Bloomberg
“U.S. Softens Stance on Rusal Sanctions; Aluminum Plunges.”
The U.S. softened its position on sanctions against Russian metals giant United Co. Rusal, sparking a record plunge in aluminum prices.
For the first time, the U.S. Treasury discussed a path for lifting the sanctions on Rusal, saying it would provide relief if Oleg Deripaska relinquished control. It also extended the deadline for companies to wind down dealings with the Russian aluminum producer by almost five months.
Rusal petitioned to be removed from the sanctions list and Treasury granted the extension while it considers the appeal, according to a statement from Treasury Secretary Steven Mnuchin.
“Rusal has felt the impact of U.S. sanctions because of its entanglement with Oleg Deripaska, but the U.S. government is not targeting the hardworking people who depend on Rusal and its subsidiaries,” Mnuchin said.
Aluminum plunged in response as traders speculated that supply disruptions could ease. Prices fell as much as 9.4 percent, the most ever. U.S. metal producers also dropped, with Alcoa Inc. sliding 12 percent.
Washington’s clarification follows two weeks of chaos in global metal markets. Aluminum shot to multi-year highs as manufacturers scrambled to secure supply. A German lobbying group said European plants may be forced to close and carmakers could face supply shortages.
Reuters
“China fund managers slash ZTE valuation after U.S. sanction.”
Chinese funds have slashed valuations of ZTE Corp after the United States banned American companies from selling components to the telecoms equipment maker for seven years, a move ZTE said threatened its very survival.
The U.S. action last week was sparked by ZTE’s violation of an agreement reached after it was caught illegally shipping U.S. goods to Iran. American companies are estimated to provide 25-30 percent of the components used in ZTE’s equipment. Chinese mutual fund managers cut the value of the stock in their portfolios by 20-30 percent in a spate of announcements over the weekend, a blow to ZTE that suspended trading in its mainland and Hong Kong shares on April 17.
Around 40 Chinese mutual funds have adjusted the valuation of ZTE in their portfolios since it suspended trading. In the latest batch, five fund managers revalued the stock on Saturday.
Several funds with exposure to ZTE’s Hong Kong shares, including HuaAn Fund and Harvest Fund, cut valuations to about 20 percent below the last trading price of HK$25.60 ($3.26). ZTE, which had a market capitalization of about $20 billion before trading in its shares was suspended, did not respond to a request for comment on Monday.
Shares in display maker BOE Technology slumped as much as 6 percent on Monday, even after the firm said it had not received any official information regarding U.S. sanctions in response to rumors in the market that it would be targeted. The CSI Information Technology index of Shanghai- and Shenzhen-listed tech firms fell 2 percent.
BBC News
“Interest rates to rise twice this year, says EY Item Club.”
The Bank of England is likely to raise interest rates twice this year and twice in 2019, despite a sluggish economy, says a forecasting body. Bank governor Mark Carney has said a rate rise is «likely» this year, but any increases will be gradual.
However, the EY Item Club said a tight labour market and firming earnings growth were likely to fuel «hawkish instincts» at the Bank. The forecaster predicted GDP growth of 1.6% this year and 1.7% in 2019.
It said the expected rate rises would allow the Bank to «gradually but steadily normalise monetary policy». UK interest rates currently stand at 0.5%. Many economists and investors in the markets believe that the Bank’s Monetary Policy Committee (MPC) will vote for a 0.25% rate rise at its May meeting. Howard Archer, chief economic adviser to the EY Item Club, said there was a risk that two rate hikes this year would exert «unnecessary pressure» on consumers.
However, he added that the growth of fixed-rate mortgages meant that fewer homeowners would be affected by a rate rise. «In addition, the burden of interest payments to the average household was at a record low at the end of 2017, and so consumers are in a relatively healthy position to cope with dearer money,» he said.
Mr Archer said the UK economy was «chugging along at a fairly steady but uninspiring rate», with inflation continuing to fall and a tight jobs market expected to «deliver some uptick in pay growth».
At the same time, separate research by Deloitte showed an improvement in UK consumer confidence but said this had «yet to translate into an overall increase in spending».
Deloitte’s latest quarterly Consumer Tracker survey said UK consumers were feeling «more upbeat» about their personal finances.
Bloomberg
“If Treasuries Reach 3%, That Would Be Big. Here’s Why.”
The global bond market’s primary benchmark, the 10-year U.S. Treasury yield, is knocking on the door of 3 percent, a level it hasn’t topped in more than four years. That’s more than just a nice round number. Higher yields make the burden of everything from mortgages to student loans and car payments even heavier. Some market gurus see it as a turning point with effects that could be felt for years — and not just in bonds. With the Federal Reserve signaling interest rates are going up even more, investors in riskier assets like stocks and high-yield debt are left to wonder if this is how their post-recession party ends.
Since 2011, it’s been touched only twice, briefly, in 2013 and early 2014, before a bond bull market drove yields to record lows. But 3 percent has also been cited by prominent fixed-income investors like Jeffrey Gundlach at DoubleLine Capital and Scott Minerd at Guggenheim Partners as critical to determining whether the three-decade bull market in bonds is at an end. In the mind of analysts who look at market patterns, once the yield breaks much beyond the 3.05 percent, to levels last reached in 2011, that threshold could flip to a floor from a ceiling.
Market watchers partly blamed the rapid rise in Treasury yields for the equity market correction at the start of February, which resulted in the largest daily point drop ever in the Dow Jones Industrial Average. Stocks wobbled again in March, but have mostly stabilized. In theory, higher corporate borrowing costs would erode a key element of companies’ profitability. But they’re also getting a windfall from the Republican tax plan. The area to watch is high-dividend stocks, which have served as bond proxies for years since they offered high fixed payments. Now that Treasury yields have caught up, investors are starting to sell equities.
The general consensus is that yields have moved very far, very fast already. More than half of the 56 analysts surveyed by Bloomberg expect the 10-year yield to end 2018 within 25 basis points of 3 percent, meaning a range-bound remainder of the year. Bond bears counting on even higher yields would argue that inflation is just around the corner and the economy is about to get even hotter. Bond bulls would say the Fed is getting close to its limit for rate hikes because the economy can’t withstand much steeper borrowing costs without slowing down.