March 3, 2023: Global News Roundup
Pivot problems—Markets falter on rate hike expectations, US war machine turns to China
This post was originally published on IPEwithSBB.org.
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
Starting with finance, investors’ hopes for impending central bank pivots were dashed this week as inflation data came in hot in the US and EU, leading to shifting expectations about future rate hikes and correspondingly gloomier market sentiment (markets these days prefer easy money, so the prospect of more future rate hikes tends to push asset prices lower). Last Friday, data from the US showed more jobs added and higher consumer price inflation than had been expected. On Tuesday, new data out of Europe showed that “inflation rebounded in France and Spain in February, sending European governments’ borrowing costs up as doubts increased over how quickly the European Central Bank will stop raising interest rates”. On Thursday, the inflation print for the Eurozone also came in higher than expected at 8.5%. All the higher-than-expected inflation data gave bond market investors a “reality check”, sent Indian share prices lower, and for Wall Street resulted in the biggest weekly drop in major stock indices in 2023. “Things were priced for perfection — investors were betting that the Fed was going to get inflation down successfully and quickly. I think this process is going to take longer than people thought,” said Idanna Appio, a portfolio manager at First Eagle Investment Management, according to the Financial Times.
Inflation and rising rates also took their toll on markets elsewhere, with bondholders expecting Pakistan to default perhaps by June. “According to Fitch Ratings, the country’s dollar bonds due next year fell to their lowest level since November as investors weighed the country’s ability to honor $7 billion in repayments in the coming months, including a $2 billion Chinese loan due in March,” reported ProPakistani on Thursday. Moody’s downgraded Pakistani government bonds to junk status earlier in the week. Pakistan’s finance minister denied that default was imminent, China urged creditors to play a “constructive role to help Pakistan”, and Pakistan’s negotiations with the IMF for bailout funds are ongoing. (See also prior posts on sovereign debt issues, including in Pakistan, e.g., here and here; I also have an article going to press any day now on what I’m calling the Whole World Debt Crisis, and I’ll post it here to the Substack, too, in case you’re interested.)
Along similar lines—and suggesting just how widespread the impending global debt crisis is going to be—US asset management firm Blackstone on Thursday defaulted on a roughly US$600 million CMBS (commercial mortgage-backed security) bond backed by Norwegian real estate. Last December, I noted that Blackstone was in trouble, at that time trying to manage the fund equivalent of a bank run by limiting customer redemption requests. This week, Reuters reported that in February Blackstone continued to block redemption requests for its real estate income trust (BREIT). Credit Suisse, another struggling financial giant mentioned in a post last fall, saw it’s shares fall even further this week (the bank’s share prices fell over 40% last year), as news hit that it continues to struggle with a slow-moving bank run. On Tuesday, Swiss regulators further ruled that Credit Suisse was guilty of a “serious breach of Swiss supervisory law” regarding its prior dealings with Greensill Capital.
Turning to geopolitics, central bank pivots weren’t the only ones in the news this week. Current events pointed the beginnings of another critical pivot, with the US and EU slowly revising their expectations about the possibility of victory in Ukraine and turning their gaze further eastward to China. Russia has been advancing in eastern Ukraine over the past month or so, taking back territories lost this past fall, and on Thursday crept closer to taking control of Bakhmut: “Bakhmut has been reduced to a blasted wasteland, with a few thousand of its 70,000 pre-war civilian population still inside as armies battle street-by-street. Russian troops, bolstered by mercenaries of the Wagner private army, have been advancing north and south of the city to cut it off.” The WSWS reported earlier this month that the Ukrainian government has been ramping up efforts to deter soldiers in Bakhmut from deserting their posts: “Amidst a major escalation of the war in Ukraine by NATO, the government of Ukrainian President Volodymyr Zelensky has begun cracking down on “refuseniks,” or deserting soldiers, as bloody fighting continues with Russian forces for control of Bakhmut. Under the newly signed law draft Law 8271, soldiers directly disobeying an order, threatening a senior officer with violence or deserting one’s unit would face five to 10 years in prison. Convictions of desertion in the face of fire will carry a minimum of five and a maximum of 12 years in prison.”
Meanwhile, public support for arms transfers to Ukraine is falling in the US, and roughly ten thousand people took the streets of London, Paris, Berlin, and other European cities this past weekend to protest the Ukraine war. Radio Havana reported about the London protests, attended by former Labour Party leader Jeremy Corbyn: “Corbyn called on world leaders to unite their actions in order to bring peace to Ukraine. He added that hatred, poverty, terrorism and refugees are all fruits of war, warning that a new conflict will be just around the corner if the world leaders do nothing to the war in Ukraine.”
(Image: “Anti-war protesters in London and Paris demand West stop arming Ukraine”, from Radio Havana, here.)
The call for peace from Corbyn (who has opposed the war from the start) follows closely behind recent calls for a ceasefire and peace talks from China, which garnered support for the idea from a number of other countries (including from Ukraine itself), but were spurned by the US and EU (see here and here). Further, the recent G20 meetings were rife with disagreement over the war, and it was announced on Thursday that there will be no joint statement issued owing to the Ukraine conflict (recall that the war also divided G20 members at the Bali meetings last November). And, the Philippine Star reported that Ukrainian President Zelensky is planning a trip to China to meet with President Xi to talk about the peace plan.
The significance of this shift in the tenor of international conversations about the Ukraine war, coming as Russian battlefield successes mount, is unclear. But what does seem fairly clear is that the US is quickly turning towards more hostile engagements with China in a way that makes future military conflict more likely. Recent weeks have been full of US provocations and increasingly heated Chinese responses. As I mentioned in my last post, while US President Biden was in Ukraine last week, a delegation of members of the US Congress arrived in Taiwan. Arms sales to Taiwan have been ramping up, alongside US military patrols and surveillance efforts in the Taiwan Strait and the South China Sea (see here).
And, then, this week, the US Department of Energy released a report concluding that the SARS-Cov-2 virus (the one that causes covid-19) probably leaked from the Wuhan Institute of Virology in China. A day or so later, the US Federal Bureau of Investigation (FBI) made similar comments: “The FBI has assessed that a leak from a laboratory in the central Chinese city of Wuhan likely caused the COVID pandemic”, director Christopher Wray said on Tuesday. What’s interesting to me about this development is the timing. Why now? Official reports that the virus probably leaked from the Wuhan lab are not new, for example the Lawrence Livermore National Laboratory and the State Department both acknowledged the possibility back in June 2021. So, why did US officials decide that this was the week to start loudly talking about this again? Why ramp up tensions and seriously enrage China now? (There is a lot at stake for China should the world start blaming the Chinse government for the pandemic). The day after the Department of Energy report was released and the lab leak accusations surfaced again, the South China Morning Post ran a story entitled: “Beijing’s ‘reunification’ plan for Taiwan ‘on fast development track’, NPC deputy says.”
In other news, the UK and EU concluded a deal about trade with Northern Ireland, a major source of conflict since the UK left the EU in 2015 (“Brexit”). The people of Mexico gathered over the weekend to protest impending changes to how national elections are administered. Russian President Putin bestowed the Order of Friendship upon American actor and Russian Foreign Ministry Special Representative for Russia-US Humanitarian Ties Steven Seagal. And Al Jazeera reported that there were 187 internet shutdowns around the world in 2022, 84 of them in India, which was the biggest offender. Digital rights watchdog Access Now said governments are using shutdowns as “weapons of control and shields of impunity”.
Things I’m keeping an eye on:
1. Cascading defaults? Blackstone and Credit Suisse are very large financial firms. Pakistan is the 5th largest country in the world by population. These are not small stones being thrown into the global economic pond. On this note, I read in the financial presses yesterday that the odds of a US government debt default have tripled since the beginning of the year.
2. Taiwan: I don’t know what “fast track” means, precisely, in the context of Taiwan reunification. Prior to this week, many observers were already anticipating an expedited timeline. The US State Department approved the sale of F-16 fighter jets to Taiwan yesterday, with Congressional approval anticipated next month. It was also reported yesterday that the US is trying to drum up support among allies for sanctions against China, apparently intended to discourage weapons sales to Russia.