Focus: Powell and Mnuchin testimonies and the fear of zombie companies

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Updated 20 May 2020
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Focus: Powell and Mnuchin testimonies and the fear of zombie companies

What Happened:

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin testified before Congress, underlining that they would do whatever it takes to keep the economy going amid the crisis brought on by the coronavirus disease (COVID-19).

European equity markets had a lackluster response to Emmanuel Macron and Angela Merkel’s plan to funnel €500 billion in stimulus through the EU budget, which would be awarded to countries as grants rather than loans. The commission could issue AAA-rated bonds. The onus of paying it back would lie on the EU 27.

The package is likely to face pushback from northern countries, which are against the mutualization of debt, and from southern countries, which consider it as being too little too late. It is none the less significant, however, that the plan is backed by the two largest economies, which sit on opposite sides of the debt mutualization debate. This may well be an important step toward some sort of a fiscal union within the EU, which would be important to the longevity of the euro.

The New Zealand dollar saw a boost after Governor of the Reserve Bank of New Zealand Adrian Orr said that he did not want to go into negative rates at this point in time but wanted to preserve the optionality. The litmus test was that negative rates were necessary, effective, efficient and “operationally capable.”

Rolls Royce is cutting 9,000 jobs — nearly 20 percent of its workforce. The majority of the layoffs will hit the aerospace business, which accounted for roughly 60 percent of the company’s sales before the COVID-19 crisis. Rolls Royce CEO Warren East told Bloomberg that the aerospace business could shrink by as much as two thirds in the near term and that current measures were aimed at bringing staffing in line with future demand. He expects air travel to be at 33 percent of 2019 levels by the end of 2021 and thinks that it might take five years until the industry fully recovers.

Target sales were up 10.8 percent for the first quarter, owing mainly to digital sales, in line with a general trend of retail moving online.

Background:

US President Donald Trump considers reopening of the economy to be more important than issuing further stimulus. Both Trump and Senate Majority Leader Mitch McConnell feel that the US needs to grow again, contrasting the proposed $3 trillion additional support package that passed the Democrat-controlled House of Representatives last week.

In his testimony, Powell said that he thought additional fiscal stimulus would be necessary down the line but refrained from specifying the timing or shape of the stimulus. At the same time, Powell said he would use all the policy tools at his disposal to combat the recession. He reiterated his opposition to negative interest rates as well as concerns about what current levels of unemployment would do to the economic recovery. 

In Powell’s words: “We are committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public-sector response.”

Steven Mnuchin stated that the Department of Treasury would risk its $75 billion guarantee to back the Federal Reserve’s $600 billion loan facility to Main Street, stating that he was willing to incur losses.

“There’s scenarios within Main Street where we could lose all of our capital, and we’re prepared to do that,” he said.

There is the valid question whether a government stimulus plan would support zombie companies in the US and Europe. The Federal Reserve is prepared to support sub-investment grade companies under the caveat that they were investment-grade before the pandemic and could be tagged as “fallen angels.”  The European Central Bank may also go down that trajectory in the coming months.

Over 100 companies are on the verge of crossing the threshold between investment-grade and sub-investment grade. So far, big companies that were recently downgraded include Carnival Corp., Marriott International, Delta Airlines and GAP in the US, and Lufthansa, Virgin Atlantic, Bank of Ireland and Peugeot in Europe.

There is an old Wall Street proverb that says one should never bet against the Federal Reserve. The question is whether one must watch out for temporary liquidity impasses turning into insolvency during these unprecedented times.

Where we go from here:

The biggest cyclone in two decades is headed for the Bay of Bengal, hitting both Bangladesh and India at a time when their economies are reeling from the fallout of the COVID-19 pandemic.

Brexit negotiations hit another impasse when UK Chief Negotiator David Frost called the EU’s Brexit proposals low-grade and EU Chief Negotiator Michel Barnier retorted that the UK could not expect to keep the same privileges as before after having left the EU.

Investors will be watching Bank of England Governor Andrew Bailey’s testimony later on Wednesday after the yield of the 2-year guilt turned negative for the first time. Bailey is not known as a friend of negative interest rates.

 

— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources


Europe posts record year for clean energy use as Trump pulls US toward fossil fuels

Updated 4 min 41 sec ago
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Europe posts record year for clean energy use as Trump pulls US toward fossil fuels

  • With another 24% of electricity in the bloc coming from nuclear power, nearly 3/4 of EU's electricity is considered clean energy
  • In contrast, economic giants China and the US still get nearly 2/3 of their energy from carbon-polluting fossil fuels like coal, oil and gas

A record 47 percent of the European Union’s electricity now comes from solar and other renewables, a report Thursday said, in yet another sign of the growing gap between the bloc’s push for clean energy and the new US administration’s pursuit of more fossil fuels.
Nearly three-quarters of the EU’s electricity doesn’t emit planet-warming gases into the air — with another 24 percent of electricity in the bloc coming from nuclear power, a report released by the climate energy think tank Ember found. This is far higher than in countries like the United States and China, where nearly two-thirds of their energy is still produced from carbon-polluting fossil fuels like coal, oil and gas. Around 21 percent of the US’s electricity comes from renewable sources.
Experts say they’re encouraged by Europe’s fossil fuel reductions, particularly as the US looks set to increase its emissions as its new president pledges cheaper gas prices, has halted leases for wind projects and pledged to revoke Biden-era incentives for electric vehicles.
“Fossil fuels are losing their grip on EU energy,” said Chris Rosslowe, an energy expert at Ember. In 2024, solar power generated 11 percent of EU electricity, overtaking coal which fell below 10 percent for the first time. Clean wind power generated more electricity than gas for the second year in a row.
Green policies and war drive clean energy growth

Illustration courtesy of EMBER

One reason for Europe’s clean power transition moving at pace is the European Green Deal, an ambitious policy passed in 2019 that paved the way for climate laws to be updated. As a result of the deal, the EU made their targets more ambitious, aiming to cut 55 percent of the region’s emissions by the end of the decade. The policy also aims to make Europe climate neutral — reducing the amount of additional emissions in the air to practically zero — by 2050.
Hundreds of regulations and directives in European countries to incentivize investment in clean energy and reduce carbon pollution have been passed or are in the process of being ratified across Europe.
“At the start of the Deal, renewables were a third and fossil fuels accounted for 39 percent of Europe’s electricity,” Rosslowe said. “Now fossils generate only 29 percent and wind and solar have been driving the clean energy transition.” The amount of electricity generated by nuclear energy has remained relatively stable in the bloc.
Russia’s invasion of Ukraine has also spurred the move to clean energy in Europe. Gas prices skyrocketed — with much of Europe’s gas coming from Russia becoming unviable — forcing countries to look for cheaper, cleaner alternatives. Portugal, Netherlands and Estonia witnessed the highest increase in clean power in the last five years.
Europe cements its place as a clean energy leader
The transition to clean power helped Europe avoid more than $61 billion worth of fossil fuel imports for generating electricity since 2019.
“This is sending a clear message that their energy needs are going to be met through clean power, not gas imports,” said Pieter de Pous, a Brussels-based energy analyst at European think tank E3G. De Pous said the EU’s origins were “as a community of coal and steel because those industries were so important,” but it is now rapidly becoming a “community of solar and wind power, batteries and smart technologies.”
Nuclear growth in the bloc, meanwhile, has slowed. Across the European Union, retirements of nuclear plants have outpaced new construction since around the mid-2000s, according to Global Energy Monitor.
As President Trump has pulled the United States out of the Paris Agreement aimed at curbing warming and is pursuing a “drill, baby, drill” energy policy, Rosslowe said the EU’s leadership in clean power becomes all the more important. “It’s about increasing European energy independence, and it’s about showing this climate leadership,” he said.
On Tuesday, EU chief Ursula von der Leyen said: “Europe will stay the course, and keep working with all nations that want to protect nature and stop global warming.”
 


Saudi crown prince makes call to US president Trump

Updated 6 min 56 sec ago
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Saudi crown prince makes call to US president Trump

RIYADH: Saudi Arabia’s Crown Prince Mohammed bin Salman made a phone call on Wednesday to US President Donald Trump, the Saudi Press Agency said.

During the call, the Crown Prince congratulated Trump and conveyed the congratulations of King Salman to the president after being sworn in, wishing the American people further progress and prosperity.

The pair discussed bilateral cooperation to establish peace, security and stability in the Middle East, in addition to enhancing bilateral cooperation to combat terrorism.

The Crown Prince pointed out the ability of the president's administration, with its expected reforms in the US, to create unprecedented economic prosperity, which the Kingdom seeks to benefit from its available opportunities for partnership and investment.

He stressed the Kingdom's desire to expand its investments and trade relations with the United States in the next four years by an amount of $600 billion, which is expected to increase if additional opportunities become available.

Trump expressed his thanks and appreciation to the King and Crown Prince for their congratulations, stressing his keenness to work with the Saudi leadership on everything that would serve their common interests.


Saudi Arabia condemns Israeli attack on West Bank’s Jenin

Updated 1 min 50 sec ago
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Saudi Arabia condemns Israeli attack on West Bank’s Jenin

RIYADH: Saudi Arabia has condemned Israeli forces’ attack in the occupied West Bank’s Jenin area, the Saudi Press Agency said early Thursday.

Gunfire and explosions rocked Jenin on Wednesday, an AFP journalist reported, as the Israeli military kept up a large-scale raid for a second day.

The operation, launched just days after a ceasefire paused more than a year of fighting in Gaza, has left at least 10 Palestinians dead, according to Palestinian health authorities.

Israeli officials have said the raid is part of a broader campaign against militants in the West Bank, citing thousands of attack attempts since the Gaza war erupted in October 2023.

“The Kingdom renews its demand for the international community to assume its responsibilities towards halting Israeli violations of relevant international laws and treaties,” a Saudi foreign ministry statement read.

Saudi Arabia warned that the continuation of these violations might cause the fighting and chaos to return to occupied Palestinian territories, thus risking the security and safety of civilians and undermining chances of peace in the region.


Microsoft’s LinkedIn sued for disclosing customer information to train AI models

Updated 26 min 36 sec ago
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Microsoft’s LinkedIn sued for disclosing customer information to train AI models

Microsoft’s LinkedIn has been sued by Premium customers who said the business-focused social media platform disclosed their private messages to third parties without permission to train generative artificial intelligence models.
According to a proposed class action filed on Tuesday night on behalf of millions of LinkedIn Premium customers, LinkedIn quietly introduced a privacy setting last August that let users enable or disable the sharing of their personal data.
Customers said LinkedIn then discreetly updated its privacy policy on Sept. 18 to say data could be used to train AI models, and in a “frequently asked questions” hyperlink said opting out “does not affect training that has already taken place.”
This attempt to “cover its tracks” suggests LinkedIn was fully aware it violated customers’ privacy and its promise to use personal data only to support and improve its platform, in order to minimize public scrutiny and legal fallout, the complaint said.
The lawsuit was filed in the San Jose, California, federal court on behalf of LinkedIn Premium customers who sent or received InMail messages, and whose private information was disclosed to third parties for AI training before Sept. 18.
It seeks unspecified damages for breach of contract and violations of California’s unfair competition law, and $1,000 per person for violations of the federal Stored Communications Act.
LinkedIn said in a statement: “These are false claims with no merit.”
A lawyer for the plaintiffs had no immediate additional comment.
The lawsuit was filed several hours after US President Donald Trump announced a joint venture among Microsoft-backed OpenAI, Oracle and SoftBank, with a potential $500 billion of investment, to build AI infrastructure in the United States.
The case is De La Torre v. LinkedIn Corp, US District Court, Northern District of California, No. 25-00709.

 

 

 


Pentagon is sending up to 1,500 active duty troops to help secure US-Mexico border

Updated 42 min 14 sec ago
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Pentagon is sending up to 1,500 active duty troops to help secure US-Mexico border

WASHINGTON: The Pentagon said Wednesday it has begun deploying 1,500 active duty troops to help secure the southern border in the coming days, putting in motion plans President Donald Trump laid out in executive orders shortly after he took office to crack down on immigration.
Acting Defense Secretary Robert Salesses said the Pentagon will provide military aircraft to support Department of Homeland Security deportation flights for more than 5,000 detained migrants and the troops will assist in the construction of barriers.
The number of troops and their mission may soon change, Salesses said in a statement. “This is just the beginning,” he said.
It remains to be seen if they will end up doing law enforcement, which would put American troops in a dramatically different role for the first time in decades.
The active duty forces will join the roughly 2,500 US National Guard and Reserve forces already there. There are currently no active duty troops working along the roughly 2,000-mile border.
Personnel started moving to the border earlier Wednesday, according to a military official briefing reporters on the condition of anonymity to provide additional details on the deployment. The troops will include 500 Marines from Camp Pendleton in California, and the remainder will be Army.
Troops have done similar duties in support of Border Patrol agents in the past, when both Trump and former President Joe Biden sent active duty troops to the border.
Troops are prohibited by law from doing law enforcement duties under the Posse Comitatus Act, but that may change. Trump has directed through executive order that the incoming secretary of defense and incoming homeland security chief report back within 90 days if they think an 1807 law called the Insurrection Act should be invoked. That would allow those troops to be used in civilian law enforcement on US soil.
The last time the act was invoked was in 1992 during rioting in Los Angeles in protest of the acquittal of four police officers charged with beating Rodney King.
The widely expected deployment, coming in Trump’s first week in office, was an early step in his long-touted plan to expand the use of the military along the border. In one of his first orders on Monday, Trump directed the defense secretary to come up with a plan to “seal the borders” and repel “unlawful mass migration.”
“This is something President Trump campaigned on,” said Karoline Leavitt, White House press secretary. “The American people have been waiting for such a time as this — for our Department of Defense to actually implement homeland security seriously. This is a No. 1 priority for the American people.”
On Tuesday, just as Trump fired the Coast Guard commandant, Adm. Linda Fagan, the service announced it was surging more cutter ships, aircraft and personnel to the “Gulf of America” — a nod to the president’s directive to rename the Gulf of Mexico.
Trump said during his inaugural address on Monday that “I will declare a national emergency at our southern border. All illegal entry will immediately be halted, and we will begin the process of returning millions and millions of criminal aliens back to the places in which they came.”
Military personnel have been sent to the border almost continuously since the 1990s to help address migration. drug trafficking and transnational crime.
In executive orders signed Monday, Trump suggested the military would help the Department of Homeland Security with “detention space, transportation (including aircraft), and other logistics services.”
There are about 20,000 Border Patrol agents, and while the southern border is where most are located, they’re also responsible for protecting the northern border with Canada. Usually agents are tasked with looking for drug smugglers or people trying to enter the country undetected.
More recently, however, they have had to deal with migrants actively seeking out Border Patrol in order to get refuge in America — taxing the agency’s staff.
In his first term, Trump ordered active duty troops to the border in response to a caravan of migrants slowly making its way through Mexico toward the United States in 2018. More than 7,000 active duty troops were sent to Texas, Arizona and California, including military police, an assault helicopter battalion, various communications, medical and headquarters units, combat engineers, planners and public affairs units.
At the time, the Pentagon was adamant that active duty troops would not do law enforcement. So they spent much of their time transporting Border Patrol agents to and along the border, helping them erect additional vehicle barriers and fencing along the border, assisting them with communications and providing some security for border agent camps.
The military also provided Border Patrol agents with medical care, pre-packaged meals and temporary housing.
It’s also not yet clear if the Trump administration will order the military to use bases to house detained migrants.
Bases previously have been used for that purpose, and after the 2021 fall of Kabul to the Taliban, they were used to host thousands of Afghan evacuees. The facilities struggled to support the influx.
In 2018, then-Defense Secretary Jim Mattis ordered Goodfellow Air Force Base in San Angelo, Texas, to prepare to house as many as 20,000 unaccompanied migrant children, but the additional space ultimately wasn’t needed and Goodfellow was determined not to have the infrastructure necessary to support the surge.
In March 2021, the Biden administration greenlighted using property at Fort Bliss, Texas, for a detention facility to provide beds for up to 10,000 unaccompanied migrant children as border crossings increased from Mexico.
The facility, operated by DHS, was quickly overrun, with far too few case managers for the thousands of children that arrived, exposure to extreme weather and dust and unsanitary conditions, a 2022 inspector general report found.