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Relief for Spanish business as emergency Covid support is extended

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There was big relief for Spanish business last week when it secured government support to ride out the ravages of the Covid-19 pandemic for at least a few more months.

At stake was one of the thorniest issues facing Europe: how far to extend employment assistance in the form of temporary leave programmes.

The dilemma is a profound one: is it better to keep jobs and, in many instances, businesses, on emergency life support, or does it make more sense to call time on subsidy-gobbling zombie jobs and companies? It is a policy test that could decide how many companies emerge from the coronavirus crisis intact and the shape of the broader economy for years to come.

At one end of the European spectrum is Germany’s Kurzarbeit furlough scheme under which workers are sent home and receive about two-thirds of their pay from the government. It has been extended from 12 to 24 months. The UK, by contrast, is replacing its own scheme with a more targeted wage subsidy programme at the end of this month.

Spain, the EU country worst hit by the pandemic in health and economic terms, has opted for something midway between the two, prolonging the country’s emergency leave schemes, known as ERTEs, from the end of September until January 31. 

The Spanish schemes at present cover about 700,000 people compared with 3.5m at their height. Their latest iteration focuses on stricken sectors such as tourism, which has suffered from a 73 per cent collapse in the number of international visitors so far this year, and associated businesses. So the dry cleaner that normally services a now-empty hotel can now benefit from generous exemptions from social security payments.

“The agreement is a good one because from now on it can cover all the companies with problems,” said Iñigo Fernández de Mesa, vice-president of the CEOE employers federation. But he recognises drawbacks to the deal itself and a broader set of preoccupations for business as Spain wrestles to free itself from the economic consequences of Europe’s worst coronavirus infection rate.

Companies remain far from thrilled with the restrictions that come with the Spanish scheme — among them a ban on dismissals for a further six months and prohibitions on overtime and paying out dividends. “We would like a bit more stability, which would have reduced uncertainty for companies,” said Mr Fernández de Mesa, casting an envious look at Germany’s 24-month timetable.

The problem is that the crisis is changing all the time in Spain — and not for the better.

As a coronavirus second outbreak ripples through the country, new restrictions this week have limited movements in and out of Madrid, the country’s economic powerhouse. Meanwhile, the Spanish services sector remains deeply depressed, with the retail sector struggling more than in any other leading EU economy. On Tuesday the government forecast the economy would contract 11.2 per cent this year.

The government holds out hope that the economy will be transformed in the longer term by €140bn in grants and loans from the EU’s coronavirus recovery fund.

Companies ranging from Iberdrola and Acciona, the energy groups, to Telefónica, the telecoms company, are hoping to benefit from EU priorities such as clean energy investment and digital transformation. But the plans are already the subject of controversy, with opposition parties calling for the government to set up a non-partisan agency to distribute the funds to prevent clientelism and inefficiencies.

Mr Fernández de Mesa cites a cluster of other concerns, such as business fears of tax increases and worries that overzealous health curbs will devastate the economy further.

Behind such issues are bigger questions. What is the role of the state at a time when governments are more closely involved in keeping businesses going than ever before in peacetime history? And where should the balance between health and the economy be struck?

In the summer, Spain relaxed coronavirus controls in the hope of retrieving some of the lucrative tourist season but ended up losing on both counts, as infections increased and tourists stayed away.

As Mr Fernández de Mesa acknowledged, the reason Spain’s temporary leave deal was more favourable for businesses than it could have been was that the overall outlook was so bad. “The agreement is a good one because the situation has got worse and companies are closing,” he said.

Daniel.Dombey@ft.com



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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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