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Commodity prices surge and shares sink as US discusses Russia oil ban

Crude hits its highest level since 2008 and shares in Asian markets sell off

Stocks tumbled, commodity prices surged and the rouble sank after the US said it was discussing a ban on oil imports from Russia and investors digested the threat of a protracted escalation in energy prices.

Equity markets in Asia started the week sharply lower. Hong Kong’s Hang Seng led with a fall of 3.3 per cent, on track for its lowest close since the beginning of the pandemic. China’s CSI 300 fell 2.8 per cent and Japan’s Topix index shed 2.5 per cent.

Futures also pointed to sharp falls for European equities, with the Euro Stoxx 50 tipped to slide about 3 per cent and the FTSE 100 expected to fall 2.6 per cent. The S&P 500 was set to dip 1.3 per cent when trading begins on Wall Street later in the day.

Investors also sought safety in the dollar, prompting sharp falls for its peers. The rouble fell as much as 11.4 per cent to 138.5 against the dollar, marking a fresh record low for the Russian currency. The euro dipped 0.5 per cent to $1.09 while the Australian dollar dropped 0.6 per cent to $0.74. Expectations of further pressure on oil importer India pushed the rupee down almost 1 per cent in early trading.

The ructions in global stocks and currencies came as international benchmark Brent crude rose almost 18 per cent to $139.13 a barrel in early trading on Monday, its highest level since 2008, before paring gains to be up almost 10 per cent at $129.45. US marker West Texas Intermediate was up 8.4 per cent at $125.41.

The surge in oil prices came after US secretary of state Antony Blinken said Washington was in “very active discussions” with European allies. Nancy Pelosi, US House Speaker, said Congress was “exploring” legislation to ban the import of Russian oil.

“The world is very unprepared for this shock,” said Robert Rennie, global head of market strategy at Westpac. He said it was unclear if a US ban would cover only oil or all Russian energy imports, but said the latter would have a “catastrophic impact” on energy prices.

The prospect of expanded sanctions hitting Russian oil shipments has jolted global commodity markets already unsettled by the increasing difficulty of transacting with Russian providers. European natural gas futures closed Friday’s session up more than 170 per cent for the year to date.

Other commodities including palm oil and nickel have hit multiyear highs since the outbreak of war. On Monday, palladium, a key component of catalytic converters in cars, jumped as much as 5.4 per cent to a record high of more than $3,174 an ounce.

In Chinese markets, iron ore futures rose as much as 7.6 per cent to Rmb874.50 ($138.53) a tonne while nickel rose 12 per cent to a record high of Rmb210,950 a tonne.

Traders dumped riskier assets in favour of sovereign debt, pushing yields lower. The yield on the 10-year US Treasury fell 0.03 percentage points to just below 1.7 per cent.

Sigrid Kaag said Netherlands open to discussing reforms as EU responds to challenges posed by Ukraine conflict

The Dutch finance minister has warned against watering down the EU’s borrowing rules by stripping out defence and other strategic investments, saying the bloc needed to keep its eyes on debt sustainability even as it confronts the economic challenges posed by the war in Ukraine.

Sigrid Kaag said that the Netherlands was open to discussing reforms to the Stability and Growth Pact, which sets debt and deficit limits for member states, but that removing military spending or green investment from the SGP, as suggested by some member states, would entail “significant risks”.

Shifting some investments “off the books” could damage the drive for economic convergence and debt sustainability, she told the Financial Times in an interview.

Kaag spoke amid calls in France and other member states for certain kinds of strategic government spending to get preferential treatment under a reformed SGP. Brussels is signalling that the pact may not get reimposed until 2024 — a year later than previously envisaged — given the damage to growth caused by Russia’s invasion of Ukraine.

The drive to reduce Europe’s reliance on Russian gas has ignited a further debate over whether the EU should undertake extra common borrowing to boost its energy investments.

Kaag, of the Dutch liberal Democrats (D66), is a former UN diplomat who served as trade minister and then foreign minister in the last government before taking up her post early this year. She is a pro-European who is expected by some officials to take a less hawkish posture on EU budgetary policy than her predecessor, Wopke Hoekstra of the Christian Democrats.

Kaag will set out her approach in a speech in Maastricht on Tuesday, after meeting with German counterpart Christian Lindner on Monday in Berlin.

The minister stressed that the Netherlands was open to new ideas for confronting the economic challenges posed by Russia’s war on Ukraine. While the government does not have a position yet on whether the SGP should remain suspended for another year, and it wants to go back to regular decision making, she acknowledged that “the war in Ukraine has shifted the paradigm”.

When it came to excluding certain categories of investment from the SGP, Kaag said the Netherlands was not saying a definitive “no, never”. But she warned: “We think there are significant risks, because you create parallel pathways and it doesn’t do justice to the real economic situation.”

A modernisation of the SGP could involve ensuring debt reduction was “viable and feasible” for countries with significant public debt burdens, she said. “But by placing investments off the books, we are not quite sure that is a solution to the serious problem of economic convergence and debt sustainability.”

When it came to the common EU response to the economic shock, she said it was “prudent and wise” to explore the scope within existing budgets to mitigate the effects of the crisis. But Kaag poured cold water on the idea of an immediate dash for extra EU debt issuance to battle the economic shock.

“Yes, it’s an understandable reflex to want to borrow more, but our very sober position would be, ‘let’s take stock, let’s find out how bad the damage is and where, and if and under which conditions assistance or compensation could be provided’.” 

Kaag stressed that while EU policy had been evolving rapidly, given the current crisis, it was still important to apply “appropriate processes and decision-making” rather than rushing through decisions that would have lasting consequences.

“In terms of crisis, one tends to sometimes overpromise and then underdeliver. I’m in favour of underpromising and overdelivering,” she said. “Keep calm and carry on, so to speak.” 

Head of Caxton, one of world’s oldest macro funds, and Tory donor warns Labour is ‘no longer unelectable’

The UK should borrow more to fund targeted projects that stimulate productivity and growth, according to the head of Caxton Associates, one of the world’s oldest and biggest macro hedge funds.

Andrew Law, whose $11bn-in-assets firm has been one of the hedge fund winners of recent years, pointed to a “depressing” outlook for the UK economy, after last year’s economic rebound, with export growth lacklustre and investment spending “chronically weak”.

He said the government should aim to lift productivity by making “targeted investment” in skills and education, funded by the current low cost of long-term borrowing. Yields on 30-year inflation-linked bonds, for instance, which have been popular among institutional investors wary of consumer price rises, stand at minus 2 per cent. Yields fall as prices rise.

“The UK can’t increase its anaemic potential growth rate without increasing productivity,” he said. Through borrowing “there’s the opportunity for some targeted investment”.

“We’ve spent £400bn through Covid, but we are scared to have a long-term investment programme of even £10bn, financed at negative rates, to build a better future for the youth of today? That is the only long term solution to boost productivity nationwide,” he added.

His comments come after the UK economy grew by 7.5 per cent last year, its strongest growth since the second world war, although it lagged other developed markets during the pandemic.

But the Bank of England has warned that growth this year will be dragged down by the biggest contraction in household real income in 30 years, caused by rising inflation, higher taxes, and surging energy costs. UK inflation hit 5.5 per cent in January and, according to Bank of England forecasts, is set to peak above 7 per cent in April.

UK public sector borrowing has surged to a record high during the pandemic. In the 10 months to January it was still £138.5bn, its second highest level for that period since records began in 1993, but below forecasts, helped by tax receipts.

Law said that the UK was on course for a consumer recession, as a cost of living crisis bites, with “large swaths” of households having little in the way of savings to call on.

“The household sector in particular [is] looking dire,” he told the Financial Times.

“I think it’s going to be very painful later this year and into next year [for UK households]. The chances of a consumer recession are high.”

Law, who has donated millions of pounds to the ruling Conservative party, also said that the government “needs to get things done” and that the opposition Labour party now looks more electable.

“The pressure is on them [the government] to deliver, the time for promises is over. Labour is no longer an unelectable party,” he said.

Caxton, founded in 1983 by US billionaire Bruce Kovner, made record gains in 2020, helped by bets on falling bond yields and from trading gold as central banks raced to stimulate economies during the onset of the coronavirus pandemic. More recently, it has prospered thanks to bets on surging inflation.

In February the FT reported that Caxton was raising fees on its flagship global fund and preparing to shut its macro fund to new money.

Law also said central banks’ policy mistakes through the coronavirus pandemic, in the form of overly large bond-buying programmes, would hit younger and poorer parts of society hardest.

Drug-resistant pathogens and poor hygiene mean simple procedures can deteriorate into lengthy and costly infections

In 2016, doctors in Gambia became alarmed about two apparently different outbreaks of hospital-acquired bacterial infection in a neonatal ward in Banjul. Baby after baby receiving non-intensive care at the Edward Francis Small Teaching Hospital ended up with infections that did not respond to normal antibiotic treatment. Many died of their illnesses.

Local investigators at the Medical Research Council (MRC) unit of the London School of Hygiene and Tropical Medicine used whole-genome sequencing — a technology rarely available in poorer countries — to identify the cause. They found it was intravenous fluids and medications that had been contaminated during preparation.

Saffiatou Darboe, who worked on the study, says it demonstrates the gravity of antibiotic resistance, also known as antimicrobial resistance (AMR), and how it makes infections more dangerous. “It is no longer a looming pandemic; it’s a pandemic that is already here,” she says. “Antimicrobial resistance is an erupting volcano.”

Some 1.27mn people died of antibiotic-resistant infections in 2019, according to modelling recently published in the Lancet — much more than previously thought and about the same death toll as malaria and HIV combined. The paper found that the burden was highest in west Africa, where it estimated there were 27.3 deaths per 100,000 directly related to antibiotic resistance. That was more than four times higher than the ratio in Australasia, the best-performing region.

Darboe, a microbiologist at the MRC unit in Banjul, says one of the main problems in west Africa — and sub-Saharan Africa, more generally — is the lack of diagnostics, meaning most infections go undetected. “My lab is the only quality-assured lab in the country,” she says.

As well as killing people, antibiotic resistance increases the cost of healthcare by causing patients to stay longer in hospital or to buy more expensive second- or third-line medicines, Darboe adds. Often, however, these drugs are beyond the reach of poorer patients. Many skip treatment or use cheaper drugs that may not be effective.

A combination of drug-resistant pathogens and poor hygiene protocols in some facilities can even mean that something as seemingly simple as a tooth extraction deteriorates into a lengthy and costly infection, she points out. “That especially affects patients in this part of the world where poverty is really a huge problem.”

Yewande Alimi, antimicrobial resistance programme co-ordinator at the Africa Centres for Disease Control and Prevention, also highlights the lack of laboratories and surveillance systems. “For a long time, policymakers struggled to get to grips with what AMR is,” she says, welcoming the Lancet report as an important step. “AMR is like climate change. Until you experience it, it seems like something far away. The more we know about it and its medical and economic impact, the more we can begin to tackle it.”

The causes of AMR, particularly in poorer regions such as west Africa, are well understood — if no easier to deal with for that. They include poor sanitation, inappropriate and excessive use of antibiotics in humans and animals, as well as an empty pipeline of new antibiotics from pharmaceutical companies focused on more profitable areas of research.

In much of Africa, there is an additional problem: counterfeit medicines. In Idumota market, just back from the waterfront on Lagos Island in Nigeria, it is easy to find fake “branded” medicines among the thousands of lock-up shops. Customers go there to avoid costly medical consultations — particularly if they assume they need repeat prescriptions of medicines they have already taken.

Unfortunately, counterfeits — locally produced or imported from China, India and elsewhere — are rife. The World Health Organization puts the value of fake medicines sold each year at an astonishing $200bn, equivalent to 10-15 per cent of the legitimate market.

“Fake medicines are really a big concern across the continent,” says Alimi. “This drives antimicrobial resistance in our countries and we need effective legislation around drug production and drug importation.”

Walter Fuller, technical officer for antimicrobial resistance at the World Health Organization’s Africa office in Brazzaville, says that tackling AMR demands a “one-health approach”. Only by improving the quality of whole systems — from farms to hospitals, from prescribing norms to hygiene practices — will any decisive impact be made.

One initiative that could help is the establishment of an African Medicines Agency — a treaty for the creation of which came into effect in November. Advocates say the AMA ought to reduce the proliferation of counterfeit medicines as well as facilitate the production of safe local medicines by establishing a common regulatory framework.

Experts also propose the standardisation of guidelines, so that doctors take a more consistent and effective approach to prescribing antibiotics according to proven protocols.

Even small initiatives can make a dent, says Fuller at the WHO. In Lagos, in combination with an NGO called DRASA, the WHO has trained 300 youth champions in 10 schools to spread the word about good hygiene and sanitation — a message that has been emphasised by the fight against Covid-19.

But, as with Covid-19, Fuller says the emergence of infections resistant to treatment is a global phenomenon that can rapidly spread from one part of the world to another. A breakthrough infection in Nigeria or Senegal can quickly move to other parts of the world, he warns.

“You could address AMR however you want in the [global] north, but AMR has no borders, so a global partnership is very important.”

Fuller has no doubt about the seriousness of the threat. Imagine, he asks, what would happen if a strain of a disease such as tuberculosis or malaria became entirely resistant to drugs.

“When Alexander Fleming discovered penicillin it was a game-changer, it revolutionised modern medicine,” he says. “Now we are at a place where, if we don’t do anything, if we leave this on the back burner, we might roll back our gains. And then our health systems, particularly our weak ones, simply might not be able to cope.”

Regulatory scrutiny, scandals and poor performances have led investors to redeem funds at increasing rates

Dealmakers looking to take companies public through Spac mergers are making short-term agreements with hedge funds in a desperate bid to replace cash being pulled by investors.

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The agreements underscore the struggles that special purpose acquisition companies are facing to complete mergers, after plunging in popularity since the frenzy that took over Wall Street during the peak of the pandemic.

A Spac raises money from investors and lists on the stock market as a shell company. It then hunts for a private company to take public, typically within two years. Investors who had backed the blank-cheque vehicle but dislike the merger target have the option to withdraw their money, subsequently reducing the amount that the company raises in the deal.

Increased regulatory scrutiny, a string of scandals and poor performances have led investors to redeem their funds at increasing rates. This jeopardises potential mergers as Spacs may struggle to fulfil the minimum cash requirements necessary to close the deal.

Companies desperate to go public and stem redemptions are turning to investors including hedge fund Atalaya Capital Management and private equity group Apollo for so-called redemption capital, where the funds agree to buy shares from investors that are looking to withdraw their money.

New York-based Atalaya has entered into this agreement, called an “equity prepaid forward transaction”, on several Spac deals, including agreeing $70mn for aircraft hangar rental company Sky Harbour Group, $30mn for semiconductor company Navitas and up to $100mn for online grocery company Boxed. Apollo entered a similar $75mn agreement for General Motors-backed car data analysis company Wejo’s Spac deal last year.

Spac teams scrambling to complete their deals are forming agreements which gives the company enough funds to meet its minimum cash requirement while the hedge funds prosper.

“It’s a sign of desperation. It’s problematic because it’s pretty hard for anyone but pretty sophisticated investors to understand what’s going on in these transactions and to see how sweet a deal is being offered to select investors,” said Michael Ohlrogge, professor at New York university’s law school who studies Spacs.

In the Spac deal for aircraft hangar group Sky Harbour, whose top investors include Glazer Capital Management, Barclays and JPMorgan’s Highbridge Capital Management, Atalaya agreed in January to buy $70mn shares from redeeming shareholders before the deal closed.

The day after Sky Harbour became publicly listed, the company reimbursed Atalaya for the purchase price of the shares. Beyond that, if the company’s share price rises, the fund can sell its shares and keep the profit, or if the stock falls below $5, the fund can receive a make-whole payment from the company.

Atalaya and Apollo declined to comment.

One Spac sponsor who has been pitched on this deal structure described some of the funds offering this capital as “ambulance chasers”. One M&A lawyer characterised the funds being offered as “toxic capital” given that the terms on offer are so advantageous to the hedge funds providing the cash.

Ohlrogge described the agreement as essentially a loan from the Spac to Atalaya, saying that the fund is “out of pocket only for a very short period of time, then [they] get that money paid back to them after the deal closes”.

The agreements illustrate how desperate Spac executives are to close their deals and how hedge funds have targeted the investments to generate returns, with dealmakers viewing the terms granted as very favourable to the funds.

Atalaya entered a similar agreement with Navitas, a Dublin-based semiconductor company, in October 2021. By November 18, the fund had sold the $30mn holding, according to regulatory filings.

“It doesn’t actually put cash into the public company. It just ensures that you can get a deal closed,” said one M&A lawyer, adding that it “papers over the problem, but it’s quite expensive and ultimately, you still end up with a public company with a depleted amount of cash in the coffers”.