Worries about political uncertainty in Brazil extended to agricultural commodity markets, with the real’s fall triggering declines in corn, soyabeans, coffee and sugar.

“Grain markets are under pressure as traders take a risk-off attitude due to Brazil’s currency falling sharply,” said brokers Allendale.

Brazil is a leading producer of coffee and sugar and is also a large exporter of corn and soyabeans. The commodities are traded in US dollars, and the sharp fall in the country’s currency normally means that exporters will accelerate their sales since they can get more bang for their buck.

ICE July arabica was down 3.4 per cent to $1.277 a pound, despite Brazilian crop supply agency Conab announcing that the 2017 coffee crop would be 11 per cent lower at 45.5m 60kg bags.

ICE July sugar retreated 1.4 per cent to 16.08 cents a pound, and corn was down 1 per cent to $3.68 a bushel, while soyabeans declined 2.3 per cent to $9.53 a bushel.

Fears over the scale of crisis that Donald Trump’s presidency faces hung over markets on Thursday, with European stocks weaker and those in the US expected to open lower following their worst one-day drop since September.

The Stoxx Europe 600, the region’s benchmark, was down 0.8 per cent in mid-session trade while futures suggest the S&P 500 will slip by 3 points to 2.354 when Wall Street opens. Haven assets such as US government bonds were in demand while EM assets were under pressure.

Investors are focused on “fears that the emphasis on tax cuts and regulatory relief could be stalled by the new political drama that may be unfolding”, said Tobias Levkovich, an equity strategist at Citigroup.

The appointment of a special counsel to lead the Justice Department’s investigation into ties between Russia and the Trump campaign is raising stubborn questions about the president’s ability to push through his pro-growth policies.

That leaves the lofty market valuations established since his election facing scrutiny from investors, who sold off stocks and the dollar in favour of haven assets on Wednesday.

Beyond the US and Europe, emerging markets currencies were also exposed on Thursday with Brazil’s down 1.5 per cent in early trade, amid the growing political crisis centred on its president, Michel Temer.

But analysts also cautioned that the market moves had to be kept in perspective.

“Some commonsense and calm is starting to prevail as investors recognise that the developments in the White House are unlikely to have much global economic impact,” said Koon Chow, strategist at UBP.

“The perceived probability of President Trump’s key economic proposals materialising — trade protectionism and tax cuts — has already been dropping. Moreover, if the president were to become increasingly beleaguered politically speaking, it might actually be a positive in terms of curtailing his team’s ability to drive through other unorthodox policy proposals.”

“The classic adage of markets being able to price risk but not uncertainty comes into play today, finally around US political events,” said Timothy Ash, of Bluebay Asset Management. “They simply do not know which way this is going to go.

“The plus in all this is that it makes it less likely that the Federal Reserve will move more assertively in terms of rate hikes/normalisation, and that is being reflected in the performance of US Treasuries and the dollar.”

A sense of unease still set the prevailing tone for EM currencies. The Turkish lira fell 1.5 per cent against the dollar while the Mexican peso slipped 1.6 per cent and the South African rand lost 1.8 per cent.

Gold prices rose to their highest level in two weeks as investors sought safety amid falling stock markets, gaining 0.3 per cent to $1,263 a troy ounce.

“We now consider that we are still at the start of a risk-off move and that gold is set to strengthen further,” said analysts at Swissquote bank.

Concerns over the US also weighed on industrial metals and iron ore, with copper falling 1.2 per cent Thursday to $5,541 a tonne, down from its peak this year at $6,204 a tonne on February 13. Iron ore futures in China fell 1.9 per cent to a low of Rmb467 ($68) a tonne.

“What happens to the metal prices if Trump goes? Well they probably fall with the exception of gold,” said Matthew Hasson, an analyst at Numis.

Wednesday’s heavy selling in the US shattered the calm that had led to Wall Street stocks hitting record levels this week.

The S&P 500 dropped 1.8 per cent, causing the CBOE Vix index, a measure of implied volatility known as Wall Street’s fear gauge, to surge 46 per cent — although its close at 15.6 was still below the historic average of about 20.

The US dollar index slid to its lowest level since Donald Trump was elected US president in November and investors sought perceived safety, pushing benchmark Treasury yields down 11 basis points, while propelling the Japanese yen and gold both 2 per cent higher.

Additional reporting by Henry Sanderson

Here is a selection of five charts that FT Markets believes are worth watching. A fresh chart will be added on a regular basis.

1. Wall Street hit by biggest slide since November

US stocks suffered their worst trading day in eight months on Wednesday after political turmoil in Washington shook investors, with some fearing President Donald Trump’s ability to push through his pro-growth policies has been sidelined by the deepening political controversy.

Reports that Mr Trump sought to interfere in an FBI investigation sent key market benchmarks back down to levels last seen before the election.

The concern is that controversies surrounding the US president will affect efforts to push ahead with plans for tax cuts, infrastructure spending and deregulation, all of which were seen as boosting economic growth and corporate earnings.

Wednesday’s selling takes indices down from record highs, but even before it kicked in, a sector rotation has been under way that reflected doubts about the Trump agenda. Investors had been moving away from financials and energy stocks, which were seen as likely beneficiaries of the administration’s deregulation agenda or fiscal policies that might stoke inflation and push interest rates up.

2. Labour shortages in Japan

The Japanese economy has experienced more than a year of what is, for a country with a shrinking population of working age adults, a strong economic recovery. For the first time in 11 years the county has expanded for five quarters in a row, according to Goldman Sachs. The unemployment rate dropped to 2.8 per cent in March.

A consequence is that small businesses are telling journalists they have difficulty filling jobs, or are contemplating how investment in robots might be needed to make do in the absence of willing staff. Economists at Bank of America Merrill Lynch highlight a spike in the number of newspaper articles using the words “labour shortage” in the past three months among the signs and, according to Izumi Devalier, an analyst at the bank: “all told, almost every single jobs indicator is pointing to the tightest labor market conditions since the 1980s bubble burst”.

Unlike much of the developed world, where inflation pressures are building, fears of rising prices in Japan remain minimal. Economists at Sumitomo Mitsui Trust Group “don’t see strong inflation on the horizon as consumption should remain muted”.

Instead labour shortages could be a constraint on economic growth. For the last five years around 1m women, mostly married, have entered the labour force each year, offsetting a similar number of workers reaching retirement. But BAML estimates this reserve of potential workers could be down to the last million, meaning to keep the expansion going Japanese businesses will have to get more productive with the employees they already have.

3. Amazon’s 20 years as ‘pre-eminent disrupter of retail’

Companies hoping to go public are often accused of over-promising would-be investors — especially those that listed in and around the dotcom bubble — but the pledge of one that listed 20 years ago this week seems even understated. “Amazon.com intends to use technology to deliver an outstanding service offering and to achieve the significant economies inherent in the online store model,” the company said in its IPO paperwork.

Amazon shares, listed at $18 at the time, have produced a compound annual return of nearly 40 per cent since the initial public offering. That means, for example, $100 invested in Amazon stock at the IPO would be nearly $64,000 today (the stock split three times, so one share at the IPO equals 12 shares now). Up 63,990 per cent since its IPO, Amazon ranks as the best-performing US-listed IPO since 1995, according to Dealogic.

For context, Netflix is fourth and Yahoo is seventh and the total return on the S&P 500 in the same period is about 300 per cent. It was not always smooth sailing, though. Its shares sold off after the initial euphoria around the listing. Then, during the dotcom bust, adjusted for the stock splits, Amazon fell from a high of $113 in December of 1999 to a low of $5.51 in October 2001.

4: UK sterling-earning stocks remain underwater after Brexit vote

Sterling’s rise back toward the $1.30 level has not deterred the FTSE 100 from setting new records, with its dominant oil majors and exporters continuing to benefit from a relatively weak pound. But new benchmarks designed by KPMG reveal the extent to which companies more dependent on earning revenue in sterling are beginning to catch up, but not to such an extent that the major accountancy company’s UK 50 index has passed back above levels reached before the Brexit referendum in June. The KPMG UK 50 is made up entirely of companies that earn more than 70 per cent of their revenue at home.

The non-UK 50 features companies that earn only 30 per cent, or below, of their revenue in foreign currency. The indices offer a clearer distinction than the FTSE 100 and FTSE 250 between which stocks benefit from a weaker pound and which do not. That’s because the traditional London benchmarks are based on a company’s market value, and pay no heed to the currency in which revenues are generated.

The ability of sterling stocks to break back above their pre-referendum levels will also be closely watched.

5. The Buffett indicator flashing a warning for US equities

The S&P 500 has risen beyond 2,400, extending its record run. By a number of valuation metrics, the US market looks expensive. One ratio that Warren Buffett has said he watches is the ratio of market capitalisation — via the Wilshire 5000 — versus the US economy or nominal gross domestic product. This measure is approaching 130 per cent, and has only been higher once before, at 137 per cent in 2000 just before the dotcom bubble popped. In a nutshell, the comparison tells us how much investors are discounting future revenues and earnings from companies compared with the size of the economy.

Other notable investors are also looking at such comparisons. This week, Jeffrey Gundlach, the head of DoubleLine Capital, opined that US equities look expensive and focused on the market value of the S&P 500, as compared with US GDP. It comes after Goldman Sachs also noted recently that US stock valuations have become “very stretched relative to history across most valuation measures”.

In a small West Village theater last week, an audience cheered on the Wu-Tang Clan and Bill Murray as they stole a one-of-a-kind rap album from a capitalist caricature.

They were watching the new musical about drug-price gouger, apparent twerp and accused fraud Martin Shkreli. The show is silly, fun and maybe went a little too long, which wasn’t too inconvenient because of its talented cast. (Who knew it was possible to sing showtunes in the voice of Ol’ Dirty Bastard’s ghost, or to perform a dance number on a hoverboard?)

Of course, much of the writing work on PharmaBro! An American Musical Douchical was done by the internet’s bizarre collective id. The musical was inspired by a viral hoax from 2015, back before hoaxes all became “fake news”.

And the real-life events were so absurd that it was tough to distinguish between news and myth. A quick refresher:

1) Wu-Tang announced they made an album called Once Upon a Time In Shaolin, and would only release one copy. They sold that copy to the highest bidder on start-up auction website Paddle8 (which reportedly laid off 25 people this year).

2) Then Bloomberg reported the buyer was Shkreli, a then-32-year-old oddball with hours of livestreamed videos on YouTube. That was only a couple of months after the public outcry about his decision to raise the price of a medication owned by his company to $750 from $13.50.

3) After the news broke, a fake contract clause popped up on Twitter, which stated:

The seller may legally plan and attempt to execute one (1) heist or caper to steal back Once Upon a Time In Shaolin, which, if successful, would return all ownership rights to the seller. Said heist or caper can only be undertaken by currently active members of the Wu-Tang Clan and/or actor Bill Murray, with no legal repercussions.

This would have been awesome, if it were true. And just eight days later, Shkreli was arrested on securities fraud charges, which whipped up more giddy speculation on social media — is it just coincidence, or is the government in on the heist, too? And as Matt Levine observed, the last name of the US Attorney who signed the indictment was “Capers“!

The caper clause wasn’t real, of course.

And the goofy plot wasn’t even the most disorienting part of the play. It was the reminder that just two years ago, internet beefs between public figures seemed fun and wacky, rather than mildly nauseous. The stakes were real in that scandal: Shkreli had illuminated a troubling feature of the US healthcare system. But it was nearly impossible to avoid the distractions of Ghostface Killah calling Shkreli “the Michael-Jackson-nosed kid” in a YouTube video, Shkreli’s weird response, and so on.

There’s some room for artistic interpretation of the Wu-Tang heist hoax. At least one PhD candidate has to be working on a piece called “Once Upon a Time In Berlin: The ‘Shaolin Heist’ Meme as American Attack on the Alt-Right Fuhrerbunker”, right? (About collective desire for the US cultural vanguard to stop the country’s power from drifting towards attention-hungry misanthropes, or something.)

But this play does not make any grand cultural statements.

This play does not need to, because it is inherently entertaining to watch the actors who play Wu-Tang and Murray face off against a manic Shkreli whirling around on his hoverboard. Though it might help viewers to have a pint or two beforehand, to suppress any queasy feelings about what’s happened since 2015.

The opening comes before Shkreli’s trial, which is scheduled to start June 26. So we thought it’d be a good opportunity to review the claims in that case, with the help of some songs and lyrics from PharmaBro — find that here.

Related links:
Art and devolution — FT Alphaville
PharmaBro! Fact-checking the Martin Shkreli musical — Financial Times

This time, the day’s big Trump-Russia-Comey news waited until around 6:00 to break.

Former FBI director Robert Mueller has been selected by the US Justice Department to serve as special counsel to oversee the investigation into alleged Russian interference in the 2016 US presidential election.

Rod Rosenstein, the US deputy attorney general, said on Wednesday that he had determined it was in the “public interest” to appoint a special counsel to oversee the probe.

The announcement comes amid a growing chorus of demands from Congress to see evidence relating to claims that Mr Trump attempted to halt an FBI investigation into alleged links between his campaign aides and Russian officials.

On Wall Street the S&P 500 suffered its biggest one-day drop in eight months as controversies surrounding the Trump administration fuelled a new wave of risk aversion, and the dollar slid to a six-month low. Oil also gained ground after new US inventories data.

That sentiment is seeping into pre-market movements in Asia Pacific equities, where futures tip Sydney’s S&P/ASX 200 index to drop 1.1 per cent at the open, Tokyo’s Topix is set to drop 1.5 per cent and Hong Kong’s Hang Seng is set to fall 0.6 per cent when trading begins.

Corporate earnings reports out today include Singapore Airlines, James Hardie and – in New York – Alibaba.

The economic calendar for Thursday has got this, don’t worry about it (all times Hong Kong):

• 07.50: Japan Q1 GDP
• 09.30: Australia unemployment rate
• 09.30: China property prices
• 10.00: Philippines Q1 GDP
• Bank Indonesia is also expected to announce its interest rates decision today.

This week’s 20th anniversary of Amazon’s initial public offering has thrown into sharp relief the stagnation of the US public equity listings market.

Finger-pointing by some at the regulatory requirements of going public — which can be burdensome and costly for small companies — is now yielding to a discussion about longer-term headwinds such as the ready availability of private funding for young companies and the culture of litigation in the US.

Appeal of private markets

The abundance of private capital has swelled the herd of so-called unicorns, or private companies valued at more than $1bn. With private markets flush with cash, the latest crop of hot tech companies have opted to stay private longer.

“It is going to be a continued theme because of the amount of money coming into the fold from private equity to hedge funds,” says Eric Kim, co-founder of Goodwater, a fund that invests in private deals. “A lot of money is pouring in so companies like Snapchat and Uber can stay private longer. When yields are so low where else do you get alpha?”

While private capital is one factor deflating the IPO market, an increase in the number of venture capital-backed companies opting to sell instead is another factor. According to the research of Jay Ritter, a professor of finance at the University of Florida, during 1990-91, 20 per cent of the exits of successful venture-backed companies were M&A transactions, typically sales to a larger company in the same industry, and 80 per cent were IPOs. By 1998-2000, 60 per cent were sales and for 2001-16 that share jumped to about 90 per cent.

Investors risk losing out

The Amazon anniversary is not just drawing attention to the dearth of US IPOs. The best performing IPO in the US since 1995 — only highlights concerns that future retirees who rely on investments in the stock market are missing out on similar opportunities as companies stay private for longer.

Although large mutual funds in recent years have begun investing in companies while they are private and pension funds have exposure to venture capital, when that is put into a fund or funds it represents typically a small portion of portfolios.

“You read about Fidelity and other major asset managers taking significant stakes in private companies like Uber,” says John Gulliver, executive director of research at the Committee on Capital Markets Regulation, a policy group. “It may be true in aggregate, but it is not true in terms of portfolio exposure for the individual investor.”

Legal deterrent

Some point to the threat public companies face from class-action lawsuits as another factor diminishing the appeal of the IPO process. Allowing shareholders to choose whether they want securities class actions is “the real low hanging fruit,” in a quest to increase the volume of IPOs, says Mr Gulliver. The committee argues that these impose costs on companies, hurt stocks prices, but fail to deter wrongdoing or compensate investors. Instead, they want regulators to pave the way for companies to use individual arbitration instead, which is typically a shorter and simpler process for a company as well as less expensive.

“We also need to think about how [regulators] can target the individuals who actually commit wrongdoing,” Mr Gulliver says, rather than penalising shareholders that suffer the consequences of settlement costs.

A selfie-app company learned the value of index membership on Wednesday, when shares in Meitu Inc dropped 9 per cent after MSCI said the Hong Kong listed stock would not, as previously announced, enter its China index in June.

MSCI had included Meitu in a list of planned index changes published Monday evening, and the sudden reversal highlights the power of index providers to direct money and attention towards little known companies.

Meitu has a mostly young and female following of over 450m active monthly users. The company makes most of its revenue from smartphone sales, but has no profits to date — and does not expect to make any this year or the next.

No explanation was given for the change until after markets closed, when MSCI released a statement suggesting the initial planned inclusion of Meitu was an error.

The company said “following additional analysis”, Meitu did not meet the index’s minimum free-float requirements, determined by the proportion of a company’s stock available to be bought and sold.

MSCI said this free-float did not include shares bought by investors before Meitu’s recent initial public offering, which cannot be sold in the first six months of trading.

So-called “lock-up” arrangements are common in Hong Kong, both for early investors and “cornerstone” investors willing to take a large position in an IPO, meaning newly issued shares can struggle to attract attention because of thin trading volumes.

“Applications for indexes are meticulously researched, so something very strange must have gone on,” said Will McFadden, head of equity sales at NSBO, a China-focused investment bank.

Meitu was valued at over $5.3bn after its December IPO, when it raised $639m from the sale of 12 per cent of its total shares. Of the shares offered, a quarter went to cornerstone investors.

As the six-month lock-up period for Meitu’s investors ends on June 13, it is possible MSCI will have to make a second U-turn at its next review of the China Index, a high profile collection of mainland Chinese businesses listed overseas and so available to international investors.

A common trading strategy is to anticipate changes to the composition of popular indices, knowing that funds that track an index or measure their performance against it may be forced to buy stocks scheduled for membership.

“It damages MSCI’s reputation — will people have to wait to see if they change their minds the next time they include something in the index?” said Mr McFadden. MSCI declined to comment further.

The index provider believes that the company’s actual free float is less than its minimum requirement of 15 per cent — due to shares being held by major pre-IPO investors, who cannot sell shares until next month.

The company’s shares are heavily concentrated in the hands of its top five shareholders, who collectively own 56 per cent of the company.

US stocks were poised on Wednesday to start the trading day on a weak note, while Treasuries rose and the dollar fell, amid mounting concern over the controversies that have engulfed the White House.

While Donald Trump’s pro-growth agenda was initially expected to be a boon for risk assets, and a negative for havens, the opposite has played out with increased frequency as the businessman-cum-politician has leapt from one scandal to another.

Late on Tuesday, news hit the wires that James Comey, the former head of the Federal Bureau of Investigation, penned a memo indicating the US president had asked him to halt a probe into Michael Flynn, the former national security adviser.

Democrats seized on the moment, comparing the allegation to the Watergate scandal that sparked the fall of former President Richard Nixon, while several Republicans appeared to distance themselves from Mr Trump.

Haven assets were among the best performers in early trading on Wednesday. The yield on the benchmark 10-year Treasury note, which moves in the opposite direction of the price, was down 0.028 percentage point at 2.298 per cent. Gold advanced 0.7 per cent to $1,245.7 a troy ounce.

Meanwhile, the buck extended its recent descent and continued to trade at levels last seen in the wake of Mr Trump’s election. The dollar index, a gauge of the currency against six trading partners, dipped 0.15 per cent.

“The price action provides further evidence of the ongoing loss of confidence in the Trump administration’s ability to materially boost US growth,” said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ. “The latest political developments in the US are contributing to building investor scepticism,”

The euro has been a particularly big beneficiary of the Trump gloom, along with brightening in the bloc’s economy, gaining 0.18 per cent to $1.1103 on Wednesday, and bringing its gains for the month to 1.9 per cent.

Meanwhile, S&P 500 futures dipped 0.37 per cent to 2,388, signalling the broad index of US equities may fall further from the record peak it set during the trading day on Tuesday.

● Trump controversies rattle nerves
● Dollar index hits fresh six-month low
● S&P 500 futures slide, dragging down other equity benchmarks
● Yen, gold and Treasury prices rise as traders seek havens
● Oil relapses after strong rally

The dollar is sliding to six-month low and US equity futures are in retreat as investors fret that president Donald Trump’s ability to push through his mooted pro-growth policies is under threat.

Reports that Mr Trump sought to interfere in an FBI investigation is the latest controversy to ensnare the White House, damping global risk appetite and causing some investors to seek the perceived safety of government bonds, gold and the Japanese yen.

“Heightened political uncertainty is reinforcing the negative impact on the US dollar from the softening US economic data flow, supporting our view that the US dollar is likely to remain offered in the near-term,” says Derek Halpenny at MUFG.

The dollar index (DXY), which tracks the greenback against a basket of its peers, is down 0.2 per cent to 97.95, its weakest since mid November. The DXY rose to a 14-year high of 103.82 in the aftermath of Mr Trump’s election victory as investors made bets that his presidency could boost the world’s biggest economy and encourage the Federal Reserve to tighten monetary policy at a faster pace.

Similar reasoning — alongside improving corporate earnings — helped propel the US stock market to record levels, with the S&P 500 on Tuesday hitting an intraday high of 2,405.8. However, futures indicate the Wall Street equity barometer will slip 16 points to 2,384 when trading gets under way later in New York.

US government bonds remain a supposed haven, even when it is the US government that is the source of market angst. Consequently, the 10-year Treasury yield, which moves opposite to the bond price, is down three basis points to 2.30 per cent.

The Japanese yen is among the main currency beneficiaries of the dollar’s woes, strengthening 0.7 per cent to ¥112.35 per buck, its firmest level in nine days.

What to watch
The UK jobs market is in focus as campaigning in the country’s general election continues. The Office for National Statistics is set to publish unemployment and average earnings data for March at 09:30 BST.

Ahead of the numbers the pound is up 0.1 per cent to $1.2931 and 10-year gilt yields are little changed at 1.13 per cent.

Commodities
The latest rally in oil prices, which came after Russia and Saudi Arabia pledged to extend production cuts, has come to a halt.

Brent crude, the international benchmark, is down 0.5 per cent to $51.42 a barrel, while West Texas Intermediate, the main US contract, is down 0.5 per cent to $48.40 ahead of inventory data due later on Wednesday.

Gold is enjoying its haven status, weaker dollar and falling bond yields, climbing 0.6 per cent to $1,243 an ounce.

Additional reporting by Hudson Lockett in Hong Kong

Stocks markets suffered in Asia as oil prices gave up recent gains and Japan’s yen rallied following a lukewarm lead-in from Wall Street and more political tumult from Washington.

Tokyo’s Topix index was down 0.6 per cent as equities suffered from a firmer yen and energy stocks fell 2 per cent on slipping oil prices. The Nikkei 225 was down 0.7 per cent as well, further diminishing the odds it could cross the 20,000-point mark for the first time in two years this week.

Shares in Australia’s Wesfarmers were down 1.3 per cent after the DIY-to-retail conglomerate blamed a poor IPO climate for its decision to scrap a proposed float of its office stationary and equipment division. The benchmark S&P/ASX 200 was down 0.9 per cent.

In Hong Kong the Hang Seng was down 0.2 per cent as gains of 0.6 per cent in real estate were offset by a 0.5 per cent dip from the energy segment. Alibaba Health, the Chinese e-commerce conglomerate’s Hong Kong-listed health arm, was up 5.2 per cent despite reporting net losses widened during the year ended March. Its parent is due to report annual earnings on Thursday.

With the greenback stuck in the doldrums, Japan’s yen has shaken off some of its recent weakness to reach its strongest level in nine days.

The yen pushed as much as 0.4 per cent higher in early Asia trade to ¥112.71 per dollar, the firmest level since May 8.

Japan’s currency had weakened to as much as ¥114.37 as recently as Wednesday, the softest level since mid-March.

That had been a boon for Japanese equities, with Nikkei 225 index this week coming within sight of the 20,000-point mark for the first time in two years.

Investors have accelerated their buying of European financial assets in the wake of Emmanuel Macron winning the French presidency, but a top executive at one of the world’s biggest asset managers cautions that the region’s stock markets aren’t as cheap as they appear.

European equity funds enjoyed their strongest week of inflows on record last week — pushing the EuroFirst 300 index up 3.7 per cent this month compared to the S&P 500’s 1.7 per cent gain — as cheaper valuations make the region look comparatively more attractive now that the French election is over.

However Rob Lovelace, a senior executive at $1.5tn Capital Group, cautions that European equity prices only look cheaper because of the region’s lack of punchily valued technology stocks, a sector that has helped propel the S&P 500 above 2,400 points and spurred a series of record highs in the Nasdaq Composite this month. Stripping out the tech sector makes European valuations look far less attractive relative to the US, he argued.

“Europe has got some green shoots. The economy is getting better and the French election is over, so it looks good. But while valuations are cheaper they’re not that much cheaper,” Mr Lovelace, Capital’s vice-chairman, told the FT. “If you correct for technology it’s basically the same.”

The Eurofirst 300 index, a benchmark for European equities, is trading at a trailing price-to-earnings ratio of 25.6 times, compared to the S&P 500’s 20.9 times PE ratio when technology and telecom stocks are excluded.

Europe has got some green shoots. The economy is getting better and the French election is over, so it looks good. But while valuations are cheaper they’re not that much cheaper. If you correct for technology it’s basically the same

On a forward-looking basis, which incorporates future earnings estimates, European stocks are trading at a PE ratio of 15.6 times, compared to the S&P 500 ex tech and telecoms index’s 17.5 times.

Indeed, the latest investor survey by Bank of America Merrill Lynch indicates that fund managers think that betting on the tech-heavy Nasdaq is the most crowded trade in markets, followed by European markets. Last month, no one polled said that European equities was a crowded trade.

A net 59 per cent of investors are overweight eurozone equities in May, according to the BofA survey, up from 48 per cent in April and the highest allocation to the region since March 2015. “Allocation to eurozone equities is at its third highest level on record. The recent outperformance seems due for a pause, especially versus the US,” said Ronan Carr, the US bank’s European equity strategist.

Mr Lovelace, the grandson of the Los Angeles-based asset manager’s founder, instead favours emerging markets. While the bourses of the developing world have already enjoyed a sterling run, with the FTSE EM index up nearly 15 per cent this year, Capital Group’s vice-chairman — an EM specialist — thinks there are further gains to come.

“You can always tell when you’re close to the end of the [EM] cycle because small and mid-sized companies begin to move, which they haven’t yet,” he said. “So they have room to run further.”

A net 44 per cent of asset managers surveyed by BofA reckon emerging market equities are undervalued. Still, views on stock prices are far from uniform, and technology stocks have also helped propel developing markets such as South Korea and Taiwan to new highs this month.

Many investors find the current bout of market tranquility unnerving, especially considering the heightened global uncertainty. Mr Lovelace said that, while a bout of turmoil was possible, many investors would only see it as an opportunity to buy at slightly cheaper prices, capping how bad a sell-off could be.

“We’re all scratching our heads, but it’s rare that our reality and our feelings are disconnected for long,” Mr Lovelace said. “It doesn’t feel like we need a bear market to clean out any excesses, but we definitely need a correction . . . But if there is a correction, it will be bought very quickly.”

London’s euro clearing dominance has been in the spotlight since the Brexit vote, as Europe would like this returned. The FT’s Philip Stafford and Daniel Hodson, chairman of FSNForum and board member of Vote Leave, discuss the merits of such a move.

Is palladium, for the first time in nearly 16 years, about to become more expensive than platinum?

The price difference between the two raw materials fell to less than $100 an ounce this month as palladium flirted with its highest price since September 2014 but its cousin eyed its cheapest level in 15 months.

Both sometimes can be sensitive to the kind of precious metal cachet afforded gold with moves by the dollar also having an impact.

Retail investor sentiment plays a part, too, with buying of metal-focused exchange traded funds capable of powering the market.

But the cause of current price convergence is of a more fundamental nature. The palladium market is witnessing a rising deficit, according to Johnson Matthey, a UK chemicals multinational, in contrast to platinum in 2017 having its first surplus in six years.

In particular, the platinum market in 2017 is believed to be facing softer jewellery and automotive demand.

Analysts think Chinese production of platinum trinkets will contract.

Both metals are used to make catalytic converters in vehicles. But platinum is used more for diesel catalysts — and auto analysts are warning about a drop in market share for diesel amid an environmental backlash.

However, commodities analysts at ICBC think “the threat to diesel car sales in Europe has been overstated”. And they see “a global platinum market that is more or less balanced and is likely to remain so for at least the next two years”.

jamie.chisholm@ft.com

Vodafone redials its Indian impairment numbers. FT Opening Quote, with commentary by Matthew Vincent, is your early Square Mile briefing. You can sign up for the full newsletter here.

Hailing from the country that gave India cricket, Victorian railway architecture and a penchant for bureaucracy, Vodafone might have expected a little goodwill on the subcontinent. Instead, India has given the British mobile phone operator a price war, a €3.7bn impairment charge and a €6.1bn loss for the full year.

Thanks to the decision of India’s richest man, Mukesh Ambani, to make phone calls and data free on his new Jio network – at a cost of £16.2bn last year – Vodafone and other rivals have found themselves having to take a huge hit just to compete in the market. Vodafone’s impairment comes after it was forced to slash tariffs just to keep customers, and scrap a plan to spin off its Indian arm in a stock market listing. It later struck an £18bn deal to merge its Indian business with Idea Cellular, but the damage was done.

Still, it could have been worse. In the first half of the 2017 financial year, Vodafone recorded a non-cash impairment of €5bn net of tax, relating to its Indian business. But when it checked the number, after its merger with Idea Cellular, the impairment charge was reduced to €3.7bn.

At a group level, revenue for the year decreased by 4.4 per cent to €47.6bn, mainly due to foreign exchange movements. Organic service revenue was up 1.9 per cent – or 2.7 per cent excluding the impact of regulatory cuts to certain charges.

Adjusted earnings, excluding the impairment, were flat at €14.1bn, but 2018 guidance is for earnings growth of 4-8 per cent, or €14-€14.5bn.

Chief executive Vittorio Colao tried to focus on the positive:

Our focus on excellence in customer experience has enabled further improvements in our overall commercial and financial performance during the year. Sustained investment in network quality has provided the platform to offer more generous plans to our mobile customers in Europe… Additionally, the proposed merger of Vodafone India and Idea Cellular will create a new champion for Digital India, while capturing synergies with an estimated net present value of US$10bn.

As the airline that gave Europe low-cost flights, extra charges for anything resembling a “frill”, and secret cabin crew hand gestures for ‘Yay, there’s yet another Stag Party on the flight to Tallinn” (can you guess what it might be?), Easyjet might expect Europe to be less than hospitable. And so it has proved – but for very different reasons. Euro strength against a Brexit-weakened pound and a price war in Europe’s short-haul travel market have hit the low-cost carrier.

Despite a record 33.8m passengers in the first six months of the 2017 financial year – an increase of 9 per cent at a record load load factor of 90.2 per cent – Easyjet said currency effects and a late Easter sent its half year losses soaring. Its pre-tax loss came in at £238m, up from £18m last year.

Chief executive Carolyn McCall said:

The first half loss is in line with market expectations and reflects the movement of Easter into the second half as well as currency effects which together had an estimated impact of circa £127m on the bottom line. Our expectations for the full year are in line with current consensus market expectations.

As the company that gave the world lumpy Bird’s custard and Batchelor’s noodles, it is hard to imagine Premier Foods having to pay much of a premium for its ingredients. But such is the weakness of the pound and the strength of commodity price inflation that the group warned shareholders in January of a 10pc dent to full-year profit. It blamed the rising cost of wheat, sugar, palm oil and butter, as well as fewer supermarket multi-buy promotions.

This morning, it said underlying full-year sales dipped 2.4 per cent to £790.4m, but underlying pre-tax profit fell 11.8 per cent to £74.2m. That was slightly better than analysts’ consensus estimates, according to Bloomberg, which had suggested adjusted profit would fall to £52.2m.

Premier described the period as “a challenging one for the industry” due to the return of food inflation and changing retailer promotional strategies. It preferred to note an increased market share for six of its eight largest brands, and international sales growth of 18 per cent.

But its recipe for 2018 tells its own story: a cost cutting programme to deliver £20m of savings over the next two years, and an emphasis on debt reduction.

And, finally, Ei – the group that gave the world beer, crisps and the name Enterprise Inns, before deciding to ditch one third of these – has found the world continues to appreciated the other two.

Ei rebranded from Enterprise in February, to reflect its strategy of becoming “a portfolio of businesses comprising a variety of operating models and trading styles designed to optimise the value derived from the asset base.” In other words, by 2020 it won’t just manage pubs. It will own about 1,000 rented properties. But it will still have 2,400 inns on a leased and tenanted basis.

And this morning Ei said like-for-like net income in the six months to March 31 had risen 1.6 per cent in its leased and tenanted pub business – although net income growth in its commercial property arm slowed to 1.1 per cent from 6.3 per cent, reflecting changes in the estate composition.

Its property portfolio now stands at 304 commercial properties, with an improved average annualised rental income per property of £66,000, up from £59,000. Selling a package of 18 commercial properties in March generated £20m of net proceeds – a 15 per cent premium to book value.

However, statutory profit after tax fell to £10m from £33m last time, due to finance costs of £30m from a refinancing of corporate bonds.

Chief executive Simon Townsend said:

We are confident that we will continue to deliver positive like-for-like net income growth in our leased, tenanted and commercial estates for the full year.

Beyond the Square Mile

Asian stock markets were faltering after initial gains. Sydney’s S&P/ASX 200 and Tokyo’s Topix were up just 0.2 per cent, while the Hang Seng was off 0.3 per cent in Hong Kong. In China, the Shanghai Composite index was off 0.3 per cent as financials shed 0.8 per cent.

The dollar index — a measure of the US currency’s strength against a basket of leading rivals — dropping 0.1 per cent to 98.806.

The Australian dollar was flat at $0.741, while the Japanese yen firmed 0.3 per cent to ¥113.51 against the dollar.

Monday’s rally in crude oil prices continued in Asia, pushing both major markers above key levels after Russia and Saudi Arabia this week backed the extension of oil output cuts.

Brent crude, the global benchmark, was up 0.3 per cent at $51.95 a barrel, bringing it 2.2 per cent higher for the week. West Texas Intermediate, the US marker, was up 0.3 per cent at $49.06 a barrel. It has gained 2.4 per cent since Friday’s close.

Gold was up 0.2 per cent at $1,233 an ounce.

Intraday

In the US, the S&P 500 is expected to dip 0.1 per cent when trading starts in New York.

Corporate earnings reports out today include Crest Nicholson, Enterprise Inns, easyJet, Premier Foods, Manchester United and Vodafone.

The economic calendar for Tuesday is the following (all times London):

07.00: Norway, Finland and Romania Q1 GDP
07.45: France consumer price index (final)
08.00: Czech Republic, Slovakia and Hungary Q1 GDP
08.30: Netherlands Q1 GDP; Riksbank opinion on on inflation target
09.00: Italy Q1 GDP
09.30: UK consumer and producer price indices, housing price index
10.00: eurozone Q1 GDP

The markets at 07:47

Asian markets
Nikkei 225 up +49.97 (+0.25%) at 19,920
Topix up +4.23 (+0.27%) at 1,584
Hang Seng down -31.38 (-0.12%) at 25,340

US markets
S&P 500 up +11.42 (+0.48%) at 2,402
DJIA up +85.33 (+0.41%) at 20,982
Nasdaq up +28.44 (+0.46%) at 6,150

European markets
Eurofirst 300 up +1.48 (+0.10%) at 1,557
FTSE100 up +18.98 (+0.26%) at 7,454
CAC 40 up +11.98 (+0.22%) at 5,417
Dax up +36.63 (+0.29%) at 12,807

Currencies
€/$ 1.10 (1.10)
$/¥ 113.36 (113.77)
£/$ 1.29 (1.29)
€/£ 0.8511 (0.851)

Commodities ($)
Brent Crude (ICE) up +0.24 at 52.06
Light Crude (Nymex) up +0.25 at 49.10
100 Oz Gold (Comex) up +2.10 at 1,231
Copper (Comex) down -0.02 at 2.52

10-year government bond yields (%)
US 2.33%
Germany 0.42%

CDS (closing levels)
Markit iTraxx SovX Western Europe at 19.9bp
Markit iTraxx Europe -0.81bps at 62.41bp
Markit iTraxx Xover -4.61bps at 253.04bp
Markit CDX IG -0.99bps at 61.67bp

Sources: FT, Bloomberg, Markit

Elsewhere on Tuesday,

– The NSA, Microsoft and WannaCry… blame the business model?

– How Trump gets his fake news. Apparently “his staff have made a habit of slipping news stories on to his desk.”

– And Lawfare blog with some initial, balanced, thoughts on the WashPo’s classified info Trump story.

– How (absurd) noncompete clauses keep workers locked in. Again, these aren’t top level executives with bargaining power.

– Felix Salmon with a few notes on Spotify’s potential direct listing. Levine good on this too.

– Ray Dalio on ‘the big picture’.

– Andy Mukherjee on the divergence between what India’s central bank says some banks’ NPAs are and what those (in this case private) banks say they are. Separately, a good Credit Suisse report laid out the numbers:

Now Mukherjee does add that “the $3 billion of additional bad loans that ICICI, Axis and Yes have been forced to disclose don’t add significantly to what’s already a $180 billion heap of stressed banking assets, including both nonperforming and restructured loans”. And a bunch of these loans may have already been sorted out/written off/ whatever. But SBI — the country’s monster public bank — reports on Friday and that will be worth watching extra closely as a result of this.

– Fyre Festival update, its mountain of debt edition.

– Singapore ‘vending machine’ dispenses Ferraris, Lamborghinis.

– From Bowie bonds to Turkish soap opera bonds:

Borsa Istanbul Chief Executive Officer Himmet Karadag says he plans to securitize the income of the Ottoman drama, which is now in its third season, and narrates the 13^th century origins of the dynasty that ruled from almost Vienna to Tehran at its height…

“Is the series successful? It’s successful. Does it have fixed income stream? It has a fixed income stream,” said the head of the securities exchange in an interview in his Istanbul office, where he was about to receive the show’s producers. “I’m going to wrap a special purpose vehicle around its income and I’m going to sell it. Why wouldn’t I?”

– This Caribbean bank wants Chinese money nobody else will touch.

– In cashless Sweden, even God now takes payment via an app.

– On Walmart, banking, incumbents and regulation:

One question to ask might be, “Why should Walmart be allowed to enter banking?” But a more relevant question would be, “Why shouldn’t Walmart be allowed to enter banking?

– Setser: China still wants to import commodities, not manufactures.

– News you probably shouldn’t use from 538: How to trade $100 for $8.20 in 34 complicated steps.

– The curious rise of the ‘white left’ as a Chinese internet insult.

– Ninja shortage in Japan.

– Further, further reading.

There is much going against South Korea right now, including an anaemic economy, a series of failures in the country’s shipbuilding sector, Chinese boycotts and North Korean belligerence. 

And yet the country’s stock market keeps hitting records. The Kospi, the Korea’s main equities benchmark, set a record high last week and is up 13 per cent in the year to date, making it one of Asia’s best-performing major markets of 2017. 

The market strength illustrates the awesome power of Samsung to propel the wider market to gains and, to a lesser extent, optimism about the election of liberal candidate Moon Jae-in as the new president.

“The Kospi rally has been mainly driven by Samsung,” says Lee Chai-won, chief investment officer at Korea Value Asset Management. 

Samsung’s share price — which also hit an all-time high last week — has climbed 28 per cent in the year to date, pulling the rest of the market along with it. Samsung alone has driven about 40 per cent of the Kospi’s gains in the year to date.

Last month, Samsung, which carries a 25 per cent weighting in the Kospi index with a market capitalisation of $288bn, announced a plan to cancel Treasury shares worth $35bn. This will concentrate dividends and ownership rights in the remaining shares, making them more valuable. 

“Samsung’s announcement to cancel Treasury shares was a major trigger for the market’s recent rally, although it is doubtful if other Korean companies will take similar steps,” says Lee Chai-won. 

The move was done to reassure investors shaken by the incarceration of Samsung’s de facto leader, Lee Jae-yong, who is standing trial on corruption and embezzlement charges. 

Samsung recorded its best quarterly operating profit in more than three years in late April on strong prices of computer chips and panels. Positive reviews of its recently launched Galaxy S8 smartphone have also been well timed, coming when investors have been receptive to a Korean revival story. 

This has largely been driven by the election of Mr Moon, viewed by investors and analysts as a good candidate to defuse North Korean tensions and fix the country’s entrenched corporate governance problems.

Mr Moon has promised to pursue more engagement with North Korea amid growing military threats from the north. He also wants to resolve the diplomatic stand-off with China over the deployment of a US missile shield while pushing for corporate reform and introduce fiscal stimulus including a Won10tn supplementary budget to reinvigorate the stalled economy. 

Mr Moon has also promised to address the country’s entrenched crony capitalism, a project that has come on and off the state agenda since the 1997-98 Asian financial crisis. The government wants the country’s pension fund, the biggest investor in major Korean companies, to adopt a stewardship code while some bills are pending in parliament to strengthen minority shareholders’ rights. 

The prospect of improved corporate governance leaves investors hopeful of improved performance, returns and share prices.

“The biggest problem of Korean companies is their inefficient capital allocation,” says Paul Choi, head of research at CLSA, referring to chaebol’s stingy dividend payouts despite their strong cash reserves. 

Mark Mobius, the well-known emerging market investor and executive chairman at Templeton Emerging Markets Group, is optimistic that chaebol reform will narrow the discount that investors apply to Korean stocks. “I think chaebol reform should result in better corporate governance and could lift the prices of many South Korean companies,” he says.

This points to the last reason for Korean stocks’ strong recent performance — they have been rising off a low base.

South Korea has historically been undervalued compared with other Asian markets mainly because of chaebols’ poor governance. It remains the cheapest market in Asia, with the Kospi trading at only 0.96 times forward book value, compared with the 2.6 and 2 times multiples seen for India and the Philippines.

The global economic recovery also bodes well for the export-driven Korean economy with its export growth hitting a six-year high. “The economy is making a cyclical recovery driven by rising exports, and there is strong national demand for economic reform,” says Mr Choi. 

South Korea remains volatile with the North Korean missile tests on Sunday just a reminder of that market’s many risks. 

Experts also expect strong resistance to the main reforms of Mr Moon’s Minjoo party, as the party lacks a majority in parliament. 

But recent events have shown that, no matter how fraught South Korea’s domestic political and economic situation may get, a strongly performing Samsung can keep the Kospi buoyant. “It is Samsung that is single-handedly leading the market’s rally,” adds Mr Choi. 

Rolls-Royce lagged behind a London market rally on Monday that lifted the FTSE 100 to a fresh record high.

Rolls was under pressure after Investec questioned whether management can hit a target of delivering more than £1bn in free cash flow by 2020. The cost of developing a new engine for Boeing could be “a material headwind” to that goal, the broker warned.

Boeing is reportedly finalising the design of a short-haul jet, dubbed the 797, which analysts expect to go into service by the middle of next decade.

If Rolls is selected as Boeing’s engine supplier the development costs are likely to exceed $10bn, with a return on the investment only evident by the 2030s at the earliest, forecast Investec.

If Rolls is rejected, it will lose share at the higher end of the market as Boeing’s new jet is likely to cannibalise demand for the Rolls-powered Airbus A330neo, it said.

Rolls closed 1.1 per cent lower at 854p. The stock had jumped since the start of May on the back of a reassuring shareholder meeting and investor roadshow, along with short covering.

Miners led the wider market higher as a weak dollar lifted metals prices, lifting the FTSE 100 to a record closing high for the second consecutive day.

The FTSE rose 0.3 per cent, adding 18.98 points to 7,454.37, as Anglo American gained 3.2 per cent to £10.75 and BHP Billiton took on 2.3 per cent to £11.91.

Citigroup ran the numbers on a BHP break-up, arriving at a sum-of-the parts valuation of £15.40 per share.

However, BHP has consistently traded below its break-up value, suggesting the market “has been efficient in pricing in value destruction”, so a spin-off risks only delivering a one-off realisation of value, said Citi.

“We think there is a pathway for the company as it needs to optimise its portfolio, shrink assets run with lower debt levels and actively manage volatility to lower its cost of capital, which ultimately could drive a bigger re-rating than simply spinning petroleum or selling US onshore,” the broker said.

Holiday companies were under pressure after Tui, down 4.8 per cent to £11.33, reported a deterioration in UK bookings. Thomas Cook, which posts interim results on Wednesday, faded 3.7 per cent to 92.4p.

Ahead of results on Wednesday, Sophos climbed 7.3 per cent to a record high of 366p as security software stocks benefited from press coverage around the WannaCry ransomware attacks.

Relx was off 0.8 per cent to £16.12 after UBS downgraded the publisher to “neutral”, largely on valuation grounds.

Consort Medical edged 0.5 per cent higher at £10.31 after Patheon, a US drug development peer, agreed to be bought by Thermo Fisher for a $7.2bn enterprise value.

Puerto Rico’s once-influential Government Development Bank has won agreement from some of its creditors to cut its debt burden and restructure its obligations.

The organisation, which for years acted as the territory’s primary fiscal agent and evolved into a lender of last resort in times of distress, will transfer its assets into a new entity and issue new bonds in a deal that will see creditors take principal losses of as much as 45 per cent.

The assets to be transferred to the new entity include its loans to Puerto Rico’s municipal governments, property and excess cash, which the government said are worth $5.3bn.

“This agreement is an example that the government is regaining the credibility it had lost over the past few years,” governor Ricardo Rosselló said in San Juan on Monday.

Earlier this year, the GDB said it would liquidate and wind down after falling into insolvency. The organisation counts more than $4bn of indebtedness and has played a central role in Puerto Rico’s ongoing financial crisis. Mr Rosselló triggered the largest bankruptcy filing in the $3.8tn municipal bond market this May, as he seeks to cut the island’s $74bn debt load.

Creditors are set to exchange their ownership in existing GDB bonds for one of three new instruments, which include haircuts of between 25 and 45 per cent. Bondholders who agree to the 45 per cent cut to principal will receive coupon payments of 7.5 per cent per year on the new notes.

Hedge funds including Avenue Capital Management, Brigade Capital Management, Fir Tree Partners and Solus Alternative Asset Management were among the group of creditors that agreed to the deal.

France has today announced a 31-year government bond, in a sign of further market optimism after the victory of Emmanuel Macron in the recent presidential election.

The debt, which is expected to price later this week, had been previously planned as part of the country’s funding programme for the year.

The timing of the syndicated deal comes just over a week after Mr Macron’s victory in the final round of the election, and will provide a further test of market appetite for French assets in a climate of reduced political risk.

It also follows a week in which European issuers, especially banks, rushed to sell debt and take advantage of improved market conditions.

The yield on 10-year French government bonds are trading at 0.88 per cent, down from over 1.1 per cent in mid-March. In the build-up to the election, French assets sold off over the perceived risk of a victory for Marine le Pen, the anti-euro candidate.

BNP Paribas, Citi, HSBC, JP Morgan and Societe Generale are on the deal.

German stocks hit a new high on Monday morning, as higher commodity prices boost stocks across Europe.

The Dax climbed as much as 0.48 per cent to 12831, with energy group RWE the biggest gainer despite reporting an 18 per cent drop in first quarter profits.

German stocks have been some of the biggest beneficiaries of renewed investor desire for European assets, after Emmanuel Macron’s victory in the French presidential election allayed fears about the future of the eurozone.

Investors poured a record $6bn of new capital into European stock funds last week, according to data from EPFR.

That demand has helped the Dax climb 11.5 per cent since the start of the year, compared to a 4.4 per cent rise in the UK’s FTSE 100.

Oil jumped after the energy ministers from Saudi Arabia and Russia said that an OPEC-led agreement to cut output should be extended until March 2018.

Saudi energy minister Khalid Al Falih and his Russian counterpart Alexander Novak discussed oil output policy in Beijing after which they made a joint statement.

Mr Falih said the next round of cuts will be on the same terms as the first curbs deal, to cut almost 1.8m barrels a day, as part of the latest effort to rebalance the global oil market.

Mr Novak said the aim of the cuts is to rebalance supply and demand. Russia is the world’s biggest oil producer, while Saudi Arabia is the biggest exporter.

Opec ministers are due at the end of this month to meet in Vienna, to discuss an extension of the cuts deal past the initial six months of 2017. This is when the final decision will be made.

Brent crude, the international benchmark, was up 1.5 per cent at $51.59 a barrel, its highest level since the start of this month. Prices gained as much as 1.7 per cent.

West Texas Intermediate gained 1.5 per cent to $48.55. Both price benchmarks were trading about 0.1 per cent higher prior to the release of the statement.

The cyber attacks that swept the globe on Friday likely aren’t over just yet: current data show more than 1.3m computer systems are still vulnerable to infection to the debilitating WannaCry infection.

So far, 200,000 computers across 150 countries are known to have been infected in the first wave of the WannaCry cyber attack, Europol said on Sunday. “The recent attack is at an unprecedented level and will require a complex international investigation to identify the culprits,” the European police agency added.

Intelligence agencies in Europe and the US have spent the weekend warning large companies and organisations that the threat from the ransomware — a category of malicious software that encrypts infected machines’ hard drives and demands payment to release the data again — may escalate.

In Asia Pacific equities, futures tip Sydney’s S&P/ASX 200 to gain 0.1 per cent at the open, while Tokyo’s Topix is expected to shed 0.3 per cent and the Hang Seng is set to rise 0.5 per cent when trading begins in Hong Kong.

Corporate earnings reports out today include NTT, Mitsubishi UFJ Financial, Asahi Group, Mizuho Financial, Japan Post Bank, Japan Post Holdings, SMFG and Dai-ichi Life.

The economic calendar for Monday is kicking the week off with a bang (all times Hong Kong):

• 07.50: Japan producer price index
• 09.30: Australia home loans
• 10.00: China industrial production, retail sales and fixed asset investment
• 10.30: Thailand Q1 GDP
• 14.00: Japan machine tool orders (preliminary)

President Uhuru Kenyatta of Kenya has called on China to rebalance an increasingly skewed trade relationship between Africa and the rising superpower, arguing that Beijing must do more to tackle a widening trade deficit.

Africa’s trade balance with China has moved decisively into deficit due to a fall in the price of many African commodities, such as oil, copper, iron ore and cocoa. In 2015, the most recent year for which there is reliable data, Africa’s 54 countries recorded a $34bn deficit with China on total trade of $172bn, according to the China-Africa Research Initiative (Cari) at Johns Hopkins University, although commodity prices have strengthened somewhat since then.

“As with any country, the . . . trade deficit is an issue of concern and we will be pushing to see how we can increase opportunities for Kenyan goods to penetrate the Chinese market,” Mr Kenyatta said in an interview with the Financial Times. He did not specify which goods Kenya hoped to export or precisely what Chinese barriers stood in their way.

Kenya, east Africa’s most developed economy, is less dependent on commodities than many countries on the continent and grew by nearly 6 per cent last year. Nevertheless, in 2015, Kenya imported $5.9bn worth of Chinese goods, much of it steel and equipment for a $4bn Chinese-built railway, but shipped only $99m of goods in return, according to Cari.

Mr Kenyatta, one of only two African leaders to attend this weekend’s Beijing forum of China’s flagship Belt and Road regional infrastructure programme, said ahead of the gathering: “Those of us there, representing Africa, will be pushing . . . to increase our trade into China.”

Referring to concerns in parts of Africa that China was recreating colonial trading patterns by flooding the continent with manufactured goods, extracting raw materials and gobbling up construction contracts, Mr Kenyatta said that Beijing was “beginning to appreciate that, if their win-win strategy is going to work, it must mean that, just as Africa opens up to China, China must also open up to Africa”.

Under its Belt and Road initiative, China is seeking to refashion the ancient Silk Road linking Asia with Europe and Africa, including Kenya on the Indian Ocean coast. China overtook the US as Africa’s biggest trading partner in 2009.

Mr Kenyatta said Kenya intended to emulate Ethiopia by inviting Chinese manufacturers to the country. As Chinese wages rise, African leaders see attracting jobs in labour-intensive industries such as textiles, shoes and agro-processing as one way of tackling the trade imbalance.

Mr Kenyatta said the establishment of special economic zones, modelled on China and built close to new, mostly Chinese-built, transport links, was “critical for job creation in Kenya”.

The president denied Kenya was taking on too much Chinese debt to finance what critics have suggested are white elephant projects that will never pay for themselves. His government borrowed $3.6bn for the Mombasa-Nairobi leg of a new rail line, due to open next month, which Mr Kenyatta said would eventually extend to Uganda, Rwanda and even the Atlantic coast in the Democratic Republic of Congo.

[Beijing was] beginning to appreciate that, if their win-win strategy is going to work, it must mean that, just as Africa opens up to China, China must also open up to Africa

“We believe strongly that infrastructural development is what is going to help us open up east Africa, open up the continent to trade and investment,” he said. “Our debt is all towards investment — investment that should have been made a long time back,” he said, adding that debt was still at a “very sustainable level”.

On Mr Kenyatta’s watch, since 2013, debt has risen from 40 per cent to 53 per cent of gross domestic product. And critics say that ratio is flattered by the fact that Kenya’s GDP jumped by a quarter when it was recalculated in 2014. “We’ll find ourselves so indebted to China we will be beholden to them not only economically but politically,” said Patrick Lumumba, director of the Kenya School of Law.

Mr Kenyatta, who faces re-election in August, indicated he expected to defeat Raila Odinga, a perennial opposition figure, in the first round. Mr Odinga says he lost out to Mr Kenyatta last time only because the polls were rigged.

Mr Kenyatta in his FT interview denied allegations that his government had been mired in corruption — a common perception among Kenyans. “We as an administration have not pushed the corruption agenda under the table,” he said.

Last week, the US partially suspended funding to Kenya’s health ministry over concerns about graft. Kenya is ranked 145 out of 176 countries on Transparency International’s corruption index.

Mr Kenyatta said that the election would be fought on economic issues, particularly the spiralling cost of food, which is largely the result of a lengthy drought.

He also conceded that bank credit had slowed sharply since the introduction last August of a cap on interest rates, a measure that he said might eventually be reversed. “As people have seen a decline in credit, especially to small and medium enterprises, maybe people would be willing to relook at this,” he said.

The Federal Reserve is actively considering a profound change in US monetary policy, in effect the reversal of quantitative easing (QE). In its March meeting, the FOMC discussed its strategy for the future run down of its balance sheet, and said that further debate would take place in upcoming meetings.

The FOMC has already concluded that “a change in the Committee’s reinvestment policy would likely be appropriate later this year” and that this would need to be flagged “well in advance”. The minutes to the May meeting (to be published on 24 May) will probably provide some further indication about their thinking on this important topic.

Investors are therefore beginning to focus on the possible consequences of the reversal of QE on interest rates and the shape of the yield curve.

In a previous column, I outlined the likely path for the US central bank balance sheet under the new policy, and predicted that this would cause global QE to turn negative in 2019, after being consistently positive by about 2 percentage points of global GDP in every year since 2011. The great unknown is whether this reversal of central bank support will remove the underpinnings from the bond market, risk assets and the global economic upswing.

I take the optimistic side of this debate, but investor opinion is sharply divided on the matter.

The FOMC has already outlined some of the principles that will guide the shrinkage of its balance sheet. The central bank’s portfolio of treasuries and mortgage backed securities will almost certainly be run down in a gradual and predictable manner, allowing bonds to run off as they mature, instead of reinvesting the proceeds in more bonds. There will be no direct sales of bonds into the open market.

The run down will start only when the normalisation of interest rates is “well underway” (probably implying a Fed funds rate of around 1.5 per cent), and when the FOMC is confident that there is little risk of needing to reverse the direction of monetary policy in the foreseeable future.

The FOMC is still deciding whether reinvestments should cease in a single jump, or whether they should be phased out more gradually. But the Committee clearly wants to set the balance sheet reduction on a predictable long term path, while relying on changes in interest rates to make shorter term alterations to monetary policy.

What would be the effect of fully reversing the quantitative easing that has taken place since 2007, a period in which the Fed’s balance sheet has risen by $3.5 trillion, from $0.9 trillion to $4.4 trillion? There have been many studies on the economic effects of this unconventional monetary easing, including an analysis by Fed economists that has been quoted recently by Janet Yellen. This study, by Eric Engen, Thomas Laubach and David Reifschneider, presents conclusions that may be near the consensus of Fed thinking on the subject at present.

The Fed study suggests that the effect of the entire QE programme was to reduce 10 year term premium, and therefore the bond yield, by 120 basis points in 2013. This is estimated to have reduced US unemployment by about 1.25 percentage points and increased inflation by about 0.5 percentage points. On my reckoning, other results in the Engel et al paper indicate that the QE programme increased US equity prices by 11-15 per cent, and reduced the dollar effective exchange rate by 4.5-5 per cent.

These are obviously very large effects, and if we were to make the highly simplified assumption that they will be fully reversed during the unwind of QE, there would be plenty of reason to be worried.

However, that simplified assumption does not make much sense. There are at least three good reasons for believing that the effects of the run down will be much smaller than the impact of the original QE programme, quoted above.

First, the scale of reduction in the Fed’s balance sheet in the next few years will be nowhere near as large as the increase during the expansion phase. For various reasons related to changes in the Fed’s mechanism for controlling short rates, and in the demand for liquidity in the banking sector, it will be necessary for the central bank’s balance sheet to be permanently larger than it was before the crisis (see this earlier column).

The FOMC will probably publish the full path for the expected balance sheet before it even starts the run down. This is likely to show that the Fed will shed only around one third to one half of the assets it accumulated during the expansion phase, implying that the balance sheet will drop by $1.2-1.8 billion over several years. The total effect of this might be to increase 10 year bond yields by about 40-60 basis points, and the other economic effects quoted above would also need to be scaled down proportionately.

A likely path for the balance sheet (actually, the total securities held in the Fed’s System Open Market Account), compared to the desired long term or “normalised” size, is shown here:

Second, some of the effects of balance sheet normalisation may already be in the market. According to to New York Fed’s Primary Dealer Survey in March, market participants already expect the run down to start in mid 2018, when the Fed funds rate has reached 1.63 per cent. Since the FOMC is very unlikely to shock the market by announcing a more hawkish path than this expectation implies, the impact of the event itself may be rather muted.

Third, the effect of balance sheet tightening may be offset by the Fed adopting an easier path for short term interest rates than it otherwise would have chosen. This is very different from what happened during the balance sheet expansion phase, when short term rates were fixed at almost zero.

The key point is that the future stance of monetary policy will not be determined by the balance sheet normalisation in isolation, but by its combination with the path for the Fed funds rate. If the adverse effect of the balance sheet run down on bond yields is larger than expected, it would quickly be offset by a more dovish path for short term interest rates.

Janet Yellen has suggested that the expectation of balance sheet normalisation has already increased the bond yield in 2017 by 15 basis points, which she says is equivalent to two 25 basis point increases in the fed funds rate. The market seems to think that the balance sheet run down will have an even larger effect on short rates than Yellen implies, which is perhaps why it is so reluctant to price in the full rise in rates implied by the FOMC’s “dot plot” for 2018-19.

The Fed is determined to avoid a repeat of the 2013 “taper tantrum”, when the tapering of its bond purchases caused major turbulence in the bond market. With careful communication, it can achieve this.

The US dollar came under pressure on Friday morning, with investors eyeing a duo of disappointing reports on the American economy.

The buck was recently down by 0.44 per cent against the euro at $1.0909, while it was flat against sterling at $1.2878, having earlier traded as strong as $1.2845.

Meanwhile, the greenback declined 0.34 per cent against the Japanese yen to ¥113.48.

Friday’s performance came after data on US inflation and retail sales for the month of April underwhelmed Wall Street expectations. In addition to the dollar weakness, investors were also bidding-up US Treasuries, sending yields lower.

India’s $1.6tn stock market broke new ground last week, with the benchmark index hitting an all-time high as confidence builds that the government’s reform agenda will strengthen growth and corporate earnings.

But the stock market’s 14.9 per cent rally since January 1 has divided opinion among fund managers who disagree over whether Indian equities can make further gains.

“The most common question that I am asked by investors is, ‘Have I already missed the boat?’, but the answer is no. The outlook for India over the next few years is particularly positive,” says Kunal Desai, manager of Neptune’s £93m India equity fund.

A quarter of the world’s under-25s live in India, part of a large and expanding middle class of several hundred million citizens with rising incomes who are expected to fuel strong economic growth over the medium term. The government, led by Prime Minister Narendra Modi, is pursuing an ambitious reform programme that is attracting support from international investors.

India-focused equity funds have attracted net inflows of around $6bn so far this year, compared with the $3.8bn registered over all of 2016, according to EPFR, the data provider.

India ranks as the market most favoured by investment managers running broad emerging market funds, holding an average “overweight” position 2.55 percentage points higher than the country’s weighting in the MSCI benchmark.

So far this year, the MSCI India index has risen 18.3 per cent in US dollar terms, outperforming both China (up 1 per cent) and Brazil (up 6.3 per cent), but lagging behind Russia, which has rallied 28.5 per cent.

Mr Desai notes that Mr Modi’s BJP won the state election of Uttar Pradesh in March by a surprisingly large margin.

“The government now has a reasonably clear runway until the next general election in 2019, which will probably stimulate further reform activity in an effort to drive India’s growth higher.”

As part of its reform agenda, India’s government unexpectedly withdrew 87 per cent of the currency in circulation in November. It abruptly scrapped 500 and 1,000 rupee notes, the two highest denominations, as part of a crackdown on “black money” — cash earned either illegally or earned legally but never declared to tax officials.

This led to the closure of numerous cash-dependent small businesses and thousands of job losses.

However, demonetisation has also encouraged savers to move into financial assets, according to Avinash Vazirani, who runs the £837m India fund for Jupiter, the London-based asset manager.

He highlights a significant increase in bank deposits, record inflows into domestic mutual funds and a rise in life insurance sales this year as evidence of the benefits of the move.

In addition, the government has introduced a universal biometric identity card scheme, known as Aadhaar, that will allow benefits to be paid directly into recipients’ bank accounts

“This should lead to an increase in consumer spending and encourage those on low incomes to join the formal banking system,” says Mr Vazirani.

Last month, India’s parliament approved plans to sweep away the different levies that apply on goods in each state and replace them with a single tax, one of the country’s most important reforms since independence in 1947. Long queues of lorries waiting at state borders to pay tolls or excise duties are common across India but the single tax should lead to a significant fall in logistics costs.

The government also plans to provide more affordable housing via measures such as construction projects aimed at the urban poor, increasing subsidies and extending property loans.

“Giving a boost to housing can essentially raise demand for multiple other industries, ranging from steel to consumer finance,” says Shekhar Sambhshivan, manager of Invesco Perpetual’s $296m India fund.

He believes disruption caused by demonetisation was temporary and points out that the government provided relief for low-income taxpayers and small companies that were hit hardest.

These tax benefits will have a cascading effect that should boost consumer spending, says Mr Sambhshivan.

1. November 8 2016: Prime Minister Narendra Modi announces that 86% of India’s currency by value is no longer legal tender
2. December 30 2016: Deadline for depositing old currency notes
3. February 1 2017: Finance Minister Arun Jaitley’s fourth budget maintains focus on fiscal restraint
4. February 28 2017: India’s statistics office estimates the economy grew 7% in the previous quarter, despite the shock of demonetisation
5. March 11 2017: The ruling BJP seals a decisive election victory in Uttar Pradesh, India’s most populous state
6. Market hits all-time high

______________________

But demonetisation prompted changes in India allocations at GMO, the $77bn Boston-based investment manager. GMO cut the net long India exposure in its $3bn emerging domestic opportunities fund from 20 per cent to around 7.5 per cent by January. Once it became clear that the economy was not reacting badly to demonetisation, GMO raised net long position in the fund to around 17 per cent.

Amit Bhartia, a portfolio manager for GMO’s emerging markets team, says banks are flush with liquidity following demonetisation and interest rates have fallen as a result, encouraging savers to put cash into the stock market.

GMO estimates that equity inflows from domestic investors are running at an annualised rate of $10bn- $12bn.

“Liquidity is playing a key role in driving the stock market higher,” says Mr Bhartia.

But those inflows have helped push up the valuation of India’s stock market, which is trading on a price to earnings multiple of 19.6 times for this year, the highest of any emerging market. “The market is priced for a perfect outcome,” says Mr Bhartia.

Shilan Shah, an analyst at Capital Economics, the consultancy, shares these concerns.

“Valuations are higher than they have been over the past five years, which suggests that the scope for further upside [for equities] is limited,” says Mr Shah.

The MSCI India index has risen 18.3 per cent in US dollar terms so far this year, outperforming the broad MSCI emerging markets benchmark which has increased by 3 per cent

Capital Economics expects India’s stock market to drop back later this year, particularly if the central bank begins to tighten monetary policy.

Analysts have pencilled in average earnings growth across India’s stock market at 17.5 per cent for 2017, rising to 19.8 per cent for the following year.

High valuations have also prompted some cooling in the enthusiasm for Indian equities among managers running broad emerging market funds, according to Copley Fund Research, the data provider.

Two-thirds of the emerging market funds tracked by Copley now hold an “overweight” opposition in India, down from 85 per cent in May 2015, when the stock market was significantly lower.

Steven Holden, founder of Copley, says valuations for other markets are “more palatable, particularly Russia and Brazil, which have both seen allocation increases among emerging market managers”.

Rajiv Jain, former chief investment officer at Vontobel who left the Swiss asset manager to found GQG Partners in 2016, is an emerging-market veteran who is sceptical about India’s prospects. He believes India’s stock market and currency are overvalued.

“Top down, from a political perspective, it looks good, but I think from a bottom-up, company-wise scenario, it’s not good,” he says.

Mr Bhartia of GMO cautions that investors may be underestimating the political risks facing Mr Modi, as the BJP might have to rely on coalition partners to remain in power after the 2019 general election.“The market has not priced in that risk at all and the election is only two years away. Political risks have not gone away and history has shown that just a few individuals can have a disproportionate impact on economic policy,” he says.

BP is suing one of its former US oil trading analysts for allegedly stealing company secrets, in a case that shines a light on the importance of proprietary data to the world’s largest oil traders.

In a filing in the United States Northern District of Illinois, BP’s trading division alleges that Joseph Giljum, a crude oil analyst at its Chicago office until last month, uploaded “large volumes” of BP’s confidential data to his Amazon Cloud Drive account.

The filing contains emails and text messages that BP alleges show he was negotiating a new job with a rival, promising in one message that BP’s information and models would help them “crush the competition”, according to the suit.

The suit seeks their return and to bar Mr Giljum from taking another oil analyst job in the industry, as well as damages.

“BP is concerned that Giljum will improperly use this information to compete against BP unfairly, and that Giljum has plans to continue to do so when he begins employment with BP’s competitor,” the filing, dated April 28, says.

The competing company is not named in the filing but it says that Mr Giljum was negotiating with former BP trader James Chrystal, who now works in the US for Mercuria, the Swiss commodity house, which has expanded its North American operations in recent years.

Parties close to the matter say that BP and Mercuria, which is not a defendant in the case, have held talks about the issue.

The filing details alleged efforts by Mr Giljum to upload BP data and models related to oil trading and inventory levels to the Amazon cloud, before downloading them to his private computer.

BP hired Mr Giljum as a “crude bench analyst” in May 2010 at its Integrated Supply and Trading Division (IST), which deals with millions of barrels a day of crude and refined products for the company. Its muscular trading operation has helped bolster BP’s earnings during the oil slump.

“Proprietary information constitutes BP’s most important asset and is essential to BP’s competitive advantage,” BP said in the filing.

Mr Giljum started talks with Mr Chrystal about joining him at his new employer late last year, the filing said, before handing in his resignation to BP in April.

The BP analyst compiled more than 950 business files of intelligence and analytics on his desktop work computer that he placed in a folder labelled “JPG” — his initials and also a common file extension for photos.

The files were placed in subfolders labelled with the names of Mr Giljum’s family and dogs, which BP alleges “was a ruse designed to conceal the true nature” of what they contained.

He later contacted a forensic accountant enquiring about how to wipe computers and phone messages after transferring them via the Amazon cloud, the complaint alleges.

The filing includes exchanges between Mr Giljum and Mr Chrystal that suggest both men were nervous about the alleged plan.

In one correspondence, Mr Chrystal allegedly said: “just don’t text me that shit” “i [sic] don’t want to get sued” “thats [sic] toeing close to the line”.

Mr Giljum responded: “All good will just move to email from here on out.”

Mr Chrystal said he was “paranoid as it is” adding “on top of that, smoke a lot of weed, makes me even more paranoid,” according to the complaint.

A lawyer representing Mr Giljum declined to comment. Mr Chrystal did not respond to an email seeking comment.

Bonds issued by commodity trader Noble Group have fallen, mirroring a sharp decline in its share price, amid growing concerns about the company’s ability to manage its debt load and secure liquidity from banks.

Noble’s recently issued 8.75 per cent 2022 notes have fallen from 97 cents on the dollar this week to just 53 cents, pushing the yield up to about 27 per cent, according to Tradeweb.

Meanwhile, the company’s share price dropped a further 24 per cent on Friday to a 15-year low of S$0.66, having fallen by almost a third on Thursday. The company is now valued at $630m, down from more than $10bn seven years ago when it was one of the biggest commodity traders in the world.

The plunging price of Noble’s bonds and equity comes after it announced a first-quarter of loss of $130m and revealed it had yet to extend a key credit facility.

The company also said on Thursday that founder Richard Elman would be replaced as chairman by Paul Brough, a former partner at KPMG, who would lead a strategic review.

“There is risk that losses may continue due to the inability to effectively hedge the price risk in its coal business, and still-negative operating cash flows,” said Mervin Song, an analyst at DBS Bank. “Furthermore, there are questions surrounding Noble’s ability to secure sufficient liquidity from its key banks.”

Over the next year, Singapore-listed Noble must repay a $379m bond in March followed by an $1.14bn unsecured term loan three months later.

Speaking to analysts on Thursday, Noble’s chief financial officer Paul Jackaman said the trader was in discussions with its banks to ensure the group’s credit lines “provide the liquidity required to support the structure of the group’s business going forward”.

Over the past two years, Noble has been battered by a downturn in commodities markets and questions from analysts about its ability to convert profit into cash. Its accounting also came under scrutiny after a little-known research firm called Iceberg queried its financial reporting.

Noble has sought to revive its fortunes by replacing its chief executive, selling unwanted businesses and raising cash from shareholders to reduce its debt and provide more working capital.

The company has also strongly defended its accounting and dismissed the criticism of its financial reporting as the work of a disgruntled former employee. But it has continued to struggle.

“We do not see positive catalysts near-term barring an improvement in earnings or a strategic partner investing in the company,” said Bharat Shettigar, analyst at Standard Chartered in a note to clients on Friday.

“Also, the lack of prior warning on the results and management’s poor responses to some of the questions on the earnings call may lead some investors to adopt a ‘sell now, ask questions later’ approach,” he said

Brick makers Forterra and Ibstock hit record highs on Friday after Berenberg tipped them as a way to play the UK’s housing shortage.

New home construction should be underpinned in the short term by the Help To Buy subsidy, and over the longer term by government support to bring smaller builders back into the market, Berenberg said.

Its team estimated that the UK’s shortfall now stood at 1.1m homes, up from 450,000 identified in the government-commissioned Barker review in 2004.

The shortage should translate into steady volumes for Ibstock and Forterra as four-fifths of new UK homes use brick cladding, Berenberg said.

Substitution risk looks minimal, barriers to entry are high and the top three suppliers control more than 90 per cent of the market so, given that brick costs account for just 1 per cent of the price of a new home, industry pricing power is strong, it said.

That means Ibstock and Forterra are “mispriced”, trading at discounts to the construction sector of 20 per cent and 30 per cent, respectively, the broker told clients. Both stocks gained 2.9 per cent in response, with Ibstock closing at 237.6p and Forterra at 255.3p.

A wider market rally lifted the FTSE 100 to a new record high, up 0.7 per cent, or 48.76 points, to 7,435.39. For the week, the index was up 1.2 per cent.

AstraZeneca jumped 9 per cent to £51.76 after saying that a late-stage trial of its Imfinzi immuno-oncology drug for lung cancer showed that it significantly reduced the risk of death and of the disease worsening. AstraZeneca released the interim data earlier than expected, ahead of its keenly awaited Mystic trial.

According to Berenberg, Roche, Merck and Bristol-Myers Squibb all have similar drugs in development “but these trials are not expected to read out until around September 2019 at the earliest, so Astra now appears to have a meaningful lead in this setting”. It estimated a market opportunity for the indication of more than $4bn.

Hikma weakened a further 2 per cent to £17.59 after saying on Thursday that its generic version of GlaxoSmithKline’s Advair inhaler was unlikely to win US regulatory approval this year. GSK rose 2.3 per cent to £16.65.

Petrofac tumbled 14.1 per cent to 700p after the Serious Fraud Office said that it was investigating the group and its subsidiaries for suspected bribery, corruption and money laundering. Petrofac said it believed that the investigation was linked to an SFO probe into the Unaoil consultancy.

“The news is unwelcome in so much as, in our view, Petrofac needs all the support it can get from clients to win the $4bn of new engineering and construction work we see as minimum to meet our (low end of consensus) revenue estimates,” Jefferies said.

Investors wiped $4.6bn from the market value of the US department store sector in the space of two days this week, as concern mounted about sliding sales and the effects of online competition.

The consequences are spilling into the real estate and derivatives markets, and the latest bad news has intensified the focus on the sector ahead of more earnings reports from retail heavyweights next week.

Five stores, $4.6bn in market value

A quintet of big US department stores this week disclosed declines in like-for-like sales for the first three months of the year. The figures that were revealed by Macy’s, Kohl’s, Dillard’s, Nordstrom and JC Penney were below most analysts’ forecasts, suggesting Wall Street has still not got a handle on how fast things are deteriorating in the sector.

The disappointment ignited a sell-off that sent the market value of the S&P department stores index sliding from $27.8bn on Wednesday to $23.2bn on Friday, marking the biggest two-day wipeout in dollar terms since the 2008 financial crisis. This despite some commentary from executives that they had seen an improvement since the start of spring.

Here is how the individual stocks fared:

● Macy’s and Dillard’s each ended down 18.5 per cent

● JC Penney fell 17.1 per cent

● Nordstrom was down 15.9 per cent

● Kohl’s fell 9.1 per cent

Jitters among fixed-income investors

The anxiety was not limited to the equities market.

Investors marked up the cost of insuring against defaults on department stores’ debt, and on the debt of other groups that are vulnerable to consumers’ shift away from bricks-and-mortar shopping.

Macy’s, Nordstrom and Kohl’s were three of the worst four performers in Markit’s index of credit-default swaps of investment-grade companies this week. Spreads also widened for the CDS tracking the debt of electronics retailer Best Buy, Simon Properties, the biggest US mall operator, and discount chain Target.

Retail Reits left reeling

Real estate investment trusts that own and operate retail properties, like shopping malls, were among the worst-performing industry groups on the S&P 500 index this week. The broad benchmark ended the week down 0.35 per cent, while the retail Reit group was off 4.1 per cent.

The fall this week deepens the year-to-date decline for retail Reits to 12.3 per cent, versus 1.5 per cent for the whole Reits sector.

Here is a round-up of how individual retail Reits performed this week:

● Macerich, which operates malls in the western US, fell 5.6 per cent

● Kimco Realty, which focuses on open-air shopping centres, was down 5.1 per cent

● Simon Properties, the largest player in the group, slipped 4.3 per cent

● GGP, the second-biggest group by market value, slipped 1.9 per cent

What retail executives are saying

Marvin Ellison, chief executive at JCPenney: “While February was a very challenging month for JCPenney and broader retail, we are pleased with our comp-store sales for the combined March and April period, which improved significantly versus February.”

James Nordstrom, Nordstrom president: “While there may be opportunities to close underperforming stores, that’s not really part of our strategy. We don’t have a closure strategy. We have a market share strategy.”

Jeff Gennette, Macy’s chief executive: “These are unusual and challenging times for retail, especially for mall-based department stores. We know that these changes we’re seeing are secular and not cyclical.”

How earnings look so far

The weakness in sales is affecting the bottom line.

According to FactSet, department stores and apparel retailers are expected to average declines of 6 per cent or more in net income for the first quarter. Profits at general merchandise stores are faring even worse, whereas internet retailers are on a tear. Their net income is expected to be up more than a quarter, on average.

On deck next week

If department stores are uniformly losing out in the changing retail landscape, the companies that are reporting next week may be more of a mixed bag.

So far off-price retailers, which offer rapidly changing selections of designer names at a sharp discount to retail prices, have bucked the gloom. Investors will tune in next week to see if TJX Cos, behind chains such as TJ Maxx and Marshalls; and Ross Stores, had a better start to the year than their traditional rivals, even though those traditional rivals have recently started to push their own lower-price offerings.

Meanwhile, Target had a difficult holiday season as customers turned to Amazon and Walmart. But next week investors get to hear if chief executive Brian Cornell’s efforts to lure customers back by lowering prices, sprucing up stores, and introducing new brands is paying off.

If you are an investor wanting a safe, unexciting asset to make a bit of money, avoid South Africa’s rand.

It is not that you cannot make money trading the currency. You very much can, and you might make it big and quickly. The problem is you can also lose much more than you gain and at a frightening pace.

To play the rand, investors need not just thick skins and a heightened awareness of risk. They also must be schooled in the politics of South Africa, particularly the ruling African National Congress.

According to JPMorgan, the rand looks unattractive “given the significant and varied likely political noise in the months ahead”. Investors should also follow the fluctuations in the price of gold, oil and other commodities South Africa exports, not to mention the economy of China, its biggest customer.

“Any increase in market concern around the tightening in China would likely impact the rand via terms of trade effects on metals,” argue analysts at Morgan Stanley.

Those keen to play the rand will need an understanding of the workings of the carry trade, a strategy that enables investors to borrow a currency with a low interest rate in order to fund the purchase of a currency with a high rate, such as South Africa. They should follow the trends that influence the exchange rate between the US dollar and emerging market currencies.

In addition, investors ought to monitor the size of South Africa’s current account deficit and the country’s ability to finance it. They will have a keen eye on the country’s rate of inflation.

Above all, they should never fall asleep on the job. The rand dropped 7.5 per cent in the last four days of March. It rose by the same amount in a nine-day stretch in April. Moves on this scale are frequent and can come with little or no warning.

Anyone with the resolve to have played the rand over the long term will have endured a slide of more than 50 per cent in its value between 2011 and 2015 and seen a 13 per cent rise last year when it outperformed every EM currency except Brazil’s real and Russia’s rouble.

Since Jacob Zuma became president in 2009, the currency has lost a third of its value. After an initial modest rise, it has been falling since the spring of 2011, hitting an all-time low of 17.83 rand to the dollar on January 31 this year.

But has it reached a turning point? For some seasoned EM forex watchers, the rand’s path bears similarities to Brazil’s real, which fell heavily in the months leading to the political demise of former president Dilma Rousseff, then bounced when Michel Temer succeeded her.

Mr Zuma is in the final year of his final term and his sacking last month of finance minister Pravin Gordhan has exposed fissures in the ANC.

“The anti-Zuma sentiment is mounting in the country and international investors definitely do not like it,” says Arnaud Masset of online bank Swissquote.

Mr Zuma had long threatened to fire Mr Gordhan but each threat triggered a big rand sell-off. The surprise is that when the sacking came, it did not lead to a more substantial decline. Rating agencies duly downgraded South Africa, which is worrying the country’s central bank, yet the rand has recovered about half the losses triggered by the sacking. Government bonds also recovered.

There are two reasons, suggests the Dutch bank ING. First, global growth prospects are bright and look favourable for commodity exporters.

Second, South Africa is not alone in facing political uncertainty. With events such as Brexit, the election of Donald Trump in the US and European political risk, there has been a “convergence” between the economic uncertainty of the developed market and emerging market, says ING.

The economy is stumbling, however, with unemployment particularly high and inflation undershooting central bank targets. South African stocks are underperforming and the ratings downgrades hardly help.

Although experienced rand investors have seen it all before, that does not make the currency any easier to trade.

Greece inched closer to a return to public market finance for at least part of its Sisyphean debt burden this week, with benchmark bond yields dropping to levels seen when the country last issued new debt three years ago.

Enthusiasm for the small portion of Greek debt held in private hands and available to trade followed a long-delayed agreement on fiscal and structural reform measures with European creditors this month, paving the way towards debt relief talks.

Yields on bonds maturing in 2027 fell as low as 5.6 per cent, as the price of the bonds rose to as much 86.8 cents on the euro of face value.

However, bankers and analysts questioned whether there was sufficient investor appetite to soon test the market. They said that the continent’s policymakers would probably determine Greece’s ability to attract investors to a new debt sale.

Greece has wrapped up a deal with creditors on details of reforms to unlock a €7.4bn disbursement from its €86bn bailout programme, necessary to meet debt repayments which include €2bn to private creditors due on July 17, and €3.9bn to the European Central Bank three days later.

The deal covers a range of fiscal and structural measures, from fresh cuts in pensions to liberalising Sunday trading. The bailout programme is due to end in August 2018, by which time Greece is expected to be able to finance its government in capital markets.

Representatives of the Greek government, assisted by debt restructuring specialists from the advisory firm Rothschild, have held meetings this year with investors in anticipation of future debt sales, according to people familiar with those discussions.

“In the end it’s a question of price. Probably Greece could return to the market,” said Kathrin Muehlbronner, analyst for Moody’s, a credit-rating agency, however, she also said that fundamental questions remained about the sustainability of the debt burden.

“You have an economy that’s highly dependent on these events and the liquidity they bring. I’m not sure that is a sustainable growth path,” she said.

When Greece returned to debt issuance in April 2014, for the first time since its 2012 restructuring that placed most obligations in the hands of European and multilateral institutions, the deal for €3bn of five-year bonds attracted €20bn of orders from investors. It also sold €1.5bn of three-year debt that July.

Bankers said that strong recent price appreciation for Greek debt, which rises in value as yields fall, had produced some interest in issuance.

One said that some investors were optimists “hoping to ride the crest of a wave”, but that long-term investors remained wary about debt sustainability and the possibility of further debt restructuring measures.

The International Monetary Fund has clashed with European creditors over the depth of austerity demanded of Greece, as well as the need for further restructuring of the country’s obligations, something EU officials, particularly those in Berlin, are opposed to.

A swift resolution would potentially allow Greece to have its bonds included in the European Central Bank’s bond-buying programme, known as quantitative easing.

S&P Global Ratings on Friday lowered its long-term rating on Oman to BB+ from BBB- with a “negative” outlook, indicating the agency could further reduce its rating.

The move to cut Oman’s credit rating below investment-grade status “reflects our view that the Omani government’s heightened external financing needs have resulted in the economy’s large net external asset position, (external assets exceeding external liabilities) declining to a level insufficient to mitigate the risk from its volatile export revenue base.”

The rating agency estimated that Oman’s net external asset position has fallen to 30 per cent of its current account, from 60 per cent a year ago.

It also projected a large current account deficit of more than 10 per cent of GDP this year and next, due to subdued oil prices and the sultanate’s dependence on revenue from hydrocarbon sector exports. The government is financing these current account deficits by borrowing on international markets.

Indeed, Oman has had about $5bn in bond issuance this year. The oil minister has said the sultanate is considering privatising parts of its state-owned energy infrastructure as it looks to diversify the economy and raise money amid the protracted oil-price slump.

by: Mark Robinson and Emma Powell, Investors Chronicle

Shares in Anglo American have risen 84 per cent base-to-apex within the past 12 months, a reflection of improved commodity pricing combined with cumulative rationalisation measures.

Earlier this year, it was announced that the miner’s chairman, Sir John Parker, had decided to call it a day after an eight-year tenure in which he oversaw the sale of numerous assets deemed surplus to requirements, the latest of which — an 88.2 per cent interest in the Drayton thermal coal mine in New South Wales — was announced this month.

Not all of the sales met with universal shareholder approval, but no one pretends that it has been plain sailing for Sir John since he came on board, particularly given the weakness in underlying markets through 2014-16.

But prices for speciality metals and bulks, most notably iron ore, strengthened considerably through last year. The consequent rise in cash flows, along with the asset sales, enabled the embattled commodities giant to reduce net debt as a proportion of shareholder funds by around two-fifths since the end of 2015. So he leaves the group, if not in rude health, then certainly in better trim than he probably might have thought possible 18 months ago.

Shares in London Stock Exchange rocketed following the announcement of its proposed merger with Deutsche Börse in February last year. Despite the deal finally falling through this April on competition grounds, very little of these gains have fallen out of the share price. Now chief executive Xavier Rolet has sold shares in the group worth £1.8m.

Even without completing the deal, London Stock Exchange looks in pretty good shape. Income from continuing operations was up almost a fifth during the first four months of the year at £459m; information and post-trade services have led the way in terms of revenue growth.

Global clearing business LCH increased revenue by almost a third during this period, thanks to growth in over-the-counter clearing of derivatives contracts through its SwapClear platform. Meanwhile, demand has remained high for information services, with sales up 9 per cent on a like-for-like basis during the first four months of the year. This is largely due to the popularity of FTSE Russell indices.

European equities funds have enjoyed a $6.1bn rush of new inflows around the election of Emmanuel Macron. “Allez les flows“, says Bank of America Merrill Lynch, suggesting there’s still much further to go. “Our European Equity Strategist Ronan Carr argues Europe inflows are barely halfway to levels consistent with prior market peaks,” it says.

(Read our full story on flows for more detail.)

The new-found enthusiasm comes alongside an unusually upbeat assessment among analysts for Europe’s likely earnings growth for the year, as the bank’s chart below shows.

Profits take a hit at Entertainment One. FT Opening Quote is your early Square Mile briefing. You can sign up for the full newsletter here.

Efforts to strengthen Entertainment One’s film division will hit its full-year profits by almost £50m, the company announced today, after it renegotiated one of its main distribution agreements, writes FastFT.

Entertainment One is best known for producing television programmes such as Peppa Pig, but has been working to reduce its reliance on the popular cartoon through investments in film production and distribution.

Today the company said it has terminated one of its contracts and replaced it with a new distribution agreement. It said the new agreement will increase its underlying profitability and cash flow, but will require a one-time payment of $25m which will be included in its upcoming financial results for the year to March.

Further investments in “reshaping” the film division will lead to an additional £27m of one-off costs, as the company works to shift from a focus on physical distribution activities to digital content.

Together, the costs will have a total impact of around £47m, but the company said its underlying earnings for the year will be in line with management expectations, and chief executive Darren Throop said the changes will have “a positive impact” over time.

German steel and capital goods group ThyssenKrupp warned of a “significant net loss for the year” owing to the sale of its Brazilian steel business and said that free cash flow for the year before M&A would be negative.

The group on Friday posted a net loss to shareholders of €870m for last quarter, versus a €45m profit a year before. Sales rose 12 per cent to €11bn, ahead of forecasts at €10.3bn.

Thyssenkrupp said it will remain in the red for the year, “exclusively as a result of the negative earnings impact from the sale of CSA,” its steel producing business in Brazil, which resulted in a €900m writedown. It announced the sale of the business in February as part of a transition from making steel to producing goods and services, including making elevators, submarines and car components.

The group also said it would generate negative free cash flow in the “mid-three-digit million euro range”, due to a “significant increase in net working capital at our materials businesses”. It had previously forecast “slightly positive” cash flow.

Finally, Matthew Vincent writes: In the UK, US and Europe, SuperGroup has just achieved a 27 per cent increase in sales of T-shirts that proudly declare “目娱 乐 节今日” and “極端に乾いださい”. If the clothing brand’s 20-to-30-something devotees ever took selfies with the Google Translate app switched on, they might discover that the fashion statement they are actually making is: “Project Entertainment Section Today” and “Extremely Desiccated Please”.

For more on SuperGroup, as well as GSK and Lloyds, see Matthew’s Lombard column.

Beyond the Square Mile

Asian markets have had a mixed day, following on from a retreat on Wall Street. Sydney’s S&P/ASX 200 was down 0.9 per cent, Tokyo’s Topix dropped 0.6 per cent and in Hong Kong the Hang Seng up just 0.1 per cent. China’s Shanghai Composite rose 0.4 per cent.

In New York on Thursday, the S&P 500 slipped 0.2 per cent from a record high in its biggest one-day fall in three weeks. Low levels of volatility have kept market moves subdued.

The Japanese yen was 0.2 per cent firmer at ¥113.66 per dollar in Asian trading.

The dollar index, a measure of the US currency against a basket of global peers, was fractionally lower at 99.58.

Sterling was flat at $1.2888 in Asia, recovering about a quarter of Thursday’s decline when weak industrial production data offset a more upbeat tone from the Bank of England as it kept interest rates on hold.

Oil prices were set for their first three-day increase in a month. Brent crude, the international benchmark, was up 0.1 per cent at $50.84 a barrel, while West Texas Intermediate was up 0.2 per cent at $47.92.

Gold was up 0.1 per cent at $1,226.48 an ounce.

Intraday

In the US, the S&P 500 is tipped to drop 0.2 per cent when trading begins in New York.

Corporate earnings reports out today include Allianz, Innogy and Interserve.

The economic calendar on Friday is as follows (all times London):

07.00: Germany Q1 GDP, consumer price index
07.45: France Q1 wages
08.00: Spain consumer price index
10.00: eurozone industrial production

The markets at 07:50

Asian markets
Nikkei 225 down -77.65 (-0.39%) at 19,884
Topix down -6.15 (-0.39%) at 1,581
Hang Seng up +28.41 (+0.11%) at 25,154

US markets
S&P 500 down -5.19 (-0.22%) at 2,394
DJIA down -23.69 (-0.11%) at 20,919
Nasdaq down -13.18 (-0.22%) at 6,116

European markets
Eurofirst 300 down -6.90 (-0.44%) at 1,550
FTSE100 up +1.39 (+0.02%) at 7,387
CAC 40 down -17.04 (-0.32%) at 5,383
Dax down -46.40 (-0.36%) at 12,711

Currencies
€/$ 1.09 (1.09)
$/¥ 113.71 (113.84)
£/$ 1.29 (1.29)
€/£ 0.843 (0.8426)

Commodities ($)
Brent Crude (ICE) up +0.19 at 50.96
Light Crude (Nymex) up +0.18 at 48.01
100 Oz Gold (Comex) unchanged 0.00 at 1,223
Copper (Comex) unchanged 0.00 at 2.50

10-year government bond yields (%)
US 2.38%
Germany 0.43%

CDS (closing levels)
Markit iTraxx SovX Western Europe at 19.9bp
Markit iTraxx Europe +0.16bps at 62.35bp
Markit iTraxx Xover +1.96bps at 254.86bp
Markit CDX IG +0.49bps at 62.13bp

Sources: FT, Bloomberg, Markit

US stocks tumbled on Thursday morning and despite clawing back some of the losses the benchmark equity index ended the day down 0.2 per cent, says Robin Wigglesworth.

It’s been a strange day in Washington, as top intelligence officials and even US President Donald Trump appeared to question his own statements on the firing of FBI director James Comey.

Andrew McCabe, the FBI acting director, contradicted Mr Trump over the firing of Mr Comey, denying in testimony to the Senate intelligence committee that the ousted chief had lost the support of employees as he insisted the FBI’s Russia probe would not be knocked off course.

The atmosphere in Washington grew more feverish when the committee’s two top lawmakers broke off from the hearing for a previously unannounced meeting with Rod Rosenstein, the deputy attorney-general.

The deputy attorney general’s Thursday visit to Capitol Hill followed reports that he had come close to resigning after White House officials implied that the president fired Mr Comey on Mr Rosenstein’s recommendation. Mr Trump told NBC, however: “I was going to fire regardless of [his] recommendation.”

On Wall Street the S&P 500 dipped 0.2 per cent, but Brent crude oil prices extended a rally above $50 a barrel. In London the Bank of England left interest rates unchanged, although a more upbeat tone in its monetary statement failed to support the pound, which slipped back below $1.30.

In Asia Pacific equities, futures tip the S&P/ASX 200 index to dip 0.2 per cent when trading begins in Sydney, while Tokyo’s Topix is expected to drop 0.4 per cent. Hong Kong’s Hang Seng is set to drop 0.5 per cent at the open.

Corporate earnings reports out today include Hitachi, Yamaha Motor, Mitsui Fudosan, Suzuki Motor, SMC Corp, AAC Technologies, Yue Yuen Industrial, Nissin Food and Sega Sammy.

The economic calendar for Friday is working for the weekend (all times Hong Kong):

• 13.00: Singapore retail sales
• 15.00: Malaysia interest rates decision
• 15.30: Thailand foreign exchange reserves
• 16.30: Hong Kong Q1 GDP
• 19.30: India wholesale inflation
• 20.00: India consumer inflation and industrial production

Pets at Home hit a record low on Thursday amid fears of a profit warning with its full-year results this month.

Morgan Stanley slashed earnings forecasts for Pets at Home’s 2018 financial year to reflect margin pressure, continued weak sales and rising costs.

So-called “category killer” specialist retailers need high gross margins to be economically viable because they suffer from low sales densities and slow stock turn, said Morgan Stanley. However, the same products are typically 20 per cent cheaper online or at general discounters such as B&M, meaning category killers such as Pets At Home, Dunelm and Halfords “face a bleak future”, it argued.

All three retailers trade at more than 12 times earnings even though they carry debt and have mostly leased store estates, which gives them no asset backing if earnings continue to fall, Morgan Stanley argued. It saw Pets at Home most at risk going into full-year results due May 25, as consensus forecasts still bake in modest earnings growth for 2018 yet management has openly acknowledged it has a “value perception” problem.

Pets at Home closed 7.6 per cent lower at 164.5p. Since flotation in early 2014 the stock has fallen 32 per cent.

In the wider market, a lot of ex-dividends offset gains for the energy and mining stocks to leave the FTSE 100 barely changed at 7,386.63.

Centrica, which was trading at an 8.4p ex-dividend, was down 5.4 per cent to 192.2p. JPMorgan Cazenove turned negative on the British Gas owner based on fears that new entrant Engie was starting a price war. Three of the big six energy suppliers have cut tariffs after Engie last month undercut the market average by about 15 per cent with a dual fuel offer at less than £900 a year.

“This fresh round of heavy discounting does not auger well for portfolio margins with price regulation on the horizon,” said JPMorgan.

Hikma Pharmaceuticals dropped 8.2 per cent to £17.95 after confirming that the US Food and Drug Administration had requested more data on its generic version of GlaxoSmithKline’s top-selling Advair inhaler, which will probably push its launch into next year. Vectura, which licenses its inhaler system to Hikma, dropped 9 per cent to 131.9p while GSK (trading at an 19p ex-dividend) added 0.2 per cent to £16.28.

BT Group dropped 4.5 per cent to 297.9p after ditching its target of at least 10 per cent dividend growth target and cutting cash flow guidance.

ITV fell 3.7 per cent to 189p after John Malone of Liberty Global, its 10 per cent shareholder, said a takeover did not make “economic sense” at current levels.

Ladbrokes was down 1.9 per cent to 123.9p. After the close, shareholders Apollo and Cerberus began selling a 3.2 per cent stake in the bookmaker.

Adjustments to closely tracked corporate bond indices have “clear” trading and pricing impacts, a new study from credit rating agency Fitch showed on Thursday.

The US rating agency found that changes to the Bloomberg Barclays US Aggregate Index earlier this year resulted in “dramatic increases” in trading volumes for bonds set to be dropped from the index and that prices for those bonds underperformed larger credits.

Bloomberg announced in January that it would increase the minimum requirement for a bond to gain inclusion in the index to $300m from $250m previously. More than $170bn worth of debt from 866 issues fell out of the index with the change.

The index is tracked by $1.2tn of mutual funds and exchange traded funds, according to Morningstar.

Fitch said it looked at nearly 700 bonds, split between those worth between $250m and $299m and were directly affected by the change, and bonds worth more than $300m.

Prices of the smaller bonds began to trail the larger credits in the days leading up to the start of the second quarter, when the adjustment to the index went into effect. The larger bonds had outperformed their smaller counterparts by 18 basis points on March 27. By March 31, the day before the change, price gains on the larger bonds outpaced the smaller cohort by 54 bps.

“The fact that even small changes in bond-index composition can trigger market responses of this kind suggests that larger changes in the index, including large-scale downgrades, could impact pricing and liquidity in a meaningful way,” says Robert Grossman, an analyst at Fitch.

As a result of the new minimum threshold, a number of small- and mid-sized companies increased the size of their bond offerings, including asset manager Eaton Vance, real estate investment trust CubeSmart and specialty chemicals group RPM International.

Many passive bond ETFs only buy bonds that are in the index.

BT’s own goals cost the boss dearly. FT Opening Quote, with commentary by Matthew Vincent, is your early Square Mile briefing. You can sign up for the full newsletter here.

Two months ago, all Paris St Germain had to do to reach the quarter finals of the European Champions League was not concede three goals in the final 2 minutes of their match against Barcelona. Barcelona’s ensuing last-minute goal rush has since been described as one of the greatest sporting comebacks of all time. But to a Parisian fan, it must have have felt like the most unlikely example of snatching defeat from the jaws of victory.

And shareholders in the UK broadcaster of that match – BT – will know that feeling all too well.

A few years ago, BT was looking a bit like PSG after 88 minutes. It was dominating the football rights scene, outplaying flashier and much much fancied rival, Sky, to secure Premier League and European TV rights. All the hard work was paying off: its consumer arm scored an increase in revenue in 2014, for the first time in nearly five years. But then, this year, in the space of a few months, BT has somehow managed to concede four own goals: an accounting scandal at its Italian division; accusations of bid rigging at its Hong Kong operation, a profit warning amid a public sector slowdown; and a £42m fine for breaking rules over competitor access its broadband network.

It now faces difficult discussions its pension trustees over the £10bn company pension deficit. Oh, and the head of its TV sports business, Delia Bushell, has just left on a free transfer…

So BT shareholders – and indeed boss Gavin Patterson – could really do with a result. Unfortunately, its full-year results show that underlying revenue – excluding foreign exchange movements and disposals, and assuming EE had been part of the group from 1 April 2015 – fell by 0.2 per cent for the year and 0.9% for the quarter. Adjusted earnings per share for the year and quarter down 9 per cent and 13 per cent respectively.

BT has now lowered its earnings guidance and reduced its outlook for dividend growth to reflect its various problems. It will also cut 4,000 jobs in back office and managerial roles over the next two years at a coast of £300m.

As a result, the remuneration committee has decided that chief executive Gavin Patterson and outgoing finance director Tony Chanmugam will not receive a bonus for the 2016/17 financial year. Also, the value of their 2013 Incentive Share Plan has been reduced.

Mr Patterson said:

This has been a challenging year for BT. We’ve faced headwinds in the UK public sector and international corporate markets and must learn from what we found in our Italian business. Openreach also received a fine from Ofcom after an investigation into historical Deemed Consent practices revealed it fell short of the high standards we expect. We take these issues extremely seriously and are putting in place new measures, controls and people to prevent them happening again. Learning from the challenges of this year will make BT a stronger company for the future.

However, he added that the integration of EE was going well, and BT’s UK consumer, SME and corporate businesses are performing strongly.

British football fans’ preferred casual look – the tight, tatt-revealing t-shirt – has been fuelling more high street sales for fashion retailer Supergroup. Its garments have been snapped up at a tremendous rate – despite their ‘Superdry’ logo giving a misleading impression of the wit and alcohol consumption of the person within them.

Group revenues for the full year increased by 27 per cent to £750.6m. One third of this was thanks to the beneficial effect of sterling weakness. But the remainder reflected strong positive sales momentum – particularly online – with like-for-like sales rising 12.7 per cent.

Wholesale revenue continued the rapid growth seen in the first half year, rising by 42.9 per cent. Supergroup attributed this to a focus on improved service levels, franchise expansion and product innovation.

However, adverse effects of foreign exchange meant gross margins were broadly flat year on year, and are anticipated to decline on a full year basis by 120 to 140 bps.

Chief executive Euan Sutherland said:

FY17 has seen another good year of sales and profit growth. This has been achieved by improving our product ranges and introducing new categories to excite, inspire and maintain the brand’s relevance while, in parallel, investing in our development markets and improving our infrastructure. … We remain confident in the continued delivery of sustainable revenue and profit growth.

And, finally, auditor PwC has been booked by the referee – again. It has been fined £5m by accounting watchdog the Financial Reporting Council for “misconduct” in relation to its audit of Connaught, a FTSE 250 company put into administration in 2010.

This represents one of the biggest fines ever administered by the FRC. PwC was also ordered to pay the FRC’s legal costs and to make an interim payment of £1.5 million. Stephen Harrison, a retired PwC audit partner, was fined £150,000 in relation to the case.

News of the yellow card comes after the accounting giant settled a $3bn lawsuit filed by the administrator of failed futures brokerage MF Global – the second time in eight months that its US arm paid out to halt a high-profile malpractice lawsuit mid-trial. It also follows embarrassment at this year’s Oscars when PwC partners handed out the wrong winner’s envelope.

Beyond the Square Mile

Asian markets were mostly higher on Thursday. Japan’s Topix was up 0.1 per cent, Hong Kong’s Hang Seng gained 0.3 per cent and Australia’s S&P/ASX 200 was 0.1 per cent higher.

Sterling was trading flat in Asia at $1.2938.

The dollar index tracking the currency against a basket of peers was flat at 99.637.

Oil prices were consolidating gains from a late-day rally on Wednesday that pushed Brent crude, the international benchmark, back above the $50-a-barrel mark. Brent was up 0.4 per cent in Asia trading at $50.43 a barrel. West Texas Intermediate, the US marker, was up 0.5 per cent at $47.55 a barrel.

Gold was flat at $1,219.51 an ounce.

Intraday

In the US, index futures suggest the S&P 500 will shed 3.1 points to 2,396.5, when trading gets under way later in New York

The main event on this side of the pond is the Bank of England’s interest rate decision. Policymakers are expected to keep rates on hold. Still, the decision comes at an interesting time, with the British pound flirting with the $1.30 level for the first time since October.

Companies reporting today include: Enel, Deutsche Telekom, Telefonica, Credit Agricole, Supergroup, BT, as well as annual general meetings for Serco, Ascential, Direct Line, Lloyds Bank, SIG and RBS.

Here is today’s economic calendar (London times):

08.15: Switzerland inflation
08.30: Sweden inflation
09.30: UK industrial and manufacturing production
09.30: UK trade balance
10.00: Greek unemployment
10.00: ECB growth forecasts
10.30: South Africa mining production
12.00: Bank of England policy decision
13.00: BoE presser

The markets at 07:45

Asian markets
Nikkei 225 up +61.46 (+0.31%) at 19,962
Topix up +1.67 (+0.11%) at 1,587
Hang Seng up +112.89 (+0.45%) at 25,128

US markets
S&P 500 up +2.71 (+0.11%) at 2,400
DJIA down -32.67 (-0.16%) at 20,943
Nasdaq up +8.56 (+0.14%) at 6,129

European markets
Eurofirst 300 up +2.92 (+0.19%) at 1,557
FTSE100 up +43.03 (+0.59%) at 7,385
CAC 40 up +2.45 (+0.05%) at 5,400
Dax up +8.34 (+0.07%) at 12,757

Currencies
€/$ 1.09 (1.09)
$/¥ 114.10 (114.23)
£/$ 1.29 (1.29)
€/£ 0.8402 (0.8397)

Commodities ($)
Brent Crude (ICE) up +0.28 at 50.50
Light Crude (Nymex) up +0.43 at 47.76
100 Oz Gold (Comex) up +2.70 at 1,220
Copper (Comex) up +0.02 at 2.51

10-year government bond yields (%)
US 2.40%
Germany 0.43%

CDS (closing levels)
Markit iTraxx SovX Western Europe at 19.9bp
Markit iTraxx Europe -0.14bps at 62.19bp
Markit iTraxx Xover +0.63bps at 252.9bp
Markit CDX IG -0.74bps at 61.64bp

Sources: FT, Bloomberg, Markit

Stock markets in the Asia Pacific region were mixed on Thursday as energy stocks enjoyed a boost from improved crude prices.

In Sydney the S&P/ASX 200 was up 0.7 per cent as energy stocks climbed 1.1 per cent. Shares in major banks were recovering from a drop brought on by a new levy announced on Tuesday night, with National Australia Bank up 1.1 per cent.

Tokyo’s Topix was off 0.1 per cent, with a 0.8 per cent drop from the real estate segment offseting gains of 0.7 per cent in telecoms stocks.

In Hong Kong the Hang Seng was up 0.4 per cent, with state-owned Chinese oil companies helping to drive the energy segment up 0.5 per cent.

Shares in commodities trader Noble Group fell as much as 16.2 per cent on Thursday ahead of the company’s afternoon release of its first quarter results. It had issued a profit warning on Tuesday predicting a loss of $130m in the first quarter due to a misplaced bet on coal prices. The FTSE Straits Times index was up 0.6 per cent.

With passive investing passing the $4tn mark in April, things aren’t exactly looking up for active asset managers.

New product launches and investor inflows mean there are now almost 7,000 exchange-traded products managed by 313 providers and total assets of $4.002tn at the end of April, according to fresh figures from ETFGI, an industry data provider.

The relentless flood of money into passive investment vehicles is a blow to the asset management industry, which has struggled to stem outflows — especially in areas that are more acutely vulnerable to competition from ETFs, such as mainstream US equities. As a result, US-listed investment groups have lagged behind the broader market since the end of the financial crisis, despite rising markets swelling their assets under management.

On Wall Street the S&P 500 gained just 0.1 per cent on Wednesday, stopping one point short of the 2,400-point mark at the close. International oil benchmark Brent crude climbed back above $50 a barrel for the first time in a week.

In Asia Pacific equities, futures tip the S&P/ASX 200 index to climb 0.2 per cent in Sydney when trading begins, while Tokyo’s Topix is set to gain the same amount. Hong Kong’s Hang Seng is expected to rise 0.4 per cent at the open.

Corporate earnings reports out today include Rakuten, Nissan Motor, Bridgestone, Panasonic, KDDI, Daiwa House Industry, Wilmar International, DeNA, Konica Minolta, Square Enix, Konami, and Daiichi Sankyo.

The economic calendar for Thursday isn’t trying to fool anyone, honest (all times Hong Kong):

• 07.00: South Korea unemployment rate
• 07.50: Japan balance of payments current account balance
• 09.00: Philippines imports, exports and trade balance
• 12.00: Malaysia industrial production

Retailers were among Wednesday’s biggest gainers, with Next and AB Foods both in demand on broker upgrades.

Next climbed 1.7 per cent to £44.01 on the back of an Investec upgrade to “buy”. Investors have been too preoccupied by Next’s short-term trading and have missed its active estate management, Investec said.

Rather than focus on refurbishments, Next has been opening and closing stores to adapt to the changing market, with the result that more than half of Next’s floor space did not exist a decade ago, said the broker. The well-invested and flexible store estate should translate to a sustainable profit margin even if retail like-for-like sales continue to fall, it argued.

Sector peer AB Foods took on 2.4 per cent to £28.77 after Citi added the Primark owner to its “buy” list.

Primark’s implied valuation has fallen nearly 30 per cent in 18 months, against a cut to 2017 earnings forecasts of 17 per cent largely because of currency headwinds, said Citi. The downgrade cycle seems to be over and, with double-digit earnings growth set to return, Primark will re-establish itself as a resilient retailer with a proven international business and an expansion programme with room to expand, Citi argued.

An oil price rally helped underpin the wider market as the FTSE 100 hit a seven-week high, up 43.03 points, or 0.6 per cent, to 7,385.24.

Hikma Pharmaceuticals lost 1.2 per cent to £19.56 on speculation that the US Food and Drug Administration had requested further tests of its generic version of Advair, GlaxoSmithKline’s top-selling asthma inhaler. Awaiting the FDA’s decision, Express Scripts, the drug scheme benefits manager, reported that an Advair clone “may not reach the market until sometime in 2018”.

Vectura, whose inhaler system is licensed by Hikma, fell 3.3 per cent to 144.9p.

ITV slipped 2.3 per cent to 196.2p after a trading update confirmed advertising markets remained weak, though the broadcaster kept its full-year guidance unchanged.

Pearson fell 1.8 per cent to 721p, with Berenberg repeating “sell” advice. Most of the cost savings announced last week had already been baked into consensus forecasts and the planned sale of its K-12 schoolbook division is likely to be dilutive to group earnings, it said.

“Given the concentration of market share in the educational publishing market, we think it is highly unlikely that Pearson would be able to obtain regulatory approval for a sale of its K-12 business to a rival which might pay a high price in return for synergies,” Berenberg said. “This means any buyer is likely to be a financial investor, with specific return requirements likely to entail a relatively unattractive sale price for Pearson.”

.

Oil prices extended their gains after a report showed US crude stockpiles fell by the biggest margin since December and were down for the fifth straight week.

Inventories of US crude fell by 5.25m barrels in the week ended May 5, according to the Energy Information Administration. That topped forecasts for a draw of 1.9m barrels. This was the largest streak of back-to-back declines in US oil stocks since September.

The larger-than-expected drop came alongside weaker imports, which averaged over 7.6m barrels per day last week, down by 644,000 barrels per day from the previous week. At 522.5m barrels, US crude oil inventories are near record levels.

Meanwhile, the report also showed that stocks at Cushing, Oklahoma decreased by 438,000 barrels, compared with expectations for a draw of 419,000 barrels.

Stockpiles of gasoline, one of the products that crude is refined into unexpectedly fell by 150,000 barrels, against expectations for a build of 65,400 barrels.

Following the release, West Texas Intermediate, the US crude marker, was up 2.5 per cent to $47.03 barrel, while Brent crude, the global oil benchmark, rose 2.4 per cent to $49.90 a barrel.

Despite expectations that Opec and Russia will extend their oil output cuts into the second half of the year, crude continues to trade below the $50 a barrel mark. Markets have grown anxious amid concerns that US production and the oil cartel’s exports are undercutting production curbs. Moreover, concerns about a slowing Chinese economy have also dampened oil sentiment.

The Indian government issued an ordinance at the end of last week laying out some new powers for the Reserve Bank of India, powers which are aimed at chipping away at the country’s mammoth and thoroughly discussed bad loan problem. Here’s CreditSights with a brief explanation:

In essence, two additional sections ­35AA and 35AB ­ were introduced into the Banking Regulation Act. 35AA will allow the government to authorize the RBI to issue directions to banks to initiate insolvency proceedings for specific accounts under the provisions of the Insolvency and Bankruptcy Code while 35AB will let the RBI specify one or more committees to advise banks on loan resolution.

The idea is apparently to concentrate on the 40-50 big ticket accounts that make up 70 per cent of Rs6trn of NPLs, according to BofAML.

Now, this is potentially a good thing for a number of reasons.

For one, it might provide banks with cover from charges of crony capitalism, which would make it easier to move on bad loan resolution. If the RBI is making decisions about insolvency then bankers might be protected from investigative agencies — the ‘C Trinity‘ — probing their decisions. From CreditSights again, with bonus mention of the King of Good Times who acted as part catalyst for this recent bad loan push:

The purpose of 35AB is not as immediately apparent but is partly meant as a solution to mitigate bankers’ fear of being accused for “undue vigilance”. This was sparked by the arrest of former IDBI bank officials for allegedly showing favor over loans made to Vijay Mallya’s Kingfisher Airlines. Setting up oversight committees to help banks monitor progress and make decisions will partly “absolve” bankers of their actions and ease fears over being investigated. Decisions regarding delinquent borrowers are fraught with risks for Indian bankers, especially those in the public sector. If they get tough on powerful borrowers, they may face lawsuits from the borrower or political pressure from his supporters. If they are too lax, they may be penalized for losing what is ultimately public money. The involvement of the RBI may help to depoliticize the banks, though it may further politicize the RBI.

For two, it might be able to push through decisions that would have been stymied by bank consortiums failing to reach agreements on shared projects, or backing out of agreements which had been made. As CreditSights say, a joint lender forum framework “was introduced back in 2014 to tackle stressed assets by identifying vulnerable accounts early and come up with a corrective action plan (CAP). However, disagreements between banks have caused delays.”

And now, from SocGen’s Kunal Kumar Kundu (with more detail from the RBI here):

… joint lender forums (JLFs), which are consortiums of bankers dealing with particular projects. They may also be able to decide on matters such as bank haircuts and intervene if JLFs reach deadlock. The framework will also enable JLFs to deal more effectively with NPLs by possibly tweaking the current guidelines and reducing the threshold in terms of exposure as well as the number of banks within a JLF for taking a decision on NPAs. Banks that are a part of a consortium face problems when disagreement arises among them on projects that have gone bad. There are promoters who have taken loans from one set of banks for their holding company, while they may have loans from another set for their operating company through pledged loans. In certain cases, banks opt to evergreen loans by giving fresh loans to borrowers to pay off old loans. Thus, a particular account that is an NPL for one set of banks could very well be regular/performing loan for another set. The current rule states that decisions regarding a bad loan or toxic assets are binding on all lenders in a JLF if they are approved by 75% in terms of exposure or 60% in terms of absolute numbers. The above examples clearly explain why it is difficult to arrive at a consensus given the high threshold, and hence the threshold has proved to be a deterrent against resolution in multiple cases. The amendment has brought down the threshold to 60% of creditors by value and 50% by number of lenders.

For three, and most simply, the RBI will now explicitly be able to push reluctant banks to move. That’s a good thing if it gets a gummed up system moving but you do have to pause and note the obvious risk of the RBI being politically comprised by decisions it makes or doesn’t make. There’s also the difficulties involved in the RBI trying to price assets that can be half-completed or held up due to pending government approvals. Oh, and also the RBI is the banks’ regulator, which is a bit awkward/compromising. As CreditSights put it, this “is significant in terms of its practical aspect but also because of the promulgation of a more intrusive central authority to oversee commercial decisions.”

But even if you overlook the politicisation of the RBI, there are other problems with this plan. Most basically, there is the question of who will buy the assets and the need for capital to be pumped in as haircuts are taken. From Nomura:

However, there are some issues… as most of the NPAs (~85%) are concentrated in public sector banks, there would be fiscal implications. According to our banking analysts, while large PSU banks have the capital to take 40-50% haircuts, smaller PSU banks will need capital infusions by the government.

There’s also the idea that this plan relies on an untested and overburdened bankruptcy court and an ordinance is rather far from the bad bank many had hoped was coming — in fact, it might be best seen as part of a series of efforts to increase the efficacy of the mechanisms already in place to deal with the bad loan problem. For example, there are those who argue the RBI already had broad powers that allowed it to inspect, caution and advise banks. But the answer to that seems to be… yes, but they were indeed broad and now have been rendered explicit.

As Praveen Chakravarty says, “it’s a leverage that was previously not explicitly available. This ordinance is also as much about signalling as it is about the technicalities, I think.” Which is fair but also means we have to wait to see what the RBI does with this signal and whether the government follows up and reins in the state-owned banks where the majority of the problem resides. As CreditSights argue, “given the scale of the problem and the fact that a substantial amount of bad loans are not recoverable, it will take more than a piece of new legislation to help revive banks.”

While one could easily argue that recent moves to push a farm-loan waiver might be seen as a signal of a different sort… As SocGen said to close:

The government needs to play a much more proactive role to ensure that cyclical bursts of burgeoning NPLs do not take the economy hostage. Rather than banking on hope as a strategy, a sincere effort at reforming SOBs should be visible in reality and not just in policy documents. Freeing SOBs from political influence and ensuring more professional bank boards remains essential. The Bank Boards Bureau (BBB) set up under the Indradhanush scheme has so far met with limited success in ensuring the professionalisation of the boards of various SOBs. However, apart from top-level appointments, many of its functions are quite vague. Even with regard to appointments, the BBB does not have the final say and quite often decisions are left in limbo as the finance ministry (which has representative on the BBB) may differ in opinion with the BBB. The BBB also doesn’t have any role in choosing the non-official directors at boards of SOBs, and such appointments typically remain political. BBBs need to be given wider power in this respect, and the government needs to maintain a hands-off approach. The government should also aim at bringing down its ownership in SOBs to less than 51%. Increasing the number of private shareholders could eventually force SOBs to act in a much more professional manner and take lending decisions purely on a commercial basis.

Finally, and more importantly, governments should show a greater sense of fiscal responsibility and eschew populist decisions that adversely impact bank balance sheets. The recent decision by the newly elected government in the state of Uttar Pradesh to waive farm loans is a case in point. A study by Niti Ayog (erstwhile Planning Commission) shows that if other states follow suit, the total of waived loans could amount to 2% of GDP. Another example is the policy of providing extremely cheap (even free in many cases) energy to the agriculture sector. Not only does this cause major stress in the finances of power distribution companies (c.90% of which are government owned), leading to periodic bailouts of these companies by the banks, but it also unintended consequence of depletion of the already stressed levels of groundwater in India, as the extraction of groundwater becomes cheap.

Related links:
What Makes a Good ‘Bad Bank’? The Irish, Spanish and German Experience – ECB
So you think you can bank? Indian public sector edition – FT Alphaville
Modi takes aim at India’s ailing public banks – FT

Transport company National Express, stung this week over its CEO’s bonus, said today that currency shifts have helped it produce a near 16 per cent rise in revenues.

The bus, coach and rail company, with operations in the UK, Europe and the US, said today that revenues so far this year are up by 5.4 per cent on a constant currency basis, but that translates to a 15.8 per cent gain on a reported basis when allowing for the weaker pound.

Organic growth, acquisitions and “significant foreign exchange tailwinds” have all helped, the company said.

Still, the company is likely to face a grilling at its annual shareholder meeting today. Large investors have balked at plans to award its chief executive a £1m bonus for a year that included a school bus crash in the US that killed six children.

The shareholders, who plan to vote against the UK bus company’s remuneration report, believe the board should have cut the annual bonus to zero in line with a clause that says an improvement in safety processes is a precondition of any award.

Photo: Bloomberg

Two Sigma Securities said on Tuesday that it plans to buy Interactive Brokers’s options market-making unit.

After completion of the deal, Two Sigma Securities’s market-making offering will “span over 7,000 U.S. equity securities and options on 1,300 underlying securities, executing over 300 million shares and one million options contracts per day,” the company said.

“Through this transaction, TSS will integrate Timber Hill’s highly complementary platform to form a full-service, large-scale market-maker across equities and options on exchanges and for wholesale retail clients,” said Simon Yates, Two Sigma Securities chief executive.

The terms of the deal were not disclosed.

Gains in technology stocks on Tuesday allowed the Nasdaq Composite to add 0.3 per cent to another all-time closing high, while the S&P 500 inched off its most recent record set on Monday.

In a listless day of trading, the Nasdaq Composite added 17.9 points to 6,120.59 by market’s close, while the S&P 500 fell 2.5 points to 2,396.91 after breaching the 2,400 intraday level for the first time.

In the wake of Emmanuel Macron’s victory in the French election and growing expectations of a US interest rate rise, the two indices have hovered at record highs as investors’ appetite for riskier assets has ticked higher.

However, some stock gains were trimmed as oil prices fell off of gains on Monday. The US benchmark West Texas Intermediate fell 1 per cent to $45.96 a barrel, while Brent crude dropped 1.1 per cent to $48.79.

The 10-year US Treasury note’s yield, which moves inversely to price, hit its highest point in nearly six weeks, adding 0.5 basis points at 2.392 per cent, while the price of gold, another so-called safe-haven asset, dropped 0.5 per cent to an eight-week low at 1,220.29. The US dollar index, which measures the buck against a basket of its peers, added 0.53 per cent to 99.59.