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Will Turkey’s new central bank governor announce a big rate rise?

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Will Turkey’s new central bank governor announce a big rate rise?

Expectations are high for the first monetary policy meeting chaired by Naci Agbal, Turkey’s new central bank governor, on Thursday.

His appointment on November 7 triggered the departure of president Recep Tayyip Erdogan’s finance minister and son-in-law Berat Albayrak, who had faced months of criticism for his management of the country’s $740bn economy.

Following the upheaval, Mr Erdogan — who is infamous for his opposition to high interest rates — promised a reset with international and local investors and vowed to “swallow a bitter pill” if necessary to get the economy back on the right track.

Markets responded with glee. The Bist 100 stock index climbed by nearly 8 per cent over the week. The lira, which has lost more than a quarter of its value against the dollar this year, also rallied as investors bet that the central bank would announce the substantial interest rate rise that economists have long warned is sorely needed.

Estimates range from no change in the one-week repo rate, currently at 10.25 per cent, to an increase to 16 per cent, according to a Bloomberg survey. The median projection is a rise to 15 per cent.

Daniel Salter, head of equity strategy at Renaissance Capital, argues that an increase of 4 percentage points or more would be enough to send “a strong but necessary signal of a desire to normalise policy, attract money back to lira assets, control inflation and stabilise the currency”.

Per Hammarlund, chief emerging market strategist at Swedish bank SEB, offered a warning to the new governor about the danger of a currency plunge: “If Agbal fails to act decisively, expect the lira to fall sharply to new lows.” Laura Pitel

How much has US consumer spending slowed?

US retail sales figures, due on Tuesday, are expected to show that month-on-month growth slowed in October ahead of the key holiday shopping season as the effects of fiscal stimulus fade and the coronavirus pandemic worsens

Economists estimate that retail sales advanced 0.5 per cent from September when they rose 1.9 per cent. So-called control sales, an underlying measure that excludes more volatile items such as petrol and building materials, are also expected to have climbed 0.5 per cent month on month in October. 

Consumer spending — a key driver of the US economy — was supported earlier this year by a record-breaking $2tn fiscal stimulus package that helped boost incomes. However, Congress failed to strike an agreement on another package ahead of this month’s US election and some economists now think the prospects for one before the presidential inauguration in January are dimming

“Consumers are likely to be much more cautious in the coming weeks with employment slowing and fiscal aid disappearing,” said Gregory Daco, economist at Oxford Economics. “As such, phase two of the recovery is expected to be much slower.”

Despite last week’s announcement of a coronavirus vaccine breakthrough, the US is experiencing a resurgent wave of infections heading into the Thanksgiving holiday on November 26 and some states have introduced further restrictions to curb the spread of the virus. 

“I think we’re in a pretty tough place right now,” said former New York Federal Reserve president William Dudley during the FT’s Global Boardroom event last week. “I wouldn’t rule out a double dip if the pandemic worsens.” Mamta Badkar

Is the gold rally coming to an end?

Gold prices last week fell to their lowest levels since the end of September following the news of a big step forward in the search for a Covid-19 vaccine. 

The price of the haven asset has pushed 24 per cent higher this year, peaking at a record of $2,072 an ounce in August. In part, that is because of the popularity of gold-backed exchange traded funds, which trade on stock exchanges but are linked to physical holdings of gold stored in vaults. 

But gold has erased most of its gains for the month. Having gained 4 per cent in the first week of November, it dropped 3.3 per cent in the second to end the week around $1,890 a troy ounce.

In a sign of the change in sentiment last week, gold-backed ETFs had the biggest net outflows since the stock markets plunged in March. 

Nevertheless, some analysts predict that gold’s strength is not over yet.

Goldman Sachs said that an improving US economy in 2021 could be supportive for gold, especially in the event of an increase in inflation, for which the metal is often used as a hedge.

“In our view, the structural bull market for gold is not over and will resume next year as inflation expectations move higher, the US dollar weakens and emerging market retail demand continues to recover,” Goldman Sachs said, adding that it expected gold prices to rise to $2,300 an ounce within the next year. Henry Sanderson



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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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