dislocation events historically present opportunities, as long as recession doesn’t follow,” said Cliff Hodge, CIO at Cornerstone Wealth. “Higher energy prices will also support sticky inflation which may keep pressure on the Fed to stay on course.”
Shares of Beyond Meat tumbled more than 10% in extended trading after the alternative meat producer reported a wider-than-expected loss and shrinking revenue for its fourth quarter.

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Beyond Meat “Beyond Burger” patties made from plant-based substitutes for meat products sit on a shelf for sale in New York City.
Angela Weiss | AFP | Getty Images

Check out the companies making headlines after the bell: 
Beyond Meat — Shares of the meat alternative producer tumbled more than 11% in extended trading after the company reported a wider-than-expected loss and shrinking revenue for its fourth quarter. Beyond Meat also released a weak forecast for its 2022 revenue.

Coinbase — Shares of the crypto trading platform dipped more than 5% in after-hours trading even after the company reported fourth-quarter earnings that beat analyst estimates. The company predicted that retail Monthly Transaction Users and total trading volume would be lower in Q1 2022 compared with Q4 2021.
Etsy — The online marketplace saw its stock pop a whopping 15% after the company beat analysts’ estimates for the fourth quarter. Etsy reported earnings of $1.11 per share for the December quarter, ahead of analysts’ consensus expectations of 79 cents, according to Refinitiv. Its quarterly revenue also came in above expectations.
KAR Auction Services — Shares of the used car company soared more than 60% in extended trading after it said it has agreed to be acquired by Carvana in a $2.2 billion all-cash deal. Carvana, which also reported a wider-than-expected loss for the fourth quarter, saw its stock fall more than 10% in after-hours trading.

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In the thirteen years since launching, Square has grown into a $50 billion-plus financial powerhouse.
Now called Block, the company operates an FDIC-insured bank, consumer payments platform, offers stock and cryptocurrency trading and has made a number of high-profile acquisitions.
Block earnings are due out after the close of trading on Thursday, and the next decade of growth will likely be more about blockchain and cryptocurrencies as CEO Jack Dorsey focuses on “the native currency of the internet.”

Jack Dorsey (L), CEO of Square and CEO of Twitter, live casts video while standing outside the New York Stock Exchange for the IPO of Square, in New York November 19, 2015.
Lucas Jackson | Reuters

In this weekly series, CNBC takes a look at companies that made the inaugural Disruptor 50 list, 10 years later.
It all started with a tiny square card reader.

Tech entrepreneurs Jack Dorsey and Jim McKelvey set out to find a straightforward way for artists and vendors to accept credit cards. The solution came in the form of a plastic, stamp-sized dongle that could be plugged into an iPhone jack.
The two St. Louis natives launched their start-up in 2009 and rode the wave of smartphones and online payments. In the thirteen years since, Square, now called Block, has grown into a $54 billion financial powerhouse.
“We happened to recognize a problem: more of the U.S. was moving to paying with plastic cards which was great for individuals because it’s convenient, but the problem was, a lot of sellers couldn’t accept cards,” Dorsey said in a recent interview with MicroStrategy’s CEO. “We didn’t realize that was just the tip of the iceberg.”
The early iPhone dongle quickly evolved into an iPad app to get rid of the need for cash registers. Square struck a deal with Apple to sell its hardware in stores, and later with Starbucks, becoming its official card processor. From there, Square started focusing on all things small business, including loans and payroll. It bought food delivery service Caviar, then a few years later sold it to DoorDash.
Block now operates an FDIC-insured bank, consumer payments platform, stock and cryptocurrency trading and physical debit cards. The San Francisco-based company also bought Jay-Z’s music streaming service Tidal and buy-now-pay-later provider Afterpay.

Like most Disruptor 50 companies, Square’s growth was fueled by venture capital dollars.
Its first official round of funding in 2009 was led by Khosla Ventures at a roughly $45 million valuation, according to Pitchbook. Early investors in that $10 million round included Virgin Group founder Sir Richard Branson, former Yahoo CEO Marissa Mayer, Twitter co-founder Biz Stone and Napster’s Shawn Fanning. Later funding brought in the venture capital arms of Visa, Citi, Starbucks, Goldman Sachs, as well as Silicon Valley giants Sequoia and Kleiner Perkins.
An initial public offering came in 2015, with Square listing on the New York Stock Exchange, under the ticker SQ, with Dorsey at the helm. The newly public company was valued at just under $3 billion with shares pricing at $9. Its stock has climbed nearly 900% since.

The original CNBC disruptors: Where are they now?

Square’s consumer facing business grew fast and organically. The Cash App now makes up roughly half of revenue for the company and was one of the biggest drivers of growth during the pandemic as Americans pivoted to digital banking.
In the early days of Cash App though, few people internally thought it was worth pursuing, Dorsey explained recently.
“The Cash App was something that everyone in the company, at the time we started, didn’t think we should be doing,” Dorsey said at the Microstrategy conference in February. “It was a very hard sell… we weren’t seeing much traction in the market, and every day I was losing credibility, which I was hyper-aware of defending this thing. Eventually, the team found a model and made it work.”

‘Native currency of the internet’

Dorsey has applied that experimentation model in other areas of Block’s business — especially bitcoin.
Square started experimenting with cryptocurrency within the Cash App back in 2014, Dorsey said, and enabled online stores to accept cryptocurrency. Square saw few transactions, and it “didn’t really go anywhere.”
The company took it up in earnest again years later, and now facilitates the buying and selling of bitcoin on the Cash App, in addition to equities. In the first quarter last year, bitcoin trading added $3.5 billion to revenue, more than half of the total for the three-month period.
Block now holds bitcoin on its balance sheet as an alternative to cash, and has launched multiple, open-source crypto projects within the company. It’s working on a decentralized cryptocurrency exchange and a mining project and has a bitcoin-focused division of the company, called TBD.
Dorsey has been one of the most high-profile advocates of bitcoin, and often refers to it as the “native currency of the internet.”
He stepped down as the CEO at Twitter late last year, and said he believes the company is “ready to move on from its founders.”
The 45-year-old will have more time to dedicate to Block’s growing portfolio. But Dorsey’s also expected to focus on his well-documented commitment to cryptocurrency.
The rebranding to Block is a nod to the company’s crypto ambitions and a focus beyond its original credit card-reader business.
“We built the Square brand for our Seller business, which is where it belongs,” Dorsey said in a statement. “Block is a new name, but our purpose of economic empowerment remains the same. No matter how we grow or change, we will continue to build tools to help increase access to the economy.”
Block was one of the biggest winners of the pandemic era as investors embraced high-growth tech stocks. But its share price has dropped back to pre-pandemic levels as investors move away from rich valuations, with higher interest rates threatening future growth.
Shares have dropped more than 45% this year alone. The company reports earnings after the closing bell Thursday and investors are closely watching Block’s forecast for 2022, and its plans to execute on the next era of growth. More

An illustration of a Live Nation Entertainment logo is seen on a smartphone and a pc screen.
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Check out the companies making headlines in midday trading Thursday. 
Live Nation – Shares of the live event producer popped more than 6% after the company reported a better-than-expected quarterly revenue. Live Nation also said 45 million tickets have been sold for 2022 events, even as ticket prices spiked significantly.

Moderna — Shares of the vaccine maker jumped nearly 11% on Thursday after Moderna reported better-than-expected results for the fourth quarter. The biotech company earned an adjusted $11.29 per share on $7.2 billion of revenue. Analysts surveyed by Refinitiv were expecting $9.90 in earnings per share on $6.78 billion of revenue. The company’s CEO told CNBC that he thought people would need another Covid booster shot in the fall.
Gannett – The USA Today publisher’s shares tumbled 10.2% after it posted a quarterly loss that was wider than expected. Its revenue for the last quarter came in below expectations. Gannett also said it expects revenue to fall this year.
Alibaba – The Chinese e-commerce giant fell nearly 5% after it reported its slowest-ever growth in quarterly revenue since going public in 2014. Alibaba’s quarterly revenue dipped below analyst forecasts as competition intensified.  However, its quarterly earnings did topped Wall Street’s expectations.
Quanta Services – Shares of Quanta Services rose 9.7% in midday trading after the company reported stronger-than-expected quarterly earnings. The company report earnings per share 14 cents above estimates at $1.54 per share, according to Refinitiv.
Norwegian Cruise Line – The cruise line operator’s stock fell 5.2% after the company reported a wider-than-expected quarterly loss. Norwegian’s quarterly revenue missed estimates as well. 

Papa John’s Pizza – Shares of the pizza chain dipped 2% amid a broad market sell-off, which overshadowed its better-than-expected profit and revenue for its latest quarter. Papa John’s did not provide 2022 guidance due to uncertainties related to the ongoing pandemic, however.
Booking Holdings – Shares of Booking Holdings dropped more than 9% after the company warned that there will be periods this year when the pandemic negatively impacts travel demand. Its warning came as Booking Holdings reported adjusted quarterly earnings of $15.83 per share, well above the $13.64 consensus estimate, according to Refinitiv. Its revenue also topping Wall Street forecasts.
– CNBC’s Jesse Pound and Maggie Fitzgerald contributed reporting.

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IN 1920 JOHN MAYNARD KEYNES reflected on the Britain he knew before the outbreak of the first world war. “The inhabitant of London”, he wrote, “could order by telephone, sipping his morning tea in bed, the various products of the whole earth.” Keynes’s Londoner “regarded this state of affairs as normal, certain and permanent”, and not long ago the globalisation of the present age seemed a similarly inexorable force. A new world war remains unlikely, but the uncomfortable echoes of the past in recent history suggest that a closer look at the rise and retreat of 19th-century globalisation might yield valuable lessons.A work of economic history published in 1999 provides a great starting point. “Globalisation and History”, by Kevin O’Rourke and Jeffrey Williamson, hit shelves at a time of growing unease about the effects of deepening economic integration. Then, anti-trade activists swarmed meetings of the World Trade Organisation, while a few economists began to draw attention to the occasionally troubling distributional effects of globalisation. It roared on nonetheless over the first decade after the book’s publication. But in the years since, economic nationalism has become a potent political force, and the book has come to seem eerily prescient.Nineteenth-century integration began in earnest around mid-century, after decades of instability and insularity. Liberalised trade rules helped; Britain repealed its Corn Laws—tariffs on imported grain—in 1846. But the integration of markets was supercharged by improvements in communication and transport technologies which allowed for faster, cheaper and more reliable movement of people, goods and information. The telegraph, steamships and railways brought the economies of Europe and the Americas into close contact, with profound consequences. In the new world, land was abundant and cheap, and wages were high. The reverse was true in Europe, where workers were plentiful and landowners collected fat rents. As these markets integrated, prices converged. In 1870 British wheat prices were 60% above those in America; by 1890 the gap had mostly closed. When telegraph cables connected distant financial markets, differences in the pricing of various securities vanished almost immediately.Simple trade theory predicts that as differences in the prices of traded goods shrink, the cost of factors of production like land and labour should likewise converge. Experience in the 19th century bore this out. As waves of American grain spilled into European ports, land prices in Europe tumbled toward those across the pond. In America, the real price of land tripled between 1870 and 1913, while in Britain, it dropped by nearly 60%. Real wages converged as well, although the authors note this owed more to migration than trade. Nineteenth-century migrant flows were unlike anything in recent memory. Between 1870 and 1910 they reduced Sweden’s labour force by 20% relative to what it otherwise would have been, and increased America’s by 24%. These flows transformed labour markets. Real wages earned by unskilled labourers in Ireland rose from roughly 60% of the British level in the 1840s to 90% in 1914, thanks entirely to Irish emigration.How much can really be learned from such a different world? Today, migration matters much less than it did in the 19th century. Skilled workers account for a far larger share of rich-world workforces, and are protected by modern regulations and social safety-nets. Trade consists not only of bulk commodity shipments, but of components imported and exported multiple times along complex supply chains. Forget telegraphs; in meetings today people chat face-to-face with colleagues on other continents.Yet a number of lessons appear relevant. Start with the issue of convergence in incomes across countries. Much of modern theorising about convergence focuses on the role of capital accumulation and technological progress. Poor countries grow rich, in these models, because they invest more and adopt more sophisticated technologies. But in the 19th century the integration of markets drove convergence: a force which has also been at work in recent decades. The narrowing gap between American and Chinese wages is in part a story of Chinese technological progress. Yet it is also one in which hundreds of millions of Chinese workers began participating in a global economy, making low-skilled labour more abundant globally and contributing to weaker blue-collar wage growth and higher inequality in rich countries.Second, people in the 19th century generally understood the effects that trade and migration had on their economies, and those on the losing end sought political solutions to their troubles. Then, as now, training and education were touted as answers to the problems of unhappy workers. But moves to improve schooling were accompanied by a broad shift towards protectionism. From the 1870s European economies, with the notable exception of Britain, began raising tariff rates. Over the same period, migration policy in the Americas became ever more restrictive.Don’t spoil the endingSo it has gone this time, too. Work by David Autor of the Massachusetts Institute of Technology and three co-authors found that American counties which were more exposed to imports from China became more likely to vote Republican in presidential elections, for example: a shift which in 2016 helped to elect a trade-warring president.And yet third and most important, it was not higher tariff barriers or restrictions on migration which plunged the world into the deep and destructive insularity that took hold after 1914; it was war. But for war, the retreat of globalisation a century ago may have remained modest and short-lived. The same may be true today. If inattention to the distributional effects of trade can prompt a backlash, then a greater commitment to sharing the bounty generated by openness might permit a renewal of economic integration—if the world remains willing to learn from the past. ■This article appeared in the Finance & economics section of the print edition under the headline “Second-time lucky” More

IN THE ONCE-BUSTLING streets around the IMF’S headquarters in Washington, DC, you can hardly spot a soul these days. Soul-searching is also keeping officials busy inside the building. With government debt ballooning everywhere, many continue to criss-cross the globe, talking with countries that can still borrow and coaxing creditors into granting relief to those who cannot. But the world’s lender of last resort is hampered by conflict between its members—just as rising interest rates threaten to cause a big bang of defaults.Two years of pandemic-fighting and on-off lockdowns have turbocharged global debt, both public and private. In 2020 alone it soared by 28 percentage points, to 256% of GDP—the largest one-year rise in borrowing since the second world war. In recent months, as central banks have raised interest rates to combat inflation, the cost of servicing it has increased, raising demand for the fund’s assistance. In most large emerging markets the pain is manageable, for now. Soaring inflation and sinking currencies have not yet pushed the likes of Brazil or India towards crisis.Instead a quieter crisis is breaking out in smaller countries devoid of hard currency. Sri Lanka, Tunisia, Lebanon and Ghana are all candidates for loan programmes from the IMF. On February 23rd the fund said it would start talks with Ukraine over a possible $700m debt tranche. Among the world’s 60-odd poorest countries, more than half carry debt loads which may need to be restructured. That may be an underestimate: a recent World Bank report found that 40% of low-income countries have not published any data about their sovereign debt since 2020.The IMF has enough firepower to help solvent countries. Its resources were increased after the global financial crisis, boosting its lending capacity to $1trn today, up from $400bn in 2010. It has also responded creatively to members’ difficulties since the start of the pandemic. When markets melted down in early 2020, it launched a short-term liquidity facility through which countries facing cash squeezes could borrow cheaply. It also lent $170bn through rapid credit facilities similar to its standard loan programmes, but with fewer strings attached.Last August it also doled out $650bn-worth of new special drawing rights (SDRs), a quasi-currency used to augment countries’ foreign-exchange reserves, to all its members. Because SDRs are allocated based on what each member contributes to the fund, most of the issuance went to well-off countries. Just $21bn was allotted to those that really needed it. But the fund is working to create a trust through which some of the SDRs allocated to richer members might be available for long-term lending to poorer ones. Though the G20 promised last year to pony up $100bn for the trust, only $60bn has been pledged so far.Such programmes have helped to tide over many solvent countries when markets have dried up. But lending, no matter how easy or cheap, is of little help to countries that are nearly bankrupt. At least a dozen countries today owe more than they can hope to repay. Given the fragile outlook for growth—clouded by tighter monetary policy, a weak Chinese economy and geopolitical tensions—more may join their ranks. Without debt relief, many will only use IMF loans to repay other creditors, leaving the fund with an ever-growing share of the tab.In the past the IMF used its convening power to cajole richer members into forgoing some of the money they were owed. In 2020 its efforts yielded the Debt Service Suspension Initiative, through which 73 low-income countries became eligible for a temporary moratorium on debt payments. By the end of the programme in December last year nearly 50 countries had opted to make use of it, freeing some $10bn they could use to meet urgent needs. Separately, the IMF also suspended some debt payment on loans it had made itself to 29 very poor countries.But such suspensions do not make underlying debt loads more sustainable, because the delayed principal and interest payments remain due. Thus a new G20 initiative, referred to as the “common framework”, was rolled out in November 2020. Its utter failure to gain traction—so far only three countries have sought relief under its auspices, and none has completed the process—illustrate the new political pickle the IMF finds itself in.The framework was intended to provide a broad set of principles which could be applied to individual countries in need of debt relief. Crucially, it was meant to extend beyond lenders from the “Paris Club”—rich-world governments which have long co-operated in cases of sovereign insolvency—to include private creditors and countries like China, India and Saudi Arabia. These, however, have largely refused to play ball. That is a big problem. Whereas a decade ago Paris Club members still provided the bulk of credit to poor-country governments, China is increasingly bankrolling them: its disclosed lending (which probably understates the true total) amounts to roughly half the money they owe to other governments.Restructuring such debt is extremely hard. Views differ within China as to whether and how much debt relief to provide to overextended borrowers. Many different Chinese institutions are involved in foreign lending, not all of which are keen to help. And many poor countries are reluctant to seek relief from China, lest they cut themselves off from future access to Chinese financing or otherwise antagonise the Chinese government.Yet without participation from other lenders, the IMF is in a bind: under pressure from rich-world politicians to do more to help struggling economies, yet often unable to provide programmes that put countries on a path towards stable finances. Some critics suspect that the fund, squeezed in this way, has occasionally indulged in excessive optimism about countries’ prospects in order to justify its lending. In January Kenneth Rogoff, a former chief economist of the IMF, wrote that the fund’s permissiveness risked transforming the institution into an aid agency. A recent, tentative agreement between the IMF and Argentina, to refinance $45bn owed to the fund, drew widespread criticism for the vagueness of the path it sketched for eventual repayment of the loan.The fund lacks good alternatives. Failure to reach a deal with Argentina might well have meant financial disaster for that country and lost the IMF billions. Its leaders could perhaps be more vocal in calling for China to be more lenient. But the West’s reluctance to increase the country’s 6% voting share at the IMF, to a figure matching its new economic might, has made China less willing to listen. And the window for getting China deeper into the tent has probably closed, because its relations with the West have deteriorated so much.In the 1990s the IMF and the World Bank, capitalising on a moment of international bonhomie, marshalled the Heavily Indebted Poor Countries Initiative, through which lumps of debt owed by 37 economies were forgiven—with most of the funding coming from creditor countries. The sums needed today are not huge, but getting the world’s big countries to agree on anything seems ever harder. On February 18th a G20 meeting ended with no firm commitment to expand debt relief. That bodes ill for the IMF. Without global co-operation, it is fast becoming a shadow of its former self—just like the eerily quiet district where its offices stand. ■This article appeared in the Finance & economics section of the print edition under the headline “Lost and fund” More

OVER THE past decade intensifying geopolitical risk has been a constant feature of world politics, yet the world economy and financial markets have shrugged it off. From the contest between China and America to the rise of populist rulers in Latin America and tensions in the Middle East, firms and investors have carried on regardless, judging that the economic consequences will be contained.Russia’s invasion of Ukraine is likely to break this pattern, because it will result in the isolation of the world’s 11th-largest economy and one of its largest commodity producers. The immediate global implications will be higher inflation, lower growth and some disruption to financial markets as deeper sanctions take hold. The longer-term fallout will be a further debilitation of the system of globalised supply chains and integrated financial markets that has dominated the world economy since the Soviet Union collapsed in 1991.Start with the commodity shock. As well as being the dominant supplier of gas to Europe, Russia is one of the world’s largest oil producers and a key supplier of industrial metals such as nickel, aluminium and palladium. Both Russia and Ukraine are major wheat exporters, while Russia and Belarus (a Russian proxy) are big in potash, an input into fertilisers. The prices of these commodities have been rising this year and are now likely to rise further. Amid reports of explosions across Ukraine, the price of Brent oil breached $100 per barrel on the morning of February 24th and European gas prices rose by 30%.The supply of commodities could be damaged in one of two ways. Their delivery might be disrupted if physical infrastructure such as pipelines or Black Sea ports are destroyed. Alternatively, deeper sanctions on Russia’s commodity complex could prevent Western customers from buying from it. Up until now both sides have been wary about weaponising the trade in energy and commodities, which continued throughout the cold war. Sanctions after the invasion of Crimea did not prevent BP, ExxonMobil or Shell from investing in Russia, while American penalties on Rusal, a Russian metals firm, in 2018 were short-lived. Germany’s decision to mothball the Nord Stream 2 gas pipeline on February 22nd was largely symbolic since it does not yet carry gas from Russia to the West.Nonetheless the prospect now is of more Western restrictions on Russia’s natural-resources industry that curtail global supply. Russia may retaliate by deliberately creating bottlenecks that raise prices. America may lean on Saudi Arabia to increase oil production and prod its domestic shale firms to ramp up output.The second shock relates to tech and the global financial system. While the trade in natural resources is an area of mutual dependency between the West and Russia, in finance and tech the balance of economic power is more one-sided. America is thus likely to put much tougher Huawei-style sanctions on Russian tech firms, limiting their access to cutting-edge semiconductors and software, and also blacklist Russia’s largest two banks, Sberbank and VTB, or seek to cut Russia off from the SWIFT messaging system that is used for cross-border bank transfers.The tech measures will act as a drag on Russia’s growth over time and annoy its consumers. The banking restrictions will bite immediately, causing a funding crunch and impeding financial flows in and out of the country. Russia has sought to insulate its economy from precisely this: the share of its invoices denominated in dollars has slumped since its invasion of Crimea in 2014, and it has built up foreign-exchange reserves. Still, it will hurt. Russia will turn to China for its financial needs. Already trade between the two countries has been insulated from Western sanctions, with only 33% of payments from China to Russia now taking place in dollars, down from 97% in 2014.Western banks appear to have fairly low exposure to Russia. Nonetheless, since the modern era of globalisation began in the 1990s no major economy has been cut off from the global financial system, and the risk of broader contagion across markets, while apparently low, cannot be ruled out.What does all this mean for the global economy? Russia faces a serious but not fatal economic shock as its financial system is isolated. For the global economy the prospect is of higher inflation as natural-resource prices rise, intensifying the dilemma that central banks face, and a possible muting of corporate investment as jittery markets dampen confidence.The longer-term impact will be to accelerate the division of the world into economic blocs. Russia will be forced to tilt east, relying more on trade and financial links with China. In the West more politicians and firms will ask if a key tenet of globalisation—that you should trade with everyone, not just your geopolitical allies—is still valid, not just for Russia but other autocracies. China will look at Western sanctions on Russia and conclude that it needs to intensify its campaign of self-sufficiency. The invasion of Ukraine might not cause a global economic crisis today but it will change how the world economy operates for decades to come. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.Our recent coverage of the Ukraine crisis can be found hereThis article appeared in the Finance & economics section of the print edition under the headline “The economic fallout” More

THE LAST shall be first, and the first, last. An emerging theme in capital markets is that securities that generated bumper returns in the era of low inflation, sluggish demand and zero interest rates—think American tech stocks—are under pressure, while assets that fared horribly in the 2010s (oil, mining and bank stocks) are holding up well. If it is cheap, inflation-proof and formerly unloved, capital is now increasingly drawn to it.This brings us to the yen, the forgotten currency of the least inflation-prone big economy, Japan.It once had a solid reputation as a haven, like the Swiss franc or the American dollar. Whenever a storm blew up, the yen rallied. But not recently. In the volatile weeks since the start of 2022, the yen has mostly moved sideways against the dollar. Even Russia’s invasion of Ukraine did not immediately change its course. The yen is a cheap currency that keeps on getting cheaper. Its cheapness now looks like an obvious virtue.Japan remains the world’s largest creditor. Its net foreign assets—what its residents own abroad minus what they owe to foreigners—amount to around $3.5trn, almost 70% of Japan’s annual GDP. Some of those assets are fixed investments, such as factories and office buildings. But a chunk is held in bank deposits, and in shares and bonds, which can be liquidated quickly.In past periods of high stress, such as during the global financial crisis of 2007-09, capital was pulled back into Japan by nervous investors. The upshot was an appreciating yen. In some instances, the effect was dramatic. In October 1998, as the crisis surrounding LTCM, a busted hedge fund, came to a head, the yen appreciated from 136 to 112 against the dollar in a matter of days. It is rallies such as this that gave the yen its safe-haven reputation. When trouble struck, you followed the Japanese money.This has not worked so reliably lately. An important change came with the re-election of Abe Shinzo as prime minister, in December 2012, and the subsequent appointment of Kuroda Haruhiko as governor of Japan’s central bank. A key goal of “Abenomics” was to banish Japan’s chronic deflation through the use of radical monetary policy, including huge central-bank purchases of bonds and equities. A result of all the sustained money-printing was a much weaker yen, but not much stronger inflation. The yen’s safe-haven status wore off, says Peter Tasker, a seasoned observer of Japan’s economy and markets.Might it be restored? In a world in which inflation is a serious concern, there is a lot to be said for a currency which holds its purchasing power. The yen is now very cheap in real terms against a broad basket of other currencies. On a measure calculated by the Bank for International Settlements, the yen is now more competitive than at any time since the series began in 1994. The Economist’s Big Mac Index, a light-hearted gauge of purchasing power, tells a similar story. The exchange rate required to equalise the price of a Big Mac in Tokyo and New York is 67; but the yen currently trades at 115 to the dollar. On this basis, the yen is undervalued by 42%. Even if the yen continues to trade sideways, it is likely to become cheaper in real terms. Japan’s inflation rate is currently just 0.5%. America’s is 7.5%.In the near term, risk aversion and rising interest rates in America will support the dollar. But the more the Federal Reserve has to do to contain inflation, the greater the risk of a hard landing for America’s economy. The dollar might eventually find itself at the centre of a storm. In such a scenario, the yen would rally strongly. Kit Juckes of Société Générale, a French bank, sees a risk that dollar-yen falls below 100 in the next year or two. Traders might wait for signs of trouble in America’s economy before buying. For those who want exposure now, Japan’s stockmarket has appeal. It, too, is cheap: it trades on 13.6 times expected earnings. And for cautious souls looking for a cheap segment of a cheap market in a cheap currency, Japan’s banks offer a dividend yield of 4% and trade on a single-digit multiple of expected earnings.The tides are shifting. Not so long ago many investors were fearful of “Japanification”, in which economies got stuck in too low a gear to stop prices and bond yields from falling. But now inflation is roaring back and interest rates are on the rise. In a world turning upside-down, the yen’s old-fashioned virtues ought to jog the memory.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “The sun also rises” More