Private equity dealmaking has soared to its highest level since the lead-up to the global financial crisis, and there is no end in sight to the buyout boom as companies chase investment opportunities for a record amount of unspent cash that totals almost $2.5tn. Activity in the first half of 2019 has been swollen by a series of $10bn-plus megadeals, undeterred by volatile financial markets, a slowdown in global growth and rising trade tensions. Deal appetite at leveraged buyout shops like KKR, Blackstone and Brookfield has been fuelled by the enormous pile of so-called dry powder, which they have raised from pension and sovereign wealth funds and not yet spent, and by still-cheap borrowing costs that make it easy to finance takeovers. Data provider Preqin estimates $2.44tn of dry powder is at the ready to buy companies, real estate, infrastructure, natural resources and debt. Tens of billions of dollars more are being raised for new funds, giving private equity groups even more dealmaking ammunition. Jay Powell, US Federal Reserve chairman, has warned that risks to global growth have increased in recent weeks, reinforcing expectations that the central bank is likely to trim interest rates next month. In a speech on Tuesday, Mr Powell warned that businesses and farmers are becoming more concerned about trade tensions, resulting in a drop in business confidence. His comments suggest the Fed is unlikely to return to raising rates any time soon and could cut them, despite what he described as “solid fundamentals . . . supporting continued growth”. Mr Powell said: “When the FOMC [Federal Open Market Committee] met at the start of May, tentative evidence suggested these cross-currents were moderating, and we saw no strong case for adjusting our policy rate. “Since then, the picture has changed. The cross-currents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.” Donald Trump has signed an executive order that imposes new sanctions on Iranian officials including Ayatollah Ali Khamenei, the supreme leader, as the US president presses on with his “maximum pressure” campaign against Tehran. Mr Trump said the “hard-hitting” fresh sanctions would prevent top officials from accessing financial instruments. The US did not seek conflict but it “cannot ever let Iran have a nuclear weapon”, he added. The move against Mr Khamenei, Iran’s ultimate decision maker, and his office is likely to be viewed as highly provocative in Iran and will fuel suspicions that Washington is pushing for regime change in the Islamic republic. The US and Iran have been locked in a stand-off since Mr Trump last year unilaterally withdrew from the landmark 2015 nuclear deal Tehran signed with world powers. Bitcoin edged lower on Monday after rallying above $11,000 over the weekend to hit a 15-month high. The digital currency climbed to as much as $11,247 on Sunday, its highest since march 2018, according to Refinitiv data tracking the Bitstamp exchange. Bitcoin started the year at just below the $4,000-level but remains some way short of its all-time peak of more than $19,000 at the end of 2017. Bitcoin dipped 1.4 per cent in trading on Monday to $10,682. President Donald Trump ordered a military strike on Iranian targets in response to Tehran’s shooting down of a naval surveillance drone before reversing course, according to multiple US media outlets. The New York Times said Mr Trump approved attacks on targets such as radar and missile installations and that US aircraft were en route when a decision was taken to abort the mission. The Washington Post and ABC News also reported the developments. The news of possible military action against Iran emerged as the US Federal Aviation Administration issued an emergency notice barring US airlines from flying in airspace over parts of the Gulf because of heightened tensions following the drone incident on Thursday. “All flight operations in the overwater area of the Tehran flight information region . . . above the Persian Gulf and Gulf of Oman only are prohibited under further notice due to heightened military activities and increased political tensions,” the FAA said. Jay Powell reached for an old proverb on Wednesday to explain why the Federal Reserve might cut US interest rates to fend off the risks to the economy posed by slowing global growth and Donald Trump’s trade wars. “An ounce of prevention is worth more than a pound of cure,” the Fed chairman told reporters. But whether the central bank will pull the trigger on a pre-emptive monetary easing to keep the US expansion in good health — possibly as early as next month, as many investors are betting — is hardly a foregone conclusion. Mr Powell emphasised that new information between now and July 31, the date of the next meeting of the Federal Open Market Committee, would be crucial to monetary policy. As well as routine economic data, this will include the outcome of a meeting at the G20 summit in Japan later this month between Mr Trump and Xi Jinping, the Chinese president, aimed a resolving trade tensions that have spooked businesses across the US. US president Donald Trump has accused Mario Draghi of “unfairly” manipulating the euro, after the European Central Bank president made dovish comments that sent government bond prices sharply higher and pushed down the single currency. Speaking at the ECB’s annual symposium in Sintra, Portugal, Mr Draghi said the bank could launch a fresh expansion of its €2.6tn quantitative easing programme if the inflation outlook failed to improve. The euro sank about 0.5 per cent against the dollar, reaching a low of just under $1.12, while European and US equities rose — Germany’s Dax index was up 2 per cent on the day and the S&P 500 was more than 1 per cent higher in afternoon trading. Mr Trump hit out at Mr Draghi’s remarks, suggesting that Europe was engaging in currency manipulation. “Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA,” the US president wrote on Twitter. “They have been getting away with this for years, along with China and others.” Facebook has revealed plans for a new global digital currency with the backing of more than two dozen companies ranging from Visa and Mastercard to Lyft and Spotify, bringing the heft of the world’s largest social network to efforts to transform financial services. The scope of Facebook’s ambitions for the new currency, called Libra, was made clear as it claimed 1.7bn people around the world without a bank account would be able to use it to make instant and nearly free international money transfers from their mobile phones. With traditional banks and the other large technology companies sitting on the sidelines for now, and with regulators taking a cautious approach to digital currencies, Facebook on Tuesday began the task of persuading merchants to use Libra as a means of payment and consumers to see it as a safe store of value. “The internet . . . has given everyone access to the world’s information, and democratised access to free communications, but money has stayed the same,” said David Marcus, the former president of PayPal who joined Facebook in 2014 and has steered the Libra project. Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold tens of billions of euros of assets as chief executive Christian Sewing shifts Germany’s biggest lender away from investment banking. The plan would see the bad bank house or sell assets valued by the German lender in its accounts at up to €50bn after adjusting for risk. Deutsche’s equity and rates trading businesses outside continental Europe will be severely shrunk or closed entirely as part of the revamp, although the final decision is pending, according to four people briefed on the plan. Managers are also set to unveil a new focus on transaction banking and private wealth management. The proposed bad bank, which is known internally as the non-core asset unit, will comprise mainly of long-dated derivatives, the people said. Mike Pompeo, US secretary of state, has blamed Iran for attacks in the Gulf of Oman that severely damaged two oil tankers and sparked a surge in crude oil prices. The top US diplomat said the assessment was based on intelligence, the weapons used, the expertise needed for such an operation, and recent similar Iranian attacks on shipping. He said it was also partly based on the fact that “no proxy groups operating in the area have the resources to act with such a high degree of sophistication”. The ships — a Japanese vessel named Kokuka Courageous and a Norwegian vessel called Front Altair — were hit by unknown weapons and abandoned close to the Strait of Hormuz, one of the world’s busiest shipping routes. No one claimed responsibility. Later on Thursday, the Pentagon released a video showing what it said was an Iranian military vessel removing an unexploded limpet mine from the Kokuka Courageous. Protesters fought pitched battles with police in central Hong Kong on Wednesday in an eruption of public anger against an extradition bill that critics see as a fundamental threat to the territory’s civic freedoms and rule of law. Police used pepper spray, rubber bullets and tear gas and by 7pm Hong Kong time had cleared demonstrators from immediately outside the Legislative Council, Hong Kong’s de facto parliament, following violent scenes that left several people injured. But late evening, thousands of protesters remained in a stand-off with police in the centre of the city with the city’s Hospital Authority confirming that 72 people were injured, with two in serious condition. “The police used some aggressive actions towards protesters today,” said one 24-year-old demonstrator, who identified himself only as Joe. He joined the protests around 8am but took refuge in a McDonald’s restaurant in the early evening. “They shot consecutively towards the protesters, who had no protection — only gloves and goggles. We cannot fight back,” he added, saying he watched eight officers surround a protester “and beat him”. Extreme weather drove growth in energy demand last year to its highest level since 2010, triggering warnings of a “vicious cycle” fuelled by reliance on heating and cooling systems that could worsen the world’s carbon emissions crisis. Energy group BP said in its closely watched annual market review that energy consumption grew 2.9 per cent in 2018, led by China and the US, despite modest economic growth and strengthening oil and gas prices. The rise spurred a 2 per cent increase in carbon emissions, the fastest since 2011 and equivalent to increasing the global passenger car fleet by a third, or just under 400m. “If there is a link between the growing levels of carbon in the atmosphere and the types of weather patterns observed in 2018, this would raise the possibility of a worrying vicious cycle,” Spencer Dale, BP’s chief economist, said in a speech on Tuesday afternoon. With the threat of US tariffs no longer hanging over it, Mexico expects to ratify the USMCA trade agreement — the successor to Nafta — next week, President Andrés Manuel López Obrador said. The president said Mexico’s Senate would hold an extraordinary session in a week’s time and the first item on the agenda was ratification of the US Mexico Canada Agreement. “I can assure you that next week, the Senate will ratify this,” Mr López Obrador said, adding that would help the legislative process in the US and Canada “greatly”. After three days of tense negotiations, Mexico and the US averted Mr Trump’s threat to have begun levying tariffs from June 10 after Mexico promised to curb the flows of migrants arriving at the US border and to take back a higher number of migrants claiming asylum in the US pending their US court hearings. Theresa May quit as Conservative leader on Friday, but was accused by the former top official at the Treasury of planning “legacy vanity projects” in her dying days as prime minister. Downing Street confirmed that the prime minister, who will stay in office until a new Tory leader is elected next month, was focused “on delivering and building on the domestic agenda that she has put at the heart of her premiership”. Fiat Chrysler Automobiles has withdrawn its proposal for a €33bn merger with France’s Renault, reversing plans to create what could have been the world’s third-largest carmaker. FCA said in a statement that it “remains firmly convinced of the compelling, transformational rationale” but it had “become clear that the political conditions in France do not currently exist for such a combination to proceed successfully”. The decision came after Renault’s board for the second time pushed back a decision on whether to engage with the all-stock proposal, saying the French government, its largest shareholder with a 15 per cent stake, had requested the delay. After more than six hours of discussion on Wednesday evening at Renault’s headquarters in Paris, the French carmaker said it “was unable to take a decision due to the request expressed by the representatives of the French state to postpone the vote to a later council”. Jay Powell, chairman of the Federal Reserve, signalled the central bank stood ready to cut interest rates, saying it would “act as appropriate to sustain the expansion” amid the economic impact of escalating trade wars. “We do not know how or when these issues will be resolved,” he said, in remarks that helped stoke a powerful rally on Wall Street. “We are closely monitoring the implications of these developments for the US economic outlook.” Mr Powell was addressing a conference hosted by the Federal Reserve Bank of Chicago, part of a year-long review of how the central bank carries out and communicates its monetary policy objectives. Referring to tariffs, which in the past month have been raised on imports from China and threatened on imports from Mexico, he said that the Fed would “act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric 2 per cent objective”. US antitrust enforcers have carved up jurisdiction for possible investigations into Google, Facebook, Amazon and Apple, according to two people familiar with the matter, in a development that wiped more than $133bn from the market value of the technology giants on Monday. The agreement between the Department of Justice and Federal Trade Commission has paved the way for antitrust investigations into the four companies, though it is unclear what matters the agencies are examining or how aggressively they intend to move. Tech stocks were dragged lower on Monday on the news, which was followed after the market closed with an announcement from the House judiciary committee that it would launch its own investigation into competition in digital markets. The revelations marked a decisive shift for the technology sector as both the Trump administration and Congress are now signalling a tougher stance on digital competition whereas, for many years, the primary antitrust risk for large US tech groups had emanated from the EU. Italian assets were under pressure on Tuesday after a victory for the rightwing League party in the European elections, which investors said could embolden its leader and deputy prime minister Matteo Salvini to step up a budget battle with the EU, or push for early elections. The EU is likely to start disciplinary measures against Italy over its debt and deficit levels in early June, Reuters reported. Mr Salvini pledged to use “all my energies” in a confrontation with Brussels, saying the European Commission could impose a €3m fine on Italy. The FTSE MIB index fell 0.5 per cent, while Italy’s government debt sold off. The benchmark 10-year bond yield rose for a second day, up 6 basis points to 2.719 per cent. German sovereign bonds rallied, sending yields on 10-year Bunds to fresh two-and-a-half-year lows of minus 0.153 per cent, as investors sought the safety of German government paper. “With uncertainty running high, it is difficult to see anything that could drive yields back up,” said Italian bank UniCredit. |
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March 2021
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