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Oil Bust

Investment in the U.S. shale sector will drop by half this year, the International Energy Agency said Wednesday, as access to capital and investor confidence dry up. American shale drillers helped the U.S. produce more than 13 million barrels of oil a day earlier in 2020—before the coronavirus pandemic forced governments world-wide to impose lockdowns and travel bans on their citizens. Now, the IEA expects the largest drop in global energy investment in history, with worldwide spending on oil and gas decreasing by a third and the financing of all energy projects declining by 20%, David Hodari reports.

That’s bad news for the economy. The energy sector helped lead the U.S. out of the last recession before falling oil prices caused a pullback in investment in 2015 and 2016. That doesn’t look likely to repeat as the country tries to emerge from a sharp, coronavirus-induced downturn.

WHAT TO WATCH TODAY

The Richmond Fed’s manufacturing survey for May is out at 10 a.m. ET.

The Federal Reserve’s beige book is out at 2 p.m. ET.

St. Louis Fed President James Bullard speaks at 12:30 p.m. ET and Atlanta Fed President Raphael Bostic speaks at 3 p.m. ET.

TOP STORIES

More Signs the Economy Is Stabilizing

U.S. consumer confidence held roughly steady in May as households worried about the present but grew a little more optimistic about future economic conditions.

Purchases of newly built single-family homes increased—a little—in April, a stronger-than-expected result during a period marked by stay-at-home orders and economic uncertainty.

And the Dallas Fed said: “The contraction seen in the Texas manufacturing sector seems to have peaked in April, as the pace of decline slowed notably in May.” Even so, the bank’s latest manufacturing survey showed production contracting for the second straight month.

In a nutshell: “The free fall started to stabilize in May, but the economy is in a really deep hole,” said Naroff Economics president Joel Naroff.

Back-to-Work Bonus

The Trump administration is examining proposals to provide cash incentives to encourage unemployed Americans to return to work. Larry Kudlow, the director of the White House National Economic Council, told Fox News the-back to-work bonus is “something we’re looking at very carefully.” Mr. Kudlow was asked about a proposal by Sen. Rob Portman (R., Ohio) to provide a temporary $450-a-week bonus for unemployed workers returning to work, on top of their wages, Andrew Restuccia reports.

Republicans joined with Democrats in March to pass an economic-aid bill that included enhanced unemployment payments of $600 a week through July. Since, federal outlays for unemployment insurance have skyrocketed, totaling $79.7 billion over the past five weeks, according to figures tracked by the WSJ’s Anthony DeBarros.

Underscoring what is likely to be a long, difficult road for the labor market, Boeing will this week announce about 2,500 voluntary layoffs in the first phase of broader cuts triggered by the coronavirus-driven collapse of global air travel. And Amtrak is preparing to cut up to 20% of its workforce. Ridership and ticket revenue at the company have fallen by 95% since the pandemic began, Chief Executive Bill Flynn told Amtrak workers.

Lucky Seven

China set a reference rate for the yuan at its weakest point in 12 years, a signal that Beijing sees the benefits of a weaker currency as it grapples with an economic slowdown and rising tensions with Washington. The People’s Bank of China set a daily midpoint for the yuan at 7.1293 per dollar, the lowest level since February 2008. The central bank lets the onshore yuan trade in a band around this fix. The currency also trades in less tightly controlled offshore markets. The yuan broke below 7 per dollar in August, prompting President Trump to accuse Beijing of manipulating its currency, Joanne Chiu reports.

Cheers (Drink to That)

As the summer season approaches, consumers might end up paying more for their beer and soft drinks. The reason? The cost of the bubbles in the drinks is going up. Carbon dioxide is a byproduct of ethanol, which by federal mandate is mixed into gasoline to help it burn more cleanly. But fewer people are driving because of the Covid-19 lockdowns, and demand for gasoline has plunged, prompting ethanol plants to shut down. That has put pressure on the source for roughly 40% of all industrial carbon dioxide produced nationwide—a key ingredient for soft drinks and beers. Carbon-dioxide production this year has fallen by roughly 30% from last year’s levels, Vipal Monga reports.

WHAT ELSE WE’RE READING

U.S. workers have lost power. “The evidence in this paper suggests that the American economy has become more ruthless, as declining unionization, increasingly demanding and empowered shareholders, decreasing real minimum wages, reduced worker protections, and the increases in outsourcing domestically and abroad have disempowered workers–with profound consequences for the labor market and the broader economy. We argue that the reduction in workers’ ability to lay claim to rents within firms could explain the entirety of the change in the distribution of income between labor and capital in the United States in recent decades, and could also explain the rise in corporate valuations, profitability, and measured markups, as well as some of the decline in the [non-accelerating inflation rate of unemployment],” Harvard’s Anna Stansbury and Lawrence Summers write.

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Original Source: blogs.wsj.com

Currency-linked bonds have proven to be a powerful innovation in Asia and the Pacific in the last decade. Photo: Jason Leung
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One of the more compelling innovations in fixed income emerging markets over the last decade is the currency-linked bond issue. This is a debt security which is denominated in one currency but settled in another, usually US dollars. In the emerging or frontier market context, this allows investors to gain exposure to and income from a high yielding currency whilst avoiding the complication of buying that currency itself.

Currency-linked bonds are impactful in development terms because they help to plot a yield curve where government issuance is often sparse. They mobilize foreign investment by tapping into international savings pools, and they support the financing of local currency loans and projects in developing countries.

The beauty of the product is its simplicity. Currency linked bonds are documented principally via a pricing supplement from Global Medium Term Note programs thereby avoiding the need for expansive offering circulars and onerous regulatory filings. Time-to-market is quick with issues mandated, launched, documented and settled within five business days. The bonds are cleared in international central securities depositaries and listed on major stock exchanges. Investors in currency-linked bonds have disparate pedigrees and can include central banks, sovereign wealth funds, insurance companies, pension funds and private banks.

Multilateral development banks (MDBs) are benchmark issuers of currency-linked bonds, since our AAA ratings allow investors to disassociate the currency risk from the credit risk. In some cases, MDBs treat such issues as arbitrage trades, since they don’t need the proceeds in the denomination currency.

For example, when ADB issues bonds in Brazilian real, Mexican peso, Russian rubles or South African rand we simultaneously swap the proceeds into floating rate US dollars with a non-deliverable swap. This is because none of these countries are members of ADB and therefore we have no use for these currencies, although they do provide competitively priced sources of funding. On the other hand, when we issue currency-linked bonds in the currencies of our members we keep those funds for on-lending to development projects. This benefits borrowers by mitigating their currency risk.

Keeping the funds in local currency is not as straightforward as it sounds, since investors pay for their bond purchases in US dollars. To generate the local currency ADB undertakes an FX spot conversion selling dollars for the local currency. Spot FX settles on the second day after trade date (T+2), whereas new issues of bonds settle on the fifth day after trade date (T+5) so there is a mismatch and funding shortfall; we buy the local currency before receiving the money from bond investors. We can do this by dipping into ADB’s prudential liquidity buffers on a temporary basis to cover the three-day gap.

In frontier markets with few options for warehousing the proceeds of bond issues, ADB issues currency-linked bonds on a back-to-back basis with the underlying loan although we may build in an extra day’s cushion before disbursement.

  Currency-linked bonds: A powerful tool for emerging markets

In mainstream emerging markets such as India, Indonesia and the Philippines, we can hold the proceeds of our bond issues for significant periods of time until a project is ready for disbursement. We achieve this by investing the proceeds into government bonds of similar duration as an interest rate hedge. Since ADB’s currency-linked bond yields less than the corresponding government security, a positive carry is generated.

There are also opportunities for ADB to deliver broader development impact, by supporting local stock exchanges and working with local counterparties to manage cash and securities. For example, in February 2020, ADB issued a new 10-year, 8.5 billion Indian rupee-linked masala bond, and dual-listed the issue on our normal venue, the Luxembourg Stock Exchange, as well as the Global Securities Market of India International Exchange at Gujarat International Finance Tec-City – International Financial Service Centre.

To date ADB has issued more than $1 billion equivalent of Indian rupee-linked masala bonds with maturities from two to ten years. We have also raised more than $200m equivalent in Philippine peso Boracay bonds and 15-year funding with our second Indonesian rupiah Komodo bond issue. This source of competitively priced funding has provided tangible support for ADB’s private sector operations, with micro-finance, renewable energy and infrastructure projects to the value of more than $716 million funded through currency-linked bonds over the last four years.

There are no limits on the denomination for currency-linked bonds, but investor demand can prove fickle. The pandemic has prompted a wholesale flight to quality and cash from global investors, with emerging markets and frontier markets impacted. But if investors won’t buy ADB’s local currency bonds, fortunately we can turn to alternative financing solutions to limit any fallout on project delivery.

Offshore currency-linked bond markets are helping to make currencies more resilient in developing countries by shepherding foreign investment and encouraging two-way flows. They further spur economic growth and development by complementing domestic capital markets, without crowding the government out of its own funding base.

Philippines, Indonesia, currency, bonds, treasuries, finance, central banks, fiscal management, bond markets, domestic capital marketsJonathan GrosvenorCountries: IndonesiaPhilippinesArticle

Original Source: blogs.adb.org

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