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FirstFT: US Senate approves $40bn Ukraine aid package

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Good morning. This article is an on-site version of our FirstFT newsletter. Sign up to our Asia, Europe/Africa or Americas edition to get it sent straight to your inbox every weekday morning

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The US Senate approved $40bn in fresh military, economic and humanitarian assistance for Ukraine yesterday, as Russia presses an offensive in the Donbas region.

The vote passed 86-11 after a week-long delay, despite opposition from a handful of self-described America First Republicans. US president Joe Biden is now expected to quickly sign the measure, freeing up vital assistance as the war enters its fourth month.

The $40bn package is more than the $33bn Biden requested three weeks ago, and includes increased spending on defence and humanitarian aid.

Biden welcomed the bill’s passage and said Congress’s actions ensured there wouldn’t be a lapse in funds for Ukraine. The president will sign the measure once it is formally delivered by the Senate.

More than half of the funds in the new package will be earmarked for weapons, equipment and military financing for Ukraine, as well as for restoring US weapons stocks and support for European Command operations.

Thanks for reading FirstFT Asia. Here’s the rest of today’s news — Sarah

1. Sri Lanka defaults on foreign debt for the first time Sri Lanka’s central bank has confirmed the country has missed a deadline for foreign debt repayments, deepening the economic and political crisis. The island — which has never defaulted before — owes about $51bn in overseas debt to bilateral creditors and international bondholders.

2. Google’s Russian unit to file for bankruptcy The US tech group plans to file for bankruptcy after authorities in the country seized its bank account, saying it had become “untenable for our Russia office to function”. Google said it would continue to provide free services, including search, YouTube, Gmail, Maps, Android and Play, to users in Russia.

3. Joe Biden bids to boost alliances in Asia The US president visits South Korea and Japan as worries rise over a potential Chinese military action against Taiwan. Biden is expected to address those concerns and reassure countries that his administration has not diverted attention from China, which he has called his top foreign policy challenge.

4. Luxury goods leaders bet booming US will offset China hit Some investors worry that Covid-19 lockdowns in China, sanctions on Russia and the global cost of living crisis could hurt demand for luxury goods. But two top executives in the industry have insisted their businesses will continue to grow and that faltering Chinese demand will rebound.

5. UAE’s new president takes power as dynasty speculation swirls Sheikh Mohammed, known as MBZ, could break with tradition and pick his son, rather than one of his brothers, as crown prince. “MBZ is already doing centralisation — this would be hyper-centralisation,” said Cinzia Bianco, a research fellow on Europe and the Gulf.

The days ahead

Japan April CPI data Last month’s consumer price index is set to be released today.

Ukraine Foreign ministers from the 46 Council of Europe member states meet today in Turin to discuss their response to Russia’s invasion of Ukraine.

Biden in Asia The US president begins his first trip to Asia in the role. He will meet the new president of South Korea, Yoon Seok-youl, today. On Sunday, Biden will head to Japan for discussions following the spate of weapons tests by North Korea.

Australian election Australians will vote on Saturday in a federal election. The incumbent Liberal-National coalition government — led by Prime minister Scott Morrison — is challenged by the Labor party. (The Guardian)

What else we’re reading

China’s crackdown reflects splits among policymakers In Beijing, rival factions are battling for influence amid a new regulatory storm. The fight is between senior party and government officials focused on economic growth and those more concerned with security and control, echoing infighting and policy guesswork that plagued China under Mao Zedong.

Images of Xi and Mao
© Greg Baker/AFP/Getty Images

Twitter deal leaves Elon Musk with no easy way out Could the Tesla boss walk away from his $44bn Twitter bid? As the richest person in the world appears to have second thoughts, the “bulletproof” modern deal agreement faces one of its biggest tests. Read our Explainer.

The Russian network helping Ukrainians flee A network of Russian volunteers, among them antiwar activists, is operating largely through word of mouth and the Telegram messaging app to help thousands of Ukrainian refugees get out of Russian displacement camps.

Corporate Japan wary of the sliding yen A weak currency was long a blessing for corporate Japan, especially large exporters. But as Russia’s invasion of Ukraine is sparking a surge in commodity prices, the yen’s spectacular fall is suddenly turning into a threat.

There is a moral case against crypto Mining digital currencies is not “just all a bit of harmless fun”, writes Jemima Kelly. The latest crypto crash should be an opportunity to reflect on the environmental, financial and psychological harm caused by mining coins, from growing e-waste to suicide attempts.

Gaming

Being a real-life city planner sounds both complex and stressful. So why is it so much fun in game form? Balancing resources and attending to citizens’ diverse needs can be a satisfying puzzle. And, in recent years, city-builders have become more complex and environmentally minded.

A screen grab of Cities: Skylines is a modern successor to the original city-building game, ‘SimCity’
‘Cities: Skylines’ is a modern successor to the original city-building game, ‘SimCity’

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Economy

Chinese banks lend Pakistan $2.3bn to avert foreign exchange crisis

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A consortium of Chinese state banks has lent $2.3bn to Pakistan to help the country stave off a foreign payments crisis, finance minister Miftah Ismail said on Friday.

Confirmation of the support from China, a close economic and military ally of Pakistan, came on the same day Islamabad announced a one-off 10 per cent ‘super tax’ on important industries that is intended to lead to a stalled $6bn IMF loan package being resumed.

“I am pleased to announce that Chinese consortium loan of Rmb15bn ($2.3bn) has been credited in to SBP [State Bank of Pakistan, Pakistan’s central bank] account today, increasing our foreign exchange reserves,” Ismail said in a tweet on Friday evening.

A senior government official said the arrival of the loan was “one of the signals that we’re about to return to the IMF programme”.

China had quietly urged Islamabad to repair ties with the IMF “as an essential step to improve Pakistan’s economic health and avoid a default”, the official said.

The Chinese loan will raise Pakistan’s liquid foreign reserves of $8.2bn to $10.5bn and could help shore up the rupee, which has slumped against western currencies.

Pakistan began to receive IMF payments in 2019 under a 39-month loan programme, but the fund has so far given only about half of the $6bn agreed.

In recent months, sliding confidence in Pakistan’s economy has prompted concerns it could follow Sri Lanka in defaulting on international debt.

Prime minister Shehbaz Sharif, who was elected by parliament in April following the ousting of rival Imran Khan, unveiled on Friday the new super tax to be levied on manufacturers of cement, beverages, steel, tobacco and chemicals.

“The government has decided to impose a 10 per cent ‘poverty alleviation tax’ on large-scale industries of the country,” Sharif tweeted.

Business leaders widely criticised the move and share prices on the Karachi Stock Exchange fell nearly 5 per cent after news of the tax emerged. Analysts said the decision would further fuel inflation, a central concern for households across Pakistan.

Zaffar Moti, a former KSE director, said: “This is a major setback for the economy. The government has decided to further tax those who are already paying their taxes.”





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Climate graphic of the week: ‘Worrying’ gap in clean energy investment between leading and emerging economies

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Charts showing that the rise in clean energy investment is concentrated in advanced economies

The “worrying” disparity in clean energy investments between the advanced economies and the developing nations was put into the spotlight this week, ahead of the G7 leaders meeting.

G7 economies account for about a quarter of the global energy-related carbon emissions that are behind global warming. The leaders’ meeting comes as all economies grapple to end their reliance on Russia for fossil fuel supplies as prices spike in the wake of the invasion of Ukraine.

The latest International Energy Agency world energy outlook report released last week said that while global clean energy investment had increased since the Paris climate accord was adopted in 2015, the “weakness” of clean energy investments across the developing world was “one of the most worrying trends”.

“Much more needs to be done to bridge the gap between emerging and developing economies’ one-fifth share of global clean energy investment, and their two-thirds share of the global population,” the IEA said.

The IEA cited scarce public funds, highly indebted state-owned utilities and a worsening global economic outlook as factors that made it more difficult for developing economies to invest in clean energy projects.

The agency advocated for financial and technical support, including concessional capital, private sector capital, and inflows from international carbon markets, as “crucial” for closing the gap.

The IEA also warned global investment levels in the power sector over the past three years had fallen short of the level needed to meet countries’ climate pledges, and would lead to a failure to meet the net zero global emissions target by 2050 that is required to curb climate change.

The IEA estimated global investment into power in 2022 totalled about $975bn, versus an annual requirement of $1.2tn to achieve countries’ stated policies, and $2tn to reach net zero.

Chart showing that clean energy investment in the power sector is short of what is required to meet net zero emissions by 2050

It said a rapid acceleration of investment was needed in renewable technologies, alongside reduced dependency on fossil fuels, for the world to reach a 1.5C stabilisation of the rise in average global temperatures. Temperatures have already risen about 1.1C since pre-industrial times.

Power investments in emerging market economies needed to grow at a compound annual growth rate of 25 per cent to reach net zero levels, the IEA said — or twice the pace of advanced economies.

Leaders of G7 countries are expected to discuss global energy demands when they meet in Germany on Sunday. Germany’s chancellor Olaf Scholz gave assurances that climate change remained on the agenda, but the war in Ukraine has raised fears that Europe may backslide on commitments to end fossil fuel funding as coal plants and gas plants are brought into commission to compensate for the Russian supplies.

G7 countries must generate 42 per cent of their electricity by wind and solar by 2030 to keep global warming to 1.5C by 2050, the IEA has calculated.

Pressure is building on Japan, which will assume the G7 presidency next, to take a lead role in commitments to cut coal use. Tokyo agreed at the recent G7’s energy and environment ministers meeting to stop financing fossil fuel projects internationally by the end of 2022 and promised to clean up its power system by 2035. This included supporting “an accelerated global unabated coal phaseout”.

It is the only G7 country to have set a target falling short of the IEA’s recommendation of 42 per cent of energy from renewables, however, by setting itself a goal of 38 per cent.

In 2020, 70 per cent of Japan’s electricity was generated from gas and coal, with just 20 per cent coming from renewables, according to energy think-tank Ember.

“In the lead-up to the G7, many will ask if it is possible for Japan to achieve a 100 per cent clean energy system by 2035,” Ember said in a report last week. “While this target will be a challenge, it is achievable. The obvious place to start is scaling up rooftop solar and wind energy, which could help Japan create a far more secure and sustainable energy system by 2035.”

Charts showing G7 countries’ ambitions on electricity from renewables

The EU has set an average target of 63 per cent by 2030 for the generation of electricity from renewable sources.

Among the leading bloc countries, Germany is aiming for 80 per cent by 2030, while Italy has a 70 per cent goal, and France just 38 per cent, because of its ample nuclear energy supplies that are regarded as “clean”.

The UK has said it will generate 95 per cent of its electricity from low carbon sources by 2030, and the US has committed to 100 per cent clean power by 2035 but is lagging behind the G7 in current renewable generation.

A US official told reporters in Washington this week that the subject of energy security would be “very much at the heart of discussions” at the G7 gathering.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here.

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here



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Investors are on recession watch

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The writer is editor-in-chief of Money Week

Are we nearly there yet? Global markets are over 20 per cent off their highs. And the past month has been particularly horrible.

Even the longstanding defensive (and supposedly diverse) strategy of having 60 per cent of your assets in equities and 40 per cent in bonds has been something of a disaster — 60/40 is heading for the worst year since 2008 (when a standard 60/40 portfolio fell 20 per cent). The only hiding place has been China.

Sadly, this level of misery does not mean there is not more misery to come. There may be a recession ahead.

Bear markets don’t necessarily cause or come with recessions. The short, but nasty, bear markets of 1962, 1966, 1987 and 2018 did not, for example. However, a recession can make a bear market very significantly worse — or, at the very least, longer.

Look at all the bears since 1902 in the US and you will see that those without a recession have lasted on average a mere 7.6 months. Those with a recession have lasted an average of 23.8 months — and that is with the generous inclusion of the super-short (one-month) bear market and state-enforced recession of 2020.

This makes sense, of course. Bear markets are, in the main, reactions to overvaluation — a reversion to some kind of mean. If there is no recession — and hence no real change to the earnings part of the equation — a fall in prices back to a level at which price/earnings ratios look OK can be quick and simple.

But add in a recession and all simplicity collapses. We can set prices when we have one moving part, but not when we have two. If you have been wondering why all market analysts are now obsessed with the possibility of a recession and how long it might last, this is why.

Figuring out the answer is a matter of establishing first where inflation will go, and second how central bankers will react to where inflation has gone. Most analysts are looking to commodity prices — the supply crunch that has driven this year’s horrible consumer price index numbers — for the answers.

Here there might be glimmers of good news. The oil price has turned down slightly and the copper price (one of the most watched numbers in the market) has just hit a 16-month low (it is down 14 per cent this year so far). Mining stocks are falling too.

This suggests the tantalising possibility that we may be near peak inflation. If that is so, then it might not be that long until central banks can pull back from raising interest rates, today’s scary anti-Goldilocks environment (everything is either too hot or too cold) will evaporate and all will be well again.

If central banks get the balance right — unlikely, I admit — we could end up seeing exactly what everyone wants: a soft landing that comes with either no growth for a few quarters or a very mild recession. Job done.

There is, however, an inflationary wild card here: wages. Listen to the news occasionally and you might conclude that real wages everywhere have been collapsing. But that is not quite right.

As market historian Russell Napier points out, by the end of April 2022, UK wages were 13.9 per cent above their pre-Covid level. Consumer price inflation had risen only 9.2 per cent.

In the past few months, inflation has hit new and nasty highs. But there is good reason to think that wages will catch up soon. The labour market in the UK remains very tight (as is the case in the US, where real wages are also up since the beginning of the pandemic). And while union membership in the UK has halved from its peak in 1979, it is rising again.

A summer of industrial action is already under way in the UK, as anyone hoping for an easy train ride to the first Glastonbury music festival in three years will know. And anyone planning to go on holiday over the summer will be increasingly worried, given that British Airways employees have just voted to strike.

There is, says Napier, “a bull market in the price of labour”. That is not necessarily bad news at all. In fact, you could see it as a welcome development. It makes a long, deep recession less likely.

Note that even in the grim consumer confidence numbers released in the UK this week, purchasing intentions remained unchanged. And, given that central banks, the US Federal Reserve in particular, appear to be more focused on the wellbeing of Main Street than that of Wall Street at the moment, pay may be an inflation driver that worries them less than others.

Where wage growth might hurt, however, is in profit margins. Look at company earnings forecasts and you will see that not much misery has been priced in.

Current estimates suggest that UK companies will report earnings per share 4 per cent above 2019 levels this year and that US and European companies will see EPS up 38 per cent and 24 per cent respectively, notes Simon French of Panmure Gordon.

A summer of strikes and real wage rises could turn that around pretty quickly, recession or no recession. We might be nearly there. It is just that our destination may not be the one we were expecting.



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