Closing post
Time to recap….
Balance effects of AI with profits tax and green levy, says IMF
Governments faced with economic upheaval caused by artificial intelligence should consider fiscal policies including taxes on excess profits and a green levy to atone for AI-related carbon emissions, according to the International Monetary Fund.
The IMF said unlike previous technological breakthroughs such as the steam engine, generative AI – the term for computer systems such as ChatGPT that can produce convincing, human-like text, voices and images from simple hand-typed prompts – can spread “much faster” and advances in the technology are happening at “breakneck speed”.
The international lender of last resort said governments should consider a range of policies to mitigate the impact on jobs, including a carbon tax to account for the environmental impact of operating the computer servers that train and operate AI systems.
The value of risky debt issued by French lenders has fallen further today, Reuters has spotted, as investors fret about political uncertainty.
An AT1 bonds issued by Societe Generale dropped to its lowest price since December, Tradeweb data showed, while equivalent debt from BNP Paribas also weakened.
These AT1 bonds, also known as “contingent convertibles” or “CoCo” bonds - can be converted into equity if a bank hits trouble.
Effectively, they are shock absorbers if a bank’s capital levels fall below a certain threshold.
Empire State manufacturing index falls again
Just in: Activity at factories in the state of New York has weakened, for the seventh month running.
June’s Empire State Manufacturing Survey, just released, shows the sector contracted again this month
The headline general business conditions index moved up ten points but remained below zero at -6.0.
The general business conditions index in the New York Fed's Empire State survey of manufacturing is up to minus 6.0 in June after minus 15.6 in May, and the highest since minus 2.4 in February. pic.twitter.com/bugzK5fMbR
— Econoday, Inc. (@Econoday) June 17, 2024
Firms also reported that new orders held steady, delivery times shortened somewhat, and supply availability was little changed.
Employment levels and hours worked continuing to contract, suggesting weak demand for workers…. but optimism about the six-month outlook picked up to its highest level in more than two years.
🏭 The Empire State Manufacturing Survey General Business Conditions index fell +9.6 pts to -6.0 (vs -9.0 expected) in May.
— MTS Insights (@MTSInsights) June 17, 2024
New Orders: +15.5 pts to -1.0
Shipments: +4.5 pts to 3.3
Prices Paid: -3.8 pts to 24.5
Prices Received: -7.0 pts to 7.1
# of Employees: -2.3 pts tp -8.7… pic.twitter.com/RhLdlNuq2B
Citi downgrades Europe stocks amid political turmoil
Citigroup has downgraded its rating on European stocks, citing risks from France’s politicial turmoil, Bloomberg reports.
Citi analysts have cut their view on European shares to neutral from overweight on “heightened political risks”, among other factors. Instead, they favour growth-oriented US stocks, which are upgraded to overweight from neutral.
They say:
“We upgrade the US due to its substantially higher growth tilt relative to Europe, and more defensive nature in episodes of uncertainty.
Political uncertainty could cool US investors’ recent rotation into European equities for the time being.”
💥Vol in Europe exploding. Citi downgrades EU on:
— Menthor Q (@MenthorQpro) June 17, 2024
1. heightened political risks
2. narrowing market leadership
3. potential for a continued positioning unwind
Is Europe a Buy or Sell? pic.twitter.com/qK63m903Lz
London remains the most productive region of the UK, according to new data from the Office for National Statistics, but the gap is narrowing.
The ONS reports that the capital had the highest productivity level of any UK region in 2022, with an output per hour 26.2% higher than the UK average.
The South East was also ahead of the national average, by 10.8%, but the rest of the country lagged on an output per hour basis.
However, London made the largest negative contribution to UK growth in output per hour by region, compared with 2019.
The ONS explains:
UK output per hour worked has grown at a cumulative average annual rate of 0.8% from 2019 to 2022.
The North West experienced growth of 2.6% annually, which is the largest of any region, and London the largest fall of any region, at 0.9%.
China’s decision to launch a probe into pork anti-dumping isn’t a shock, says Jens Eskelund, president of the European Union Chamber of Commerce in China.
“It will not be the first time that a probe announced in one jurisdiction is responded to in kind, so in view of the EU electric vehicles probe, this is not a surprise.”
“Free and open markets rely on rules-based trade practices,”
Updated
A spokesperson for the European Commission said the bloc was not worried about China opening its investigation and told reporters the EU would intervene appropriately to ensure the investigation complied with all relevant World Trade Organisation rules.
The European Union is not worried about China opening an anti-dumping investigation into imported pork and its by-products from the EU, a spokesperson for the bloc's executive Commission said on Monday.#China #ChinaBusinesshttps://t.co/eK6eew5506
— chinaspotlight (@chinaspotlight1) June 17, 2024
Updated
The copper price has slipped to an eight-week low, following this morning’s generally weak economic data from China.
China is a major consumer of copper, so the slowdown in industrial production last month (growth slowed to 5.6% in May, from 6.7% in April) could hint at weaker demand.
The ongoing slump in China’s housing market could also be a factor hitting copper, which fell around 1% on the London Metal Exchange to $9,631 a metric ton, the lowest since April 23.
That early rally in European stock markets didn’t last.
The pan-European Stoxx 600 index has now dropped by 0.3% today, hitting its lowest level in six weeks.
Spain’s IBEX share index is leading the selloff, down 0.7%, while Italy’s FTSE MIB has lost 0.2% and the French CAC 40 is down 0.1%.
⚠️ EUROPE'S STOXX 600 <.STOXX> HITS FRESH 6-WEEK LOW, LAST DOWN 0.3%
— PiQ (@PiQSuite) June 17, 2024
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says:
Some of the risk-off sentiment which spread sparked by worries about the far-right gaining legislative power in France has eased off.
Although the European Central Bank does not look like it’ll be easily propelled into buying French government debt, hopes have risen slightly that spending pledged by the National Rally party would in practice be curtailed in a hung parliament scenario.
Updated
The pound has dipped this morning, as traders await the Bank of England’s interest rates decision on Thursday.
The BoE is widely expected to leave interest rates on hold at 5.25%, and the City will be looking for any signals as to when it might start to lower borrowing costs.
Steve Matthews, investment directo for liquidity at Canada Life Asset Management, predicts the BoE coud cut rates in August, saying:
“Looking ahead to Thursday’s Bank of England interest rate decision, we expect a 7-2 vote in favour of no cut. Despite recent data supporting a cut - such as the unemployment rate rising to 4.4% and expectations that the CPI will hit 2% on Wednesday - concerns about upcoming wage data and services inflation persist.
“While the European Central Bank made a move last week, the Federal Reserve is taking a more cautious approach. This gives the Bank of England additional opportunity to make a well-timed decision.
“Although there is light at the end of the tunnel, we are still firmly in the tunnel. We maintain our view that a first cut of 25bps in August is still the most likely scenario.”
The pound has lost 0.15% against the US dollar this morning, to $1.266, and to €1.1822 against the euro.
Official campaigning for the French elections began at midnight today, ahead of the first round of voting on 30 June.
A frenetic fortnight of activity is expected, after the deadline for candidates to register for the 577 seats in the lower house expired yesterday evening.
Kylian Mbappé, captain of the men’s French football team, has urged young people to vote in the election, and to resist extremism.
Mbappé said:
“This is a never-seen-before event.
And that is why I want to talk to the whole of the French people, but also the youth. We are a generation that can make a difference. We see the extremes are knocking on the door of power and we have the opportunity to shape our country’s future.”
impressive statement by Mbappé on the far right:
— Henry Mance (@henrymance) June 17, 2024
"I want to be proud to wear this jersey... I don't want to represent a country that doesn't correspond with my values, that doesn't correspond with our values." https://t.co/9SGI9iuhyz
China opens tit-for-tat anti-dumping probe into European pork
China has retaliated against Europe’s new curbs on its electric cars, by opening an anti-dumping investigation into imported pork and its by-products from the European Union.
China is the EU’s biggest overseas market for pork, which was worth over $1.8bn last year according to Bloomberg, led by shipments from Spain, Denmark and the Netherlands.
China’s Ministry of Commerce said the investigation has been launched in response to an application submitted by the China Animal Agriculture Association.
It will examine the import of pork and pig by-products from the EU during 2023, and look into whether any damage was done to related Chinese industries.
News agency Xinhua says the probe is expected to end before 17 June 2025, but may be extended for half a year under special circumstances.
Beijing’s move comes a few days after the EU notified Beijing that it intends to impose tariffs of up to 38% on imports of Chinese electric vehicles.
China is the EU’s biggest overseas market for pork, although export volumes have fallen off in recent years due to domestic oversupply and low prices. The trade was worth $1.83 billion last year, with farmers in Spain, Denmark and the Netherlands the biggest beneficiaries. pic.twitter.com/ibxMnHDAgh
— annmarie hordern (@annmarie) June 17, 2024
Analysts have warned that pork supply chains in Europe would be heavily disrupted if exports to China were suspended, leaving farmers with unwanted stock.
Updated
ECB’s Lane says current bond turmoil is ‘not disorderly’
The European Central Bank’s chief economist has attempted to pay down concerns over the turmoil in the eurozone’s bond markets.
Philip Lane told a Reuters NEXT Newsmaker interview that the bond markets are not disorderly, a signal that the ECB is not planning to intervene to calm nerves over the upcoming French election.
As Lane put it:
“What we are seeing in the markets is a repricing but it is not in the world of disorderly markets right now.”
He added that the ECB must make clear that it will not tolerate unwarranted or disorderly market dynamics.
This morning, the yield (or interest rate) on French and German bonds have both risen slightly, as prices have dipped, but not at rates that could be called disorderly.
When asked about the situation in France, Lane says all governments must show how they will implement new fiscal frameworks.
Warrington Borough Council has credit rating withdrawn
Debt-ridden Warrington Borough Council has lost its credit rating with Moody’s, just as the government investigates whether it is meeting its obligations.
Warrington, which had estimated debts of £1.8bn, told investors this morning that Moody’s withdrew its credit rating on Friday.
This is due to “the inability of the Council to procure that its statements of accounts are audited by external auditors for historical financial years,” Warrington admits.
The council is now seeking a rating from another agency for £150m of bonds which mature in 2055, and says it remains compliant with the terms of these bonds.
Moody’s move comes a month after the Financial Times reported that Warrington Borough Council had refused to hand key information to its auditor, Grant Thornton.
Like many UK councils, Warrington has ploughed cash into commercial schemes in the hope of generating returns. That included a stake in Together Energy, which fell into administration in 2022, and a £200m loan facility to Matthew Moulding, billionaire owner of the Hut Group.
At the start of May, the government appointed an inspector to undertake an independent inspection of Warrington Borough Council, to see if it is meeting its Best Value Duty (to continuously improved the way its functions are exercised).
The chief executive of the council, Steven Broomhead, insisted this month that the £1.8bn of debt was actually an investment.
Broomhead declared:
“A lot of what we’ve done in Warrington has been what I call ‘civic entrepreneurism’. We’ve been very commercial in the way we’ve operated.
We’ve been so commercial that we’ve attracted the attention of government who are carrying out a best value inspection in what we’ve been doing.”
We haven’t been borrowing money to invest for a return. We’ve been borrowing money for regeneration. What the hell is wrong with that?”
Paris hands crown as Europe’s biggest stock market back to London
Last week’s turmoil in the French stock market has resulted in Paris losing its crown as Europe’s biggest equity market to the UK (who it snatched it from two years ago).
Bloomberg reports that stocks in France are now collectively worth about $3.13trn, narrowly losing out to the UK at $3.18trn.
This reversal came after around $258bn was wiped off the French market last week, when shares in French banks fell sharply.
Paris Loses Crown as Europe’s Biggest Stock Market to London.https://t.co/YkuUrM0Yww
— Social Trade Inc. (@TheSocial_Trade) June 17, 2024
Britain’s stock market lost its position as Europe’s most-valued to France in late 2022, a decline that was blamed on the weak pound, UK recession fears, and a surge in the value of French luxury goods maker LVMH.
Bloomberg’s data, though, only covers actively traded, primary securities on the two country’s exchanges.
If you include other securities, such as ETFs and ADRs, London was already bigger….
European stock markets have opened a little higher.
In Paris, the CAC 40 share index has gained 0.5%, recovering just a little of last week’s 6% tumble.
Germany’s DAX is 0.4% higher, while the UK’s FTSE 100 is up 0.23%.
Rightmove: House prices hold steady in the UK
The UK housing market remained flat this month, new data from Rightmove shows.
Average asking prices were unchanged month-on-month in June, with prices strengthening in less expensive regions while lagging behind in the pricier East of England and in London.
Rightmove reports a “slight drop” in new sellers, particularly at the high-end of the market, which may be a sign of caution ahead of the UK general election next month.
Over the last four weeks, the number of sales being agreed has stayed steady at 6% higher than a year ago.
Base cut delays rein in those sellers in more expensive areas from asking for more while more affordable areas push ahead.
— Emma Fildes (@emmafildes) June 17, 2024
The result; average ASKING prices remain flat at £375,110 (-0.0%) with first time buyer prices falling the furthest at -0.1% as rates expand squeezing… pic.twitter.com/NaqKomFc7u
Ian Preston, group CEO at estate agent Preston Baker in Leeds, reports that the general election hasn’t made an appreciable difference to market conditions, adding:
Whichever government is chosen, the priority must be increasing the supply of new homes. Investment in the local authority planning system, to speed up applications, is the priority.
Deutsche Bank: The French market is in the eye of the storm
The last two or three weeks have been seismic in terms of election results, points out Jim Reid of Deutsche Bank, telling clients:
South Africa, Mexico, India and Europe have seen varying degrees of fallout as a result. However, as we know by now it’s the French market currently in the eye of the storm with the rest of Europe being sucked into the vortex.
Reid warns that the uncertainty in France will be with us until at least the second round of the election on July 7th and likely beyond.
The polls haven’t narrowed in Macron’s favour in the first week of the campaign with the far right and left outpacing the President’s centrist party.
He warns that the spread between German and French borrowing costs (measured by the interest rates on their respective 10-year bonds) could widen further:
The reason this is important is that last week the Franco-German 10yr spread rose +28.6bps over the week (and +6.9bps on Friday). This brings it to its highest level since November 2012, and its largest weekly increase since late 2011 during the Euro crisis, and during German reunification in August 1990. The spread is now +76.7bps with our rates strategists targeting +90bps. They think +90-100bps would be the equivalent to the 2017 Presidential election peak of +80bps when adjusting for today’s French fundamentals.
In equity risk, the CAC 40 fell -6.23% last week (-2.66% on Friday), its largest weekly move down since March 2022 and apart from another big differential in the early Covid period you’d have to go back to the aftermath of 9/11 in 2001 to see such extremes.
China’s sluggish May economic data (see opening post) will increase calls for interest rate cuts, predicts Lynn Song, chief economist for Greater China at ING.
Song points out that the Chinese property market continued to slump despite a supportive policy push by Beijing, and points out that prices for ‘used homes’ (rather than newbuilds) also fell in May.
China’s 70-city housing prices continued to decline in May, with new home and used home prices down -0.7% month-on-month and -1.0% MoM respectively, both seeing the steepest monthly sequential declines of the current cycle. From the peak, new home prices have declined -6.4% and the secondary market has declined -12.3%.
Of the 70 city sample, only two cities (Shanghai and Taiyuan) saw an increase in prices in May for new homes, while none saw an increase in the secondary market. This was notably worse off compared to April, when six cities saw increases in new home prices and one city saw an increase in secondary market prices. Year to date, two cities saw new home prices increase, and none saw secondary market prices increases. 16 and 48 cities within the sample have seen declines of over 3% in primary and secondary markets respectively. New home sales remained well in contraction at -27.9% year-on-year YTD.
ING suspects that the odds of a PBoC rate cut in the coming months have risen, given today’s economic data and recent rate cuts by the European Central Bank and the Bank of Canada.
Pepperstone: French election angst to persist this week
Last week was a tough one for French financial assets, with stocks sliding and the spread between French and German 10-year government bonds widening.
Political uncertainty abounds again today, following President Emmanuel Macron’s surprise decision to call a snap vote. Marine Le Pen’s far-right National Rally is leading in opinion polls, while France’s left-wing parties have formed a new alliance to fight the election.
The euro is slightly weaker this morning, dipping below $1.07 in early trading, towards the six-week low hit on Friday.
Chris Weston, analyst at Pepperstone, says there is a real prospect of further downside in French and EU markets before the elections to the national assembly are completed early next month.
The worry, Weston explains, is that France could move away from its planned €20bn of spending cuts, which would push up its budget deficit, adding:
The evolving theme in French politics continues to see market players attempting to price risk and uncertainty around the future French fiscal position and what this could mean for France’s credit rating, and the cost to fund a wider deficit.
Introduction: China home price slump accelerates
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Lukewarm Chinese economic data, and political instability in France, has dampened market sentiment at the start of the new week.
In China, new home prices fell at the fastest pace in almost 10 years in May, new data shows, despite Beijing’s efforts to prop up its property sector.
In annual terms, new home prices were down 3.9% from a year earlier, worse than the 3.1% slide in April.
During May alone, prices dipped by 0.7%.
National Bureau of Statistics (NBS) spokesperson Liu Aihua told a media briefing on Monday that the property market is undergoing adjustment and it will take some time for policy measures to kick in.
The declines were broad-based: prices fell in 68 of the 70 cities surveyed by the government, up from 64 in April.
🇨🇳#China's May 1st-tier cities' new home prices -0.7% m/m(Prev. -0.6%), 2nd-tier -0.7% m/m (Prev. -0.5%), both expanded.
— CN Wire (@Sino_Market) June 17, 2024
There are 68 cities out of 70 with m/m decreases in sales prices of new homes and 70 decrease in 2nd-hand, compared to 64 and 69 in April respectively.
Policymakers have been attempting to rein in the oversupply of housing, and support debt-laden developers since the market went into freefall in 2020, hit by the pandemic and a sudden regulatory crackdown on indebted lenders.
Last month, the People’s Bank of China cut mortgage rates and allowed local authorities to turn unsold homes from developers into affordable housing,
But this has not, yet, revived a sector in which a glut of unoccupied property is weighing on the market.
As my colleague Amy Hawkins reported this month:
All across China, from Beijing in the north, to Shenzhen in the south, millions of newly built homes stand empty and unwanted. There were nearly 391m sq metres of unsold residential property in China as of April, according to the National Bureau of Statistics. That is the equivalent of Manchester and Birmingham combined – and then some – sitting as vacant, unwanted property.
The crux of the problem is that, with shaky faith in the economy and big property developers failing to deliver on paid-for apartments, potential homebuyers are keeping their money out of the market.
🟠 🇨🇳 #China's Housing Market Craters to 11-Month Low 📉
— Juan Carlos Carrasquilla 🇵🇦 (@JC_Carrasquilla) June 17, 2024
☑️May 2024 saw China's #housingmarket in freefall, with new #homeprices down 0.71% and existing home prices plunging 1% month-on-month—both steeper drops than April.
☑️This marks the 11th month in a row of declining… pic.twitter.com/f8MMDKFxeH
However, China’s property sector isn’t the only area struggling; factories grew slower than expected last month.
Industrial output grew 5.6% in May, year-on-year, from a year earlier, NBS data showed, compared with 6.7% in April. Economists had expected growth of around 6%.
China’s retail sales were more positive: they beat expectations in May by climbing 3.7% year-on-year, ahead of forecasts of a 3% rise.
Overall, investors seem unimpressed, wth China’s SSE Composite index dipping by 0.6% today.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, reports that sentiment is gloomy:
The latest data showed that home prices there slid at a faster pace in May despite all the efforts that the Chinese government puts in to stop the bleeding and industrial production slowed significantly more than expected, as well, during the same month.
The People’s Bank of China (PBoC) is expected to maintain its rates unchanged this week, but some economists at Bloomberg believe that the week could bring a 10bp cut in China to prop things up.
The agenda
9am BST: European Central Bank chief economist Philip Lane speaks at Reuters Newsmakers event in London
1.30pm BST: New York Empire State Manufacturing Index for June
