>>> Up
* Allianz Raised to Buy at Erste Group
* Directa SIM Raised to Outperform at EnVent S.p.A.; PT 5.85 euros
* Gap Raised to Equal-Weight at Morgan Stanley; PT $14
* Vinci Raised to Buy at Insight Investment Research; PT 140 euros
>>> Down
* Atlantia Cut to Sell at Insight Investment Research; PT 28 euros
* Getlink Cut to Hold at HSBC; PT 16.40 euros
>>> Initiation
* Novartis Reinstated Buy at Erste Group
>>> Call
* Nike Positive on China Business Despite Lockdowns, JPMorgan Says
Stocks and U.S. equity futures declined Monday, while Treasury yields rose, as a jump in energy costs again highlighted the inflation concerns that are weighing on both the global economy and investor sentiment. Japanese and Chinese shares dropped along with S&P 500 and Nasdaq 100 contracts. Treasuries fell on the prospect of rapid Federal Reserve monetary tightening to curb price pressures, pushing the 10-year yield to about 2.86%. The cautious mood aided the dollar and gold. The yen fluctuated after Bank of Japan Governor Haruhiko Kuroda said its recent retreat was “very rapid.” Natural gas and oil advanced, partly on risks chf from Russia’s war in Ukraine. These include the possibility of a de facto European Union embargo on Russian gas and the threat of some curbs on crude in the next European sanctions. In China, economic data were mixed -- while first-quarter gross domestic product growth accelerated, retail sales shrank in March for the first time since 2020. The latter hinted at ongoing damage from Covid lockdowns in the last few weeks. Officials cut the reserve requirement ratio Friday but refrained from lowering interest rates in a cautious approach to policy easing. China’s Covid restrictions are snarling supply chains and stoking global inflation pressures. The latter were already exacerbated by disruptions to commodity flows due to the war and Russia’s isolation. Concern is growing that the U.S. economy faces a downturn as the Fed pivots toward aggressive policy tightening to contain the cost of living. History suggests the Fed will face a difficult task in tightening policy to cool inflation without causing a U.S. recession, according to Goldman Sachs Group Inc. It put the odds of a contraction at about 35% over the next two years. In Shanghai, officials reported the first deaths from a surging Covid-19 outbreak. The city has also published plans to resume productionafter a prolonged lockdown, recommending businesses adopt so-called closed-loop management, where workers live on-site and are tested regularly.
Markets in Australia, Hong Kong and much of Europe remain shut for Easter.
Nikkei -1,41% Hang Seng Closed CSI -0,91% Shanghai -0,78% Shenzen -0,06%
Eur$ 1,0791 CNH 6,3839 CNY 6,3741 JPY 126,62 GBP 1,3021 CHF 0,9444 RUB 82,6453 TRY 14,6296 WTI$ 107,95 Gold 1984,85 BTC 38,817 -3,4% ETH 2912 -3,45%
S&P -0,56% Nasdaq -1,02% EuroStoxx Closed FTSE Closed Dax Closed Cac closed SMI Closed
Macro :
- U.K. Ministers to Soften Clampdown on Tech Deals: Telegraph
- EU Can Cut Russian Energy Dependence Sooner Than Thought: Draghi
- Putin, Saudi Crown Prince Upbeat on OPEC+, Kremlin Says of Call
- Crypto Fund Founder Warns Industry on North Korean Cyber Attacks
- Biden Plans to Nominate Michael Barr as Fed Banking Supervisor
- ECB’s Muller Says APP Stimulus May End Already in July
- Hedge-Fund Giant Man Group Questions Whether 60/40 Ever Worked
Keep an eye on :
- ADS GY : Nike Positive on China Business Despite Lockdowns, JPMorgan Says
- ADP FP : ADP March Passengers 5.97M
- CAMB BB : Campine Offers to Buy Recyclex’s Lead Battery Recycling Plants
- CHRONO24 IPO : Chrono24 Plans IPO in Coming Year, Handelsblatt Reports
- DIDI US : DiDi Plans Shareholder Meeting in May to Vote on U.S. Delisting
- ECONB BB ; Econocom 1Q Organic Revenue +3.2%
- EL FP : EssilorLuxottica Says GrandVision’s CEO and CFO Step Down
- GBLB BB : GBL Said Near to $1.7 Billion Affidea Deal With Swiss Tycoon
- G IM : Generali Files Complaint to Consob Over Challengers Statements
- GLEN LN : ISS Urges Glencore Holders to Vote Down Climate Plan: Reuters
- GES US : Guess Shareholders Urged by ISS to Oust Marcianos From Board
- IDEA LN : Cinven Confirms It’s in Early Stages on Possible Ideagen Offer
- LDO IM : Leonardo Board Disagrees With Bluebell’s Statements About CEO
- RUI FP : Rubis Completes Purchase of Solar Energy Player Photosol
- RYA ID : Ryanair Faces Belgian Staff Action April 22-April 24: RTL Info
- SCR FP : SCOR’s 1Q Results Will Be Impacted by Russia’s War in Ukraine
- STLA IM : Macron Backs Pay Cap for CEOs in Bid for Votes From the Left
- TSLA US : Judge Rules Musk Go-Private Tweet False, Tesla Investors Say
- TWTR US : Twitter Board’s Interest Not Aligned With Holders, Musk Says (2)
- TWTR US : Twitter Brings on JPMorgan as Adviser Alongside Goldman
- VK FP : Vallourec Names Sascha Bibert as New CFO
- VRP FP : Virbac Sees FY Organic Revenue at Constant FX +5% to +10%
Investors seeking havens must weigh geopolitical risks of China versus US
Reserve currency competition is all about what constitutes the least unsafe option
Economists’ definitions of so-called safe assets — those that serve as a bolt hole for nervous money in crises — are often devoid of political content. This omission is historically under-informed. Safe assets, like reserve currencies and financial centres, have largely lost their pre-eminent status thanks to war.
Russia’s invasion of Ukraine serves as a reminder that the definition of a safe asset will differ according to which geopolitical camp you side with in the strategic competition between the US and China. China, of course, has adopted a position of “strategic neutrality” towards the invasion.
To qualify as safe, an asset has to be highly liquid, backed by a solvent sovereign borrower — or incapable of default like gold — and reliably able to hold its value during a disaster. Yet geopolitics matters, which is why Japan, dependent on the US security guarantee, holds a higher percentage of reserves in US Treasuries than Russia does.
It matters even more since the freezing of Russia’s reserves and the ejection of Russian banks from the Swift financial messaging system. Economic sanctions do not usually operate on such a gigantic scale, so investors will inevitably rethink their asset allocation decisions.
In reality there is no such thing as a safe asset. The nearest the world has come to one was a British gilt-edged security during the gold standard era. Gilts in the 19th century enjoyed the backing of Palmerstonian gunboat diplomacy and Gladstonian fiscal orthodoxy. They appeared to offer a perfect, and perfectly liquid, store of value. But then in the 20th century Britain abandoned the gold standard, demonstrating that super-safety in gilts was illusory.
Reserve currency competition is a relative matter. It is all about what constitutes the least unsafe asset. Despite being described as the quintessential safe asset, US Treasuries were a rotten store of value in the twin oil crises of the 1970s, offering negative real income. They will show similarly poor returns in today’s inflationary world.
Paul Volcker, while chair of the Federal Reserve in the 1980s, restored some safety to Treasuries through a draconian monetary policy. The resulting bond bull market was further helped by a shortage of safe assets. This arose because the growth of advanced economies that produce safe assets has been slower than the global growth rate, which has been driven disproportionately by high-saving emerging market economies such as China.
These countries’ under-developed financial markets are unable to absorb all their savings, which find their way into US Treasuries in the form of official reserves.
Before the financial crisis, these global creditors also invested in supposedly safe private assets, namely triple-A rated mortgage-backed securities. Their claim to safety was blown in the credit crunch of 2007. The pool of safe assets then shrank further in the eurozone debt crisis when markets woke up to the lack of safety in Italian and Greek government paper. The central banks added to the shrinkage through their asset-purchasing programmes.
At the outset of the pandemic, liquidity in US Treasuries was patchy because market makers’ balance sheets had been bloated by a high level of Treasury issuance, among other things. The shortage of safe assets had turned into a glut.
Meanwhile, the recent dysfunctionality of US politics has contributed to the waning of Treasuries’ haven qualities. Yet the dollar remains the pre-eminent global reserve currency with a 59 per cent share, whereas the Chinese renminbi has less than 3 per cent.
China aspires to a bigger reserve currency role. Geopolitics will now help that aspiration. But its currency is not convertible, its government bond market is illiquid, it has a weak legal framework and its markets are hostage to the whims of the Communist party leadership.
A more pressing threat to the dollar may be that to meet future renewed demand for safe assets, the US government will have to run yet more budget deficits and to do so from a very high level of indebtedness. This could lead to worries about creditworthiness — similar to the early 1970s fiscal bind that caused Richard Nixon, then president, to break the dollar’s link with gold — a de facto sovereign default.
Yet rest assured. The dollar will not be toppled by the renminbi any time soon. And US Treasuries will retain their “least unsafe” cachet for quite a while yet.
China GDP growth beats forecasts but lockdowns weigh on outlook
Gross domestic product expands 4.8% while retail sales record first contraction since 2020
China’s economy expanded faster than expected in the first quarter but official data revealed a recent contraction in consumer activity as lockdown measures to counter the spread of Covid-19 clouded the country’s growth outlook.
China’s gross domestic product rose 4.8 per cent compared with the same period a year earlier, after expanding 4 per cent in the final three months of 2021. On a quarter-on-quarter basis, GDP grew 1.3 per cent.
Analysts had projected gains of 4.4 per cent year on year and 0.6 per cent quarter on quarter.
Retail sales, a gauge of consumer spending, fell 3.5 per cent in March — their first year-on-year fall since July 2020 and worse than a projected 1.6 per cent decline — as authorities hardened restrictions to counter the country’s worst coronavirus outbreak in more than two years. In the same month, the official unemployment rate rose to 5.8 per cent, its highest level since May 2020.
The data will heap greater pressure on President Xi Jinping’s government, which has reaffirmed its commitment to a zero-Covid policy despite the mounting costs and disruption across the country’s biggest cities. In April, when economists expect activity to have deteriorated, infections across China increased and Shanghai, its financial hub, has remained largely sealed off.
The outbreak and subsequent spate of lockdowns erupted at a precarious moment for China’s economy following a debt crisis in its real estate sector and a wider loss of momentum. The government has targeted growth of 5.5 per cent in 2022, its lowest in three decades.
Fu Linghui, a spokesperson for the National Bureau of Statistics, said that “the operation of the economy was generally stable” but pointed to “frequent outbreaks” of Covid-19 in China and an “increasingly grave and complex international environment”.
“The country is facing recurring waves of the pandemic in many places and its impact on the economy is increasing,” he said.
Data for the first three months will not capture the full extent of recent events in Shanghai, which was in late March was plunged into China’s most severe citywide lockdown since the emergence of coronavirus in Wuhan. Analysts at Nomura last week estimated that 45 cities responsible for about 40 per cent of China’s GDP were under complete or partial lockdowns, and added the country was at “risk of recession”.
Tommy Wu, lead China economist at Oxford Economics, suggested the 4.8 per cent GDP increase “mainly reflects the growth seen in the official January-February data before the weakening in economic activities in March”.
He added: “The central government is now trying to balance minimising disruption against controlling the latest wave of Covid infections, but the disruption is likely to last for weeks and will weigh on activity in April and into May, if not longer.”
In contrast to the sudden weakness in consumer spending, industrial production, which was a big driver of China’s initial recovery from the pandemic in 2020, added 5 per cent year on year in March. Fixed asset investment rose 9.3 per cent in the first three months of 2022 compared with the same period last year.
Even before a wave of the highly infectious Omicron variant gathered pace, China’s economy had been hit by a real estate crisis centred around highly indebted developer Evergrande that spread across the property sector.
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The rest of the world should watch what is happening in Shanghai
In a sign of the lingering effects of that crisis, new housing starts for apartments declined 20 per cent in the first three months of the year. Steel and cement production fell 6 and 12 per cent, respectively, in the same period.
In addition to its lower annual growth target, the government has also embarked on a round of monetary easing, which has included cutting crucial lending rates for the first time since 2020 despite a previous push to reduce leverage.
On Friday, the People’s Bank of China reduced the reserve requirement ratio for banks by 25 basis points in an effort to inject liquidity into the financial system.
Xi, who is this year seeking an unprecedented third term in power, has promoted a “common prosperity” campaign designed to reduce inequality. But lockdown measures now dominate the country’s economic trajectory and have stoked anxiety over supply chain disruptions.
Li Keqiang, China’s premier, has cautioned repeatedly in recent weeks of economic risks, following a warning from Xi in March of the need to minimise the economic impact of Covid policies.
Equities in China were down following the data release as concerns over the contraction in consumer spending outweighed the higher-than-expected reading on first-quarter growth.
The CSI 300 index of Shanghai- and Shenzhen-listed stocks was off about 1 per cent. Banks were among the worst performers as lenders faced the prospect that policy easing to cushion the economic blow of lockdowns risked affecting profits.
“We definitely think that Chinese policymakers are willing to make sure they reach their growth targets,” said Jean-Charles Sambor at BNP Paribas Asset Management.
M&A law/Newport Wafer: efforts of enforcers are far from fab
The danger with new legislation regulating foreign takeovers is that deals could be vetoed for political reasons
The UK’s shiny new system for regulating foreign takeovers appears to have fumbled one of its first tests.
China’s Nexperia bought Welsh microchip plant Newport Wafer Fab last year, making it an early candidate for a probe into potentially harmful technology transfer. Fretful MPs worried no review had been initiated. A minister replied that a review is under way. It is unclear how active that investigation really is.
The government unit that polices the new security law was never going to resemble the Committee on Foreign Investment in the US. This is Washington’s draconian — if sometimes foot-dragging — gatekeeper.
Nor is it clear that the sale of Newport presents a national security risk. Newport is a small plant that makes silicon wafers, a key part of the supply chain but a far cry from cutting edge technology.
Neither of these factors are reasons to nod the deal through. That would suggest light enforcement of the National Security and Investment Act.
The legislation is targeted largely at Chinese buyers. Britain has already made some controversial sales. China-backed Canyon Bridge controversially swooped on Imagination Technologies after the British chip designer lost Apple as a client. The government only intervened years later when Canyon sought to install four directors linked to itself. Imagination is now set to return to public markets. Nasdaq may prove a more appealing venue — as for SoftBank-backed Arm — than London.
The government says it is considering the Newport deal separately from a broader review of the UK’s chip industry. This is wise. Conflating national security with industrial policy would be unhelpful. There is some overlap, but a robust chip strategy should focus on fostering talent, financial returns and security of supply.
The danger with the new law — as with any government decision-making on takeovers — is that deals will be vetoed for political reasons on the pretext of defending national security. The legislation shies away from defining the latter. That means acquirers, targets and their advisers will depend heavily on precedents to work out what is unacceptable.
All the more reason for a timely and robust investigation into the Newport deal, justifying why it does — or does not — pass muster. The government has instead given the impression it is looping back to examine a deal it had overlooked. That is bad for confidence.