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Will inflation data justify investors’ concerns?

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Will inflation data justify investors’ concerns?

Wall Street is beginning to fret about the prospect of rising inflation. US Treasuries, whose value is eroded by higher inflation, continued to lose ground last week, leaving investors to debate when the sell-off will start seriously troubling equity valuations.

The 10-year break-even rate, a common marker of investors’ inflation expectations, hovered around 2.2 per cent last week, reflecting concerns that a looming $1.9tn stimulus package from the Biden administration, paired with continued loose monetary policy from the Federal Reserve, will eventually lead to stronger inflation.

Investors will get their next clue on Friday, when the US Department of Commerce releases its personal consumption expenditures price index for January. Economists forecast a 1.4 per cent year-on-year rise in the core index that strips out volatile food and energy prices, according to Bloomberg. That remains some way below the Federal Reserve’s 2 per cent inflation target.

In December, core PCE was running at 1.5 per cent.

While the core consumer price index, another measure of inflation, has already been released for January, showing a 1.4 per cent increase year-on-year, the PCE is the Fed’s preferred gauge of how much prices are rising. Data from the two markers, which are based on different surveys and calculations, have diverged in the past.

Fabiana Fedeli, global head of fundamental equities at Robeco, said Friday’s figure is likely to be “broadly stable”. A faster rise in April and May is more likely, she added, given that a year-on-year comparison for those months would take into account the economic conditions in the early months of the pandemic. Aziza Kasumov

GM200218_21X Fed inflation WEB V3

Is German economic sentiment on the upswing?

A key measure of morale among German households and companies — currently suffering one of Europe’s longest lockdowns — will be provided with the release of two widely tracked surveys this week.

On Monday, the Ifo Institute in Munich will issue its latest business climate indicator for the EU’s biggest economy, which economists expect to rebound from a seven-month low of 90.1 in January to hit 91.8 in February.

That will be followed on Thursday by the publication of the GfK institute’s indicator of consumer confidence, which is also likely to recover after hitting an eight-month low last month.

The nation’s economy was struck by a record postwar contraction of 5 per cent last year. The latest lockdown, which began in mid-December and has been extended until at least March 7, means the economy is set to undergo another contraction at the start of this year.

Deutsche Bank economists last week slashed their forecasts for economic output in Germany, predicting it would shrink 2 per cent in the first quarter and recover more slowly than expected with growth of 4 per cent over the full year.

“As in the second quarter of last year, the brunt of the lockdown will be felt in private consumption, in particular in dry goods retail and personal services,” the Deutsche economists said in a note to clients. 

However, they noted that consumer confidence was “holding up a bit better” than last year, helped by “more stable business cycle expectations and a more sanguine labour market assessment”. Martin Arnold

Can the Turkish lira continue its rally?

The Turkish lira has experienced a dramatic turnround this year, after a disastrous 2020, to become the world’s leading emerging market currency.

It has gained more than 6 per cent against the dollar in 2021, after plunging by a fifth last year. The resurgence followed a shake-up in November of the country’s economic management.

Some analysts think the rally, which has brought the exchange rate against the dollar to just below the closely watched TL7 level, has further to go, albeit at a slower rate than the runaway pace of recent months.

Phoenix Kalen of Société Générale predicts the lira will strengthen to 6.2 to the dollar by the end of the year.

The lira’s rally “can still be fuelled by other segments of market participants re-engaging in Turkish currency markets, and by gradual de-dollarisation from retail customers in Turkey,” she said.

Piotr Matys, an emerging market currency strategist at Rabobank, also thinks the lira can add to its gains. However, he expects some headwinds when the central bank begins buying foreign currency, as promised, to replenish its severely depleted reserves.

The big unknown is how long President Recep Tayyip Erdogan, a strong opponent of high interest rates, will be willing to tolerate the hawkish stance adopted by Naci Agbal, the new central bank governor, who has engineered the change in the lira’s fortunes. The central bank held the country’s main policy rate at 17 per cent last week.

“There is definitely a risk that Governor Agbal will be in a similar position to his predecessors, who were under tremendous pressure to ease monetary policy,” said Matys. “But I assume that it may not happen until early next year.” Laura Pitel



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Emerging Markets

NYSE to suspend trading of China’s Cnooc next month

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The New York Stock Exchange is to start delisting proceedings against China National Offshore Oil Corporation to comply with an executive order from Donald Trump that bans Americans from investing in companies with ties to the Chinese military.

The NYSE on Friday said it would suspend trading in Cnooc’s American depository shares on March 9, after determining that the company was “no longer suitable for listing” following the order that the former US president signed in November.

The order banned investing in several dozen Chinese groups that were last year put on a Pentagon blacklist of companies that are accused of working with the People’s Liberation Army and threatening US security. Trump set a January 28 deadline for the ban to take effect, but President Joe Biden pushed the deadline back to May 27.

The NYSE move comes as Biden evaluates a number of assertive actions that Trump took against China during his last year in office. The commerce department last year put Cnooc on a separate blacklist — called the “entity list” — that makes it hard for US companies to sell products and technology to the Chinese oil group.

The Biden administration has not made clear whether it intends to keep Trump’s executive order in place. But the new president and his officials have so far adopted a tough stance towards China over everything from its economic “coercion” to concerns about its clampdown on the pro-democracy movement in Hong Kong to the repression of more than 1m Uighur Muslims in the northwestern Chinese province of Xinjiang.

Earlier this month, Biden used his first conversation with Chinese president Xi Jinping since assuming office to raise concerns about Hong Kong and Xinjiang, and aggressive Chinese actions towards Taiwan. Antony Blinken, secretary of state, also described the detention of Uighurs in labour camps as “genocide”.

Jen Psaki, White House press secretary, has said the administration was conducting a number of “complex reviews” of the China actions that Trump took. The former president put dozens of other Chinese companies on the Pentagon and commerce department blacklists, including Huawei, the Chinese telecoms equipment group.



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Bond sell-off roils markets, ex-Petrobras chief hits back, Ghana’s first Covax vaccines

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The yield on the benchmark 10-year Treasury exceeded 1.5 per cent for the first time in a year and the outgoing head of Petrobras warns Brazil’s President Jair Bolsonaro against state controlled fuel prices. Plus, the FT’s Africa editor, David Pilling, discusses the Covax vaccine rollout in low-income countries. 

Wall Street stocks sell off as government bond rout accelerates

https://www.ft.com/content/ea46ee81-89a2-4f23-aeff-2a099c02432c

Ousted Petrobras chief hits back at Bolsonaro 

https://www.ft.com/content/1cd6c9fb-3201-4815-9f4f-61a4f0881856?

Africa will pay more for Russian Covid vaccine than ‘western’ jabs

https://www.ft.com/content/ffe40c7d-c418-4a93-a202-5ee996434de7


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Petrobras/Bolsonaro: bossa boots | Financial Times

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“Brazil is not for beginners.” Composer Tom Jobim’s remark about his homeland stands as a warning to gung-ho foreign investors. Shares in Petrobras have fallen almost a fifth since President Jair Bolsonaro said he would replace the widely respected chief executive of the oil giant.

Firebrand Bolsonaro campaigned on a free-market platform. Now he is reverting to the interventionism of leftist predecessors. It is the latest reminder that a country with huge potential has big political and social problems.

Bolsonaro reacted to fuel protests by pushing for a retired army general to supplant chief executive Roberto Castello Branco, who had refused to lower prices. This is politically advantageous but economically short-sighted.

Fourth-quarter ebitda beat expectations at R$60bn (US$11bn), announced late on Wednesday, a 47 per cent increase on the previous quarter. This partly reflected the reversal of a R$13bn charge for healthcare costs. Investors now have to factor the cost of possible fuel subsidies into forecasts. The last time Petrobras was leaned on, it set the company back about R$60bn (US$24bn at the time). That equates to 40 per cent of forecast ebitda for 2021.

At just over 8 times forward earnings, shares trade at a sharp discount to global peers. Forcing Petrobras to cut fuel prices will make sales of underperforming assets harder to pull off and debt reduction less certain. Bidders may fear the obligation to cap prices will apply to them too.

A booming local stock market, rock bottom interest rates and low levels of foreign debt are giving Bolsonaro scope to spend his way out of the Covid-19 crisis. But the economy remains precarious. Public debt stands at 90 per cent of gross domestic product. The real — at R$5.40 per US dollar — remains near record lows. Brazil’s credit is rated junk by big agencies.

Rising developed market yields will make financings costlier for developing nations such as Brazil. So will high-handed treatment of minority investors. It sends a dire signal when a government with an economic stake of just over a third uses its voting majority to deliver a boardroom coup.

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