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Weekly Comic: Draghi Finds Out That Bond Markets Can Still Bite

By Geoffrey Smith Investing.com — It seems the bond market can still bite. It can even bite the hand that fed it generously for eight years.

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Weekly Comic: Draghi Finds Out That Bond Markets Can Still Bite
© Investing.com

By Geoffrey Smith 

Investing.com — It seems the bond market can still bite. It can even bite the hand that fed it generously for eight years.

But was what happened in European sovereigns last week just a reflex reaction, born of ancient instinct, or was it a more ominous sign of things to come?

Just as importantly, was the market just giving a friendly nip to its old friend, Italian Prime Minister and ex-ECB President Mario Draghi, or was it warning him that there are limits to how far even he will be indulged?

Italian and Greek bonds had their worst one-day sell-off in over a year on Thursday, and on the flimsiest of pretexts. European Central Bank President Christine Lagarde, asked a routine question about the future course of the ECB’s interest rates, was deemed by many listening not to have pushed back firmly enough against the suggestion that they may one day have to rise.

The market responded by selling Italian debt heavily, pushing yields up by 25 basis points to their highest in 15 months. The notorious ‘’ – the premium over German bonds that is the barometer of Eurozone breakup risk – also rose as high as 135 basis points, its highest in over a year.

That followed months of unprecedented calm, in which it had drifted between 97 and 109, as the ECB’s bond buyers squashed any hint of the pandemic causing a systemic crisis.

So why the sell-off now? Lagarde’s lapse in communication was – at most – a sin of omission. It was nothing compared to the famous gaffe in her first press conference when she said that “the ECB isn’t there to close the spread,” a comment that went against eight years of Draghi-era ECB policy and triggered the last halfway serious sell-off.

The EU has already approved Italy’s (read: Draghi’s) post-pandemic reform and rebuilding plan, which earmarks over 200 billion euros ($232 billion) of EU money for Rome. That’s a luxury no Italian Prime Minister has ever enjoyed. That’s despite the fact that, at over 5% of GDP, next year’s budget deficit is clearly unsustainable in the medium term. Fortunately for Italy, the risk of the EU Commission re-imposing strict limits on government borrowing is small as long as compatriot Paolo Gentiloni holds the key Economic and Monetary Affairs portfolio. The prospect of a less fiscally-hawkish government in Berlin is also timely, in that regard. As long as Draghi runs the show in Rome, Italy’s credit will always be good in Brussels and Frankfurt, it seems. 

But how long will that be? As the pandemic emergency fades (Italy’s economic rebound this year had been no less vigorous than France’s or Germany’s – in sharp contrast to 12 years ago), the discipline of Italy’s warring political parties will inevitably fray. Already, party leaders such as Matteo Salvini are jostling for a return to more competitive politics, seeking to push Draghi to the sidelines.

Moreover, Draghi’s authority already seems to be weakening a little, albeit from an unexpected corner. The collapse last month of talks to sell troubled bank Monte dei Paschi di Siena to Unicredit (MI:) was a rare but significant defeat. Protests against his vaccine mandate – the world’s first to cover both private- and public-sector workers have been large and unruly – the kind that can do serious damage to leaders without a direct democratic mandate.

The solution already appears to be taking shape: in January, the venerable Sergio Mattarella’s term as President ends. Draghi has so far dismissed suggestions that he would allow himself to be nominated as Mattarella’s successor, saying that he wants to stay until parliamentary elections in 2023. However, it is an office that fits his stature within Italy, and one that still allows him to exert a less direct, but – given the frequency of Italian government crises – still important influence.

As long as Draghi is involved at some level, then the risk to Italian bonds – and Italian assets in general – from here, looks contained. The lesson of the last 10 years is that no Italian government can survive without the support of the ECB, and that Draghi is uniquely placed to maintain relations between the two. But whatever the final arrangement in Rome, last week’s sell-off is a reminder that a solution should be found sooner rather than later. The bond market has already told Australia that central banks can’t defy them forever, and it may bounce the Bank of England into tightening monetary policy later this week too. The days of zero volatility look like being over. The need for a calming hand like Draghi’s will soon be greater than ever.

 

Economy

World food prices chart: World food prices have plummeted

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why worldwide food prices are rising

Why are worldwide food prices rising? First, because of the current world situation. But world food prices fell sharply in July, with prices of major grains and vegetable oils dropping more than 10% in a month. 

World food prices chart

The Food Price Index was 140.9 points in July, down 8.6% from June. The drop in the index value continues for the fourth consecutive month after it reached an all-time high at the beginning of the year. Compared to July 2021, the index is up 13.1%. 

Despite the decline in high food prices, there are still many uncertainties around the world, such as high fertilizer prices, exchange rate volatility and weak global economic forecasts.

Vegetable Oil Price Index fell 19.2% in July from a month earlier, reaching its lowest level in a decade. Global cereal prices fell 11.5% for the month, still 16.6% higher than last year. Wheat prices fell the most (14.5%). 

World sugar prices over the month decreased by 3.8%; dairy products — by 2.5%, meat — by 0.5% due to weakened import demand for beef, lamb, and pork. At the same time, chicken meat rose in price due to strong demand and lower production volumes related to bird flu outbreaks. 


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Economy

Are hedge funds bad? Investors are disappointed in hedge funds

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are hedge funds bad

Are hedge funds bad? This year is sure to be one of the worst years in hedge fund history. In the first six months of 2022, funds posted losses of 5.6%, according to HFR. In July, though, they rebounded by 0.5%, but nevertheless, writes the Financial Times, the sector is well on its way to its second-lowest year in a third of a century, since 1990, when they started keeping records. The only time the hedge fund market was worse than this was during the financial crisis in 2008.

Are hedge funds losing money? 

Most of the problems are accounted for by so-called long-short-term funds, whose assets total about $1.2 trillion. The results of their activity depend directly on the securities market. In the first half of this year, these funds lost an average of 12%, according to HFR data. This category of funds earned only about 1% in July, according to JPMorgan’s John Schlegel calculations, well below the 7% rally in the stock market last month.

Among the hardest hit is the well-known Maverick Capital fund, which has been making double-digit returns to its investors for the past three years but lost 35% in January and June of this year. Similar losses have seen Skye Global, which has pleased investors with high returns over the past six years, but lost 10.4% in June alone. The fund was let down by a large stake in Amazon, which fell 36% in January-June 2022. However, in recent weeks, the retail giant has improved and cut its losses in half, to 19%. 

Already the first signs are starting to emerge that the losses are scaring investors. While they invested a total of $13.92 billion in hedge funds last year, only $440 million in the first quarter. There was a strong outflow of funds in March, and in June it exceeded $10.1 billion, according to Citco’s fund administrator. Redemptions are expected to be $7.8 billion in the third quarter and $6.4 billion at the end of the year.

Weak performance in the first half of 2022 and investor dissatisfaction, however, have not affected the sector’s confidence in its ability to raise funds. A survey of 100 hedge funds by technology company SigTech found that nearly one-in-four (23%) expect a sharp increase in investor activity in the next two years; 60% of respondents expect a slight increase in activity and only 4% believe investor activity will decline in 2023-24.



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Economy

Chinese economy 2022: China will give up first place in the list of the largest importers of raw materials

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chinese economy 2022

Chinese economy 2022 news: China’s commodity-buying companies will be adversely affected by government debt and demographic problems.

Over the next ten years, debt problems and slowing population growth may force China to cede the unofficial title of world’s largest buyer of raw materials and minerals to India. 

Chinese economy analysis — the current situation

The structural challenges will make it very difficult for Beijing to accept and implement most of the policy initiatives coming from the center. Apart from the Chinese economy, this trend will have a major negative impact on mining companies around the world, many of which are heavily dependent on demand in China. Incidentally, many such companies are located in Australia.

China will likely be replaced in the next few years by India. If UN statistics are to be believed, India could overtake China regarding population as early as this year. This will have not only psychological, but also “material consequences” for the global market of raw materials and minerals.

China has been much criticized for shifting to mindless spending to combat the economic slowdown. Lowy Institute economist Roland Raja is pessimistic about the growth prospects of the Chinese economy. Even though the Indian economy is only a small part of the Chinese economy, he sees no signs of a slowdown soon. 

China will try to be more aggressive this year in combating the economic slowdown. Beijing will invest very heavily in the extractive industries.

Moyo also believes that Beijing will no longer be able to regain the high growth rates of past years. According to her forecast, China’s economic growth will be 4% this year. Recall, the Chinese leadership set a higher target of 5.5%. Incidentally, this is the lowest growth in the Chinese economy for the past three decades. In the second quarter of this year, China’s economic growth slowed to 0.4%.



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