France could plunge the eurozone into its next crisis
The country is dancing on a debt volcano
In the French presidential elections, and now in the legislatives that will close on Sunday evening, the one issue kept under the carpet is finance. Neither the centrist Macronista grouping ‘Ensemble!’, nor the far-left Corbynista-like Nupes coalition of Jean-Luc Mélenchon has updated the electorate on how their manifestos are to be funded. And yet over the last month French finances have deteriorated dramatically. Neither programme has the slightest chance of being implemented without plunging French finances, and thus the eurozone generally, into a new sovereign debt crisis. France is dancing on a debt volcano.
The unabashedly ideological Nupes programme calls for nationalisation of the banking and energy sectors, motorways, strategic industries, raising the minimum wage to €1,500 (£1,500) a month, increasing paid holidays from five to six weeks, cutting the working week for certain sectors from 35 to 32 hours and reducing the pension age from 62 to 60. Not to mention the European Central Bank nullifying all member states’ debt. To be fair, Nupes has itself costed its programme at an astronomical €250 billion (£210 billion) annually, though more independent organisations such as the respected Institut Montaigne puts the figure closer to €332 billion (£280 billion) annually.
France finds itself in the same perilous place it was in after the First World War
Nupes claims that its programme will be financed by taxes on the rich and renewed consumer spending resulting from shifting wealth from rich to poor. But costings were done when French inflation was at 2 per cent and the interest on French debt close to zero per cent. French inflation in May was 5.2 per cent and debt financing at 2.2 per cent, both rising fast. Add to that a French national debt to GDP ratio of 115 per cent which, in absolute, rather than percentage, terms is the highest in the EU; when public and private debt are combined, it reaches a staggering 361 per cent (UK 289 per cent, Germany 205 per cent) making France for the first time the greatest debtor in the world.
It is all but certain that Mélenchon’s coalition will not win an outright majority on Sunday. However, the latest polling gives Nupes between 150 and 190 seats, with Macron’s coalition probably denied an outright majority (289) on 255 to 295; marking a fall from his present 346 seats. That will make governing particularly difficult. Add to that the French parliamentary rule that the largest opposition party automatically chairs the highly influential and interventionist finance committee and the financial picture is worse than sombre.
But what of Macron’s programme, if he gets a chance to implement it? Macron continues to claim that his second presidential mandate will see more company and personal tax cuts paid for by reforming the French social benefit system and raising the pension age from 62 to 65. His financial calculation done months ago rests firmly on continued economic growth. But in the last quarter the French economy shrunk by 0.3 per cent and growth prospects are poor. What's more, seat projections for the new assembly put the Rassemblement National – opposed, like Nupes, to pension and social reform – on 20-45 seats, meaning Macron is unlikely to have the parliamentary muscle to reform anything. Meanwhile servicing French debt is predicted to cost huge sums that will not only stymie tax reductions but likely require tax increases (a VAT hike has already been leaked as a possibility).
Both the French presidential and legislative elections have been lacklustre affairs, with Emmanuel Macron continuing to maintain his habitual Jupiterian and scornful posture. To the extent that there has been any serious political debate, all sides have studiously avoided the explosive issue of France’s perilous finances and how to fix them. Fear of depressing French voters further with the reality that after Covid, and potential stagflation, greater pain is to come, is motivated by fear of where historically that leads the French.
After Brexit, France aspired to regain the position she occupied before the first world war as Europe’s banker, with Paris once more at the heart of European finance. That dream came to nought. Now the scenario is more that of France after the first world war: mired in debt, stalemated in policy and with the broader modern prospect of seriously contributing to a new eurozone debt crisis. In the past, France devalued to extricate herself from financial plight, most notably after president Mitterrand’s socialist reforms of 1981 to 1983. Without that option, France could end up passing on the burden to a far more indebted eurozone than in 2012/13, once again fragmented by widening spreads on Italian, Spanish, Greek and Portuguese government bonds. The euro would never survive.
Closing Market Summary: Slight volatility ahead of the long weekendThe major indices saw a bit of volatility ahead of the long weekend, opening firmly higher before giving way to selling pressure. All the indices set session lows in early trade, climbed as the day went on, but backpedaled from highs into the close. Bargain hunting activity helped keep the S&P 500 in positive territory as the market was oversold on a short-term basis coming into today.
The market saw high volume on this quadruple witching options expiration day which left the S&P 500 up 0.2% for the day and down 5.8% for the week; the Nasdaq up 1.4% for the day and down 4.8% for the week; and the Dow Jones Industrial Average down 0.1% for the day and down 4.8% for the week.
The energy complex selling off today, no doubt, helped buying sentiment. WTI crude oil futures fell 6.3% to $108.06/bbl, natural gas futures settled down nearly 7% to $6.95/mmbtu, and Unleaded gasoline futures fell 4.2% to $3.68/gal. In addition, the energy sector was the worst performing S&P 500 sector by a wide margin, down 5.6% at the close.
The modest gains today were not enough to claw back out of the red for the week. The losses experienced earlier this week were attributed to economic growth concerns, which have been an offshoot of aggressive rate-hike actions from many of the world's leading central banks racing to combat inflation.
The Bank of Japan, however, isn't even in the race. Today, it agreed to leave its key policy rate unchanged at -0.1% and to maintain yield curve control with an aim of keeping the 10-yr JGB yield at around zero percent. The yen sank on this news, falling 2.1% against the dollar to 134.99.
A stronger dollar is doing nothing to help U.S. multinational companies like Adobe (ADBE 360.79, -4.29, -1.2%) which reported better-than-expected earnings before the open but lowered Q3 guidance below consensus citing foreign exchange headwinds and Russia's war on Ukraine as contributing factors. Adobe reached a new 52-week low today.
Six of the 11 S&P 500 sectors closed in the green to end the week. The heavily weighted communication services (+1.3%), consumer discretionary (+1.2%), and information technology (+1.0%) sectors finished atop today's leaderboard.
The discretionary sector played a significant part in keeping the S&P 500 in positive territory even though several of its components hit fresh 52-week lows before bouncing. Travel-related names were at the forefront of the advance with Carnival (CCL 9.60, +0.85, +9.7%) leading the way, as it bounced after approaching its pandemic low in recent days. Top-weighted Amazon (AMZN 106.22, +2.56, +2.5%) held above its May low (101.26), contributing to the strength in the sector.
The laggards, besides energy, were utilities (-1.0%), consumer staples (-0.4%), and industrials (-0.2%).
Treasuries finished a down week on a mostly higher note with the 10-yr yield falling seven basis points to 3.24%. The 2-yr note underperformed, pressuring the spread between the 10-yr yield and the 2-yr yield to just six basis points.
Reviewing today's data:
- Total industrial production increased 0.2% month-over-month in May ( consensus 0.5%) following an upwardly revised 1.4% increase (from 1.1%) in April. The capacity utilization rate increased to 79.0% ( consensus 79.3%) from a downwardly revised 78.9% (from 79.0%) in April.
- The key takeaway from the report is the dip in manufacturing output. That dip, however, followed three months where growth averaged nearly 1.0%, so it is too soon to say if the dip in May is a sign of true weakness or a natural moderation following an extended period of solid growth.
- The Leading Economic Index for May was down 0.4% after decreasing a revised 0.4% (from -0.3%) in April.
Bond and equity markets will be closed on Monday for Juneteenth while Tuesday's economic data will be limited to the 10:00 ET release of May Existing Home Sales (prior 5.61 mln).
· Dow Jones Industrial Average -17.8% YTD
· S&P 400 -21.8% YTD
· S&P 500 -22.9% YTD
· Russell 2000 -25.8% YTD
· Nasdaq Composite -31.0% YTD
Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout
Firm’s founders say they still believe in the future of cryptocurrencies
Cryptocurrency-focused hedge fund Three Arrows Capital Ltd. has hired legal and financial advisers to help work out a solution for its investors and lenders, after suffering heavy losses from a broad market selloff in digital assets, the firm’s founders said on Friday.
“We have always been believers in crypto and we still are,” Kyle Davies, Three Arrows’s co-founder, said in an interview. “We are committed to working things out and finding an equitable solution for all our constituent.”
The nearly decade-old hedge fund, which was started by former schoolmates and Wall Street currency traders Su Zhu and Mr. Davies, had roughly $3 billion in assets under management in April this year.
That was shortly before a sudden collapse in the values of TerraUSD, a so-called algorithmic stablecoin, and its sister token, Luna, in mid-May.
Three Arrows is exploring options including asset sales and a rescue by another firm, Mr. Davies said. The fund is hoping to reach an agreement with creditors that would give it more time to work out a plan. The firm is still operating as it seeks a solution.
Three Arrows was among a group of large investors that took part in a $1 billion token sale earlier this year by Luna Foundation Guard, a nonprofit organization started by South Korean developer Do Kwon, the creator of TerraUSD. The funds went toward a bitcoin-denominated reserve for the stablecoin, and were meant to help maintain TerraUSD’s value at $1 per coin.
Mr. Davies said Three Arrows invested about $200 million in Luna as part of that deal, a sum that was effectively wiped out when TerraUSD and Luna both became worthless in a matter of days.
The two cryptocurrencies were previously among the 10 largest digital coins before they lost a total of $60 billion in market capitalization last month, he added. Before the collapse, a few people in the crypto industry had voiced concerns about TerraUSD’s stability and its dependence on traders to act as its backstop, saying this mechanism could allow for a potential downward spiral.
“The Terra-Luna situation caught us very much off guard,” Mr. Davies said, adding that the massive selloff was unprecedented. The Luna Foundation’s sale of bitcoin to help support TerraUSD also worsened declines in the value of bitcoin in May.
Mr. Davies said Three Arrows was able to withstand the Luna losses, but the subsequent cascade of events that caused prices of bitcoin, ether and other cryptocurrencies to plummet in recent weeks created more problems, he added.
Credit conditions have tightened markedly as digital asset values have fallen across the board, leading some lenders to demand partial or full repayment on loans they previously made to crypto investors. Rapidly rising U.S. interest rates—a result of the Federal Reserve’s attempts to rein in high inflation—have also worsened a selloff in riskier assets.
Crypto’s total market capitalization, which had topped out at nearly $3 trillion in November last year, had tumbled to $910 billion as of Friday, according to data provider CoinMarketCap. Last weekend, Celsius Network LLC, a widely used cryptocurrency lender, abruptly froze customer withdrawals, swaps and transfers between accounts, blaming what it said were extreme market conditions.
“We were not the first to get hit…This has been all part of the same contagion that has affected many other firms,” Mr. Davies said.
He said Three Arrows is still trying to quantify its losses and value its illiquid assets, which include venture-capital investments in dozens of private cryptocurrency-related companies and startups.
“We are the biggest investors in the fund, and our intent was always for everyone to do well in it,” said Mr. Zhu, Three Arrows’s other founder.
Back in early 2021, Mr. Zhu had predicted that bitcoin would enter what’s known as a growth supercycle with continually rising prices as the cryptocurrency gained more mainstream adoption. In late May, as the market selloff was under way, he tweeted that the “Supercycle price thesis was regrettably wrong, but crypto will still thrive and change the world every day.”
The sudden comedown of Three Arrows follows the firm’s previously strong performance record. Messrs Zhu and Davies started their fund in late 2012 with just $1.2 million. It originally focused on trading emerging markets currencies before moving heavily into cryptocurrencies in recent years—multiplying the fund’s investments as bitcoin and other digital assets increased in value.
The firm is known to have had large positions in the Grayscale bitcoin Trust and “Lido staked ether” tokens, both of which have also suffered losses recently. The latter is derivative of the cryptocurrency ether that is locked up until the Ethereum network transitions to a less energy-intensive model. These tokens have recently traded at a discount to ether itself.
Nichol Yeo, a partner of law firm Solitaire LLP who is advising Three Arrows, said all of the fund’s investors are institutions or wealthy investors. He added that the firm is keeping Singapore’s financial regulator, the Monetary Authority of Singapore, apprised of its recent developments.
Just before the latest downturn, Three Arrows said it was making plans to move its headquarters to Dubai, where the digital-asset industry is booming. The firm operated as a regulated fund manager in Singapore until last year, when it shifted its domicile to the British Virgin Islands as part of its relocation plan.
Putin's much-hyped speech delayed due to 'massive' cyberattacks, Kremlin says
By Ivana Kottasová, Anna Chernova, Fred Pleitgen and Zahra Ullah, CNN
(CNN)Russian President Vladimir Putin's much-hyped speech at St. Petersburg International Economic Forum was delayed on Friday after a "massive" cyberattack, the Kremlin has announced.
Kremlin spokesperson Dmitry Peskov told journalists in an impromptu conference call that the speech would be postponed by an hour due to distributed denial of service (DDoS) attacks on the conference's systems.
"Unfortunately, today, due to massive DDoS attacks on the forum's system, the base of accreditation and admission were disabled," Peskov said.
Peskov told CNN in a text message that the technical specialists working to fix the systems would "need 30-40 minutes" to restore the database.
Putin's speech at the annual conference in the western Russian city is seen as an opportunity for the world to get some insight into the Russian leader's thinking four months into his war on Ukraine.
The Russian president has long framed his decision to launch an invasion of Ukraine as a response to Kyiv's growing diplomatic and security ties with the West. Last week, he hinted that his aim in Ukraine is the restoration of Russia as an imperial power.
Just before Putin's speech on Friday, Russian senator Konstantin Kosachev told CNN he believed Russia's actions in Ukraine "prevented a huge war, probably a third world war."
"If you keep in mind the perspective which could have become a reality, Ukraine becoming a part of NATO," said Kosachev, who is the Deputy Speaker of Russia's Federation Council.
"Member states having their view on Crimea, having their view on matters that don't involve NATO, the United States of America included in the military conflict with Russia. And now, this military conflict is prevented and this is the end of the story and this is the only good news."
The European Commission announced Friday that it was recommending Ukraine and neighboring Moldova as EU candidate states, with the commission's chief Ursula von der Leyen saying that Ukrainians are "ready to die" for the European perspective. Peskov said the announcement required Moscow's "increased attention."
"We all know about the intensification in Europe and discussions about strengthening the defense component of the EU. Therefore, there are different transformations that we observe," he said earlier on Friday during a routine daily call with reporters.
How ESG strategies hurt emerging markets
Plus, the comment period on the SEC’s big climate proposal comes to an end
Criticisms of the environmental, social and governance investment agenda have been flowing thick and fast in recent weeks, whether from Republican politicians or from HSBC’s Stuart Kirk. Today, we consider a question that should be particularly uncomfortable for the sustainable investing world: is the ESG framework steering capital away from developing nations that need it most desperately?
The report that we dig into below argues that there are some worrying flaws with today’s ESG paradigm, with an emphasis on risk aversion that threatens to undermine financial support for sustainable development in poorer countries.
Are these concerns justified, and if so how can they be addressed? We’d love to hear the thoughts of our readers — particularly those based in developing nations. You know where to find us: moralmoneyreply@ft.com. (Simon Mundy)
ESG and emerging markets: Doing more harm than good?
Undermining development in poor countries is not something any investor would want to achieve with an ESG strategy. But that is precisely what seems to be happening, according to a troubling report out this week.
The study, carried out for the UK government by the consultancy Intellidex, aimed to identify the big impediments to capital flows into developing countries, through interviews with 52 market professionals. One of the biggest obstacles, it found, is the rise of ESG strategies.
“It was a surprise to me, to what extent ESG — as it’s practised — is not aligned with the SDGs,” Intellidex co-founder Stuart Theobald told Moral Money, referring to the UN’s 17 Sustainable Development Goals, which target issues ranging from hunger to education.
The key problem, according to the report, is the emphasis that many ESG strategies put on avoiding risk — especially of the reputational sort — rather than achieving positive impact. That very often leads investors to “downweight” developing markets, or avoid them altogether — either because of concerns about social and governance flaws, or a simple lack of data.
That ESG headwind is the last thing these countries need amid a broader souring of investor sentiment as global interest rates rise. Emerging market bonds have been suffering their steepest falls for almost three decades. There have been sharp outflows, too, from equities in developing countries, which have been underperforming in recent years.
So what’s the answer? An obvious one is tackling that lack of data. Intellidex is urging development institutions to help create user-friendly platforms that EM businesses can use to share the ESG data sought by investors. Fuller and more frequent reporting of economic data by national governments could also have a big impact.
But the effect of such measures can only go so far without a fundamental rethink of the ESG paradigm, Theobald argues. “Do we merely want to have capital swerving certain issuers, or do we want capital to be flowing towards opportunities to deliver on our social and environmental objectives?” While much ESG reporting is preoccupied with dodging risks, Intellidex argues for a far greater emphasis on “additionality”, centred on how far investments further the SDGs.
“A lot of investor behaviour is about reputational risk fundamentally. It’s about being nervous about anything that might bite you,” Theobald said. “If you want to make a big difference, you have to trade in harder, more difficult markets, and you’ve got to have a risk appetite for that.”
ESG investors’ nervous approach to frontier markets might be understandable. But if their strategies are impeding urgently needed capital flows, that looks like a pretty dire risk in itself — reputational and otherwise.
Gapping down
In reaction to earnings/guidance:
- ADBE -3.4%
Other news:
- RYTM -5.1% (FDA issues CRL for the sNDA for setmelanotide in Alström syndrome; FDA approves sNDA for IMCIVREE; also enters into Revenue Interest Financing Agreement with HealthCare Royalty for a total investment up to $100 mln)
- CO -2.3% (FDA recently cleared Cellenkos' IND application for CK0804 as add on therapy to Ruxolitinib)
- FTI -2.2% (awarded a significant contract by TotalEnergies EP Angola)
- OWL -1.5% (files $1 bln mixed securities shelf offering)
- TRGP -0.8% (to acquire Lucid Energy for $3.55 bln; also updates 2022 standalone outlook)
Analyst comments:
- DFH -5.1% (downgraded to Underperform from Neutral at BofA Securities)
- AEO -1.7% (downgraded to Neutral from Buy at B. Riley Securities)
- DOW -0.8% (downgraded to Neutral from Buy at Citigroup)
- CF -0.7% (downgraded to Neutral from Buy at Citigroup)
Gapping up
In reaction to earnings/guidance:
- X +6.4% (issues upside EPS guidance), CNC +2.3% (raises FY22 outlook ahead of Investor Day; authorizes $3.0 bln increase to existing stock repurchase program)
Other news:
- REV +81% (Reliance mulling buyout of REV according to Economic Times)
- EFC +5% (reports book value per share)
- JG +4.9% (receives RMB15 mln in special support funding from the Shenzhen Development and Reform Commission)
- CTRN +4.4% (names new CFO)
- ROKU +4.2% (ROKU and
- WMT announce partnership to bring comerce to TV ads)
- SRRA +3.8% (announces submission of new drug application for Momelotinib to FDA)
- BITF +3.8% (entered into an equipment financing agreement with initial funding of $37 million)
- BHC +3% (provides update on Solta Medical; IPO process suspended in light of market conditions)
- ZIP +2.9% (authorizes $150 mln increase to share repurchase program)
- REAX +2.5% (surpasses milestone of 5000 agents)
- BGS +2.4% (forms four business units)
- WPC +2.3% (increases dividend)
- UWMC +2.2% (CFO takes leave of absence for health reasons)
- ZI +1.8% (settles lawsuit with Bombora)
- TWI +1.6% (entered into a global long-term agreement with Deere (DE) on June 13 to supply wheels and tires)
- DAN +1.5% (awarded a $2.7 million (£2 million) grant to develop an e-Powertrain for OX Delivers)
- AJRD +1.4% (CEO Eileen Drake and Committee for Aerojet Rocketdyne Shareholders and Value Maximization Extremely Pleased with Delaware Court's Opinion)
- GVA +1.3% (awarded two contracts worth a combined $38 mln)
- OAS +1.2% (declares $15 special dividend in connection with closing of merger with WLL)
- OEC +1% (to raise prices for rubber carbon black products)
- JATT +1% (JATT Acquisition Corp and Zura Bio Limited announce definitive business combination agreement to create NYSE listed biotechnology company)
Analyst comments:
- AZEK +4.7% (upgraded to Buy from Neutral at BofA Securities)
- COF +2.1% (upgraded to Outperform from Neutral at Robert Baird)
- AXP +2% (upgraded to Outperform from Neutral at Robert Baird)