FT : Emerging markets turmoil: in charts

Emerging markets turmoil: in charts
Turmoil across emerging markets has intensified during August and for many veteran fund managers, there is a very real concern that selling pressure will escalate and draw comparisons with past implosions, notably the emerging market crisis of 1998.
Here are some charts that show just how bad things have become in local equity and bond markets in the developing world.
This has obviously been building for some time, with concerns over individual developing countries such as Brazil and Russia, weaker commodity prices and US Federal Reserve interest rate increases on the horizon. But the trigger for the deepening rout is mounting concerns over China’s economy — a vital driver of emerging markets as a whole.
As the charts show, the Shanghai stock market has fallen precipitously this summer, and Beijing this month devalued its currency slightly, exacerbating fears over emerging markets.
Yet there are more profound, fundamental problems dogging emerging markets. As the four charts from Capital Economics show, economic growth, household consumption, industrial production and exports in the developing world have all slowed sharply in recent years.
Of course, emerging markets is a blunt concept, and not every country is in bad shape. Morgan Stanley analysts have made a list of the countries it sees as the most vulnerable, based on factors such as dependence on overseas funding, debts metrics, growth fundamentals and exposure to China.
Brazil, South Africa and Turkey look the worst, while Indonesia, Russia, Peru, Malaysia, Colombia and Mexico are also vulnerable. Morgan Stanley have also made a handy Venn diagram for further illumination.
Drilling down into two of these issues, here are two charts from Barclays and UBS respectively. The first one from Barclays shows which countries are the most dependent on exports to China, while the second one from UBS underscores how there is still plenty of international investor money in emerging bond markets, despite a fierce shake-out in the 2013 “taper tantrum”.
That could mean that foreign inflows are stickier than expected, or that there is much more scope for pain if investors throw in the towel on emerging markets, as they have often done in the past.

NY Post : Market dive may actually be a good sign

China’s economy started sneezing two weeks ago, and last week US stock markets got sick. How sick?
The Dow Jones industrial average had its worst week in four years as investors ran for the exits wondering just how much growth the US and other countries could muster if the world’s No. 2 economy — that’d be China — devalued its currency in an attempt to get its mojo back.
The sell-off put the Dow in correction mode, down 10 percent.
As folks check their 401(k)s and deal with lower balances in the wake of the selloff, two questions might jump into their heads.
First: “Holy crap! Am I going to have to work, like, another five years to make up for this decline?”
And then: “How come the US economy isn’t doing better as oil prices, which spent 2010-2014 above $80 a barrel, tumble to under $40? Don’t US motorists spend their pump savings at malls and such?”
Let me answer the last two questions first.
Plummeting oil prices have historically been an economic positive — but are not any more. Oil prices are down 58 percent over the last year, but pump prices are down just 23 percent.
The problem this time is that the US today is almost energy-independent, thanks to the fracking boom. That boom has swelled employment in the energy sector to 2 million jobs.
But the cost of producing that fracking gas is higher than it costs Mideast oil countries to produce a gallon of gas’ worth of oil. So as prices fall, US wells close and layoffs follow, thereby offsetting any economic benefit we would have felt from cheap gas.
Now, about that first question.
If you have some years to go before retirement, you might not have to start thinking about sticking around the workforce for another five years.
Stock market corrections are healthy and tend to be rejuvenating.
Sure, it’s not fun, and it will create tension. But it’s just part of the markets. Look, historically it has been far more profitable to be a buyer in a correction.
As the Chinese are fond of saying — “Out of every crisis comes opportunity.”

NY Post : Chief of snacks giant prepared to make deal for company

Chief of snacks giant prepared to make deal for company

One problem down for hedge-fund moguls Bill Ackman and Nelson Peltz — but one very big one still stands.
The two, who are keen for a sale of snacks giant Mondelez, won’t have to worry about CEO Irene Rosenfeld blocking a deal, The Post has learned.
Rosenfeld, 62, will be a “willing seller” should a buyer come forward, sources told The Post. That comes as a surprise, since the CEO orchestrated the company’s 2012 spinoff from Kraft.
But Rosenfeld, considered one of the most powerful women in business, wants to go out at the top and is ready to move on — and possibly even leave the corporate world entirely, sources close to the situation said.
Rosenfeld has been with Mondelez and its predecessor, Kraft Foods, for nine years.
“I’m pretty confident the Rosenfeld-led Mondelez board would pursue an intelligent deal,” said one individual familiar with its thinking.
That’s good news for rabble-rousers Ackman and Peltz, two top Mondelez shareholders.
Peltz, who has been on Mondelez’s board for 19 months, had tried to get PepsiCo to buy the company — but PepsiCo nixed it before Mondelez considered it.
Ackman, who revealed a $5.5 billion stake in Mondelez more than two weeks ago, is looking at Kraft Heinz, the $98 billion market-cap food conglomerate that Warren Buffett’s Berkshire Hathaway and private-equity giant 3G Capital put together earlier this year.
Ackman is an investor in 3G’s funds and has worked with them.
But a big problem remains. Last week, Buffett threw cold water on the idea, saying he’d listen to 3G if it wanted to do it, but that bundling it into the Kraft-Heinz merger would make a Mondelez deal hard now.
Since then, industry sources told The Post that combining the three companies at the same time might be smart in the long run. “‘You can definitely argue that it makes sense to make two big mergers and extract all the synergies in a relatively short period of time,” said one source.
Mondelez declined to comment.

FT : The Chinese model is nearing its end

The Chinese model is nearing its end

The country is now going through a crisis of transition, unparalleled since Deng Xiaoping

August in China has been anything but the quiet month of myth. Developments in the equity and foreign exchange markets and even the appalling industrial accident in Tianjin might seem mere bad luck when considered individually. Together, however, they symbolise a slow-motion denouement of China’s economic and political model. The country is now going through a crisis of transition, unparalleled since Deng Xiaoping set out to put clear water between China’s future and the Mao era.
The signs are that it is not going so well. Rebooting the authority and primacy of the Communist party, the pursuit of often contentious reforms, financial liberalisation and rebalancing the economy while trying to sustain an unrealistic rate of growth are complex and mutually incompatible goals.


Deng’s task in a pre-industrial society without a middle class and social media was, in many ways, easier. Determined to avoid the concentration of power in one individual, he empowered government bodies and ministers, especially the State Council and the prime minister, and encouraged openness and a consensus-driven political model. This worked well enough until the 21st century, but gradually tended towards atrophy. The party succumbed to corruption and paid scant attention to citizens’ concerns about social, environmental and product safety. The economy built up high levels of debt, overcapacity and an addiction to misallocated and credit-fuelled investment.
To address these serious problems, President Xi Jinping has turned the clock back. He has accumulated more power than any leader since Mao and consistently emphasised the Leninist need for “party purity” to avoid the fate of the Soviet Communist party. Among his first policies was an extralegal anti-corruption campaign that continues to this day. He has usurped the authority of government institutions by establishing party bodies, known as “small leading groups”, that are more numerous than ministries and hold sway over the most important functions of the state.
There was doubtless a strong case for some re-centralisation of power in China, especially to implement the party’s ambitious reforms. Yet while some reforms have made progress, many important ones affecting the role of the state in the economy and the introduction of market mechanisms have suffered from dilution and the opposition of vested interests. The clampdown on civil society, media, legal and non-governmental institutions has not helped. A strong central authority, perversely, has stifled important reforms, removed authority and accountability from those institutions responsible for carrying them out and produced conflicted decision-making.


That is why August’s events matter. Encouragement of the stock market was supposed to be a weathervane for market mechanisms and a more efficient allocation of capital. But equities suffered a relapse, following extraordinary support measures estimated at more than $150bn. The indices are still flirting with the nadir reached in early July. Caught between its roles as cheerleader and regulator, the government has shown a lack of trust in the very market forces it sought to introduce.
This month’s mini-devaluation of the renminbi was explained officially as an incremental change to China’s financial liberalisation, designed to help the currency’s admission later this year to the International Monetary Funds’s accounting unit, the Special Drawing Right. Yet the action was communicated poorly at best. Again, the authorities have been conflicted, torn between a strong renminbi policy to help rebalance the economy, and a softer one to respond to weakening growth. Economic statistics this summer, especially for exports, manufacturing and investment, were disappointing, underscoring that weaker performance for the past four years has become impervious to stimulus measures, which this year already add up to more than 1 per cent of gross domestic product.


A central part of the challenge for China will be its ability to manage employment, a more politically sensitive indicator than GDP. The official unemployment rate, supposedly about 4 per cent over many years, is fiction. Current developments in investment and labour-intensive construction, the low registration for unemployment benefits among those without urban registration status, the weakness of the benefit system and the difficulties of finding suitable work for 7m graduates a year are among many reasons to believe that the jobless rate may not only be higher than the 6.3 per cent estimated by the International Labour Organisation but rising.
China’s economic transition was always going to be difficult, but developments this year suggest that things
are not going according to plan. The
centralisation of power is proving to be
a double-edged sword for reform, the anti-corruption campaign is choking off initiative and growth and the economy cannot be kept on an unrealistic expansionary path by unending stimulus.
The time for accepting a permanently lower growth rate is drawing closer. It will test the legitimacy and reform appetite of China’s leaders in ways that will determine the country’s prospects for years to come.

FT : Swiss launch criminal inquiry related to Malaysia’s 1MDB

Swiss launch criminal inquiry related to Malaysia’s 1MDB

‘Two entities’ of state fund under investigation in case involving suspected corruption

Attempts by Najib Razak, Malaysia’s embattled prime minister, to contain a financial scandal have taken a knock after Swiss authorities said they had opened criminal proceedings related to the state development fund at the centre of the affair.
Switzerland’s Office of the Attorney-general said its case involved “suspected corruption of public foreign officials, dishonest management of public interests and money laundering”.

Its confirmation of proceedings involving 1Malaysia Development Berhad, or 1MDB, which has $11bn in debt, marks the potential internationalisation of a case that has so far received mainly domestic scrutiny. The fund, established in 2009 by Malaysia’s finance ministry, is supervised by an advisory board chaired by the prime minister.
The domestic investigation into allegations of mismanagement and corruption at 1MDB has slowed since Mr Najib removed Malaysia’s attorney-general on health grounds and promoted members of a task force that had been co-ordinating the investigation, ending their involvement in the probe. The task force has suspended its work while new members are appointed.
“Effectively all investigations have been stopped,” said Tony Pua, an opposition legislator. “It’s got too close for comfort so Najib has ended the pretence of an independent inquiry and cut everything off.” The prime minister’s office denies any attempt to block the investigation.
Last month Mr Najib also fired Muhyiddin Yassin, the deputy prime minister, who had said the prime minister needed to provide an explanation about how nearly $700m found its way into his personal bank account.
In July, the Sarawak Report, a UK-based blog, and the Wall Street Journal published a report alleging that money in Mr Najib’s account had been moved by agencies, banks and companies linked to 1MDB. Mr Najib vigorously denies any 1MDB link to the money, saying it was a donation from an unnamed Middle Eastern benefactor. That claim was endorsed by Malaysia’s anti-corruption commission.


The Swiss attorney-general said it was investigating “two entities of 1MDB” and an “unknown person”. Two deposits into Mr Najib’s account, amounting to $681m, allegedly came via a Swiss bank from a company registered in the British Virgin Islands, according to documents prepared by Malaysian prosecutors and cited in the Wall Street Journal.
Finma, the Swiss financial regulator, said it was aware of the corruption allegations and was in contact with several Swiss banks about the issue.
Other critics of Mr Najib in Malaysia said they hoped the Swiss investigation would prompt US regulators to look into the issue.
Last month Singapore froze two bank accounts in connection with investigations into 1MDB, and the Monetary Authority of Singapore said it would share information with Malaysian investigators.
1MDB said it had not been contacted by Swiss authorities but stood “ready to assist in any investigation . . . subject to advice from the appropriate Malaysian authorities”.

FT : Bank litigation costs hit $260bn — with $65bn more to come

Bank litigation costs hit $260bn — with $65bn more to come

The wave of fines and lawsuits that has swept through the financial industry since the 2007/8 crisis has cost big banks $260bn, new research from Morgan Stanley shows.
The analysis, which covers the five largest banks in the US and the 20 biggest in Europe, predicts the group will incur another $60bn of litigation costs in the next two years.

Bank of America, Morgan Stanley, JPMorgan, Citi and Goldman Sachs have borne the brunt of the fines so far, collectively paying out $137bn. They have another $15bn to come in the next two years, Morgan Stanley said.
The top 20 European banks have paid out about $125bn and have about $50bn to come “albeit with a wide range”, the analysis said. “In the States . . . there have been more precedents on settlements and so as more banks have settled, the market’s ability to make a guesstimate of the amount for other banks has improved,” said Huw van Steenis, managing director at Morgan Stanley.
Mr van Steenis said the fines, which cover everything from foreign exchange rate rigging to US mortgage-backed securities and mis-selling of payment protection insurance in the UK, are having a profound impact on the banks.
“Litigation not only takes a bite out of your equity but has a much longer lasting impact on the amount of capital you need to hold,” he said.
The figures include fines and penalties banks have already paid, plus any provisions taken by June 30 for issues the groups see coming down the tracks, such as US mortgage fines that European banks expect to pay.
The report also charts what banks have done to reduce the risk of future litigation, but concludes that “lack of disclosure means it has been difficult for us to say definitively which firms have developed the best practices overall”.
Bank of America is spending $15bn a year on compliance, Morgan Stanley said, while JPMorgan is spending $8bn or $9bn. Mr van Steenis and his colleagues said they “struggled to obtain consistent data” on extra compliance costs in Europe.
The impact goes beyond the financial. “A lot of management time and IT budget has been focused on rectifying malfeasance rather than being able to position the bank for the future,” said Mr van Steenis.
“Banks’ ability to respond to new technology and new challenges generally has understandably been slowed down.
“In Europe, there’s still a nervousness on some mortgage settlements because no European bank has yet settled with the DoJ [Department of Justice] on mortgage,” he added.

So far, US mortgage issues accounted for $110bn of litigation costs across the banks followed by PPI at $43bn, foreign exchange rigging at $15bn, money laundering at $15bn and Libor/Euribor at $10bn. Other future costs include civil suits on foreign exchange rigging, which lawyers have warned could cost tens of billions.
Bank of America has taken the most litigation charges, with $65.6bn so far, followed by JPMorgan’s $42.4bn and Lloyds £26.6bn.
Actions taken by banks to prevent future litigation issues included everything from changing remuneration policies to a greater focus on “non-financial metrics”, adding compliance staff, to elevating chief risk officers to boards and using “robo surveillance” in trading rooms.
The US banks were more forthcoming than their European peers on changes they have made. An appendix showed that Barclays, Lloyds and RBS all failed to answer four of the seven questions posed by Morgan Stanley.
“What our review has shown is there isn’t an awful lot of disclosure,” said Mr van Steenis. “There were areas where quite a few people struggled to provide disclosure.”

WSJ : Don’t Dive Into Oil Yet

Don’t Dive Into Oil Yet

Prices dipping below $40 per barrel don’t mean it is a great time to buy.

With oil dipping below $40, is it time to dive in?

A roughly 30% drop in the oil price since June naturally has both bulls and bears making pitches. For example, hedge funds have adopted an unusually short position in oil futures, signaling expectations of further declines, according to Ole Hansen at Saxo Bank. Yet more than $1 billion has flowed into energy exchange-traded funds over the past month, suggesting other institutions and retail investors think the collapse is overdone.

This is echoed somewhat in oil stocks. The SPDR S&P Oil & Gas Exploration & Production ETF initially staged a rally this month before succumbing to a selloff. Even so, it is down only about 7% versus a drop of around 14% for oil.

The fundamental bull case for oil runs thus: The longer prices stay down, the more pressure on producers to curb investment in supply, helping eventually balance the market. There is a fundamental problem with this idea from an investor’s point of view, which I will get to soon.

Don’t bank on a repeat of that. The spring rally came just before the start of the summer driving season and a jump in gasoline demand. Yet stubbornly high crude-oil inventories along with rising stocks of diesel suggest oil will come under even more pressure once driving season ends and refineries begin what will probably be a heavier-than-usual fall maintenance schedule.

This will happen against a global economic backdrop that has also deteriorated since spring. In May, the dollar began strengthening again—usually bearish for commodity prices—and that will likely continue with the Federal Reserve poised to raise interest rates.

Moreover, emerging markets, the growth engine for oil demand, are wobbling. This is epitomized by China, whose summer stock-market seizure and currency devaluation reinforce concerns about debt, capital flight and slowing growth.

Look at copper, the metal embedded as deeply in many a commodity supercycle portfolio as it is in Chinese infrastructure. Back in March, it still traded above $6,000 a metric ton. Last week, it dipped below $5,000 for the first time since 2009.

ETF inflows might yet spark another rally anyway. But again, things have moved against this happening. When the oil futures curve steepens, ETFs invested in futures suffer bigger costs when rolling positions forward as contracts expire. At the end of March, the October 2015 oil contract traded at a discount of less than $4.50 a barrel, or just under 8%, to the contract a year further out.

Today, the discount is almost $7, or more than 14%, meaning anyone buying a product like the United States Oil Fund needs a big rally in near-dated oil futures to offset the negative “roll yield.” To understand the pressure this puts on returns, it is worth noting that, even during oil’s spring rally, that ETF barely made it into positive territory for the year.

As for gaining exposure to any oil rally by betting on E&P stocks, doing so suffers from a fundamental contradiction. This buy case rests on E&P companies being squeezed so hard that many cut output, thereby rebalancing supply and demand and supporting oil prices. Yet putting in capital when the argument for doing so rests on choking off investment is ultimately self-defeating. Just take a look at the E&P sector’s strong second-quarter production numbers, which came amid a spring rally that allowed companies to do follow-on equity offerings at a record pace.

There are indeed growing signs of stress in the sector: Equity issuance has slowed to a trickle, KKR-owned Samson Resources is poised for bankruptcy proceedings and E&P high-yield debt is trading at recession-like levels.

Yet, with oil prices set to come under renewed pressure and seasonal negotiations on credit lines between E&P firms and their banks imminent, that stress will likely intensify in coming months. Down the road, this tees up a more balanced oil market and even likely acquisitions as majors swoop in to buy E&P assets at discount prices. But with this shakeout barely begun, diving in now is just a good way to get hurt.

(GoldMoney) China chooses her weapons

China chooses her weapons
By Alasdair Macleod

China's recent mini-devaluations had less to do with her mounting economic challenges, and more to do with a statement from the IMF on 4 August, that it was proposing to defer the decision to include the yuan in the SDR until next October.

The IMF's excuse was to avoid changes at the calendar year-end and to allow users of the SDR time to "adjust to a potential changed basket composition". It was a poor explanation that was hardly credible, given that SDR users have already had five years to prepare; but the decision confirming the delay was finally released by the IMF in a statement on Wednesday 19th.

One cannot blame China for taking the view that these are delaying tactics designed to keep the yuan out, and if so suspicion falls squarely on the US as instigators. America has most to lose, because if the yuan is accepted in the SDR the dollar's future hegemony will be compromised, and everyone knows it. The final decision as to whether the yuan will be included is not due to be taken until later this year, so China still has time to persuade, by any means at her disposal, all the IMF members to agree to include the yuan in the SDR as originally proposed, even if its inclusion is temporarily deferred.

China was first rejected in this quest in 2010 and since then has worked hard to address the deficiencies raised at that time by the IMF's executive board. That is the background to China's new currency policy and what also looks like becoming frequent updates on her gold reserves. It bears repeating that these moves had little to do with her domestic economic conditions, for the following reasons:

• To have an economic effect a substantial devaluation would be required. That is not what is happening. Furthermore devaluation as an economic solution is essentially a Keynesian proposal and it is far from clear China's leadership embraces Keynesian economics.
• Together with Russia through the Shanghai Cooperation Organisation, China is planning an infrastructure revolution encompassing the whole of Asia, which will replicate China's economic development post-1980, but on a grander scale. This is why "those in the know" jumped at the chance of participating in the financing opportunities through the Asian Infrastructure Investment Bank, which will be the principal financing channel.
• China's strategy in the decades to come is to be the provider of high-end products and services to the whole of the Eurasian continent, evolving from her current status as a low-cost manufacturer for the rest of the world.

China's leaders have a vision, and it is a mistake to think of China solely in the context of a country whose economy is on the wrong end of a credit cycle. This is of course true and is creating enormous problems, but the government plans to reallocate capital resources from legacy industries to future projects. Rightly or wrongly and unlike any western government at this point in a credit cycle, China accepts that a deflating credit bubble is a necessary consequence of a deliberate policy that supports her future plans. She is prepared to live with and manage the fall-out from declining asset valuations and business failures, facilitated by state ownership of the banks.

Instead, to understand why she is changing the yuan-dollar rate we must look at currencies from China's perspective. China is the world's largest manufacturing power by far, and can be said to control global trade pricing as a result. It then becomes obvious that China is not so much devaluing the yuan, but causing a dollar revaluation upwards relative to international trade prices. She is aware that the US economy is in difficulties and that the Fed is worried about the prospect of price deflation, so lower import prices are the last thing the Fed needs. Now China's currency move begins to make sense.

The mini-devaluations were a signal to Washington and the rest of the world that if she so wishes China can dictate the global economic outlook through the foreign exchange markets. China believes, with good reason, that she is more politically and economically robust, and has a better grasp over the actions of her own citizens, than the welfare economies of the west in the event of an economic downturn. Therefore, she is pursuing her foreign exchange policy from a position of strength. And the increments that will now be added to gold reserves month by month are a signal that China believes she can destabilise the dollar through her control of the physical gold market, because it gently reminds us of an unanswered question always ducked by the US Treasury: what evidence is there of the state of the US's gold reserves?

China would probably live with a deferral of her SDR membership for another year, if there is a definite decision in October to include her currency in the SDR basket. That being the case, China must be tempted to increase pressure on all IMF members ahead of the October meeting. The strategy therefore changes from less passivity to more aggression over both foreign exchange rates and gold ownership over the next eight weeks. We can expect China to tighten the screw if necessary.

The stakes are high, and China's devaluation of only a few per cent has caused enough chaos in capital markets for now. But if the eventual answer is that the yuan will not be allowed to join the SDR basket, it will be in China's interest to increase the pace of development of the new BRICS bank instead with its own version of an SDR, selling dollar reserves and underlying Treasuries to fund it. The threat that China will turn her back on the post-war financial system and the IMF would also undermine the credibility of that institution more rapidly perhaps than the dollar's hegemony if the yuan was accepted. And if a US-controlled IMF loses its credibility, even America's allies will desert her, just as they did to join the Asian Infrastructure Investment Bank a few months ago.

It was always going to be the US that faced a predicament from China's growing economic power. She has chosen to bluff it out instead of gracefully accepting the winds of change, as Britain did over her empire sixty years ago. Change in the economic pecking-order is happening again whether we like it or not and China will have her way.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

RiskOn1

This week market relationships underwent a sea-change, with a sudden realisation that the global economy is in a deepening crisis.

Equity valuations in the developed nations are falling sharply and corporate bond spreads are widening, triggering a flight to the relative safety of government bonds. Gold and silver prices have recovered somewhat this week, with gold now 9% up from its lows of six weeks ago, and silver 8%.

While this has been encouraging for followers of precious metals, it is probably realistic to describe their performance so far as evidence of a developing bear squeeze and not yet a sign of something more material. Bears being closed out should be evident from a fall in open interest on the futures market, and this may be true in silver, which is our next chart.

RiskOn2

Note how open interest continued to fall after early August, despite the price recovery. Another reason for OI to drop off is the September contract is winding down, so spread positions were being reduced accounting for much of the fall. If this is so, then short positions in the managed money category will still be uncomfortably high.

This is not so evident in gold, which is next.

RiskOn3

In this case, open interest has steadied since early August, only picking up slightly in the last few days. It could be that new spreads are being opened, rather than new bull positions, but we shall only know for certain when the Commitment of Traders Report is published this evening.

China's series of minor changes to the yuan/dollar rate has triggered, or at least coincided with weaknesses in emerging market currencies, verging on a crash in some instances. The Khazak tenge lost 23% in one day as oil prices slid lower, and the Turkish lira, which has a poor history, has also fallen sharply on political turmoil. Other weakening EM currencies range from Brazil to South Korea, and Thailand to South Africa. Old hands are reminded of the Asian crisis in 1997, which started in a minor way with the Thai baht coming under pressure, spreading to other South East Asian currencies and becoming a full blown regional crisis.

Many of the factors that drove these currencies into a sharp devaluation are present today on a wider and larger scale, with nearly all equity indices firmly entrenched in bear markets. Investors are shifting their perceptions from chasing equity uptrends to protecting themselves, aware that if emerging markets sink further there is a risk of a full-scale rout developing. That being the case, gold prices should benefit considerably from accelerated buying of physical metal throughout Asia.

It seems improbable that the Fed and the Bank of England will persist in their desire to raise interest rates, particularly since the S&P500 and the FTSE are reflecting growing investor panic. Instead, unless equities stabilise of their own accord, there will be a growing likelihood of a new round of quantitative easing aimed at supporting the markets.

To summarise, precious metals prices are rapidly switching from an entrenched bear market to conditions that could drive prices significantly higher over the medium term.

FT : Where will the energy business be in 2025?

Organisations, especially those that are doing well, can easily get stuck on narrow views of the future and their own role within it. It can be useful and creative in those circumstances to give people the opportunity to think more widely. One method that I have seen used to great effect is to ask people to imagine the world in 10 years’ time and suggest what might have changed, particularly against the expectations of the conventional wisdom. The process can provide a useful counterweight to long-term forecasts, which tend to do no more than roll forward recent history.

In that spirit, and for the holidays, here are a few stories on the energy sector from the FT in 2025. These are not forecasts — just possibilities. Readers would be welcome to suggest additions to the list.

1. In Moscow, ShellGaz — the world’s largest energy company as measured by its listing on the FTNikkei 250 — announces that it is proceeding with Eaststream3, the latest in a series of export projects from eastern Siberia. Eaststream3 will take gas by pipeline to the rapidly growing cities of northern India. ShellGaz was formed in 2017 through the merger of Royal Dutch Shell and Gazprom and represented the first fruit of the reset of European-Russian relations after the agreed federalisation of Ukraine.

2. In the UK, Prime Minister Amber Rudd inaugurates the country’s first new nuclear power station for 50 years at Wylfa in North Wales. In her speech, she expresses optimism that work on the long-promised Hinkley Point nuclear station, which has been held up by technical and financial problems, will start by the end of the year.

3. Newly published statistics confirm that Germany is now Europe’s biggest energy exporter, providing wind and solar-generated electricity to the countries of central and eastern Europe. As part of the 2018 plan for further European integration through the creation of a common energy policy this power is supplied at marginal cost. The second-largest energy exporter in Europe is Scotland, which is now the dominant supplier of electricity to the rest of the UK using large-scale onshore wind generated in the Highlands. Resentment at the resulting high energy costs being paid in England (which has an opt out from the Energy Union) is generating pressure for independence from Scotland. As a result of the increased production from renewables, Europe’s degree of dependence on energy imports is falling — a shift that is contributing to the continued weakness of global fossil fuel prices

4. Oil prices rise to almost $75 a barrel (at 2025 prices) as a result of continuing instability in Nigeria and Venezuela. Prices were stabilised in 2016 by the Saudi decision to join Abu Dhabi and Kuwait in cutting production by 2.5m barrels a day. The increase in prices has, however, been limited because expansion of supply capacity in Canada, Russia, Iran and Brazil has outstripped demand. Global oil demand, having peaked in 2019, is now stable at about 97mbd, with increased Asian consumption offset by continuing efficiency gains in Europe and the US.

5. In Chicago, the leading contender for the Democratic party’s nomination for the 2028 presidential election commits herself to an early decision on the fate of the Keystone pipeline. Would-be President (Chelsea) Clinton says her priority will be North American energy independence, based on imports from Mexico and Canada combined with increased ethanol production from grain grown in Iowa.

6. Coal prices touch a 40-year low as coal is forced out of the European and US markets by environmental regulations. In the absence of a global carbon price, however, coal remains the fuel of choice (or necessity) for most of the growing population of India and many other parts of the developing world, having overtaken oil as the largest single source of global energy supply in 2020.

7. Climate change remains a serious and unresolved issue because of the continued use of coal but the focus of attention has shifted to the impact of climate volatility and extreme weather conditions. Insurance premiums for low-lying areas that could be hit by flooding have tripled. In 2025, Singapore announces that it will proceed with the construction of the 40km Lee Kuan Yew sea wall surrounding the island, which can be raised and lowered according to the level of risk.

8. In Beijing, scientists announce the success of a collaborative energy storage project between the universities of Cambridge and Tsinghua to develop new graphene-based materials that can be incorporated into both vehicles and buildings and which can produce efficiency gains of up to 50 per cent.

9. The world second-largest energy company, Amazon Power, continues to expand its role in the electricity sector having displaced or absorbed many traditional utilities. Amazon acts as an aggregator rather than a power producer and its dominant role in the market has drawn criticism both from producers who find their margins squeezed to minimal levels and from civil liberty campaigners who dislike the presence in homes, offices and factories of Amazon boxes which monitor and manage energy usage on all devices. Worldwide, more than 1bn boxes are now in operation producing, according to the company, a 15 per cent reduction in electricity costs for consumers.

10. In Weekend FT Lucy Kellaway has lunch with the first woman appointed as chief executive of a major international energy company.

OK — whatever you think of the other scenarios, I accept that this last one is the most far fetched.

WSJ : China Poised to Boost Banks’ Liquidity to Counter Weaker Yuan


China Poised to Boost Banks’ Liquidity to Counter Weaker Yuan

People’s Bank of China officials say another reduction in banks’ reserve-requirement ratio is imminent

BEIJING—The People’s Bank of China is preparing to flood the country’s banking system with new liquidity to boost lending, according to officials and advisers to the central bank, as a weaker currency could spur more funds leaving Chinese shores.

The step—which involves cutting the deposits banks are required to hold in reserve—would signal that the Chinese central bank’s exchange-rate maneuvering in the past two weeks is backfiring, forcing it to resort to the same easing measures that so far have failed to help spur economic activity.

The move, which the people say could come before the end of this month or early next month, would involve a half-percentage-point reduction in the reserve-requirement ratio, they say, potentially releasing 678 billion yuan ($106.2 billion) in funds for banks to make loans.

It would be the third comprehensive reduction in the reserve requirement this year. Another option being considered at the PBOC is to only target the cut to banks that lend large amounts to small and private businesses—the ones deemed key to China’s future growth—though that strategy hasn’t proven effective in the past in channeling credit to those borrowers.


On Aug. 11, the PBOC engineered a nearly 2% decline in the yuan’s official rate set by the central bank against the dollar, which has resulted in a decline of 4% in the currency’s market rate—the yuan’s steepest slide in two decades. The central bank tied the devaluation to its effort to make the exchange rate more market-driven, as investors have shifted in the past year to now expect the currency to weaken rather than strengthen.

But the devaluation came at a time when a faltering stock market had already severely battered investors’ faith in the government’s ability to manage the economy. And as fears grow of a deepening slowdown, the yuan has kept falling, and the PBOC has resorted to a strategy it has said it would use less: direct intervention to control the yuan’s value.

The latest interference has involved selling dollars and buying yuan to keep the Chinese currency from plummeting. Analysts at Orient Securities Co., a Shanghai brokerage, estimate the central bank has spent more than $40 billion of China’s roughly $3.6 trillion foreign exchange on the currency intervention. As the actions have effectively drained yuan funds from the market, the PBOC last week pumped 260 billion short- to medium-term funds into the financial system to offset the liquidity squeeze.

However, that may not be enough as the slowing economy and weaker currency would trigger greater capital outflows. Yuan positions at Chinese banks accumulated from foreign-exchange purchases fell by a record 249.1 billion yuan in July, a sign that more money is leaving China.

“A new round of reserve-requirement reductions is inevitable,” said Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a government think tank. Mr. Zhang projects as many as four such cuts in the rest of the year.


China’s Central Bank Defends Handling of Yuan Plunge
The Yuan Isn’t Ready to Be a Global Reserve Currency
Still, within the central bank, doubts remain about the effectiveness of such measures, according to the officials and advisers. The latest PBOC data show the government’s efforts to prop up share prices since early July have resulted in a surge in lending to financial institutions, but loans to the real economy have slumped. In addition, a further significant increase in China’s broad money supply of $21 trillion, nearly twice the size of the U.S.’s, could push up inflation and cause asset bubbles.

“The central bank would have preferred not to flood the market again with liquidity, if only it had a choice,” said one of the officials close to the central bank.

The dilemma shows that China’s monetary policy largely remains at the mercy of its still-rigid exchange-rate system. Beijing’s desire to control the yuan’s value, as evidenced by the recent currency intervention, means that unlike the U.S. Federal Reserve and other central banks, the PBOC still lacks the ability to conduct an independent monetary policy. That is because buying or selling the yuan to influence its exchange rate would affect domestic liquidity, causing the central bank to have to adjust its monetary policy as a result.

“We call it Zhou Xiaochuan’s dilemma,” said Wang Jian, an analyst at Orient Securities, referring to the PBOC’s long-serving governor.

For most of the past decade, the PBOC had sold yuan and bought dollars to keep the Chinese currency from rising too fast, which resulted in a massive foreign-exchange reserve and led the central bank to soak up the liquidity by raising the reserve-requirement ratio for banks. Since last year, as market expectations for the yuan’s direction changed to depreciation from appreciation, China has experienced some unnerving capital outflows and the central bank has had to instead cut the reserve-requirement ratios to keep capital from leaving the country as well as to boost market liquidity.

The PBOC has debated whether to devalue the yuan for a long time, according to the officials and advisers. It had resisted the action largely because of its desire to turn the yuan into a global currency, as a weaker yuan could hurt its appeal to international businesses and investors. But in recent weeks, as China’s economy continued to sputter, the central bank found itself having to bow to the depreciation pressure from within the Chinese government.

‘A new round of reserve-requirement reductions is inevitable. ’
—Zhang Ming, a senior economist at the Chinese Academy of Social Sciences
In the months before its surprise move on Aug. 11, the central bank had kept the yuan largely unchanged against the dollar, effectively pushing it higher against currencies in other emerging markets and hurting China’s exporters. In fact, until the depreciation action, the yuan had strengthened by 55.7% against the currencies of its trading partners, after adjusting for inflation, since the Chinese currency was allowed to float somewhat in mid-2005. The yuan had appreciated roughly 33% against the U.S. dollar over the same period.

At a news conference on Aug. 13 explaining its devaluation decision, Zhang Xiaohui, an assistant PBOC governor, said that to keep the value of the yuan—also known as renminbi, or People’s currency—more in line with those of its peers, “there’s a certain need to devalue renminbi against the dollar.” PBOC officials also hinted in recent days that the central bank is largely done guiding the yuan lower and will now focus on holding the line at around 6.4 yuan a dollar.

Some within the Chinese government viewed the PBOC’s strategy of combining the yuan depreciation with market reforms as a smart move that could fend off criticism from China’s critics. Others, however, think the central bank’s timing is questionable and that better communication by the central bank could have avoided some of the subsequent volatility and what some call a market overreaction to the yuan-devaluation move.

Press officials at the central bank didn’t respond to requests for comment.