MONOPOLY CAPITALI$M

Wall Street Warming to Big Shale After $250 Billion of Deals


Kevin Crowley, David Wethe and Mitchell Ferman
Sat, February 17, 2024

(Bloomberg) -- This week’s $26 billion combination of two Texas oil companies is the latest in a series of deals that’s ushering in the era of Big Shale. Wall Street, which eyed the sector with skepticism for most of the last decade, appears to be all in.

Diamondback Energy Inc.’s takeover of Endeavor Energy Resources LP announced on Feb. 12 topped off a year of roughly $250 billion in US oil and natural gas deals that consolidated a fractured collection of private wildcatters into larger corporations.

Diamondback boldly touted itself as “the must-own” stock in America’s richest oil field, and in a stark reversal of the knee-jerk punishment typically meted out to suitors in corporate acquisitions, the stock jumped 11% in a matter of hours. It was perhaps the surest sign of investor approval.

By the end of the week, the shale explorer touched a record high and swelled its market valuation by $5 billion, even though the transaction won’t close for several months.

On a broader scale, the consolidation wave is healing the hangover from years of overspending by shale drillers who pursued output growth at the expense of investor returns. While it was small upstarts who pioneered the shale revolution, Wall Street demands for scale, efficiency and cash returns mean the new era is turning into one of survival of the biggest.

“It has become a big-company game,” said Mark Viviano, a managing partner at Kimmeridge Energy Management Co., which has been hammering the shale-sector to consolidate for half a decade. “Now you have an arms race for operational scale and investor relevancy.”

The evolution of the shale industry comes at a time when energy makes up just 3.8% of the S&P 500 Index despite America’s status as the world’s premier oil producer, pumping 45% more crude than Saudi Arabia. To put the transition in perspective, the cohort of publicly traded shale explorers shrank by about 40% over the past six years to roughly 50 today, according to Warwick Investment Group LLC.

“It’s kind of like Pac-Man right now: consolidate or get eaten,” said Kate Richard, chief executive officer at Warwick, which has invested in thousands of shale wells. “We’re probably going back to the ‘70s, where there were seven to 10 major players in the US.”

Once the Endeavor deal is complete, Diamondback will double its market value to around $60 billion, making it a contender with EOG Resources Inc. for the title of biggest pure-play shale stock.

“It put us in a new weight class, which is a good thing in this business,” Kaes Van’t Hof, Diamondback’s 37-year-old chief financial officer, said during an interview. “The perception is that bigger means more durability” through oil’s boom-and-bust cycles, as well as lower capital costs and a deeper portfolio of drilling prospects.

In the wake of the deal announcement, Diamondback is trading at 9.9 times earnings, overtaking EOG, which has pledged to sit out the current buying spree. Diamondback will jump to around 150th in the S&P 500 by market value, from 275th today, putting it on the radar of large investors in search of more exposure to the Permian Basin, the prolific oil field straddling the Texas-New Mexico border.

For Diamondback, a bigger balance sheet means easier access to capital and more ability to sustain payouts to investors through oil price shocks. In addition, a broader geographic footprint in the Permian region means more potential drilling sites to choose from an prioritize. It also means more clout negotiating terms with the service companies that provide everything from rigs to drill bits to fracking crews and pipes.

“Big buyers are likely to spearhead a fresh wave of efficiency gains driven by technological advancements in both production and cost management,” said Teresa Thomas, US energy leader at Deloitte LLP.

One phenomenon that often flies under the radar is that takeovers of this sort tend to presage a slowdown in oil-production growth. A spate of follow-on deals could help support global crude prices and take some of the pressure off the OPEC+ alliance that has been restraining output in a bid to buoy the market.

Endeavor was one of the Permian’s fastest-growing operators, increasing production 30% since 2022. But after merging with Diamondback, that growth will slow to less than 2%, with the cash that would have gone to leasing drilling rigs and related costs freed up for dividends and buybacks.

The new era also represents a changing of the executive guard. Autry Stephens, Endeavor’s octogenarian founder, will become America’s richest oilman once the deal closes. His exit leaves a lasting legacy.

“He’s one of the last original wildcatters, funding things out of your own back pocket and taking risk,” said Sam Sledge, CEO of Midland, Texas-based ProPetro Holding Corp. “We’re playing a different game now.”

Stephens’ decision to retain 40% equity in Diamondback and Warren Buffett’s “implicit” backing of Occidental Petroleum Corp.’s recent purchase of CrownRock LP is a key reason why investors found comfort in the deals, according to Andy Rapp, co-founder of Petrie Partners, a mergers and acquisitions advisory firm.

“At some social or emotional level that validation has driven the market embracing these transactions,” he said.

(Updates with comments from Petrie Partners co-founder in final paragraph.)

Bloomberg Businessweek

Foreign Direct Investment Into China Slumps to Worst in 30 Years



Bloomberg News
Sun, February 18, 2024 

(Bloomberg) -- Foreign businesses’ direct investment into China last year increased by the lowest amount since the early 1990s, underscoring challenges for the nation as Beijing seeks more overseas investment to help its economy.

China’s direct investment liabilities in its balance of payments rose by $33 billion last year, 82% down on 2022, according to data from the State Administration of Foreign Exchange released Sunday. That measure of new foreign investment into the country — which records monetary flows connected to foreign-owned entities in China — slumped to the lowest level since 1993.

The data shows the effect of the Covid lockdowns and weak recovery last year. The investment fell in the third quarter of 2023 for the first time since 1998. Although it recovered a little and returned to growth in the final quarter, the $17.5 billion in new money in that period was still a third lower than the same period of 2022.

SAFE’s data, which gauges net flows, can reflect trends in foreign company profits, as well as changes in the size of their operations in China, according to economists. Profits of foreign industrial firms in China dropped 6.7% last year from the prior year, according to National Bureau of Statistics data.

Earlier figures from the Ministry of Commerce showed new foreign direct investment into China fell last year to the lowest level in three years. MOFCOM’s figures don’t include reinvested earnings of existing foreign firms and are less volatile than the SAFE figures, economists have said.

The continuing weakness highlights how foreign companies are pulling money out of the country due to geopolitical tensions and higher interest rates elsewhere.

There’s rising attractiveness to multinationals of keeping cash overseas rather than in China, because advanced economies have been raising interest rates, while Beijing has been cutting them to stimulate the economy. A recent survey of Japanese firms in China showed most of those companies cut investment or kept it flat last year, and a majority don’t have a positive outlook for 2024.

The government’s efforts to get overseas companies to return after Covid are falling short, and more will be needed if Beijing is to succeed in its aims.

There are some bright spots. Direct investment into China by German companies reached a record of nearly €12 billion ($13 billion) last year, according to a German Economic Institute report based on data from the Bundesbank.

That demonstrates an eagerness to expand in the world’s No. 2 economy even while the European Union steps up scrutiny of these investments because of security concerns. Investment in China as a share of Germany’s total direct investment abroad expanded to 10.3% last year — the highest since 2014, the report showed.

PRO FREE MARKET

Chinese foreign minister says trying to cut his country out of trade would be a historic mistake


Sat, February 17, 2024 



MUNICH (AP) — China's foreign minister told a gathering of international security policy officials Saturday that trying to shut China out of trade in the name of avoiding dependency would be a historic mistake.

Wang Yi spoke at the Munich Security Conference. Host Germany wants to avoid over-reliance on trade with an increasingly assertive China and diversify its supply of key goods in an approach it calls “de-risking.” That's in line with the approach of other industrial powers in the Group of Seven, which has stressed that it doesn't seek to harm China or thwart its development.

Beijing has criticized the strategy.

“Today ... more people have come to realize that the absence of cooperation is the biggest risk,” Wang said through an interpreter. “Those who attempt to shut China out in the name of de-risking will make a historical mistake.”

“The world economy is like a big ocean that cannot be cut into isolated lakes,” he added. “The trend toward economic globalization cannot be reversed. We need to work together to make globalization more universally beneficial and inclusive.”

Wang also renewed China's pushback against allegations of forced labor in the western Xinjiang region, where it is accused of running labor transfer programs in which Uyghurs and other Turkic minorities are forced to toil in factories as part of a longstanding campaign of assimilation and mass detention.

He complained of “fabricated information from different parties” and asserted that the aim is “to stop the development of China.”

The Associated Press

Stellantis CEO says Chinese EVs are ‘possibly the biggest risk’ facing his carmaker and Elon Musk’s Tesla

Steve Mollman
Sat, February 17, 2024 


One major problem for automakers as they transition to electric vehicles is that traditional cars still generally cost less. That matters to everyday car shoppers trying to make ends meet.

In China, however, EVs are actually more affordable than gas guzzlers. And increasingly, Chinese EVs are being exported to markets around the world and sold for prices that are tough to match.

That has leaders of automakers outside China worried. This week, Stellantis CEO Carlos Tavares likened China’s automotive emergence to the arrival of Japanese carmakers in the U.S. in the 1970s, followed by South Korean rivals three decades later.

Now it’s China’s turn to make its mark, he suggested, and that poses a threat to existing carmakers like Stellantis, whose brands include Dodge, Chrysler, Jeep, Ram, and Maserati.

“The Chinese offensive is possibly the biggest risk that companies like Tesla and ourselves are facing right now,’’ Tavares said. “We have to work very, very hard to make sure that we bring out consumers better offerings than the Chinese.”

The most-feared Chinese carmaker is probably BYD—backed by Warren Buffett’s Berkshire Hathaway—which recently topped Tesla in global EV sales.

“No one can match BYD on price. Period,” Michael Dunne, CEO of Asia-focused car consultancy Dunne Insights, recently told the Financial Times. “Boardrooms in America, Europe, Korea, and Japan are in a state of shock.”

BYD keeps its costs low in part because it owns the entire supply chain of its EV batteries, from the raw materials to the finished battery packs. The battery accounts for roughly 40% of a new electric vehicle’s price.

Taking on Chinese EVs

Chinese EVs are not flooding American roads today thanks to protectionist measures—a 25% tariff on Chinese-made cars on top of a regular 2.5% one on imported cars. But American lawmakers fear that Chinese carmakers will use factories in Mexico to avoid such tariffs, taking advantage of the North American free trade agreement.

“So do we want that the Chinese carmakers take a significant share of the U.S. market in the next 20 years, or the next 10 years? I don’t know. That is the question,” Tavares said. “So how do we prevent that from happening beyond all the protectionist decisions, which are out of my reach? Well, by making our consumers happy.”

Tavares said that while Stellantis will launch 18 new EVs this year, eight in North America, the “job is not done” until prices for EVs match those of traditional cars.

In Europe—where carmakers are less protected from Chinese competition—Stellantis is taking orders for the new electric Citroen e-C3. It’s priced to take on budget models from Chinese rivals like Great Wall Motor. The e-C3 sells for 23,000 euros ($25,100) and has a range of 320 kilometers (199 miles). It will hit showrooms in the second quarter. An entry-level version slated for 2025 will sell for 19,990 euros.

Avoiding a 'race to the bottom'

Both models will be sold at a profit, Tavares noted. Last month, he warned about the perils of getting drawn into a damaging price war.

"If you go and cut pricing disregarding the reality of your costs, you will have a bloodbath. I am trying to avoid a race to the bottom," he said. "I know a company that has brutally cut pricing and their profitability has brutally collapsed.”

He didn’t elaborate on which company he was referring to, but his comments came shortly after Tesla cut prices on its Model Y across Europe and both its Model Y and Model 3 in China.

Read more: Ford CEO, who’s been worrying about China’s EV dominance for years, says ‘the world has changed’ and he’d work with rivals on a cheaper battery

Tesla, in a call with investors last month, warned of “notably lower” sales growth this year after a disappointing fourth quarter. CEO Elon Musk said his EV maker is “between two major growth waves.” Hoping to better compete against both Chinese rivals and cheaper gas-powered cars, Tesla plans to start producing an entry-level EV starting at $25,000 next year.

Musk, too, is warily watching BYD and other Chinese carmakers.

“If there are no trade barriers established,” he told investors last month, “they will pretty much demolish most other car companies in the world. They’re extremely good.”

This story was originally featured on Fortune.com

Volkswagen announces second phase of Mexico investment of around $1 billion

Reuters
Fri, February 16, 2024 

Volkswagen Tiguan cars are pictured in a production line at company's assembly plant in Puebla

MEXICO CITY (Reuters) -Volkswagen's Mexican unit announced on Friday an investment of around $1 billion, in a second installment of spending by the German automaker aimed at boosting its electric vehicle (EV)business at its existing operations in central Mexico.

In a statement, the company did not offer further details on what kind of EV production it will undertake at its sprawling complex in central Puebla state.

Volkswagen's latest investment in its Mexican operations follows a $763.5 million plan announced in late 2022.

The earlier investment plan for Volkswagen's Puebla facilities, among Volkswagen's largest globally, was aimed at building a new paint plant as well as to start a new production line.

The company has made its Jetta, Taos and Tiguan models at its Puebla complex.

Since 2016, Volkswagen unit Audi has also made the Audi Q5, a compact SUV, at the same complex, and later added a hybrid version.

(Reporting by Daina Beth Solomon and Valentine Hilaire; Editing by David Alire Garcia)

Dubai’s Golden Visas Are Helping City Defy Global Office Slump




Zainab Fattah
Sun, February 18, 2024

(Bloomberg) -- At the height of the global pandemic, as Dubai faced an exodus of expatriates and mounting competition from neighboring business hubs, the government opened up. That decision is now helping the city dodge the commercial real estate crisis rippling across the globe.

The United Arab Emirates — of which Dubai is a part — started to break away from a decades-old economic model that prevails across the oil-rich region, linking residency to employment. Officials widened the eligibility net for long-term ‘golden’ visas, abolished a requirement for companies to have a majority local partner, switched to a Monday-Friday working week and made it legal for unmarried couples to live together.

Policymakers wanted to help Dubai shed its reputation of being a transient city by attracting expatriates and encouraging some of them to set up businesses. That seems to have paid off.

In response to questions from Bloomberg, authorities released data for last year, revealing the scale of the turnaround. The city had 411,802 active business licenses in 2023. That’s a 30% jump from 2022 levels and a 75% increase from 2021.

Earlier this month, Dubai International Financial Centre said the number of entities registered there rose 26% in 2023 from a year earlier to over 5,500. The free-zone now employs about 41,600 people — a 15% increase.

The impact is most evident in the emirate’s commercial real estate market. Occupancy is at record highs in contrast to slumping demand in other cities including London and New York. In Dubai’s financial district, known as DIFC, office space is scarce and rents are still rising.

The business hub’s most prominent tower is up for sale, and could be valued at as much as $1.5 billion. That property in DIFC is among Brookfield’s best performing assets globally at a time when other assets — including in Los Angeles and London’s Canary Wharf — have been hit by falling occupancy.

“The market is quite divorced from the trends we see across the world,”said Prathyusha Gurrapu, head of research and advisory at the property firm Cushman & Wakefield Core. “While a lot of western markets are still working on a hybrid or work from home model, here there is a surge in demand and almost everyone is back in the office.”

Listen to the Big Take podcast on iHeart, Apple Podcasts, Spotify and the Bloomberg Terminal. Read the transcript.

Economic Freedom

To be sure, a number of external factors also boosted arrivals. Bankers relocated from Asia to escape lockdowns, while wealthy Russians moved in to shield assets after their country invaded Ukraine in 2022. Crypto investors flooded in, alongside rich Indians looking for second homes, as well as young job seekers from Europe and the wider Middle East.

Government reforms enabled some of the new arrivals to set up businesses.

“When taken holistically, the changes made are significant,” said Ryan Bohl, a senior Middle East & North Africa analyst at risk intelligence consultancy Rane Network. Saudi Arabia and Qatar “are both going to be pressured to try to find ways to liberalize their economies in ways that make sense for themselves, if they want to compete with the economic freedom Dubai gives businesses,” he said.

Apart from the commercial property boom, signs of the influx are visible elsewhere. Waiting lists for schools and clubs run long, while key roads are routinely jammed. The government has announced a $5 billion public transit project and policymakers predict Dubai’s population will surge to 5.8 million in 2040 from over 3.5 million currently.

Residential property prices are closing in on records, despite mortgage rates hovering at the highest levels in two decades. Average annual rents for villas have surged to nearly $88,500. Last year, buyers queued up for $5 million homes and one developer sold houses worth $844 million in hours. At the high end, sales of homes worth $25 million or more doubled in 2023.

One Year at a Time

The new rules have upended Dubai’s real estate market in other ways. End users now account for 44% of property purchases, compared with 29% in 2019, according to property broker Betterhomes.

Londoner Jake El-Rasoul is one the thousands of expatriates looking to buy a home in Dubai. Since moving to the city a decade ago, the 40-year old has lived year-to-year, aware that he’d likely need to to leave if he lost his job.

But in May 2022, encouraged by the government’s visa reforms, he opened a financial advisory firm. “I sort of saw an opportunity and thought it was a good time to set up my own business,” he said. “It’s not so daunting anymore and the flexibility around visas is definitely a big factor.”

Policymakers across the Middle East see knowledge-based industries as the future and have been plowing oil wealth into high-tech sectors. To attract the right people for such jobs, UAE authorities recognized the importance of providing long-term horizons and predictability — the bedrock of decision making for executives. Golden visas ensure that to a degree, even though citizenship remains largely off the table.

While Saudi Arabia’s also announced initiatives to make Riyadh a more attractive destination, challenges remain. One big question is whether it’s ready from an infrastructure, housing, lifestyle and administrative standpoint for an influx of foreign white-collar workers and their families. Equally, a question mark hangs over whether people will abandon the relatively freer and more cosmopolitan Dubai to move there.

El-Rasoul, for his part, plans to make Dubai his home for at least the next decade. “It feels like there’s more people coming here to live for a long time,” he said. “Dubai has changed in that respect.”

Oil Wealth

Part of the draw is the the Middle East’s immense oil wealth — the UAE capital, Abu Dhabi, alone is home to state funds that control $1.5 trillion in assets. That’s prompted a number of multinational firms to consider expanding in the region.

Nathan Gatland, director at Open Hub, says his firm now helps sets up about 80 companies a month on average — up from about 25 trade licenses per month a year earlier. That’s despite the UAE’s decision to introduce corporate tax.

“I thought the corporate tax would have a negative effect but we’ve seen bigger companies come here due to the market potential,” Gatland said. “When they move staff here, it opens up a whole new market where a lot of high net worth individuals are moving to.”

Still, limitations remain. Among them: what happens when residents stop working? Dubai needs to establish retirement programs and health insurance plans to allow residents to retire in the city, according to Renee McGowan, CEO of India, Middle East & Africa at Marsh McLennan.

Dubai’s diminishing tax-free status may also hinder its ability to lure more foreigners. In addition to corporation tax, the UAE introduced value added taxes in 2018 on top of the slew of government fees on services in a city that already ranks among the world’s most expensive.

“Dubai and the UAE in general are facing clashing imperatives of finding ways to develop comparative advantage to keep people in the country on the one hand, while rationalizing their budgets by increasing taxes and broadening the tax base,” Rane Network’s Bohl said.

--With assistance from Nicolas Parasie, Farah Elbahrawy and Abeer Abu Omar.

Bloomberg Businessweek

Newleftreview.org

https://newleftreview.org/issues/ii41/articles/mike-davis-fear-and-money-in-dubai.pdf

mike-davis-fear-and-money-in-dubai.pdf - New Left Review 

We begin with Mike Davis's portrait of Dubai—an extreme concentration of petrodollar wealth and Arab- world contradiction. Future issues will carry reports from ...

Files.libcom.org

https://files.libcom.org/files/Planet%20of%20Slums1.pdf

Planet of Slums Sinister Paradise - Libcom 

In addition to being super-exploited, Dubai's helots are also expected to be generally invisible.

 ... These three articles by Californian Marxist Mike Davis deal ...

Global Factory Check-Up Is About to 

Reveal Extent of Nascent Recovery

Enda Curran and Alexander Weber

Sun, February 18, 2024 

(Bloomberg) -- Manufacturing will get a temperature check from closely-watched measures of activity for Europe and Asia, an opportunity to gauge whether a nascent recovery in factory output is gaining traction.

A recent uptick in a global index of manufacturing — to the highest level since mid-2022 — has spurred expectations the sector has reached a turning point after a broad consumer shift away from purchases of goods in favor of services.

“We believe that manufacturing activity has troughed and should improve on the back of resilient global growth and the arrival of central bank rate cuts in 2024,” Goldman Sachs Group Inc. economists led by Jan Hatzius wrote in a note.

Purchasing managers indexes are due in the coming week for the UK, euro zone and Japan. While still projected to remain in contraction territory, economists expect a modest improvement in the February PMIs for the euro zone and the UK.

“The Covid pandemic created big swings in the manufacturing cycle, with the pendulum swinging from a huge boost in goods demand to a subsequent bust,” economists at Danske Bank wrote earlier this month. “We now believe the pendulum is starting to swing back, supported by a turn in the inventory cycle and a moderate improvement in goods demand.”

Still, in a sign that the industrial sector remains under pressure, US factory production decreased in January for the first time in three months, reflecting declines in the output of motor vehicles, machinery and metals. S&P Global’s index of US manufacturing in February is seen coming close to stagnating.

Elsewhere, the Federal Reserve and European Central Bank publish minutes of their January deliberations, European finance chiefs meet in Belgium, and monetary policy authorities in Turkey, South Korea and Indonesia are predicted to keep interest rates unchanged.

Click here for what happened last week and below is our wrap of what’s coming up in the global economy.

US Economy and Canada

The US economic data calendar is sparse this holiday-shortened week. In addition to February manufacturing and services figures from S&P Global, the National Association of Realtors on Thursday will release data on sales of previously owned homes. Economists forecast a modest increase in closings as mortgage rates remained below 7%.

Investors will monitor comments from Federal Reserve officials including Vice Chair Philip Jefferson and governors Lisa Cook and Christopher Waller, among others, to gauge the appetite for rate cuts in the wake of strong inflation data.

Many policymakers, including Chair Jerome Powell, have said they’re not in a rush to start lowering rates until they’re convinced that inflation is on a sustainable path back to their 2% target.

On Wednesday, the Fed will release the minutes of its Jan. 30-31 policy gathering, at which officials left borrowing costs unchanged and signaled that a cut wasn’t likely at the March meeting.

Further north, Canada’s consumer-price growth is expected to have inched down to a yearly 3.3% rate from 3.4% in January. The hotter-than-expected US inflation print already pushed back market bets on rate cuts by the Bank of Canada, with a first move now fully priced in by September. Markets will keep an especially close eye on the core figure.

Data on Canadian retail trade for December and a flash estimate for January are also due.

• For more, read Bloomberg Economics’ full Week Ahead for the US

Asia

The Year of the Dragon gets underway in China, with markets looking for help via rate cuts or liquidity injections. The People’s Bank of China disappointed on Sunday, opting to keep its one-year policy rate steady to keep a floor under the yuan after US CPI data cooled expectations about a near-term rate cut by the Fed.

Commercial banks are forecast to trim their benchmark lending rates two days later, with the 5-year loan prime rate expected to slip to 4.10%.

Meanwhile, Chinese travel and spending during the Lunar New Year holiday exceeded levels from before the pandemic, adding to signs that consumption in the world’s second-largest economy is improving.

Elsewhere, the Bank of Korea will probably stand pat on policy, with a focus on how dovish officials sound after inflation slowed more than expected in January.

The Bank of Indonesia is seen holding its benchmark rate steady to maintain support for the rupiah, while the Reserve Bank of Australia releases minutes from its February meeting — where its tone was surprisingly hawkish.

Thailand’s GDP growth probably accelerated year-on-year in the fourth quarter. Australia gets wage data that may show growth picking up again. Japan, South Korea, Malaysia and New Zealand see trade figures, and Singapore, Hong Kong and Malaysia report consumer inflation data.

• For more, read Bloomberg Economics’ full Week Ahead for Asia

Europe, Middle East, Africa

ECB data on Tuesday will show whether growth in negotiated wages eased from a record high at the end of 2023. Policymakers are highly focused on workers’ pay as they debate whether to start cutting rates in April or June. Consumers’ inflation expectations for the euro area are due on Friday.

An account of the ECB’s January policy meeting due on Thursday will be parsed for more insight into the governing council’s thinking. Additional comments may emerge from a gathering of euro-area finance ministers and central bankers in the Belgian city of Ghent at the end of the week.

Financial statements from the ECB and the Bundesbank due Thursday and Friday will probably show pressure on their bottom lines resulting from their rapid rate-hiking campaign.

Germany’s monthly Ifo survey isn’t predicted to brighten the mood as business confidence is seen hovering around the current low level. That may feed expectations that Europe’s biggest economy is headed for a another contraction in the first quarter.

Outside of the currency bloc, UK Parliament’s Treasury committee questions Bank of England Governor Andrew Bailey and his colleagues on inflation and interest rates. Swedish inflation data is about to reveal a rebound in January while Denmark publishes figures on fourth-quarter growth. Further east, Poland is expected to report improving consumer confidence and industrial output.

In the Middle East, Israel releases gross domestic product numbers for the fourth quarter on Monday, a period almost entirely shaped by the war against Hamas. Analysts estimate the economy contracted around 15% year-on-year as the government called up hundreds of thousands of military reservists and consumer spending slumped.

Two days later, in South Africa, Finance Minister Enoch Godongwana will deliver his budget speech. With revenue collection undershooting targets, and demands growing on the public purse ahead of elections later this year, it will likely be his toughest spending plan yet. Investors will watch to see if he taps foreign reserves and raises taxes to close the funding gap and rein in debt.

On the same day, data will likely show inflation quickened for the first time in three months in January, to 5.3%, amid higher gasoline prices. The rate is currently at 5.1%.

A day later, Rwanda is set to hold its key rate at 7.5%, with inflation back within the central bank’s 2% to 8% target band since December.

In Turkey, the central bank will make its first rate decision under new Governor Fatih Karahan. Analysts expect him to follow the guidance of the MPC at the previous meeting, which signaled that an aggressive period of monetary tightening since June was over. The key rate will probably be kept at 45%.

• For more, read Bloomberg Economics’ full Week Ahead for EMEA

Latin America

Brazil’s economy has been slowing since the first half of 2023 but GDP-proxy data for December on Monday may show a slight year-end uptick. Analysts surveyed by Brazil’s central bank expect Latin America’s biggest economy to grow 1.6% in 2024, down from a forecast 3% expansion last year.

By contrast, activity figures from Argentina may show the steepest month-on-month contraction since the pandemic as President Javier Milei begins to deliver on his promised “shock therapy” for South America’s No. 2 economy, which is seen shrinking for a second year in 2024.

In Mexico, the final fourth-quarter output report, February mid-month consumer prices data and Banco de Mexico’s Feb. 8 meeting minutes are the standouts from a raft of data and reports due over the coming week.

The post-decision communique of the meeting — where Banxico kept its key rate at 11.25% — appeared to put a cut on the table for the March meeting provided data in the meantime was supportive.

All of which is to say that there’ll be considerable focus on the bi-weekly CPI report. The early consensus is for a slight deceleration in the headline print from 4.87%, while the core reading down-shifts from 4.75%.

The central banks of Uruguay and Paraguay have both been cutting rates since mid-2023 but a recent uptick of inflation may give policymakers pause at their respective meetings.

--With assistance from Robert Jameson, Laura Dhillon Kane, Brian Fowler, Vince Golle and Catarina Saraiva.

(Updates with BOE in EMEA section)

Bloomberg Businessweek

NOT HIGH ENOUGH
 

Latin America’s Troubled State Companies Lure Bond Investors

Maria Elena Vizcaino and Carolina Wilson
Sun, February 18, 2024 

 

 

(Bloomberg) -- State-owned companies across Latin America face falling output, cash woes and expensive investment plans. Yet bondholders can’t get enough.

Companies such as Petroleos Mexicanos SA, Petroleos de Peru SA and Chile’s Codelco are luring investors by offering much higher yields than debt from their respective governments for what is proving essentially the same risk. The argument, it goes, is if the sovereign is doing well, it won’t let the company go under.

“The government won’t want to make a political crisis. Nobody is interested in that,” said Peter Varga, a senior portfolio manager at Erste Asset Management GmbH. “It’s cheaper to kick down the can on the road, so they’ll always help a bit just to avoid default.”

Betting on their bonds has paid off. Debt from Pemex, PetroPeru and Codelco beat the average 5.7% return for a Bloomberg index of emerging-market credits in the last three months by at least 1.3 percentage points. While investors have long been touting Pemex’s eye-popping yields, bets on state-backed giants in Peru and Chile are only now making a comeback on the expectation of government support after their weakening finances sent spreads to historical highs.

‘Bizarre’

Examples of inadequate investment and poor management among state-run companies abound worldwide, with South Africa’s Eskom Holdings SOC Ltd. a prime example after years of crippling blackouts. In Latin America, what stands out is not just the ability of governments to back them — Mexico, Peru and Chile are all investment grade credits with a fraction of the debt-to-GDP ratio seen in many developed nations — but their willingness to do so.

“These entities are really quite bizarre,” Philip Fielding, co-head of emerging markets at Mackay Shields in London. Pemex, for instance, “is quite an unusual monster that sits atop of an otherwise quite normal, investment-grade sovereign.”

PetroPeru started to build a refinery 10 years ago that ended up costing over twice the original budget, straining its finances and saddling it with $5.2 billion of debt. The company is running out of cash, executives have said, and needs over $1 billion in the next few months to pay suppliers. Codelco’s production is running at the lowest level in a quarter century while its debt load is the largest among major copper producers tracked by Bloomberg. Pemex, which was downgraded last week by Moody’s Investors Service, has $11 billion due this year and a total debt burden of $106 billion, making it the world’s most indebted oil company.

Yet bonds for all three companies are far from distressed — Codelco’s most liquid notes, due in 2036, are trading above par — largely on the expectation of continued government backing. When it downgraded the company late last year, S&P Global Ratings cited it as a reason for a stable outlook. While Fitch slashed PetroPeru’s credit score by three notches on concern about wavering support, the government reassured investors earlier this month saying the oil producer will get liquidity in the short term and meet all payments to bondholders.

Mexico’s President Andres Manuel Lopez Obrador, who proved much more fiscally responsible than investors feared, has repeatedly put money into Pemex over the years to keep it afloat. In its latest assessment of the sovereign rating, S&P said the government is, in effect, “formally raising debt on behalf of Pemex” this year, “given a line item in the budget to cover 90% of the company’s amortizations.”

“Mexico tends to a very nationalistic country and Pemex is like the eldest child within the family,” said Jennifer Gorgoll, an Atlanta-based portfolio manager at Neuberger Berman Group LLC, which owns Pemex bonds. “It’s so incredibly important to Mexico to maintain that stability and I don’t think a default will ever happen.”

That rings true across the region. Mexico actually has an oil expropriation day — March 18 — to mark the date it seized the nation’s oil fields in 1938. Nationalizing the copper industry in the early 1970s in Chile was so popular that even free-market dictator Augusto Pinochet refused to backtrack on it.

“They’re connected at the hip,” said Aaron Gifford, an analyst at T Rowe Price in Baltimore, said of the relationship between the region’s sovereigns and the state-backed companies. “I don’t think these governments could let them go under.”

What to Watch

In Brazil and Argentina, December activity prints will shed light on fourth-quarter GDP data


Mexico’s revised GDP numbers and data for December should signal activity sharply lost momentum, according to Bloomberg Economics


Turkey’s central bank will likely hold interest rates steady while providing hawkish forward guidance


People’s Bank of China should lower its one-year rate by 10 basis points, the first reduction since last August


Bank Indonesia is likely to keep rates on hold to maintain support for the rupiah

--With assistance from Robert Brand, James Attwood, Marcelo Rochabrun, Vinícius Andrade and Karl Lester M. Yap.

Record US Stock Rally Is Under Threat From a World in Turmoil

Farah Elbahrawy
Sun, February 18, 2024

(Bloomberg) -- Investors and firms are flagging that the war in the Middle East poses a major risk for earnings as boycotts dampen sales and Red Sea shipping chaos threatens their supply chains.

Those headwinds pose a danger to the record rally in US stocks, according to a Bloomberg analysis of hundreds of earnings calls. By the halfway mark in the first quarter, the number of references to the Red Sea or “geopolitics” has almost matched the total for the previous three months.

Expectations for profits at S&P 500 companies for the next 12 months are at a record high, suggesting analysts are pricing in a blue-sky scenario with the US economy growing more than expected and the Federal Reserve cutting rates. Any major threat to earnings, or signs that inflation is returning, could impact the months-long rally which has sent the US benchmark to record highs.

Crude prices have already climbed this year in part due to fears the Israel-Hamas war could grow into a wider conflict. At the same time, container ships are being forced to avoid the Red Sea and Suez Canal after attacks by Iran-backed Houthi rebels as part of a campaign against Israel.

“The geopolitical backdrop is a risk,” said Nicole Kornitzer, portfolio manager of the Buffalo International Fund at Kornitzer Capital Management Inc. “If the pressure continues for longer, this could weigh on corporate margins and be inflationary as costs are passed on through price increases. This kind of scenario is not in estimates.”

From consumer goods companies, to social media, to freight firms, Bank of America Corp.’s latest fund manager survey also showed that investors see geopolitics as the second biggest risk to share prices after inflation, although the two dangers are connected — participants expect a further escalation in the Red Sea or Middle East to add new price pressures higher oil and freight rates.

In Europe, alcoholic beverages producer Heineken NV said macroeconomic and geopolitical developments will remain a factor of uncertainty that could impact its business. Adidas AG said tension in the Red Sea is leading to higher supply costs in the short term.

Tesla Inc. in January announced production suspensions at its German plant, citing disruptions in supplies. Medical equipment supplier ResMed Inc. said it’s seeing an impact on freight rates and lead times. Computer networking equipment giant Cisco Systems Inc. also said shipping rates have gone up. Chemicals company Albemarle Corp., tobacco firm Philip Morris International Inc. and rail services provider CSX Corp. are among S&P 500 firms also monitoring the situation in the Red Sea.

Some firms have benefited from the situation. The Dutch firm Royal Vopak NV saw a rise in demand for its storage facilities due to the disruption in the Red Sea and uncertainty in the oil market. A.P. Moller-Maersk A/S had rallied in the lead up to its results, but disappointed after saying it expects renewed gloom in the industry later this year when the current boost to freight rates from the Red Sea conflict evaporates.

Meanwhile, many shoppers in the Middle East as well as Muslim nations like Pakistan are shunning big foreign brands driven by anger against the US and Europe for not doing more to get Israel to end its offensive in Gaza. That’s weighed on the earnings of major US businesses.

McDonald’s Corp.’s sales missed investor expectations, hurt in part by the boycotts. It expects no meaningful improvement for the segment that includes the region until there’s a resolution to the war, which also hit Starbucks Corp.’s results. Even Snap Inc. sees the conflict as a headwind.

The Israel-Hamas war continues to rage with no end in sight, and the Houthis continue to disrupt shipping in the Red Sea, even as the US and UK are targeting the militant group in Yemen and a multinational naval operation patrols the waters.

“Geopolitics is the tail risk which has the most short-term market impact,” said Rajeev De Mello, a global macro portfolio manager at GAMA.

--With assistance from Sagarika Jaisinghani.

 Bloomberg Businessweek

How Texas came to rival New York as a finance hub



David Hollerith
·Senior Reporter
Sun, February 18, 2024 

JPMorgan Chase (JPM) is putting up a massive new headquarters in midtown Manhattan. But New York is no longer the state where it employs the most people.

Texas is.

The country’s largest bank has 31,500 employees in the Lone Star State following an expansion over the last decade highlighted by a four-building, 1-million-square-foot campus in Plano, a suburb of Dallas. That is 2,600 more than it has in New York.

"This state has been booming," JPMorgan Chase CEO Jamie Dimon told Yahoo Finance in November during a summit with local business owners in Frisco, Texas.

It’s not just JPMorgan. Wht’s happening at the nation’s largest lender is also playing out across the wider world of banking.

Texas recently passed the state of New York in finance employment for the first time ever in a 33-year period, according to an analysis by Yahoo Finance of Bureau of Labor Statistics data from 1990 to 2023.

It happened in December, when Texas had 384,900 such workers. That was 100 more than New York state.

The Comerica tower in Dallas is one symbol of how important finance now is to the region. (James Leynse/Corbis via Getty Images) (James Leynse via Getty Images)

This tally counts jobs directly tied to the banking industry — like analysts, loan officers, and financial managers — and does not include the insurance and real estate sectors.

The New York City metropolitan area, which includes parts of New Jersey, is still No. 1 in finance workers when compared to other metro areas. But a well-known Texas region — Dallas — has taken the No. 2 spot.

The move to the middle

The emergence of Texas as a banking center is many decades in the making. In fact, New York state has been slowly losing its grip as the dominant place for banking jobs since the years following the terrorist attacks of Sept. 11, 2001.

That’s when some of the biggest financial institutions began shifting parts of their workforce elsewhere to save on costs and manage risks. California took over the top spot between 2001 and 2006, but a housing meltdown and the 2008 financial crisis sent employment in that state and New York tumbling again.

New York eventually regained its top spot and began adding more workers as the wounds of 2008 healed.

But Texas accelerated at a much faster rate, with Dallas as a new hub for many finance giants attracted by the state’s lack of an income tax, lower cost of living, plentiful building sites, and easy transportation access.

View of the Dallas skyline. (VALERIE MACON / AFP) (VALERIE MACON via Getty Images)

One attraction is that financial giants can save money by moving more employees to Texas. The pay discount for financial workers in Dallas is 10% to 15% when compared with New York, though this discount narrows for more senior positions, according to Chris Connors, a principal with Johnson Associates.

The cost savings are most pronounced in more junior, clerical, or back-office jobs.

For these workers, though, the argument is their money will likely go a lot further. The cost of living in Dallas is 55% lower than in Manhattan, according to Bankrate. Again, the more senior a position, the more the cost of living difference narrows.

"You can't make as much as in New York City but the discount is not nearly as punitive as the cost of living for more junior, clerical jobs," Connors added.

From bust to boom

The state has been through banking booms before, as well as busts.

Local lenders thrived alongside the oil and gas industry in the 1970s and early 1980s, but Texas then became one of the hardest-hit areas in the country during the savings and loan crisis that lasted into the 1990s.

Texas lost 425 banks between 1980 and 1989, according to an FDIC history of that period, including nine of the state’s 10 largest bank holding companies.

Now many of the biggest banks in the US are rushing to install new campuses or headquarters, especially in the Dallas area. Goldman Sachs (GS) plans to complete a new office campus north of downtown Dallas by the end of 2027 and expects to add 1,000 more employees to the 4,000 it already has in the area.

A long-shuttered shop that once serviced pump jacks in Penwell, Texas is a symbol of the boom-and-bust oil cycle that Texans have lived with for generations.

 (Michael S. Williamson/the Washington Post via Getty Images)

"Dallas has this confident, frontier spirit — bold innovation, can-do attitude — I think that really aligns with what Goldman Sachs defines in our own culture and what we’re looking to build in the region," said Vicki Tung, Goldman’s global head of recruiting, who is based in New York but is originally from Dallas.

Not that far from Goldman’s campus, Bank of America is the anchor tenant of a new 30-story, $500 million high rise in Dallas’s Uptown district expected to be finished in 2027. Wells Fargo (WFC) is expanding its office campus in Irving with a two-tower, 850,000-square-foot space set to be finished in 2025.

Lots of money managers are setting up shop, as well. That includes Charles Schwab (SCHW), which moved its headquarters from San Francisco to West Lake, Texas, in 2021. It currently has 10,000 employees, or 30% of its workforce, in the state.
'Don't become like D.C.'

Operating in Texas is not without its challenges for some financial giants. There are government efforts at the state level to restrict the ability of certain banks to participate in muni bond offerings if they don’t comply with local preferences.

The office of the state's attorney general, Ken Paxton, is currently reviewing anti-firearm policies of JPMorgan and Bank of America as well as environmental, social, and governance policies of other banks.

The state has a law in place barring certain government contracts with companies that have anti-gun business practices.

Texas Attorney General Ken Paxton.

 (Sarah Silbiger for the Washington Post via Getty Images) 

Last year, in fact, Paxton’s office determined that Citigroup (C) had "a policy that discriminates against a firearm entity or firearm trade association."

The response followed a decision made by Citigroup to restrict its banking services to gun retailers that sold firearms to people under 21, which came as a response to the 2018 Parkland shooting in a Miami suburb.

The CEO of the largest US bank, JPMorgan’s Dimon, said he likes what's happening in Texas. The state "is conducive to business" and "they’re making it good to come here," citing the roughly 10,000 people the bank has in Plano alone.

Jamie Dimon, chairman and CEO of JPMorgan Chase, speaks last November during the ceremony for placement of the final beam for JPMorgan Chase's new global headquarters building on Park Avenue in New York City. 

(Brendan McDermid/REUTERS) (REUTERS / Reuters)

But he also offered a warning. "I'm begging Texas, don't become like D.C.," he added, referring to the US capital.

"D.C. goes out of its way to make it hard for small to large businesses to grow and expand."

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.