News of the week summary - 02/04/2024
Central banks:
- Wage growth concerns impact ECB's rate decision
European Central Bank (ECB) President Christine Lagarde's comments on cooling wage growth have intensified speculations about early rate cuts, prompting reactions in the euro and bond markets. The fear of rising inflation, driven by increased demands for higher wages, has been a concern for central banks. In the European Union, wage growth was slower due to lengthy sectoral pay deals, but by Q3 2023, the ECB's reported a historic 4.7% annual pay growth, outpacing the US and the UK.
While wage growth is expected to slow from 5.3% to 4.4% in the current year, concerns persist. ECB's assumption that companies would absorb wage increases within their margins seems valid, according to Lagarde. This phenomenon is contributing to economic growth, and the recovery is anticipated in 2024.
Despite low unemployment, there are signs of labor hoarding, possibly due to companies being reluctant to lay off staff in anticipation of increased demand. Labor shortages persist in the Eurozone, with a notable 31% of services companies reporting worker shortages.
Recent data has also revealed a decline in inflation in Germany and France, fueling hopes of ECB rate cuts. German two-year government bond yields have decreased, signaling positive market expectations. However, Lagarde urges caution, emphasizing the need for more data.
- Strong US job growth dampens rate cut expectations
The US economy exceeded expectations by adding a staggering 353,000 jobs in January, nearly double the forecasted 180,000 increase. This unexpected surge in employment has led investors to reconsider the likelihood of a March interest rate cut. Analysts describe the figures as "stunning," prompting a reassessment of earlier predictions.
Federal Reserve Chair Jay Powell had previously downplayed expectations for a rate cut, cautioning that it wasn't the central bank's primary scenario. The latest job data supports the Fed's stance, despite criticism from Republican presidential frontrunner Donald Trump (who accused Powell of aiming to lower rates to benefit Democratic presidential candidate Joe Biden). After the release of the employment figures, futures traders reduced the probability of a March rate cut from 37% to around 20%. The market also adjusted expectations for a rate cut in May, dropping from fully priced in to about 88%. Treasury yields rose in response, reflecting a retreat from earlier expectations of imminent rate cuts.
While acknowledging that January's job figures may be somewhat inflated due to seasonal hiring, analysts emphasize the overall strength of the data. Average hourly wages for US workers grew by 0.6% to $34.55, marking a 4.5% increase over the past 12 months. Revised December figures also revealed an additional 333,000 jobs, up from the initial estimate of 216,000.
Bitcoin ETF launch sparks surge in Futures trading tactics
The recent introduction of the first US spot bitcoin exchange-traded funds (ETFs), has triggered a rush among futures traders, capitalizing on the volatile nature of crypto-related prices. The open interest in bitcoin futures contracts at Chicago's CME Group reached record levels in January, surpassing even the well-known Binance exchange in trading derivatives of bitcoin. Daily trading volumes surged, with an average of 66,000 bitcoin futures contracts changing hands, representing a nearly 50% increase from the previous month.
Contrary to expectations that the launch of ETFs investing directly in bitcoin would attract institutional investors and boost its price, bitcoin has experienced a decline since the regulatory approval two weeks ago. However, the surge in futures interest indicates a new class of traders focused on arbitrage opportunities between bitcoin and its derivatives, rather than the overall market direction. Traders are also incorporating the new bitcoin ETFs into their strategies, particularly in the options markets, allowing them to make wagers on price swings.
China implements short selling restrictions
In response to a persistent stock market sell-off, China has officially imposed restrictions on short selling, barring investors from lending shares for short selling within a designated lock-up period, according to announcements from the Shenzhen and Shanghai bourses. The new measures, effective immediately, aim to foster a fairer market order, as stated by the China Securities Regulatory Commission. Additional limitations on securities lending will be introduced from March 18.
These regulatory actions come as Chinese authorities face mounting pressure to halt the ongoing stock market decline fueled by uncertainties surrounding the country's economic growth prospects. Prime minister Li Qiang recently pledged "more forceful" state support for the market; however, this failed to inspire confidence among investors, as shares ended a three-day winning streak on Friday.
The CSI 300 benchmark index, experienced an 11% decline in 2023, marking its third consecutive year of descent, while the Hang Seng index, with many of China's major companies, fell by 14%, its fourth consecutive annual decline.
Hong Kong court orders liquidation of real estate titan Evergrande
A Hong Kong court has issued a winding-up order for Evergrande, plunging the world's most indebted property developer into a new and unpredictable phase of its collapse. This order comes over two years after the company's official default, triggering a cash crunch for Chinese developers. The judge issued the order after Evergrande failed to present a restructuring plan to satisfy international creditors, despite lengthy negotiations.
The decision will now test the jurisdiction of Hong Kong courts in mainland China, where foreign claims are often considered to carry little weight. While Evergrande is listed in Hong Kong, the majority of its assets and over $300 billion in liabilities are in China. The property slowdown has become one of Beijing's significant political challenges. The winding-up order, could potentially pave the way for liquidators to attempt to seize control of some Evergrande assets in mainland China. However, the acceptance of the Hong Kong winding-up order by mainland courts remains uncertain.
This ruling might trigger further lawsuits related to the substantial losses stemming from Evergrande's collapse. Trading in Hong Kong-listed shares of Evergrande and its subsidiaries was halted after the court's decision.
The complexities surrounding the liquidation process, the recovery for international investors, and the cooperation of mainland China's authorities and courts will play a crucial role in determining the outcome. The case will be closely watched as it unfolds, reflecting the challenges of navigating cross-border insolvency issues within the Chinese legal and political landscape.
Saudi Arabia abandons plan to increase oil output, says Aramco
Saudi Arabia, the world's largest oil exporter, has made a significant policy reversal by abandoning its plan to expand daily oil production capacity. State-run Saudi Aramco, responsible for about 10% of the world's daily oil production, announced that the energy ministry requested the company to drop its proposal to increase its maximum sustainable production capacity from 12 million barrels per day (bpd) to 13 million bpd by 2027.
The decision to abandon the expansion plan was not attributed to any technical or operational issues at Aramco, and the company remains capable of restarting the program if needed. The energy ministry did not provide an explanation for the shift in policy. Amin Nasser, the CEO of Aramco, had been advocating for increased investment in output for the past two years.
Over the last 18 months, Saudi Arabia has repeatedly cut production as part of OPEC's efforts to support prices amid slowing demand growth and increased output from the U.S. and other countries. Currently producing about 9 million bpd, down from an average of 10.2 million bpd in the first three months of 2022, Saudi Aramco has 3 million bpd of spare capacity, reducing the immediate need for further maximum output increases.
The International Energy Agency recently forecasted a substantial surplus of oil in 2024 due to slowing demand growth and increased production from non-OPEC countries. The move by Saudi Arabia poses challenges for OPEC and its allies as they struggle to regain market share without triggering a significant rally in crude prices.
IMF doubles Russian GDP growth outlook
The International Monetary Fund (IMF) has doubled its growth outlook for Russia, anticipating a faster expansion of the economy this year. Russia's gross domestic product (GDP) is forecasted to rise by 2.6% in 2024, which is more than double the previous projection made in October. This growth rate is slightly slower than the estimated 3% expansion for 2023.
The upgraded forecast of 1.5 percentage points is the largest increase for any economy featured in the IMF's recent update. The figures raise questions about the effectiveness of Western sanctions designed to depress fiscal revenues that the Kremlin uses to finance its war in Ukraine. Despite facing sanctions, Russia's economy demonstrates resilience, with its banks reporting record profits in the previous year.
Pierre-Olivier Gourinchas, the IMF's chief economist, acknowledged that the projections are somewhat preliminary as the fund's economists validate Russian statistics. He highlighted that the Russian economy has performed better than expected, attributing it to the strong stimulus from government spending in the "war economy." However, Gourinchas cautioned that in the longer term, potential growth might be lower than before the full-scale invasion of Ukraine nearly two years ago.
Silicon Valley's venture capitalists find themselves with $300B of cash to spend
In Silicon Valley, venture capitalists (VC) find themselves with a substantial $311 billion in unspent cash, cautious about risky bets on startups and focusing on returning capital to their backers. Despite deploying half of the record $435 billion raised during the pandemic-era boom from 2020 to 2022, VC groups are accumulating reserves as they adopt a more prudent approach amid declining startup valuations. Rather than making new bets, they prefer supporting established tech groups or reinforcing their existing portfolio companies.
Despite the substantial "dry powder" available for investment, experts don't expect VCs to splurge anytime soon. The caution stems from the need to "clean the mess" created during a period of ultra-low interest rates, which has become apparent as rate increases have led to higher costs for startups.
There is growing pressure on VCs to utilize their accumulated funds or consider downsizing funds, forgiving commitments to investors, and resizing, echoing actions taken during the first tech bubble crash in 2000.