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Asian stocks rally as investors find footing at end of brutal 2022 By Reuters

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© Reuters. FILE PHOTO: A man on a bicycle stands in front of an electronic board displaying the Shanghai Stock Exchange Index, the Nikkei Stock Price Index and the Dow Jones Industrial Average outside a brokerage firm in Tokyo, Japan on September 22, 2022. REUTERS/Kim Kyung-hoon

By Ankur Banerjee

SINGAPORE (Reuters) – Asian stocks rose on Friday as investors looked to end the year on an optimistic note after US data showed the Federal Reserve’s aggressive monetary policy eased inflationary pressures even as concerns about COVID-19 cases in China lingered.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.71% and was due to end unchanged in December. The index is set to end the year down 19% – the worst performance since 2008.

It increased by 0.22%, while in Australia it increased by 0.34%. Chinese stocks rose 0.63%, while Hong Kong stocks rose 1.5%.

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US stocks closed sharply higher overnight supported by data showing a rise in US jobless claims indicating that the Fed’s interest rate hike reduces inflationary pressures.

Investors were worried that central banks’ efforts to tame inflation could lead to an economic slowdown, while uncertainty about how quickly the Chinese economy will recover in the wake of the removal of COVID controls has kept markets calm.

“Avoiding deflation is a herculean task,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank, noting that the odds are stacked against emerging economies unscathed from tightening global politics.

By 2023, inflation still has to be beaten, analysts said, and investors will also be wary of geopolitical tensions arising from Russia’s war in Ukraine and diplomatic pressure on Taiwan.

China’s health system has been under strain due to rising cases since the country began dismantling its “zero COVID” policy at the start of the month, with several countries either imposing or considering imposing restrictions on travelers from China.

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The world’s second largest economy is expected to suffer a slowdown in factory production and consumption in the near term as workers and shoppers fall ill.

In the currency market, the US dollar was on track to achieve its best annual performance in seven years. The currency pair, which measures the greenback against six major currencies, was down 0.048% on Friday, but entered the last few hours of trading for 2022, gaining nearly 9% over the year.

The pound is set for its worst performance against the dollar since 2016, when the United Kingdom voted to leave the European Union.

The pound was last traded at $1.2057, up 0.04% on the day, but down about 11% for the year.

The Japanese yen strengthened 0.36% against the dollar at 132.53 per dollar on Friday. The euro fell 0.01% to $1.066.

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It rose 0.5% to $78.79 a barrel and was at $83.81, up 0.42% on the day.

Despite moving away from the peak seen earlier this year, Brent was still poised to close in 2022 with a gain of 5.76% after rising 50.2% in 2021, while West Texas Intermediate (WTI) was at On its way to a 4.5% rise in 2022 after a 55% rise. gains last year. [O/R]

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A new world energy system is taking shape

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On Valentine’s Day 1945, US President Franklin Delano Roosevelt met King Abdulaziz bin Saud of Saudi Arabia aboard the USS Quincy. It was the beginning of one of the most important geopolitical alliances of the past 70 years, as US security in the Middle East was traded for oil pegged to the dollar.

But times are changing, and 2023 can be remembered as the year when this grand bargain began to transform, as a new global energy order between China and the Middle East took shape.

While China has for some time been buying increasing amounts of oil and LNG from Iran, Venezuela, Russia and parts of Africa with its own currency, President Xi Jinping’s meeting with leaders of the Saudi and Gulf Cooperation Council in December marked the “birth of the petroyuan,” an analyst said. Credit Suisse Zoltan Bozar in a note to clients.

According to Pozar, “China wants to rewrite the rules of the global energy market,” as part of a larger effort to de-dollarize the so-called BRIC countries in Brazil, Russia, India, China and many other parts of the world after weaponizing foreign exchange reserves with dollars in the wake of Russia’s invasion of Ukraine.

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I don’t want? For starters, more oil trading will be done in RMB. Xi announced that over the next three to five years, China will not only significantly increase imports from the GCC countries, but also work for “multi-dimensional energy cooperation.” This could include joint exploration and production in places like the South China Sea, as well as investments in refineries, chemicals and plastics. Beijing hopes to be paid for in full in renminbi, on the Shanghai Petroleum and Natural Gas Exchange, as early as 2025.

This would represent a massive shift in the global energy trade. As Bozar points out, Russia, Iran and Venezuela hold 40 percent of the world’s proven oil reserves, and they all sell oil to China at a deep discount. The GCC countries account for another 40 percent of proven reserves. The remaining 20 percent is found in north and west Africa and Indonesia, two regions within the Russian and Chinese orbit.

Those who question the rise of the petroin, and the general waning of the dollar-based financial system, often point out that China does not have the same level of global trust, rule of law, or reserve currency liquidity as the United States, making it unlikely that it would want to Other countries to do business in RMB.

Perhaps, though, the oil market is dominated by countries that have more in common with China (at least in terms of their political economies) than the United States. Moreover, the Chinese provided something of a financial safety net by making the renminbi convertible into gold on the gold exchanges in Shanghai and Hong Kong.

While this does not make the renminbi an alternative to the dollar as a reserve currency, trading in the petroyuan nonetheless comes with important economic and financial implications for policymakers and investors.

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For one thing, the prospect of cheap energy is already attracting Western industrial firms to China. Consider the German company BASF’s recent move to downsize its main plant in Ludwigshafen and shift chemical operations to Zhanjiang. This could be the start of what Bozar calls a “farm-to-table” trend as China tries to get more value-added production domestically, using cheap energy as a lure. (A number of European manufacturers have also added jobs in the United States because of lower energy costs there.)

Petroleum policy comes with financial risks as well as rewards. It should be noted that the recycling of petrodollars in emerging markets by oil-rich countries such as Mexico, Brazil, Argentina, Zaire, Turkey, etc. by US commercial banks from the late 1970s onwards led to many debt crises in emerging markets. Petrodollars also accelerated the creation of a more speculative, debt-based economy in the United States, as cash-flowing banks created all kinds of new financial “innovations,” and the influx of foreign capital allowed the United States to run larger deficits.

This trend may now begin to reverse. Previously, There are fewer foreign buyers of US Treasury bonds. If the petroyuan takes off, it will ignite the fires of de-dollarization. China’s control of more energy reserves and the products from them could be an important new contributor to inflation in the West. It’s a slow-burning issue, but perhaps not as slow as some market participants might think.

What should policy makers and business leaders do? If I were the CEO of a multinational corporation, I would look to regionalize and localize as much production as possible to hedge against a multipolar energy market. I will do more vertical integration to offset the increasing inflation in the supply chains.

If I were a US policymaker, I would consider ways to increase North American shale production in the short to medium term (and offer Europeans a discount on it), while also accelerating the green transition. This is another reason why Europeans should not complain about the Inflation Reduction Act, which supports clean energy production in the United States. The rise of the petroyuan should be an incentive for both the US and Europe to move away from fossil fuels as quickly as possible.

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rana.foroohar@ft.com

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British railway workers begin the new year with a week-long strike By Reuters

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© Reuters. FILE PHOTO: A passenger boards a train during a railway workers’ strike over wages and conditions at London’s Waterloo station on December 16, 2022. REUTERS/Toby Melville/File Photo

Written by Sachin Ravikumar and Farooq Suleiman

LONDON (Reuters) – British rail workers kicked off the new year with a week-long strike on Tuesday, delaying the return to work of millions of commuters in the latest wave of industrial strikes to hit the country.

Britain is in the grip of the worst wave of labor unrest since Margaret Thatcher was in power in the 1980s, as rising inflation follows more than 10 years of stagnant wage growth, leaving many workers unable to make ends meet.

Frequent railway strikes have crippled the network in recent months while nurses, airport staff, paramedics and postal workers have joined the fray, demanding higher wages to keep up with inflation hovering around a 40-year high, reaching 10.7% in November.

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Teachers are scheduled to start a strike in Scotland next week.

“Due to the industrial strike, train services will be significantly reduced across the rails until Sunday 8 January,” Network Rail said.

“Trains will be busier and more likely to start later and finish earlier, and in some places there will be no services at all.”

The government has said it cannot afford rising inflation for public sector workers, meaning there is no end in sight to what has been dubbed a new “winter of discontent” in reference to the industrial battles that engulfed Britain in the late 1970s. .

A YouGov poll published in December found that two-thirds of Britons supported a nurses’ strike. A majority of those surveyed said that the government is responsible for the measure and that Prime Minister Rishi Sunak may suffer if the disruption continues into 2023.

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Mick Lynch, president of the rail union RMT, said the government appeared content to see the strikes continue.

Lynch told the BBC that “all parties involved know what needs to be done to reach a settlement, but the government is blocking it.”

The government has called on union bosses to return to the negotiating table, aware that strikes are taking a heavy toll on businesses that rely on commuters, such as cafes and bars in city centres.

Transport Secretary Mark Harper told the Radio Times: “The only way to settle the deal is to get the trade unions and employers around the table and not in the picket line and that’s what I want to happen.”

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The Bank of Japan needs the courage to change course

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The writer is a contributing editor to the Financial Times and chief global economist at Kroll

The Bank of Japan shocked the markets in December by widening the range in which 10-year government bonds can trade from 25 to 50 basis points. Investors responded by pushing 2- to 10-year yields to their highest levels since 2015, betting that expansion was the first step in ending yield curve control, and pledging to buy as many bonds as necessary to reduce borrowing costs.

But Bank of Japan Governor Haruhiko Kuroda He was pained to say It was just an attempt to help the market function rather than a signal of a policy change in the future. Why?

Yield curve control was introduced in 2016 to boost economic activity and stimulate inflation. Japan now has an inflation rate consistently above its 2 per cent target. Core inflation (excluding fresh food but including energy) rose to 3.7 percent in November – the highest rate in 40 years. It is time for the Bank of Japan to muster up the courage to change course.

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Based on the experience of other central banks that will be painful, with investor losses and market rupture. The longer you wait, the worse it may be. With the liquidity of some Japanese government bonds already thin, at a time when global liquidity is declining, market turbulence may be larger and faster than usual. The BoJ should move forward anyway.

The markets, so far, seem to agree. JGB bond futures show that investors expect the 10-year trading range to widen by another 50 points this year. Index swaps, a market that the Bank of Japan does not directly influence, show that they have also priced in 24 basis points of interest rate hikes. The Bank of Japan now owns more than half of the outstanding Japanese government bond issues. That’s already poor circulation in 10 years. If investors continue to challenge the BoJ, they will eventually have to buy all bonds or give up

Meanwhile, the implied volatility of JGBs 10-year notes over the next 12 months is about three times what it was a year ago. The yield curve is twisted, with the 10-year yield falling below the 9- and 11-year yields. This affects the profits of commercial banks, creating an incentive to lend, and possibly dampening growth.

Prime Minister Fumio Kishida’s government has suggested that it will call for a policy review of the Bank of Japan when Kuroda retires in April. This is another reason for the central bank to act now. Markets will absorb policy change more smoothly under a seasoned and credible ruler than an inexperienced successor. Just ask the members of the then New Mexican government that expanded the circulation of the peso in 1994, sparking the tequila crisis.

One counterargument is that inflation in Japan is not sustainable. As elsewhere, the current rally has been driven by global energy and food prices and a weak currency – so-called cost-push inflation. BoJ officials stress that deflation will not be defeated until wages rise faster, but this year fountain shunto Union wage negotiations It is expected to bring larger wage increases to offset higher inflation. This would generate the kind of inflationary demand and pull that the BoJ wants to see.

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The Bank of Japan must also tighten policy before many advanced economies enter recession later this year. Risk markets tend to trigger a shift to quality in the yen. Changing the policy stance with the weakening of the global economy would boost the appreciation of the yen, affect the competitiveness of Japanese exports and contribute to depressing inflation.

History suggests that ending yield curve control will not go smoothly. The Federal Reserve limited the proceeds to fund the American war effort from 1942 to 1951. That YCC calmed down the companies In assumptions about interest rates and their volatility that collapsed when the caps expired, causing losses for investors holding long-term bonds and severe turmoil in the mortgage markets. The RBA practiced YCC from March 2020 to November 2021. In a Anatomy of its policythe Reserve Bank of Australia conceded to keeping it in place after market participants stopped believing it meant “the exit in late 2021 was disorderly and did some reputational damage to the bank”.

To reduce the chaos, the BoJ should be clear about its reaction function and move slowly but deliberately by expanding the YCC first or targeting a shorter duration. Ultimately, it should announce that it is abandoning YCC altogether and will instead aim to minimize rapid changes in debt prices, such as those seen in the UK government bond market in September.

Market repercussions are inevitable. But the Bank of Japan has to stay on course, barring any kind of systemic collapse. It’s time to join every other major central bank in moving to end extraordinary monetary policy.

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