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Wednesday 18th of September 2019 |
How the global bond rally lost its fizz @FT Africa |
A $1tn fall in the value of global bond markets this month is rekindling one of the biggest debates in finance: is the bull run in bonds finally coming to an end? For decades, the only way for bond prices has been up, reaching mind-boggling records in recent months. By the end of August, some $17tn of bonds, about a third of the global total, were trading at such high prices that buyers were guaranteed a loss if they held them to maturity, rewriting the rules of fund management. The rally, fuelled of late by nerves over the economic impact of trade wars and runaway expectations for central bank stimulus, has meant that borrowers have been able to bring new debt to market at a tiny or even negative cost, piggybacking on investors’ hunt for safe assets. Last week, however, this all-consuming free money craze took a rare whack. The yield on the Bloomberg Barclays Multiverse index — the broadest bond market gauge that tracks debt with a total value of more than $58tn — has jumped sharply this month, from a record low of 1.4 per cent to 1.65 per cent as of the end of Friday. In dollar terms, that translates into the global bond market losing over $1tn of value in just 10 trading sessions. It also means that the stack of negative-yielding bonds has shrunk by more than $3tn. Bonds remain historically highly priced even now, but the pullback suggests that some of the forces pushing nervous investors into the world’s premier safe assets have been overdone. “There is no question that Europe taught us that if we have a recession, there really is no lower bound [in interest rates],” said Gershon Distenfeld, co-head of fixed income at asset manager AllianceBernstein. “But if we avoid the worst, rates are probably too low.” The moves have been sharp. The 10-year Treasury yield has jumped from a low of 1.46 per cent in August to 1.82 per cent, the German Bund yield has climbed from minus 0.71 per cent to minus 0.49 per cent, and the UK 10-year Gilt yield has edged up from 0.41 per cent to 0.68 per cent. Even benchmark borrowing costs in Japan — caught in the vice of the central bank’s “yield curve control” policy — have risen from minus 0.29 per cent to minus 0.15 per cent. The Multiverse index has lost 1.4 per cent already in September. If sustained, this will be the worst monthly loss in over a year, and the 13th biggest monthly decline of the past decade. European markets have added to the sense that the rally, while not about to reverse, is running out of steam. Last week, the European Central Bank cut deposit rates even deeper below zero and restarted its bond-buying programme in a fresh bid to drag up dour inflation. Bond yields in the region, however, have not declined further. “Since the ECB meeting last week the market’s narrative seems to be changing, and we tend to agree with the shift,” RBC analysts argued in a recent note. “We recommend not to fight the yield increase.” Investors now appear more open to believing that the global economy will dodge a recession. Optimists can point to upbeat US retail sales or a positive turn in German economic sentiment, and argue that the most extreme bearish cases for the UK and Italy now appear somewhat less likely. That all adds up to a brightening outlook that hurts the bond market, according to RBC. “All these arguments are falling on fertile ground as the market had worked itself in a negative state of mind during August. Hence, there is likely to be a substantial amount of position adjustment still to come once asset allocation committees have met,” the bank’s strategists argued in a note. China’s announcement of a bevy of policy changes at the start of the month marked the turning point for the summer’s bond market narrative, which had “overshot” at least partly due to technical factors such as mortgage bond hedging, according to Ashish Shah, co-chief investment officer for fixed income at Goldman Sachs Asset Management. French bank Société Générale has also advised clients to lighten their exposure to fixed income in response to what it sees as “overly aggressive” bets on the scale of impending monetary easing from the major central banks. However, analysts and investors are reluctant to call the end of the bond market’s long-term rally, given the seismic forces that power it. Inflation — the market’s kryptonite — remains an unlikely danger, and although a global recession might be averted, there are disappointingly few signs of a durable upswing. The end of the three-decade bond bull run has been spotted more often than Elvis, but given the length of the post-crisis global expansion and the still-simmering trade tensions between the world’s two economic superpowers, many investors remain convinced that the all-time low in bond yields is yet to be seen. “We have to recognise that yields are a function of a lot of things . . . There is still a tremendous amount of uncertainty when it comes to economic growth, politics and trade policy,” Mr Distenfeld said. Technical factors still underpin the fixed income market, such as nearly indiscriminate appetite from long-term institutional investors likely to seize on any pick-up in yields. “You have to look at who the buyers are,” said Sophie Huynh, a cross-asset strategist at Société Générale. “The pension funds, the insurers, they don’t have a choice, and that is not going to change tomorrow. You are still going to have the flows.” Before one can call the bottom in global bond yields, investors need to see the economy weaken significantly, markets sell off and the Fed embrace a full rate-cutting cycle, said Priya Misra, head of global rates strategy at investment bank TD Securities. “We are nowhere close to the bottom in rates.”
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24-JUN-2019 :: Wizard of Oz World Africa |
Eventually, it is revealed that Oz is actually none of these things, but rather an ordinary conman from Omaha, Nebraska, who has been using elaborate magic tricks and props to make himself seem “great and powerful”. The US two year note which is at around 1.75% is the financial instrument which is the purest signal. We are in ‘’nose-bleed’’ territory. This is ‘’Voodoo Economics’’ and just because we have not reached the point when the curtain was lifted in the Wizard of Oz and the Wizard revealed to be ‘’an ordinary conman from Omaha who has been using elaborate magic tricks and props to make himself seem “great and powerful”’’ should not lull us into a false sense of security.
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03-JUN-2019 :: Bond Yields in "Tilt" Mode Africa |
Whilst I accept that its a 20/80 [US Consumer absorbs 20%, China will have to absorb 80%] of the Tariff Price increase, nevertheless even 20% of a 100 is inflationary. The US Rates and Bond Market looks seriously overcooked to me.However, what we also know is that Mar- kets can stay irrational longer than anyone can stay solvent.
Home Thoughts
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"The Doper's Dream - Thomas Pynchon, Gravity's Rainbow Africa |
Last night I dreamed I was plugged right in To a bubblin' hookah so high, When all of a sudden some Arab jinni Jump up just a-winkin' his eye. 'I'm here to obey all your wishes,' he told me. As for words I was trying to grope. 'Good buddy,' I cried, 'you could surely oblige me By turning me on to some dope!' With a bigfat smile he took ahold of my hand, And we flew down the sky in a flash, And the first thing I saw in the land where he took me Was a whole solid mountain of hash! All the trees was a-bloomin' with pink 'n' purple pills, Whur the Romilar River flowed by, To the magic mushrooms as wild as a rainbow, So pretty that I wanted to cry. All the girls come to greet us, so sweet in slow motion, Mourning glories woven into their hair, Bringin' great big handfuls of snowy cocaine, All their dope they were eager to share. We we dallied for days, just a-ballin' and smokin', In the flowering Panama Red, Just piggin' on peyote and nutmeg tea, And those brownies so kind to your head. Now I could've passed that good time forever, And I really was fixing to stay, But you know that jinni turned out, t'be a narco man, And he busted me right whur I lay. And he took me back to a cold, cold world 'N' now m'prison's whurever I be... And I dream of the days back in Doperland And I wonder, will I ever go free?”
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Benjamin @netanyahu left vulnerable by inconclusive Israel election @FT Law & Politics |
Benjamin Netanyahu’s political future hung in the balance as Israeli voters delivered another inconclusive election result, with no clear path to a majority for either the four-term prime minister’s Likud party, or his rivals in the Blue and White alliance, exit polls run by local television channels said. The muddled outcome in one of the most divisive elections in Israeli history — seen both as a referendum on Mr Netanyahu, and on the role of Judaism in Israeli public life — threw up a limited range of options. These include: a fragile unity government between the parties, brokered by the secular, rightwing party Yisrael Beiteinu; a third election in the midst of rising tensions with Iran, Hizbollah and Hamas; or a spate of defections between the parties to form a narrow, opportunistic coalition. Neither would guarantee a record fifth premiership for Mr Netanyahu, Israel’s longest serving prime minister, who has energised the economy and forged ties with world leaders, including Donald Trump, US president, and Vladimir Putin, Russian president, while deepening the divides in Israeli society with anti-Arab rhetoric and biblical claims to the occupied Palestinian territories. “We are witnessing quite a dramatic outcome — for the first time in a decade, there is a high likelihood that Netanyahu will not serve as a prime minister,” said Yohanan Plesner, the director of Israel Democracy Institute, and a former member of parliament. “This is unprecedented.” The exit polls — official results will take hours to tally — indicate Mr Netanyahu’s rightwing Likud winning between 31 and 33 seats in the Knesset, while Blue and White, led by the popular but politically inexperienced former chief of the military, Benny Gantz, were neck and neck with a slightly higher haul predicted. Mr Gantz told cheering supporters in Tel Aviv that he was open to a unity government, but he has ruled out supporting Mr Netanyahu as prime minister if he is indicted on corruption charges. “Starting tonight, we will work to form a broad unity government that will express the will of the people and of a majority of [Israeli] society. A government that will set the order of priorities as we think it should be. Netanyahu did not succeed in his mission. We, in contrast, proved that the idea known as Blue and White, succeeded big and it is here to stay.” Mr Netanyahu, speaking after Mr Gantz, told a vocal crowd of a few hundred supporters, that the results showed that Israel “is at a historic point”. He listed the danger from Iran, called Mr Trump his good friend on the verge of releasing a peace plan that would shape Israel for generations, and assailed the Arab political parties as supporters of terrorists. “We will enter negotiations to create a strong, Zionist government,” he vowed, without acknowledging the results of the polls. Avigdor Lieberman, the leader of Yisrael Beiteinu (Israel Our Home), described the results as a “national emergency”, and repeated his calls for a unity government that would exclude the two parties that represent the ultraorthodox, a deeply religious Jewish minority, and the extreme rightwing parties that have formed the core of Mr Netanyahu’s coalitions. “We have only one option — a national, liberal, broad government,” Mr Lieberman told supporters in Jerusalem, after emerging as the predicted kingmaker with between eight and 11 seats forecast by the exit polls. Final results are not expected until Wednesday morning, and the exit polls have had a wide margin of error in the past. Mr Netanyahu and his allies were closer to a majority than the Blue and White alliance, with either 56 or 57 seats, but if the polls are accurate in predicting that one potential coalition partner, the racist, anti-Arab Jewish Power party, did not cross the 3.25 per cent of the national vote threshold, he has run out of traditional allies with which to form a government. That leaves Mr Lieberman, a one-time ally of Mr Netanyahu’s who broke with the prime minister over concessions to the ultraorthodox, holding a crucial role. He appears to have doubled his seats in the Knesset after running an election seeking the support of secular rightwingers. The two ultraorthodox parties have together won either 16 or 17 seats, the polls said, but might be forced into opposition despite a near-record turnout. Other centrist and leftwing parties could win about a dozen seats, bringing the Blue and White alliance and its potential allies to about 44 or 45 seats, according to the exit polls. The Arab Joint List, reunited after a dismal showing in the April election, won either 11 or 12 seats, but the Blue and White leadership has ruled out sitting in government with its leaders. Mr Lieberman is expected to exact a dear price for his support. In previous governments with Mr Netanyahu, he has served as defence minister and as foreign minister. With 11 Knesset seats for this party, he is expected to ask for more cabinet positions before choosing which way to lean. But his hand is weakened by the fact that if Likud and Blue and White resolve their rivalries, he could be left out of government completely — the two parties would collectively have some 68 seats in the 120-seat Knesset.
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When @realDonaldTrump discovered the real Middle East @FinancialTimes Law & Politics |
Hurt us and we’ll hurt your friends. That’s been the apparent Iranian strategy since the US launched into maximum pressure mode, tearing apart the 2015 Iran nuclear deal and crippling the Iranian economy with debilitating sanctions. Incapable of retaliating against the US — or, more likely, too scared of the consequences — Iran has punished American allies in the Gulf, with Saudi Arabia its main target. The objective has been to demonstrate that the pain of US penalties will be spread around. If Iran can’t sell oil, other producers, and the market, will suffer too. That strategy appeared to work for a while: tankers in the Gulf were attacked, Saudi oil pipelines sabotaged and pumping stations damaged, all through carefully calibrated attacks by Iranian proxies and at little cost to Tehran. In June, a planned military strike by the US, in response to the shooting down of an American drone, was called off by Donald Trump, a US president more interested in ending wars than starting new ones. On Saturday, however, Iran’s playbook was torn up. In a brazen attack, an Iranian-backed group struck at the jewel in the Saudi crown, the Abqaiq processing centre that handles half of Saudi production, as well as an oilfield. The impact was devastating, knocking off 5 per cent of global oil supplies and driving oil prices up 10 per cent. It was likened by some to the shock of Saddam Hussein’s 1990 invasion of Kuwait. Whether the apparent drone strikes were launched from Yemen, as the Iran-backed Houthi rebels have claimed, or from Iraq by Iranian-allied militias, as some in the US claim, or even from Iranian territory is yet to be determined. Whether the strike was more devastating than intended or deliberate and ordered for maximum effect by Tehran might never be known. But whatever the answers, the responsibility will fall on Iran. This provocation was a step too far. Yet the crisis should have been foreseeable, if only Mr Trump was not learning about the Middle East on the job. His withdrawal from the nuclear deal, the region’s only diplomatic achievement in decades, was motivated by a mistaken conviction that a deal struck by his predecessor, Barack Obama, was deeply flawed and that only he, the master dealmaker, could produce a better outcome. His move ignored the Iranian regime’s ability to absorb pressure. It also failed to grasp that Iran goes on the offensive when it feels the need to defend itself. Its appetite for risk is greater than that of its neighbours. And the proxies it can use — from Yemen to Iraq, Syria and Lebanon — provide leverage that cannot be matched by Gulf states. Indeed, the attack on Saudi oil facilities has exposed not only the vulnerability of Saudi oil infrastructure. It has underlined the disastrous failure of Riyadh’s four-year military campaign in Yemen, intended to crush the Houthi rebels who may be behind the latest attack. Some in the US administration, including the recently sacked national security adviser, John Bolton, might have had an endgame in mind: pressure would either collapse the Iranian regime from within or lead to a military campaign that accomplishes the same. That was never a realistic outcome. Mr Trump, moreover, was not in agreement with the plan, preferring to threaten war but not to fight one. His assumption has been that Iran will fold and agree to negotiations on his own terms. Iran’s reaction has been to gain as much leverage as possible, prove that it will not be cowed and ensure that if it were to return to the negotiating table it would not be on Mr Trump’s terms. That prospect looked more likely in recent weeks, with France leading efforts to bring the parties back to the table. Whether by design or accident, Iran has now over-reached. So grave has the attack been that the US — and Saudi Arabia — have not rushed into a response. A military retaliation could come at any time but it would also expose Saudi Arabia to more attacks. An uncontrollable Middle Eastern conflict is not what Mr Trump wants just as he heads into a re-election campaign. Not a student of history or a man of details, he is discovering the hard way that it is easier to start a crisis in the Middle East than to control it, let alone end it.
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Saudi oil attack highlights Middle East's drone war @FinancialTimes Law & Politics |
Long before the attack on Saudi Arabia’s oil facilities that knocked out half of its oil production, the kingdom knew it was vulnerable to assault from armed drones. Houthi rebels in neighbouring Yemen have often used this new type of aerial weapon, alongside missiles, to target Saudi airports, desalination plants and crude facilities in the past 18 months. The rising threat has prompted numerous Saudi agencies — from Saudi Aramco, the state oil company, to air defence, ports and civil aviation authorities — to scout the US and Europe for adequate defence systems, said one defence industry executive. “They’ve been in a panic [over drones] since the new year,” the executive said. “It’s come down from the top — protect the nation. If you tell me [your system] can do it, get it here now.” The details of last weekend’s attacks on Abqaiq, a crude processing centre, and the Khurais oilfield, remain murky: On Sunday, Houthi rebels said they had used 10 drones to conduct the assault. But Washington has blamed Iran, which is accused by the US and Saudi Arabia of smuggling arms to the Houthis, including missiles and drones. US media reported that US intelligence indicated many of the strikes were launched from the Islamic republic and could have involved missiles. Saudi Arabia has not yet backed up such claims. Iran has denied any involvement. Either way, armed drones have become the latest weapon of choice across the Middle East. And as tensions between the US and Iran have ramped up, the Iranian-aligned Houthis have escalated attacks across Saudi Arabia’s southern border. The cheap, nimble weapon that can easily evade air warning systems is posing a novel defence challenge for the world’s largest oil exporter — also one of the world’s biggest arms buyers — and other countries in the region. “This is the advent of 21st-century drone warfare in the Middle East,” said Bilal Y Saab, director of defence and security at the Middle East Institute in Washington, and a former adviser at the Pentagon. “In this race, the advantage is to the adversary, because our responses are not efficient.” Last month, the Houthis were blamed for a drone attack on Shaybah oilfield in eastern Saudi Arabia and in May, the rebels claimed they had used drones to attack Saudi oil pumping stations and a vital pipeline deep inside the kingdom. Elsewhere in the region, the Israeli military last year said it shot down an explosive-laden Iranian drone as it flew over the Sea of Galilee. In August, Hizbollah, the Iran-allied Lebanese militant movement, accused Israel of using a drone to strike its media office in Beirut. Iraq, Saudi Arabia and the UAE import drones from markets such as China; meanwhile Israel, Iran and Turkey manufacture their own. The Middle East is particularly vulnerable to drone attacks “because it has a lot of centralised economic assets which are critical”, said Jack Watling, a research fellow in land defence at the London-based Royal United Services Institute. “Their countries are dependent on oil and have relatively badly-protected installations,” he said. “It’s a target-rich environment with existing conflicts occurring across large swaths of the region.” The asymmetry between strike and response is notable. Israel has used Patriot missiles costing $3m to $4m to take down quadcopter drones costing about $1,000. Mr Watling’s research has uncovered details of Syrian opposition forces making drone bodies from plywood covered with plastic sheeting, the wings and tails constructed from expanded polystyrene. He describes Iranian-designed drones manufactured in Yemen by Houthi groups on 3D printers, fitted at the last minute with Iranian electronics. “These are not particularly sophisticated,” he said. Anti-drone defence infrastructure is expensive to build, including GPS jammers to neutralise drone navigation, search and track facilities to identify incoming drones, and missile and radar-guided canon interceptors to destroy them. Richard Gill, managing director of the UK company Drone Defence, is in discussions with Aramco. “I would be looking at multiple layers of sensing technology . . . radars, cameras, microphones, radio-frequency scanning technology, electronic warfare and then the full range of countermeasures that go with that,” he said. “But it’s military-grade technology and it’s massively expensive. To install a defensive system is extremely complex and the threat is evolving at such a rate that it’s very hard to keep up to date, because the adversaries change the type of technology they use in a way that almost renders the defence moot.” The costs of these defences is exacerbated by their relative scarcity. “Industry is not geared up to provide the numbers that are required to protect these facilities,” Mr Gill said. “These sensors are made by very few people in very small numbers.” Saudi Arabia — which already has US-built Patriot anti-missile systems — in particular has a vast number of targets: oil refineries, desalination facilities, air ports, military air bases, and religious sites such as Mecca — spread over a huge geographical area. Effective protection on the scale of the Abqaiq facility, which spans several kilometres, is almost impossible. “There is no technologically perfect solution to this,” admitted Mr Saab, who said his former bosses at the Pentagon were at a loss over how to manage the proliferation of drone warfare. He compared the current defence gap to the strategic threat faced by US forces encountering IEDs after the Iraq invasion. Mr Saab said worse is to come. “They [the militias] are only just scratching the surface of what drones can do.” He warned of drone swarms, techniques to manipulate flight paths, and masking of radar signals. “Expect more of those,” he said. “This is the tip of the iceberg.”
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.@MoodysInvSvc downgrades Hong Kong outlook to "negative" as protests go on Law & Politics |
rising risk of “an erosion in the strength of Hong Kong’s institutions” amid the city’s ongoing protests. The move follows Fitch Ratings’ downgrade earlier this month on Hong Kong’s long-term foreign-currency-issuer default rating to “AA” from “AA+”. “Moody’s has previously noted that a downgrade could be triggered by a shift in the current equilibrium between the SAR’s (Special Administrative Region’s) economic proximity to and legal and regulatory distance from China,” Moody’s said in a statement.
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"Over half the increase in Chinese household savings since the 1970s can be attributed to the one-child policy," said @RencapMan chief economist at Renaissance Capital @FT Law & Politics |
Mr Robertson’s thesis is that, broadly speaking, “people with lots of kids don’t save money”. This is not only because they have more dependants to support and therefore less ability to save, but also because people with fewer children need to save for retirement because they are less able to rely on their offspring to provide for them in their dotage. As a result, he said there was a “surprisingly high correlation between fertility rates and bank deposits to GDP – a correlation which holds in the 1990s as well as today – and across a great many countries.” RenCap’s analysis found a 53 per cent correlation between a country’s fertility rate, measured by the number of children per woman, and its bank deposits-to-GDP ratio, as seen in the first chart. This finding is strikingly similar to that of an IMF working paper published in December that found that in China “demographic shifts alone account for half of the rise in household savings, suggesting that it has been the most important driver”, as the savings rate rose from 5 per cent in the 1980s to 23 per cent today, 15 percentage points above the global average. China’s bank deposits are equal to 210 per cent of GDP, compared with 33 per cent in Kenya, a typical frontier market country in this regard. Indeed, a 2018 Bank of England working paper went further still, concluding that demographic change could explain three quarters of the 210-basis point decline in interest rates in advanced economies since the early 1980s. The correlation is, admittedly, not particularly strong, yet Mr Robertson said that, barring Vietnam, “all countries with bank deposits above 90 per cent of GDP have low single-digit interest rates and all countries with one-year interest rates above 5 per cent in 2017 have bank deposits below 90 per cent of GDP, so high nominal interest rates that deter investment only occur in countries with a low level of bank deposits”. Perhaps more importantly, the relationship between bank deposits and real interest rates is somewhat stronger, with those countries with deposit-to-GDP ratios of at least 60 per cent in 2013 having average one-year real interest rates of 0.9 per cent between 2014 and 2018, compared with 2.1 per cent for countries with deposits of between 20 and 30 per cent, as the second chart shows. “The unfortunate reality is that countries with high fertility rates have the lowest share of bank accounts, the highest real interest rates and the lowest investment rates, so it is particularly hard for them to begin the development process,” Mr Robertson said. For many emerging nations the message is positive, however. RenCap’s analysis suggests that the biggest jump in bank deposits occurs when the fertility rate falls below three, depicted in the third chart. As such, Mr Robertson said there was scope for “a big rise in bank deposits in countries such as Argentina, Mexico, Romania and Ukraine, while “we should expect to see low interest rates and high lending to GDP ratios in Morocco, Jordan and Vietnam and scope for a big shift towards high lending to the private sector in Egypt”. Egypt, alongside Ghana, Kenya and Pakistan, could see bank deposits double to at least 60 per cent of GDP over the next 20 years, assuming fertility rates continue to fall by about 0.4 points a decade, as has happened in the past 10 years, potentially leading to a more than halving of real interest rates. “As a result, these countries in the next decade or two might become less reliant on external financing, or be able to sustain very high growth as domestically-fuelled lending is added to external financing,” Mr Robertson said. “Egypt already looks well placed to fund its own investment, when lower government borrowing stops crowding out the private sector.” Countries with higher birthrates, such as Ethiopia, Ivory Coast, Rwanda, Senegal and Tanzania, are less likely to see a sharp rise in bank deposits, he argued, but more modest growth from about 20 per cent of GDP to about 30 per cent is “plausible” over the same time period, which would be “helpful but not a game changer”. This analysis suggests investors’ should, though, be cautious of Nigeria and Angola, two of the three largest economies in sub-Saharan Africa, which have fertility rates of five or more, according to the UN. For Angola and Nigeria, it will take 20 years before their fertility rates decline to four, so until then we should not expect a big increase in the share of bank deposits,” Mr Robertson said. “The implication is that bank deposits will not become the source of higher investment these economies need. We should be more wary of these countries increasing their external debt.” “According to our estimates, demographic drivers can explain the 6.2-percentage point increase in EM household saving rates between 1980 and 2015. Between 2015 and 2040, we see a further 1-point rise,” Mr Sterne said. Moreover, given expectations that EMs will continue to account for an ever larger share of world GDP, Oxford Economics calculates that the global savings rate will be up to 1.3 percentage points higher in 2040 than now, bearing down on real interest rates. “Those expecting a demographic-led reversal of global saving rates will be disappointed,” Mr Sterne concluded. “Our microscopic trawl through demographic trends suggests that the impact of retiring baby boomers will be swamped by other global demographic trends.”
International Markets
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@WeWork bond prices tumble after it shelves IPO @FT World Currencies |
WeWork’s bond prices tumbled on Tuesday after the property group shelved its initial public offering, in the clearest sign yet of the financial strain afflicting the lossmaking company. The company’s $702m of junk debt is one of the few gauges that investors have to judge WeWork’s financial condition. The yield on the debt, which rises when its price falls, surged to a high of 8.9 per cent in early trading on Tuesday, according to bond trading platform MarketAxess. When the company borrowed the $702m last year, it yielded 7.875 per cent. The group’s parent, We Company, late on Monday evening delayed the listing after it received a frosty reception from the institutional investors who can make or break an IPO. WeWork had planned to launch its roadshow for the listing this week before selling shares to the public next week. The company said it now expected to clinch the multibillion-dollar listing by the end of the year. But it was unclear if WeWork would be able to complete an offering this year, after investors raised concerns over WeWork’s growing losses, its complex corporate structure and the sway co-founder and chief executive Adam Neumann had over the company, according to people briefed on the matter. The subinvestment grade bonds were trading heavily after the company decided to shelve the listing. The price of the bond hit a low of 95.5 cents on the dollar, down sharply from the 103 cents on the dollar it had traded hands on Monday. John McClain, a portfolio manager at Diamond Hill Capital Management, said he could not remember another unicorn — a privately held start-up valued at more than $1bn — having “zero support from either debt or equity investors”. “Their borrowing model is seriously in question at this point,” he added. “There is not a level that we could become interested in owning this company based on the business, the governance, and the financial statements.” WeWork has burnt through capital as it has plotted a global expansion that has taken its co-working spaces to more than 110 cities. In the first half of 2019, the company reported cash outlays of nearly $2.6bn to operate and invest in its business, nearly matching its cash spend on the two in the entirety of 2018. Its losses have swelled alongside its growing sales base; the company lost roughly two dollars for every dollar of revenue it generated last year. WeWork faced pressure from its largest backer, Japan’s SoftBank, to delay the listing after the company’s bankers at JPMorgan Chase and Goldman Sachs struggled to drum up broad investor interest in the listing. The lacklustre interest persisted even after the two banks tested a valuation on the group of between $15bn and $18bn, far below the $47bn valuation placed on WeWork by SoftBank in January. WeWork had sought to address some of the issues investors raised to finalise the IPO before the end of September, a deadline Mr Neumann had set for the company and his advisers. The group reduced the power of Mr Neumann’s high vote shares, which give him control of the company, and agreed to add a new member to its board. However, investors said the tweaks did not go far enough and that they did not offset their concerns with the group’s business model of renovating and releasing office space owned by other landlords.
Commodities
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DRC: Felix Tshisekedi in Brussels to turn the page on Kabila years @TheAfricaReport Africa |
The Congolese president landed in Brussels on Monday for a four-day state visit with a tight schedule. After several years of tensions between Belgium and the DRC under Joseph Kabila, Félix Tshisekedi hopes take advantage of this move to mark a break with the positions of his predecessor. While there were question marks over potential visit to Paris in mid-September, it is finally to Brussels – where he lived for a long time – that Félix Tshisekedi will make his first official visit to Europe as Head of State. It has been greeted with great fanfare by the Belgian authorities. And shows the importance given by the Congolese president to his relations with the kingdom. The Congolese President’s programme, which runs until 20 September, includes a meeting on Tuesday with Belgian Prime Minister Charles Michel, as well as with members of the government, including Cooperation Minister Alexander De Croo and Deputy Prime Minister and Minister of Foreign Affairs and Defence Didier Reynders. These interviews will be followed by an audience with the royal couple at the Palais before closing the day with a dinner at the Belgian-Luxembourg-Africa-Caribbean-Pacific Chamber of Commerce, Industry and Agriculture. The rest of the trip will be divided between Antwerp and Wallonia for meetings with officials from the diamond sector and the Institute of Tropical Medicine – where the Ebola epidemic may well be discussed – as well as exchanges with entrepreneurs and members of the diaspora. The visit will end with a meeting with Jean-Claude Juncker and Federica Mogherini, respectively President of the European Commission and High Representative of the European Union (EU) for Foreign Affairs. A thorough programme, therefore, and a strategically important visit for the Congolese President who, although only holding a minority in the Senate, the Assembly and the new government, is taking advantage of his travels abroad to mark a break with the positions of his predecessor. In Washington, for example, in April, the head of state claimed to have come to power to “disrupt the dictatorial system that was in place”. This is also a Félix Tshisekedi in search of diplomatic support – Brussels counts in the European diplomatic ballet in the DRC – as well as financial backing. Since his inauguration last January, Félix Tshisekedi has stepped up his courting of the Belgian administration. During his trip to Washington, he was able to talk to Didier Reynders. As a reminder, before taking note of the election of Félix Tshisekedi, the Belgian Minister, in the midst of the controversy over the election, asked for “the publication of the minutes”, considering “that a recount may be necessary afterwards”. On the Belgian side, it is stated that the election page has now been “turned”, but it is specified that the two countries “are not starting from scratch” and that this visit is being organised “with a certain caution”.
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Uganda's oil ambitions delayed as deals stall @FT @thomas_m_wilson Africa |
France’s Total, UK-listed Tullow Oil and the China National Offshore Oil Corporation jointly control three oil blocks in Lake Albert, a giant stretch of water on Uganda’s border with the Democratic Republic of Congo. Ugandan officials have long hoped that investment in Lake Albert — home to Africa’s fourth-largest oil reserves — would accelerate economic growth in the region from 2020. But 13 years after the first discoveries were made, Total said it was stopping technical work on the oilfield and pipeline project following the collapse of a deal to buy additional equity from Tullow and the failure of talks with the Ugandan government to agree legal terms for the investment. Oil executives said the decision to stop work had been discussed with the government but Uganda’s oil minister, Irene Muloni, said she had not been informed and denied the project had reached an impasse. “They have not given any formal communication [of an intention to cease work],” Ms Muloni told the Financial Times. “The discussions on the various issues are ongoing and we hope to reach an agreement very soon.” The pause in activities after years of negotiations is the latest setback for a complex project whose upstream development costs are estimated at $10bn and which requires the construction of a 1,443km electrically heated pipeline — the longest in the world — to get the oil from landlocked Uganda to the Indian Ocean. Tullow confirmed the commercial viability of the oil blocks in 2009 but a final investment decision has been delayed multiple times. Total told the Financial Times that the partners could make no further progress until they had “a clear and stable legal framework and clarity on the project shareholders”. There has been an over-optimism in the market both about the ease and time needed to develop east Africa’s big discoveries “Consequently, we are obliged to scale down certain technical activities associated with the project, whilst keeping personnel mobilised to agree on [the] overall business framework,” a Total spokesperson said in a written response to questions. Total and Cnooc had each agreed to acquire an additional 11 per cent in the project from Tullow in 2017 in a $900m deal. That would have allowed the smaller Tullow to reduce the amount it needs to contribute to fund the project but the deal collapsed in August following a disagreement with the Ugandan government over taxes. Tullow has said it will look for another buyer to reduce its stake from a third to 12 per cent. But this could be difficult, according to Jon Lawrence, an analyst with Wood Mackenzie's sub-Saharan Africa upstream team. “Our view is that other buyers are likely to be dissuaded because a potential buyer knows that this deal is a challenge to close,” Mr Lawrence said. Uganda and the partners disagree on other legal and tax points too, he said. “There is a fundamental capital gains tax issue on this project but also a raft of other issues [to be resolved] before an investment decision can be made.” Tullow declined to comment on the decision by Total to scale down activities but said it remained confident Uganda would become an oil producer even though the final project decision had been delayed. Cnooc didn’t respond to request for comment. Uganda is not alone in east Africa in struggling to realise its oil production ambitions. Kenya, Uganda, Tanzania and Mozambique have all made commercial hydrocarbon discoveries in the past decade and struggled to advance their respective projects quickly. “If we look historically at the timelines that have been proposed on those projects there has been an over-optimism in the market both about the ease and time needed to develop east Africa’s big discoveries,” said Wood Mackenzie’s Mr Lawrence. “These are not simple developments . . . It’s a big ask for any new oil and gas producer to get all of the necessary elements in place.”
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.@KenyaAirways chairman @michaelj2 calls for professional board after nationalisation @ReutersAfrica Africa |
The loss-making airline, which is 48.9% government-owned and 7.8% held by Air France-KLM, was privatised 23 years ago but sank into debt and losses in 2014. Lawmakers voted to re-nationalise it in July. Chairman Michael Joseph said the requirement for professionals to be put in charge of the airline is being built into draft laws that will guide the renationalisation. “It must be run in a commercial way,” he told reporters on the sidelines of an aviation meeting. “We do not want to create a situation that we had before, where you nationalise the airline and all it becomes is a department of government. The board of directors is loaded by friends of politicians.” Under the model approved by lawmakers, Kenya Airways will become one of four subsidiaries in an Aviation Holding Company. The others will be Jomo Kenyatta International Airport (JKIA), the country’s biggest airport, an aviation college and Kenya Airports Authority, which will operate all the nation’s other airports. “We want to make sure that if you create a nationalised airline that it will operate as a semi-autonomous airline,” Joseph said. Joseph said such developments left Kenya without any choice but to renationalise its airline, in order to cut costs and survive in the crowded Africa aviation market, where carriers have the weakest finances and emptiest planes of any region in the world.
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