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Sri Lanka eases curfew as new PM seeks to form cabinet

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© Reuters. FILE PHOTO: A man walks along a deserted road in Colombo, Sri Lanka, May 11, 2022. REUTERS/Dinuka Liyanawatte

By Uditha Jayasinghe and Alasdair Pal

COLOMBO (Reuters) – Sri Lanka lifted a nationwide curfew for 12 hours on Saturday, further easing tight curbs as new Prime Minister Ranil Wickremesinghe sought to form a government after clashes with anti-government groups killed nine people.

More than a month of predominantly peaceful protests against the government turned violent this week after supporters of former Prime Minister Mahinda Rajapaksa stormed an anti-government protest camp in the commercial capital Colombo, burning tents and clashing with protesters.

The initial clashes and reprisals against government figures also left more than 300 injured.

The government lifted the curfew from 6 a.m. (0030 GMT) on Saturday until 6 p.m. A 24-hour curfew imposed on Monday had been lifted for a few hours on Thursday and Friday to allow purchase of essential supplies.

Rajapaksa stepped down after violence flared on Monday, leaving his younger brother Gotabaya Rajapaksa to rule on as president.

Hit hard by the pandemic, rising oil prices and tax cuts by the populist government, Sri Lanka is in the throes of its worst economic crisis since independence from Great Britain in 1948.

Useable foreign reserves have dwindled, and rampant inflation and shortages of fuel have brought thousands onto the streets in protest.

Wickremesinghe, a five-time prime minister, was appointed to another term late on Thursday. The 73-year-old was expected to begin appointing ministers before parliament reconvenes on Tuesday.

Wickremesinghe is the sole lawmaker from his United National Party to hold a seat in parliament, and will be reliant on other parties to form a coalition government. The Rajapaksas’ Sri Lanka Podujana Peramuna has pledged to support Wickremesinghe.

The main opposition has ruled out supporting him, but several smaller parties have said they would back policies by the new prime minister to stabilise the economy.

Economy

Stocks slump on growth concerns, bond yields slip

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© Reuters. FILE PHOTO: Men wearing protective face masks walk under an electronic board showing Japan’s Nikkei share average inside a conference hall, amid the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan January 25, 2022. REUTERS/Issei Kato

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By Herbert Lash and Lawrence White

NEW YORK/LONDON (Reuters) – Shares slid worldwide on Tuesday as supply chain woes and surging costs hurt corporate earnings and slowed manufacturing output, while Treasury yields dipped as the weakness in equities revived a safe-haven bid for U.S. government debt.

U.S. and euro zone business activity slowed in May, with S&P Global (NYSE:SPGI) attributing the decline in its U.S. Composite PMI Output to “elevated inflationary pressures, a further deterioration in supplier delivery times and weaker demand growth.”

Higher costs from surging freight and raw material prices led Abercrombie & Fitch Co to say it will continue facing headwinds until at least year-end, a day after Snapchat parent Snap Inc (NYSE:SNAP) said the U.S. economy had worsened faster than expected in April.

A two-day relief rally in equities was snuffed out as investors took note of sliding corporate profits on persistent supply chain issues, worsened by the Ukraine war, and soaring inflation that has forced consumers to cut discretionary spending.

The U.S. economy likely faces a sharp slowdown as the Federal Reserve hikes interest rates to stamp out inflation, according to David Petrosinelli, a senior trader at InspereX.

“It’s really all about a hard landing and the Fed really being boxed in the corner with only demand-side tools to help,” Petrosinelli said. “They really need to squash demand.

“This is going to have a ripple effect for the economy, which is why you’re seeing the price action in stocks and bonds,” he said.

MSCI’s gauge of stocks across the globe shed 1.69%, while the pan-European STOXX 600 index lost 0.99%.

On Wall Street, the Dow Jones Industrial Average fell 1.37%, the Nasdaq Composite dropped 3.33% and the S&P 500 lost 2.16% as it again headed toward a bear market.

Shares of Snap plummeted 41.1%, dragging down several social media and internet stocks, while Abercrombie fell 29%.

In Europe, utilities and commodity-linked stocks led declines but banking shares rose.

European Central Bank Chief Christine Lagarde said she saw the ECB’s deposit rate at zero or “slightly above” by the end of September, implying an increase of at least 50 basis points from its current level.

The comments came a day after Lagarde accelerated a policy turnaround that has seen her go from all but ruling out a move this year to penciling in several hikes.

“It has raised jitters in global markets about the possibility at least of a more aggressive move by the ECB,” said Phil Shaw, chief economist at Investec in London.

“There were reports overnight that some hawks on the governing council thought her comments yesterday seemed to rule out a 50-basis-point hike, but her remarks today appeared to leave that on the table,” he said.

Germany’s 10-year Bund yield fell 7.3 basis points to 0.951%.

Treasury yields fell to one-month lows as those on benchmark 10-year Treasury notes fell 13 basis points to 2.729%.

The dollar index fell 0.343%, with the euro up 0.38% to $1.073.

Lagarde’s comments in a blog post on Monday and a swing that drove the U.S. currency to two-decade highs reinforced tactical weakness in the dollar, said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets.

“The broader macro backdrop still supports the risk-off take,” Rai said. “The dollar still has more room to run over the medium term.”

DISAPPOINTING DATA

Markets took some comfort from U.S. President Joe Biden’s comment on Monday that he was considering easing tariffs on China, and from Beijing’s continuing promises of stimulus.

Unfortunately, China’s zero-COVID-19 policy and its lockdowns have already done considerable economic damage.

JPMorgan (NYSE:JPM) cut its forecast for second-quarter Chinese gross domestic product to -5.4% from a prior -1.5% after disappointing data in April. On an annualized basis, its global forecast for the quarter is 0.6%, the weakest since the great financial crisis outside of 2020.

U.S. crude oil recently fell 0.05% to $110.23 per barrel and Brent was at $113.76, up 0.3% on the day.

Spot gold added 0.8% to $1,867.57 an ounce.

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Economy

Global macro funds shine in hedge fund industry, proving popular with investors

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© Reuters. FILE PHOTO: Traders work on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., May 20, 2022. REUTERS/Andrew Kelly

By Svea Herbst-Bayliss and Carolina Mandl

NEW YORK (Reuters) – Hedge funds that bet on bonds, currencies, stocks and commodities are among the industry’s biggest winners this year easily outpacing growth and tech funds’ returns and preparing to see significant inflows of capital as the stock market hovers near bear market territory.

So-called global macro funds returned 10.3% in the first four months of the year while the average hedge fund inched up 1.9%, according to data from Hedge Fund Research. The Standard & Poor’s 500 index tumbled 13% in that period.

Over the last three years, global macro funds on average delivered positive returns but they also trailed behind the hedge fund industry’s stronger returns.

Now with inflation surging and volatility ticking higher as central banks reverse years of monetary stimulus, the environment looks to be especially good for global macro funds.

“This environment will most likely lead to new inflows of capital to the strategy at the expense of other funds,” said Eamon McCooey, head of prime services at Wells Fargo (NYSE:WFC).

Global macro funds invest only about 17% of the industry’s $4 trillion in assets, less than the roughly 30% invested by equity-focused hedge funds and the 28% invested by funds that bet on corporate events, Hedge Fund Research data show.

Through the first quarter, the latest available data, flows were picking up as investors sent $3 billion in new capital into these strategies, compared with $1.9 billion going into equity oriented funds. Overall $19.8 billion was added in the first quarter, HFR data show.

Scott Bessent, who runs Key Square Group after having cemented his reputation as a top global macro investor by helping billionaire George Soros engineer his famous bet against the British pound 30 years ago, told investors he is even more enthusiastic about the environment now than in early January.

“We are now seeing a series of longstanding economic, political, monetary and portfolio management systems breakdown,” Bessent said in his letter. “What we see for the remainder of the 2020s is a cascading series of system collapses.”

This is opening the way for a “large pipeline of vast opportunities,” Bessent said, adding that events with a small probability of occurring are “becoming more numerous” as central banks are reversing ultra-loose monetary policies.

The firm declined to comment further on the letter.

Individual funds’ returns are making the case, with blue chip Brevan Howard Master Fund fund up 12.04% this year through April while the tiny Trium Larissa Global Macro fund is up 30.9% in the first four months of 2022.

Bridgewater’s Pure Alpha posted a return of 26.37% in the first four months. The firm told investors it is approaching capacity limits, according to excerpts of a letter seen by Reuters. A source familiar with the situation said the firm is considering returning capital to investors in the near term.

AQR’s Global Macro Strategy is up 21% and told investors its strategy has benefited from high inflation and also from the end of fiscal stimulus.

Graham Capital Management’s Quant Macro rose 21.7%, helped by commodities and foreign exchange.

“We are finally in an environment that we expect to stay really conducive for the macro strategy,” said Darren Wolf, global head of investments, alternative investment strategies at global investment company abrdn, which is headquartered in Edinburgh.

To position themselves to take advantage of the shift in tastes and capital, some firms are adding strategies. Cinctive Capital Management hired former Brevan Howard trader Giles Coppel this year to build out a team as clients were asking for it. Earlier in the year Schonfeld Strategic Advisors earmarked $5 billion to the strategy.

Investors believe macro managers are likely to keep the momentum going, given that markets are expected to both bounce higher and lower with volatility. But there could be some pitfalls.

“You can have a problem when many managers are crowded in like trades,” said Christian Lee, head of international alternative investments Itau USA Asset Management, which oversees $11 billion in a fund of funds.

“One example is the commodity trade. It’s become quite popular and it’s worked very well. Commodities can be some of the most volatile assets out there so one might want to be a bit cautious.”

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Economy

OECD chief sees global digital tax deal pushed back to 2024

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© Reuters. FILE PHOTO: OECD’s incoming Secretary-General and former Australian Finance Minister Mathias Cormann delivers a speech at a handover ceremony during which he takes on the role of Secretary-General of the Organisation for Economic Co-operation and Developm

By Dan Burns

DAVOS, Switzerland (Reuters) – The Organisation for Economic Cooperation and Development (OECD) on Tuesday acknowledged for the first time that a global digital tax deal may take a year longer to implement.

The deal, which the OECD had hoped to sign off on in the middle of this year, would give other countries a bigger share of the tax take on the earnings of big U.S. digital groups such as Apple Inc (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL) Inc’s Google.

It is the first of two pillars of the biggest overhaul of cross-border tax rules in a generation. Both pillars were originally intended to be implemented in 2023. The overhaul also includes plans for a global minimum corporate tax of 15% on big multinationals.

OECD Secretary-General Mathias Cormann told a panel at the World Economic Forum in Davos, Switzerland, that progress on ironing out technical details on the digital tax deal was going less quickly than planned.

“We deliberately set a very ambitious timeline for implementation initially to keep the pressure on … but I suspect that it’s probably most likely that we’ll end up with a practical implementation from 2024 onwards,” he said.

Meanwhile, the Biden administration and the European Union are struggling to pass legislation implementing the global minimum tax deal agreed last October by nearly 140 countries.

Cormann said it was “manifestly” in the interest of the United States to join the deal and said he was “quietly optimistic” a compromise would be presented in the EU that all members could back.

French Finance Minister Bruno Le Maire, whose country holds the European Union’s rotating presidency until end June, said on Tuesday he was confident EU finance ministers would unanimously back the global minimum tax next month.

Approval by the EU has been held up by objections from Poland, which vetoed a compromise in April to launch the 137-country deal within the EU.

U.S. approval, meanwhile, has been stalled in Congress, and Cormann was asked if prospects for U.S. ratification would be scuppered should Republicans who broadly oppose the deal win majorities in the House of Representatives and Senate in November’s midterm elections.

The deal could be implemented by other countries even if U.S. legislators decline to sign on, and Cormann argued that would put U.S. multinational businesses at a disadvantage.

“I can’t imagine that any country … would make a judgment that would put themselves at that sort of disadvantage,” Cormann said. “I believe that irrespective of who’s in the majority in Congress … this is manifestly in the U.S. interest.”

Congress would need to approve changes to the current 10.5% U.S. global overseas minimum tax known as “GILTI,” raising the rate to 15% and converting it to a country-by-country system.

The changes were initially included in U.S. President Joe Biden’s sweeping social and climate bill, which stalled last year after objections from centrist Senate Democrats.

But prospects for a slimmed-down spending package with the tax changes look increasingly difficult as midterm congressional elections approach and as lawmakers voice concerns about more spending amid high inflation.

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