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


Snakes on a plane bound for India, again

Updated 1 min 11 sec ago
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Snakes on a plane bound for India, again

  • The live snakes included reptiles often sold in the pet trade, and were largely non venomous

NEW DELHI: Indian customs officers in Mumbai said they have stopped a plane passenger arriving from Thailand with a wriggling cargo of live snakes, the third such seizure this month.
“Customs officers... foiled yet another wildlife smuggling attempt, 16 live snakes... seized from passenger returning from Thailand,” said customs officers in the airport in the Indian financial hub.
The passenger, who arrived on Sunday, has been arrested, the customs agency said in a statement, with “further investigation underway.”
The live snakes included reptiles often sold in the pet trade, and were largely non-venomous, or with venom too weak to affect people.
They included garter snakes, a rhino rat snake and a Kenyan sand boa, among others.
In early June, customs officers stopped a passenger smuggling dozens of venomous vipers, also arriving from Thailand.
Days later, officers stopped another traveler carrying 100 creatures including lizards, sunbirds and tree-climbing possums.
Wildlife trade monitor TRAFFIC, which battles the smuggling of wild animals and plants, has warned of a “very troubling” trend in trafficking driven by the exotic pet trade.
More than 7,000 animals, dead and alive, have been seized along the Thailand-India air route in the last 3.5 years, it said.


Pakistan demands world stop Israel from its ‘murderous course,’ reiterates support for Palestinian state

Updated 7 min 54 sec ago
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Pakistan demands world stop Israel from its ‘murderous course,’ reiterates support for Palestinian state

  • Israel’s retaliatory campaign against Hamas in Gaza has killed at least 56,412 people since October 7, 2023
  • Ishaq Dar criticizes Israel’s “wanton killing” of women and children, targeting aid workers and blocking Gaza aid

ISLAMABAD: Pakistan’s Deputy Prime Minister Ishaq Dar on Monday urged the international community to mobilize and stop Israel from its “murderous course” and military operations in Gaza, reiterating Islamabad’s firm support for an independent Palestinian state. 

After claiming victory in a 12-day war against Iran that ended with a ceasefire last Tuesday, the Israeli military said it would refocus on its offensive in Gaza, where Hamas still holds Israeli hostages.

Israel’s retaliatory military campaign against Hamas has killed at least 56,412 people in Gaza since October 2023. Most of the dead are civilians, according to the Hamas-run territory’s health ministry. The United Nations considers these figures to be reliable.

“The international community must mobilize to stop Israel from its murderous course and persuade it to pursue a path of reason,” Dar said during his speech at the Institute of Strategic Studies Islamabad. 

“Palestinians must be granted their inalienable right to self-determination,” he added. 

He condemned Israel’s “wanton killing of women and children,” blaming the Jewish state for using starvation as “an instrument of war” in the densely populated Gaza territory, targeting humanitarian workers and destroying homes, schools, hospitals and critical infrastructure there. 

Dar, who also serves as Pakistan’s foreign minister, said Islamabad reiterates its support for the establishment of a viable and independent Palestinian state with pre-1967 borders and Al-Quds Al-Sharif as its capital. 

The Pakistani deputy premier condemned Israel and the United States for attacking key Iranian nuclear facilities earlier this month, saying they violated the United Nations Charter, international law and put regional peace in danger. 

He welcomed the Iran-Israel ceasefire announcement, urging all parties to resolve their disputes peacefully through dialogue and diplomacy.


Women can be drafted into the Danish military as Russian aggression and military investment grows

Updated 23 min 13 sec ago
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Women can be drafted into the Danish military as Russian aggression and military investment grows

  • The Scandinavian country is seeking to increase the number of young people in the military by extending compulsory enlistment to women for the first time

HOVELTE: Peering across a dense stretch of woodland outside of Denmark’s capital with camouflage paint smeared across her face, 20-year-old Katrine scans the horizon for approaching threats.
After nearly four months of military training, the young soldier and the rest of her unit spent early June completing their final exercises near the Danish army’s barracks in Hovelte, 25 kilometers (15 miles) north of Copenhagen.
Katrine and other female soldiers, all of whom spoke to The Associated Press on June 11 on the condition that only their first names be used because of operational security, volunteered for military service earlier this year. Until now, that was the only way for women to be part of the armed forces.
The Scandinavian country is seeking to increase the number of young people in the military by extending compulsory enlistment to women for the first time. Men and women can both still volunteer, and the remaining places will be filled by a gender-neutral draft lottery.
“In the situation the world is in now, it’s needed,” Katrine said. “I think it’s only fair and right that women participate equally with men.”
Under new rules passed by Denmark’s parliament earlier in June, Danish women who turn 18 after Tuesday will be entered into the lottery system, on equal footing with their male compatriots. The change comes against a backdrop of Russian aggression and growing military investment across NATO countries.
Russia’s looming threat
Even from the relative safety of Denmark, Russia’s full-scale invasion of Ukraine casts its shadow. Lessons from the Ukrainian battlefields have even filtered down into their training.
“That makes it very real,” Katrine said.
Denmark’s gender-parity reforms were originally outlined in 2024 as part of a major defense agreement. The program was originally expected to be implemented by early 2027, but has been brought forward to summer 2025.
Col. Kenneth Strøm, head of the conscription program, told AP the move is based on “the current security situation.”
“They could take part in NATO collective deterrence,” Strøm added. “Raising the number of conscripts, that would simply lead to more combat power.”
Denmark, a nation of 6 million people, has about 9,000 professional troops. The new arrangement is expected to bring up to 6,500 annual conscripts by 2033, up from 4,700 last year.
Under Danish law, all physically fit men over age 18 are called up for military service. But because there are usually enough volunteers, there’s a lottery system so not all young men serve. Women, by contrast, could only volunteer previously, making up roughly a quarter of 2024’s cohort.
“Some will probably be very disappointed being chosen to go into the military,” Anne Sofie, part of Katrine’s cohort of volunteers, said of the new female conscripts. “Some will probably be surprised and like it a lot more than they think they would.”
The duration of service is also being extended from four to 11 months. Conscripts will first spend five months in basic training, followed by six months of operational service, plus additional lessons.
Military buildup
The move is part of a broader military buildup by the Nordic nation.
In February, Denmark’s government announced plans to bolster its military by setting up a $7 billion fund that it said would raise the country’s defense spending to more than 3 percent of gross domestic product this year. Parts of the conscript program are being financed by the so-called Acceleration Fund.
“We see a sharpened security situation in Europe. We have the ongoing conflict in Ukraine. We have focus on the Baltic countries, where Denmark is contributing a lot of soldiers. So, I think it’s a general effort to strengthen the Danish defense,” said researcher Rikke Haugegaard from the Royal Danish Defense College.
But Haugegaard notes there are many challenges, from ill-fitting equipment and a lack of additional barracks, to potential cases of sexual harassment.
“For the next year or two, we will be building a lot of new buildings to accommodate all these people. So, it will be a gradual process,” she added.
In 2017, neighboring Sweden instituted a military draft for both men and women after its government spoke of a deteriorating security environment in Europe. Norway introduced its own law applying military conscription to both sexes in 2013.


US envoy expects Trump, Erdogan to resolve arms sanctions on Turkiye this year

Updated 37 min 26 sec ago
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US envoy expects Trump, Erdogan to resolve arms sanctions on Turkiye this year

ANKARA: The US ambassador to Turkiye said he expects Donald Trump and Tayyip Erdogan to resolve long-standing defense-related sanctions on Turkiye by year end, according to an interview with state owned Anadolu Agency.
Thomas Barrack, the envoy, said the two presidents could give directions to settle the issue of sanctions, which the US imposed in 2020 over Turkiye’s purchase of Russian S-400 missile defense systems.
“In my view, President Trump and President Erdogan will tell Secretary (Marco) Rubio and Foreign Minister (Hakan) Fidan to fix this, find a way, and a resolution is possible by year-end,” he was quoted as saying on Sunday.
The CAATSA sanctions, referring to the ‘Countering America’s Adversaries Through Sanctions Act’, also removed NATO member Turkiye from the F-35 program where it was both a buyer and manufacturer of the fighter jets.
Ankara, which has closer US ties since Trump’s return to the White House, has said its removal from the program was unjust and has demanded to be reinstated or reimbursed.
“We all believe there’s a tremendous opportunity here, as we have two leaders who trust each other,” said Barrack, who is also special envoy to neighboring Syria.


China lifts a nearly 2 year ban on seafood from Japan over Fukushima wastewater

Updated 59 min 43 sec ago
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China lifts a nearly 2 year ban on seafood from Japan over Fukushima wastewater

BEIJING: China has reopened its market to seafood from Japan after a nearly two-year ban over the discharge of slightly radioactive wastewater from the tsunami-destroyed Fukushima nuclear power plant.
A notice from the customs agency said the ban had been lifted Sunday and that imports from most of Japan would be resumed.
The ban, imposed in August 2023, was a major blow to Japan’s fisheries industry. China was the biggest overseas market for Japanese seafood, accounting for more than one-fifth of its exports.
The nuclear plant at Fukushima was heavily damaged by a deadly tsunami that followed a huge offshore earthquake in 2011. Water still must be pumped in to cool the radioactive fuel. The water is then stored in what was an ever-growing complex of tanks on the property.
After years of debate, the utility won government permission to discharge the water gradually into the sea after treating it to remove most of the radioactive elements. Japanese officials said the wastewater would be safer than international standards and have negligible environmental impact.
China disagreed and imposed a ban, saying the discharge would endanger the fishing industry and coastal communities on its east coast.
The ban will remain in place for seafood from 10 of Japan’s 47 prefectures, including Fukushima and nearby ones.
Japanese seafood exporters will have to reapply for registration in China and all imports will have to include a health certificate, a certificate of compliance for radioactive substance testing and a certificate of origin, the Chinese customs agency said.