ASEAN in Focus: Staying the Course

Economic

Summary:

Surging exports are providing a powerful boost to growth across much of ASEAN, while foreign direct investment continues to remain a bright spot for the region.

Indonesia

A new innings

Following the election in February, the General Election Commission (KPU) announced in March that Prabowo Subianto has won an outright majority, garnering 58.6% of the votes, and is set to be Indonesia’s next president, starting on 20 October. All eyes are now on the key people and policies the new government champions. The continued presence of technocrats in key ministerial posts would signal a desire to push ahead with reforms, and the final legislative count will determine the parliamentary muscle power behind potential reforms.

Reforms likely to continue but challenges persist

Prabowo has spoken at length about continuing current President Jokowi’s reforms – embarking on down-streaming 2.0 and continuing the infrastructure build-out. However, we believe there will be challenges along the way: for instance, slower global demand for nickel electric vehicle (EV) batteries, lowering Indonesia’s carbon footprint, and restructuring certain state-owned enterprises (SOEs). Prabowo has outlined plans to upgrade defence systems and enhance social welfare schemes (in particular a new free lunch programme at schools). The challenge is to keep a lid on the fiscal deficit and hold on to Indonesia’s well-maintained macro stability over the next five years.

We do believe that a decade of reforms has put in place several buffers that would help keep the house in order, at least in the short term. For instance, better infrastructure and lower logistics costs will likely keep a lid on core inflation, as has been clear in recent months. Supply-side reforms could help further control the rise in food inflation. And rising exports of processed metals will likely keep the external deficits manageable.

Lower rates and FDI inflows may boost growth prospects

For now, however, growth is rather weak. Q2 GDP was 7.8% below pre-pandemic trend levels. The contraction in July and August PMIs suggest that activity weakened into Q3. As Bank Indonesia (BI) cuts rates, the new government takes over and announces its vision, thereby lowering policy uncertainty, and FDI inflows waiting on the side-lines flow in, we believe growth prospects could improve. We expect GDP growth to rise from 5% in 2024 to 5.3% in 2025 and 2026.

Moving up the manufacturing value chain to boost potential growth

Our growth model suggests that switching to loose fiscal and monetary policy could help raise growth, but only partially.

Moving further up the manufacturing value chain, and graduating from exporting just ores and metals, to exporting EV batteries and EVs, and thereby reducing the impact of commodity price shocks on the economy, could push potential growth to 5.8% by 2028.

Malaysia

At full steam

After slow growth in 2023, Malaysia’s economy has been roaring again, expanding by 5.1% y-o-y in 1H24. The momentum has also been impressive, hitting 2.9% q-o-q, seasonally adjusted, in 2Q. Beyond strong headline numbers, what is more encouraging is the breadth of the recovery.

Electronics shipments have returned to growth

For one, the long-anticipated revival in manufacturing is rather outstanding. Albeit delayed compared to peers, Malaysia’s manufacturing and trade sectors have finally turned the corner, riding the global tech upturn. After a long stretch of annual declines, electrical and electronics shipments returned to growth on a three-month moving average basis, albeit this remains at a nascent stage. Meanwhile, there is a mixed performance in commodities, with palm oil and LNG exports leading.

While construction expanded in double digits

In addition to manufacturing, what was a great surprise is the performance of construction, which expanded by a double-digit y-o-y pace for the second consecutive quarter. Coupled with the expenditure side of the gross fixed capital formation data, this is not only related to the government’s recent increase in public investment but also reflects rising interest in FDI-related large-scale projects. Meanwhile, services continue to show strength. Not only has private consumption shown resilience, but tourism has also added much-needed fuel, as Malaysia has welcomed tourists equivalent to 90% of its pre-pandemic levels.

Given the upside surprise in 2Q, we recently upgraded our GDP growth for 2024 to 5.0% (previously: 4.5%), while keeping 2025 growth at 4.6%.

We expect interest rates to stay on hold for a while

Outside of growth, inflation pressure remains largely muted, despite diesel subsidy rationalisation in June. Headline inflation averaged around 1.8% y-o-y in the first seven months of the year. Even after taking into account unfavourable base effects, we expect manageable inflation. We forecast inflation at 2.3% in 2024 and 3.0% in 2025, though acknowledge uncertainty from the potential subsidy rationalisation on the petrol RON95. Our base case is for Bank Negara Malaysia (BNM) to keep its policy rate steady at 3.0% for a prolonged period.

As long as inflation falls within BNM’s 2-3.5% forecast range, we do not expect the central bank to move. That said, the risk of a hike is higher than a cut in Malaysia, compared to regional peers.

Philippines

The Philippines started its easing cycle in August

The Philippine central bank, Bangko Sentral ng Pilipinas (BSP), embarked on its easing cycle in August, cutting its policy rate by 25bp to 6.25% – even before the Federal Reserve (Fed) had lowered its policy rate.

It is good to look back to see how impressive this was. From 2022 to 2023, not only was inflation in the Philippines the highest in ASEAN, but the economy’s current account deficit was as wide as it was in the run-up to the Asian Financial Crisis. Many, including HSBC, thought that monetary policy in the Philippines had the least independence from the Fed when compared to others in ASEAN.

As headline inflation dropped below 3% y-o-y

However, the Philippines in 2024 held itself together and turned the corner. The authorities cut the tariff for rice – the country’s most ubiquitous staple – from 35% to 15%, setting the stage for headline inflation to ease to below 3% y-o-y, or to within the lower bound range of the BSP’s 2-4% target band. The current account deficit is also moderating at a pace faster than expected, thanks to the economy’s Business Process Outsourcing (BPO) sector booming over the past year. This provides the BSP with inflows to help strengthen the peso and some support to wiggle away from the Fed. And, given how far inflation can still ease, the BSP already signalled that more rate cuts are to come.

Rate cuts should stimulate growth in 2025 & 2026

The easing cycle comes at a good time. Although growth in the Philippines has held up relative to therest of Asia, some cracks are already showing. For instance, growth in household consumption dipped to its lowest level since the Global Financial Crisis, barring the COVID-19 pandemic, while growth in durable equipment investment has fallen for the second consecutive quarter. Credit in the economy also remains weak with the cost of borrowing high. That said, we expect the BSP’s easing cycle to reinvigorate small- to medium-scale investments and reduce the debt burden of households, bolstering growth in 2025 and 2026. We are even more bullish on next year’s prospects, with the tariff rate cut on rice potentially freeing-up 1.1% of the economy for growth.

With inflation on its way down but nothing terrible happening to GDP, we expect the BSP’s easing cycle to be gradual. We expect only one more 25bp rate cut (to 6.00%) in 2024 and pencil in a total of 100bp worth of rate cuts in 2025, bringing the year-end policy rate to 5.00%. We think the easing cycle will end in 2025, so we expect the policy rate to remain at 5.00% throughout 2026.

Singapore

A mixed bag

Singapore has made good progress in its economic recovery in 2024. While the possibility of a technical recession was still on the cards in 2Q23, the recovery momentum continues, helping Singapore to emerge from a severe downturn in the trade cycle to see healthy growth of c3% y-o-y in 1H24.

Consumer electronics is set to lead Singapore’s recovery

While manufacturing remained in contraction, the magnitude was much smaller, and it is also a mixed story. The culprit was falling pharmaceutical output, which is volatile in nature, and could swing back to growth later. Electronics output still saw a decent recovery, though the pace lags behind other tech-exposed economies like Korea and Taiwan Region. But this is because they have heavier exposure to Artificial Intelligence (AI)-related production, and Singapore is set to ride a broader recovery in consumer electronics.

Services came in better-thanexpected

Despite still subdued manufacturing activity, better-than-expected services came to the rescue. But it is also a mixed bag. On a sequential basis, domestically oriented sectors fared better, while consumer-facing and travel-related ones saw large corrections in 2Q. But this was largely expected, as a busy line-up of large-scale international concerts was concentrated in 1Q. That said, there is still potential to grow further. Singapore has welcomed visitors equivalent to almost 90% of 2019’s level in 1H24. July saw for the first time the return of Chinese tourists exceeding the monthly 2019’s level.

All in all, we recently upgraded our growth forecast to 3.0% (previously: 2.4%) for 2024 and maintain our 2025 growth forecast at 2.6%.

Core inflation continued to decelerate in July

In addition, the disinflation progress also continues with core inflation decelerating to 2.5% y-o-y in July. Services inflation like education and healthcare continued to trend down, but entertainmentrelated costs barely budged. Most importantly, fuel and utilities cost momentum was muted, and oil prices are likely to stay relatively range-bound for now. As such, we recently revised down our core inflation forecast to 2.8% for 2024 (previously: 3.1%) and 1.9% for 2025 (previously: 2.2%).

Although we do not think the MAS will cut rates soon

Despite cooling inflation, we do not believe this will prompt the Monetary Authority of Singapore (MAS) to ease anytime soon; at least inflation trends on their own may not be enough to warrant an easing bias from the MAS.

Thailand

It’s complicated

Manufacturing and goods exports picked up steam Thailand’s GDP growth accelerated to 2.3% y-o-y in 2Q 2024, with its fiscal engines finally up and running, despite delaying the release of its budget for six months. The manufacturing production index in July also at last turned positive after falling for roughly 21 months, while goods exports leaped by 21.8% y-o-y as Thailand benefitted from the global tech upcycle. This coincides with the PMI new orders index, which just turned expansionary for the first time in 12 months back in July. All in all, it seems the economy is finally revving up. We expect Thailand to stage a V-shaped recovery for the remainder of 2024, growing 2.7% and 3.7% y-o-y in 3Q and 4Q 2024, respectively.

However, a lot happened before the economy got to where it is now. Amidst tough competition from mainland Chinese imports, headline inflation dropped back to below the Bank of Thailand’s (BoT) 1- 3% target band, while the trade balance swung back into deficit. Thailand also saw its political landscape change quickly: in less than 48 hours after Srettha Thavisin was removed from office, parliament elected Paetongtarn Shinawatra as Thailand’s youngest Prime Minister in history.

Although progress hasn’t been a straight line, the general direction is improving. In fact, amidst the political volatility, financial markets in Thailand finally ticked up after underperforming for 12 straight months. The SET index in September jumped for the first time this year, while the THB nominal effective exchange rate (NEER) is nearing its pre-pandemic levels.

Government spending and tourism are fuelling growth, but headwinds persist

The Thai economy, however, isn’t all in the clear. Yes, government spending and tourism continue to fuel growth. But headwinds persist in manufacturing and consumption. Competition from mainland Chinese imports may limit how far manufacturing can improve while Thailand’s high household debt will likely be a major drag on private consumption.

We expect rates to stay on hold until at least 2027

That’s the complicated part. Although headwinds are strong and inflation is weak, we do not expect the Bank of Thailand (BoT) to ease monetary policy from now until 2027. Keeping the policy rate at 2.50% should help guide Thailand’s much-needed deleveraging cycle, particularly on household debt.

Vietnam

Waiting for further lift

Vietnam’s growth surprised on the upside in 2Q. Vietnam’s economic recovery continues to firm up as the Year of the Dragon progresses. Growth improved and surprised on the upside in 2Q24, rising 6.9% y-o-y in 2Q24. The recovery in the external sector has started to broaden out beyond consumer electronics, although the pass-through to lifting the domestic sector still remains to be seen.

Helped by manufacturing and industrial production

For one, the manufacturing sector has emerged strongly from last year’s woes. PMIs have registered five consecutive months of expansion, while industrial production (IP) has registered a bounce-back in activity for the textiles and footwear industry as well. This has supported robust export growth at double digits, with structural forces, such as expanding market access for Vietnamese agricultural produce, also underway.

However, retail sales are still lagging

However, the domestic sector is recovering more slowly than initially expected, with retail sales growth still below the pre-pandemic trend. Encouragingly, the government has put in place measures to support a wide range of domestic sectors that is expected to shore up confidence with time. Environment tax cuts on fuel and value-added tax cuts for certain goods and services will last until year-end 2024, while the revised Land Law effective from August will buttress the outlook for real estate. Albeit still early, the latter seems to have already contributed to a boost in foreign investment in the sector, with recent FDI showing broad-based gains.

We believe the potential upside risks can offset the temporary economic disruptions from Typhoon Yagi. All in all, we forecast GDP growth at 6.5% for both 2024 and 2025.

Inflation is cooling as unfavourable base effects fade

On inflation, price developments are turning more favourable in 2H24, as unfavourable base effects from energy have faded. An expected Fed easing cycle will also help to alleviate some exchange rate pressures. Taking all these into consideration, we forecast inflation at 3.6% in 2024 and 3.0% for 2025, both well below the State Bank of Vietnam’s target ceiling of 4.5%. ASEAN in Focus: Staying the Course_11

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Owen Li

Economic

A predicted slide in Halloween consumption is the latest blow for heavily-indebted retailers battling mounting overheads and the trend of consumers trading down to cheaper products.

US spending for the holiday will drop by 5 per cent to US$11.6 billion (S$15.1 billion) this year, according to the National Retail Federation. Sales of greeting cards and costumes are likely to see the greatest decline, a hit to merchants reliant on seasonal splurges in what’s already been a tough year for the industry.

Households on the lower end of the income scale are broadly struggling as unemployment has edged higher this year and underlying inflation has remained persistently high. Retailer Michaels Cos. said on a recent earnings call that households earning less than US$100,000 are retrenching, resulting in lower basket sizes.

“2024 has been a perfect storm for retailers of all stripes,” said Erica Weisgerber, a partner at law firm Debevoise & Plimpton. “Inflation, high operational costs, and reduced consumer spending have been especially challenging for brick-and-mortar retailers, and online retailers have struggled with steep competition from e-commerce giants like Amazon.”

Many of the troubled firms, including Michaels and At Home Group, are owned by private equity managers after buyouts during the pandemic proved ill-timed when interest rates rose and inflation crimped household budgets. Home, clothing and hobby retailers dominate the list of distressed retailers because the size of their debt means they lack the liquidity to compete with better capitalised competitors, according to Moody’s Ratings.

Still, Michaels and At Home are hopeful that they can win a larger slice of the holiday spending. At Home saw a strong start to Halloween spending after flat second-quarter net sales of about US$443 million, chief financial officer Jerry Murray said on a September earnings call.

Michaels also saw a revenue pop tied to Halloween as customers began to buy inventory earlier this year, according to people on last month’s earnings call. That’s a fillip for the firm whose earnings declined by about 20 per cent to US$50 million in the second quarter from a year earlier, the people said, asking not to be identified as the information is private.

The pullback is creating challenges for the wider industry and has contributed to several high-profile bankruptcies this year, including Joann Inc., Big Lots and Conn’s Inc. It also makes it harder to turn around firms simply by slashing costs.

With capital markets shunning troubled firms, more retailers turned to bankruptcy rather than distressed exchanges over the past year as the companies require deeper restructuring that is best done in court, Moody’s Ratings said in a report last month. It’s part of a wider trend that saw quarterly filings for Chapter 11 bankruptcy protection rise to the highest level since 2012 in the three months through June.

Private equity’s widespread failure to hedge against rising borrowing costs also means it’s less able to come to the rescue of troubled firms, which could have knock-on effects for the economy and jobs.

Source: Straitstimes

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CEPR

Economic

Few cases better illustrate the ‘reversal of fortune’ phenomenon in economic history than that of Portugal. Throughout the early modern period, Portugal was a leading European colonial power, establishing imperial concessions first in Africa and South Asia and later – more importantly – in Brazil. Thomas and McCloskey (1981) called the Iberian countries the “giants” of the 16th century, contrasting them favourably with Britain, an “inconsiderable little island … a mere dwarf”. In 1750, Portuguese output per capita exceeded French and Spanish levels; Lisbon was Europe’s fourth most populous city. Only a century later, however, Portugal was the poorest nation in Western Europe, doomed to a period of economic stagnation that lasted into the early decades of the 20th century.

Historians have long sought to explain this puzzle. One influential strand of scholarship, in the tradition of North and Weingast (1989) and Acemoglu et al. (2005), argues that longstanding institutional differences explain Portugal’s backwardness. Portugal, like Spain and France, is said to have had “political institutions at the turn of the 16th century … more absolutist than those in Britain and the Netherlands” (Acemoglu et al. 2005: 568). This would have consigned Portugal to slow growth in subsequent centuries. Recent research, however, casts doubt on this narrative. Henriques and Palma (2023), for example, show that meaningful institutional differences between England and Iberia did not emerge until at least the second half of the 17th century, while Palma and Reis (2019) demonstrate that Portugal experienced substantial economic growth in output per head from the mid-17th to the mid-18th century.

We propose that the resource curse – specifically, the Brazilian gold rush of the 18th century – as an alternative explanation for the Portuguese decline (Kedrosky and Palma 2023). During the first four decades of the 18th century, Brazilian gold production rose by over seven times, from less than 20,000 kg to more than 140,000 kg (TePaske 2010). Over 80% of this total was exported to Portugal (Costa et al. 2016: 204). The classic work of Corden and Neary (1982) suggests that a boom in a natural resource sector can trigger de-industrialisation by raising the prices of non-traded goods relative to traded goods (the real exchange rate), draining the latter of factors of production. We show that a similar process took place in 18th-century Portugal: the influx of Brazilian gold shifted production towards land-intensive, non-tradable goods and promoted the import of English manufactured goods, at the expense of domestic industry.

To assess this theoretical prediction, we use prices and wages collected from primary sources. We compute baskets of traded and non-traded goods to generate a measure of the real exchange rate in four Portuguese cities and combine them with population weights to create a national average. The results show that a substantial appreciation of the real exchange rate – in the order of 30% – took place during the 18th century, coincident with an upsurge in the importation of gold from Portuguese Brazil (Figure 1). This appreciation – an increase in the price of non-traded relative to traded goods – likely reduced employment in Portugal’s nascent manufacturing and cereal agricultural sectors, blocking Portugal’s path towards structural transformation and industrialisation.

The Cross of Gold: Brazilian Treasure and the Decline of Portugal_1

Qualitative evidence on Portuguese history during the 18th century reinforces the narrative suggested by the real exchange. Land-intensive, non-traded primary products like meat became increasingly expensive relative to textiles and cereal grains, which could be imported from abroad (holding prices down). Wages rose during the initial boom in the first half of the century, before weakening thereafter. Amid surging inflation, Portugal ran rapidly increasing current account deficits with major trading partners, which troughed at 4 billion reis during the 1750s. The deficit with England, which ballooned to over a million pounds per annum in 1756–60, was of particular concern: most English exports were manufactured woollens, exchanged for increasing quantities of Brazilian gold (Fisher 1971: 197). Indeed, it was Portugal’s trade with England – receiving textiles in exchange for gold and wine – that inspired Ricardo’s concept of the division of labour.

Belated efforts to protect and promote manufacturing towards the end of the 18th century proved unsuccessful: establishments were of insufficiently large scale and slow to adopt new technologies. Grain imports, especially in coastal cities like Lisbon, also rose during the late 18th century, exacerbating low productivity in cereal agriculture. Both trends slowed Portugal’s transition out of the primary sector and inhibited long-run growth. Indeed, as Figure 2 below shows, the share of the Portuguese workforce outside manufacturing declined after 1750.

The Cross of Gold: Brazilian Treasure and the Decline of Portugal_2

To assess the aggregate impact of the resource curse on Portuguese economic growth, we perform a synthetic control exercise, fitting Portugal’s pre-1694 growth trajectory to a sample of European countries to create a counterfactual trajectory for the 18th century. Our results indicate that by 1800, after a temporary mid-century boom, Portuguese GDP per capita may have been as much as 40% lower than the pre-gold counterfactual trend (Figure 3). While this outcome must be interpreted with caution, given the small sample size, it suggests that the resource curse imposed a significant growth penalty on Portugal at a critical stage of its development. Our results are similar in direction and magnitude to those found by Charotti et al. (2022), who analyse the effects of Dutch disease on Spain amid the post-1500 influx of New World silver.

The Cross of Gold: Brazilian Treasure and the Decline of Portugal_3

Our paper sheds light on the causes of the ‘Little Divergence’ between Northwest Europe and the rest of the continent. The contingent nature of Portugal’s economic collapse suggests that inherent initial differences in institutions and geography did not predetermine intra-European divergence, but that this process was mediated by historical shocks with differential effects on the countries involved. For example, England – a ‘second-stage’ receiver of Brazilian gold via textile exports to Portugal – benefited significantly from the same process that hampered Portuguese development (Chen et al. 2022). Without the gold influx, it is possible to conceive of a counterfactual Portugal that took advantage of its imperial domains as a captive export market for a nascent manufacturing industry, one of the engines of growth effectively harnessed by Great Britain over the same period. With it, Portugal was reduced to a poor, quasi-dependent primary product exporter in Britain’s orbit.

Understanding how industrial and political development could be diverted is crucial to locating the sources of economic progress, both in the early modern world and in the present. Resources and institutions often play contradictory roles in this process; unravelling how the two interacted in different historical contexts is a step towards solving the eternal mystery of development.

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SAXO

Economic

What happened?

On October 16, 2024, ASML, the Dutch semiconductor equipment giant, mistakenly published its quarterly earnings report ahead of schedule. While the earnings themselves were in line with expectations, it was the company’s forward-looking guidance that caused shockwaves in the market. ASML lowered its forecasts, citing a slowdown in semiconductor demand and uncertainty in the macroeconomic environment, leading investors to reassess its growth prospects.

The U.S.-listed shares (ASML ADR) immediately reacted, dropping over 16%. The next morning, when European markets opened, the Dutch listing followed suit, sending many investors into a scramble to manage their positions. With volatility spiking, many clients who sold naked puts or held other options positions on ASML found themselves facing difficult decisions.

Smart Investor - ASML Earnings: What Happened and What to do Next?_1

Ok, now what?

In times of sharp market drops, it’s easy to panic and make decisions based on emotion. However, before taking any immediate action, it’s important to assess your situation thoroughly.

Do you need to take immediate action?

If you have received a margin call due to a short put position, you may need to act quickly. Consider whether you have enough capital to cover the margin or if it’s necessary to adjust your positions (such as closing or rolling) to avoid forced liquidation.

For others who aren’t facing urgent margin requirements, take a deep breath. Before panicking, let’s walk through a few key questions that can guide your next steps: Has your long-term outlook on ASML changed? Do we need to focus on damage control, or is this an opportunity?

Evaluate the situation

Has your long-term outlook changed?

The first thing to consider is whether ASML’s long-term investment case is still intact. While the short-term guidance looks concerning, some analysts believe that ASML remains a pivotal player in the semiconductor and AI industries.

In the AI and advanced semiconductor markets, ASML holds a critical position, particularly with its leadership in extreme ultraviolet (EUV) lithography technology. Despite this earnings report, the long-term demand for AI chips and semiconductor technology could still provide substantial growth opportunities.

As highlighted in our colleague's detailed analysis ASML earnings report – canary in the AI mine, while there are immediate headwinds, ASML’s position in the supply chain for advanced AI chips could drive future recovery, even as the company navigates a tough short-term environment.

Damage control vs. opportunity

Depending on your view of ASML’s future, your response may differ:

Damage control: If you believe the company’s prospects have materially worsened, it might be time to manage risk and reduce your exposure to further downside. In this case, rolling options down or closing positions at a loss may be more prudent.

Opportunity: On the other hand, if you see this drop as an overreaction and still believe in ASML’s long-term potential, this could be an opportunity to increase your exposure at a lower price or to manage your options in a way that capitalizes on higher premiums from elevated volatility.

Strategy discussion

Once you’ve assessed the situation and your outlook, here are some strategies to consider: For those who have sold naked puts, there are several paths forward depending on the position. If your puts are still out-of-the-money or have a longer time until expiration, you may prefer to wait and see if the stock recovers. However, if you're in-the-money or at risk of assignment, strategies such as rolling to take advantage of higher premiums, or accepting assignment and selling covered calls, could help manage risk and capitalize on the elevated volatility.

Taking assignment

For those who sold naked puts and still have confidence in ASML’s future, accepting assignment could be an attractive option. By accepting the shares at the strike price, you can hold the stock at a lower price while potentially benefiting from a future recovery. After assignment, you can sell covered calls to generate income while holding the stock.

Take advantage of higher premiums: Due to the recent drop, implied volatility has increased, which could allow you to collect higher premiums on covered calls. Selling covered calls can help you generate additional income while holding the stock during its recovery phase.

Smart Investor - ASML Earnings: What Happened and What to do Next?_2

Rolling down and out

If you’re looking to reduce risk but don’t want to close your position entirely, consider rolling your short puts to a lower strike price and a later expiration. This allows you to avoid immediate assignment while still collecting some premium due to the increased volatility.

Benefit from elevated volatility: Rolling your puts when implied volatility is high can lead to higher premiums. This means you can collect more income from rolling your option while also adjusting the strike price to better fit your risk tolerance in light of the stock’s current price level.

Closing the position

For those who are uncomfortable with the current risk or don’t want to own ASML shares, closing the position may be the best option. Even though this may result in a loss, it allows you to avoid potential assignment and further downside risk if the stock continues to drop.

Looking to the future: How to avoid this in other positions?

This sudden drop in ASML is a reminder of how quickly markets can move, even for large, high-quality companies. While it’s impossible to predict or avoid every adverse event, there are key strategies that can help you manage risk and protect your portfolio from future surprises:

Diversification

Diversifying your portfolio across different stocks, sectors, and asset classes can help you mitigate the impact of sudden downturns like this one. Relying too heavily on one stock or industry exposes you to concentrated risk, which can amplify losses during an unexpected event.

Position sizing

Selling naked puts can be an effective strategy in the right conditions, but it’s crucial to manage position sizes carefully. Ensure that no single position is large enough to threaten the overall health of your portfolio. In the case of sharp market moves, like what we’ve seen with ASML, a well-sized position will help keep potential losses manageable.

Volatility awareness and risk-defined strategies

Consider using risk-defined strategies such as put credit spreads rather than naked puts. Spreads can still generate income while capping your maximum risk in case of a market shock. Furthermore, keeping an eye on volatility, especially around earnings or major news events, can help you decide when it’s safer to avoid selling naked options.

Closing thoughts

While the short-term drop in ASML’s stock price is unsettling, it’s important to take a measured approach. Evaluate your current positions based on your long-term outlook, and choose a strategy that aligns with your risk tolerance and investment goals.

For a more detailed analysis of ASML’s earnings and long-term prospects, we recommend reading ASML earnings report – canary in the AI mine, which explores the company’s position in the evolving AI and semiconductor sectors.

By staying disciplined and managing risk appropriately, you can navigate this challenging environment and position yourself for long-term success.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Owen Li

Economic

Citigroup has struggled to adequately train employees in risk, compliance and data roles, according to the bank's own assessment, shedding light on why it is taking it years to fix regulatory issues even as billions are spent on an overhaul.

Citi’s analysis, a portion of which was seen by Reuters and has not been previously reported, shows the bank has been grappling with a shortage of skilled personnel, finding at times that it did not have the right training and assessment tools to fix its regulatory challenges. The bank, which has for the past four years been operating under two regulatory reprimands, called consent orders, must resolve these problems for the decrees to be lifted.

In one place, for example, the analysis cites "insufficient compliance risk management skills” among staff directly dealing with such issues. The sections of the analysis seen by Reuters did not address why Citi had not been able to fix these issues. They were laid out in a December 2023 spreadsheet tracking Citi's progress on various aspects of the consent orders.

Separately, four sources familiar with the matter said the situation was further complicated when CEO Jane Fraser launched a massive exercise in September 2023 to simplify the bank, firing thousands of people and reducing the number of management layers there.

In the process, some staff involved in issues related to the consent orders were also let go, according to the sources.

Reuters could not independently determine whether the layoffs set back the bank's overall efforts to resolve the consent orders. Without providing specifics, Citi denied this, saying that "cherry picking numbers will paint a misleading picture."

"We continue to invest heavily in talent and training to ensure we have the right people and expertise in critical areas such as data, risk, controls and compliance,” the bank said in a statement. It added that it proactively assesses "the evolving skills needed so that we can hire" and enhance skills accordingly.

In response to questions posed by Reuters, Citi said further that it has invested billions of dollars in its "transformation," a project to address risks, controls and data management – issues raised in the 2020 consent orders from the U.S. Federal Reserve and the Office of the Comptroller of the Currency. The analysis seen by Reuters was done in response to the Fed’s consent order.

Citigroup said it had about 13,000 people dedicated to the project to overhaul its controls and systems, with thousands more supporting the effort across the bank. The bank has about 229,000 employees overall.

The Federal Reserve and the Office of the Comptroller of the Currency declined to comment.

CEO Jane Fraser has said previously that resolving Citi’s regulatory problems is a top priority. Regulators have said the bank's widespread risk and data flaws they have identified speak to its financial safety and soundness. The bank was put in the penalty box after it mistakenly sent nearly $900 million of its own funds in August 2020 to creditors of cosmetics company Revlon.

In July, the Fed and the OCC once again reprimanded and fined the bank. The OCC said Citi had “failed to make sufficient and sustainable progress” in complying with its consent order. The OCC also required it to enact a new quarterly process to ensure it devoted enough resources to meet compliance milestones. As of mid-July, the plan had not been agreed with regulators.

Last month, the company announced its technology head Tim Ryan would take on data management efforts alongside Chief Operating Officer Anand Selvakesari.

HARD PROBLEMS

The bank's analysis shines a light on why the problems are proving to be intractable. In one section, for example, the bank said its staff's technical skills, including on data governance -- policies that set out how data is handled -- needed to be improved. But then it also noted that when it came to data governance, its training curriculum did not sufficiently address "skills identified as needing enhancement."

It also identified areas such as data analytics and digital literacy as needing improvement.

For critical roles in compliance, the bank found it had not spelled out the skills that were needed to succeed. It also said it did not have an adequate assessment of whether employees had the right skills sets for those functions.

Citi did not comment on the specific issues raised in its analysis.

CITI LAYOFFS

The sources familiar with the bank's operations said Fraser's layoffs led to the removal of some of the people involved in regulatory work.

In risk management, for example, the bank laid off or redeployed 67 people out of a group of 441, according to a Citi document that lists some of the roles affected in one of the rounds of layoffs.

Some of the sources said the layoffs disrupted work because employees feared for their jobs and loss of managers at times meant lack of direction. But Citi challenged this view, saying it was careful to not let the layoffs affect work on consent orders.

"The facts speak for themselves, but cherry-picking numbers will paint a misleading picture of the significant resources dedicated to this effort," the bank said. "Our approach was disciplined and methodical, and prioritized protecting our ability to deliver on our regulatory commitments and accelerate this important work."

Source: The edge markets

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Alex

Economic

The war on inflation is not over, but judging by the data, some battles have been won. In August, the annual rate of inflation was 2.5 percent in the United States and 2.2 percent in the eurozone. Core inflation, which excludes energy and food, was 3.2 percent and 2.8 percent in these areas respectively. Money printing has been brought under control and the proportional rise in prices has slowed since June 2022 in the U.S. and October 2022 in the eurozone. Central bankers have always claimed that their goal is low inflation (about 2 percent), rather than stable purchasing power for the dollar and euro. By that metric, success is in sight.

Moreover, the public is calm, expecting slowdowns in the price indexes before long. Most people are not aware that inflation has major redistributive effects, and that the low- and middle-income earners usually get hit. But workers realize that inflation ends up eroding their purchasing power; homeowners worry when rising nominal interest rates make their mortgages heavier; and pensioners know that under high inflation the real return on safe securities such as bonds drops to zero or turns negative.

That said, big government and part of the business world have other priorities and possibly other plans. The 2 percent inflation target may not be the true target.

Red lines for monetary expansion

Governments traditionally like generous monetary policies in general, and money printing in particular. They believe that by increasing the money supply – for example, by manipulating interest rates – they can create economic growth, while newly printed money can be used to buy treasury bills, thus allowing policymakers to finance public expenditure “for free,” without resorting to taxation or private savings.

But things have changed. After the major blunders of the past couple of decades, the “print what it takes” mantra has now been replaced by the “prudent monetary policy” slogan, where “prudent” means that monetary policy should be as generous as possible without unleashing a rate of inflation judged intolerable to the electorate. This shift raises two big questions: What delineates the red line for monetary expansion, and how can policymakers ensure they do not cross this line?

Both the U.S. and several European Union governments are currently in need of generous monetary policies and inflation support. This demand is not a recent development; as mentioned above, governments require additional revenue to manage public deficits. They also benefit from low interest rates that reduce the cost of borrowing and debt-servicing and boost private investment and debt-financed households’ consumption. Governments also need inflation to rein in some key expenditure items in real terms (such as state pensions), reduce public indebtedness in real terms, and possibly enhance debt sustainability (the debt-to-GDP ratio).

There is no objective way to determine the point at which monetary profligacy becomes alarming, but it takes time – at least two years – before monetary policy fully translates into consumer price inflation. People’s unease depends on their short-term debt-servicing (interest rates are often linked to inflation) and on how much they depend on capital income (including pensions). Of course, the latter effect is larger in countries with older populations. In this light, government action can take three different paths, as described in corresponding scenarios.

Scenarios

Most likely: Gradual easing

The most likely option involves central banks cautiously lowering interest rates to sustain economic growth, and keeping them low unless inflation resurges. The target could be set at around 3 percent for the U.S. federal fund’s rate and 2 percent for the European Central Bank deposit facility rate. Such a move would meet with the approval of the political and business spheres, and there would likely be economists ready to provide theoretical justifications for this course of action. After all, this trick worked from the late 1990s until 2021, and some may think it could work again. Central banks, aware of the short timeframes that characterize political cycles, would bear a minimal cost if the gamble backfired and the threshold were reached earlier than expected.

Less likely: Defining boundaries

A second, less likely option would be for policymakers to seek to determine where the threshold lies for maintaining tolerable inflation and acceptable interest rates. On this path, policymakers would note that American households and voters are seriously concerned about capital incomes (private pension plans play a larger role in the U.S. than in Europe) and private debt, which amounts to some $140,000 per household. In comparison, average household debt is about $42,000 in Italy, $56,000 in Germany and $70,000 in France.

During the 2010-2020 period, nominal interest rates on personal loans in the U.S. were close to 10 percent, and Americans have historically reacted nervously as soon as rates started rising above that level (they are currently 12 percent). They also focus on nominal rates, as incomes tend to lag behind inflation. On the other hand, capital-income earners expect their quasi risk-free assets to yield at least 1 or 2 percentage points in real terms. Failure to meet this target encourages them to take chances and move their wealth to the stock market. This puts pressure on the bond market and causes interest rates to inch higher.

The authorities are faced with a dilemma: To defuse alarm, they must ensure that nominal interest rates drop a couple of points. At the same time, they have to keep inflation below 3 percent, so that the real return on safe securities is consistent with people’s expectations. To achieve this, central banks must bring money printing almost to a halt in the hope of killing inflation expectations, drive interest rates down to encourage the banking sector to expand their lending activity (making the money supply rise), but also be ready to slam on the brakes should price inflation rise above 3 percent. This is a tricky path; the record of experimenting with fine tuning is poor, and economic growth is required to ensure that a modest rise in the money supply does not translate into excessive price inflation. But it could work.

The above applies to the U.S., but the line of reasoning is similar for Europe. However, the European Central Bank may have an easier job: European households are, as noted, less indebted than their American counterparts, and therefore less sensitive to interest rates. Moreover, price inflation is currently lower than in the U.S. and more or less under control. All in all, European authorities face laxer threshold constraints, and holding a steady course would not be overly problematic. Europe’s major problem is the EU’s relentless ambition to engage in grand and very expensive, presumably bond-financed projects, accompanied by growth-killing regulatory straitjackets. That is a recipe for failure.

Somewhat less likely: Abandoning prudence

The third and somewhat less likely scenario entails a situation in which central bankers on both sides of the Atlantic are put under pressure to depart from a prudent policy path and engage in money printing and/or aggressively cut interest rates to solve public finance problems. While this approach may offer a temporary respite, it risks plunging Western economies into a monetary crisis, with geopolitical ramifications potentially favoring China and most low-income, highly indebted countries.

China, for one, would eagerly exploit any dollar and euro crises and renew its efforts to make the yuan a widely accepted reserve currency. Meanwhile, the low-income, highly indebted countries, being burdened by heavy debt servicing costs – high interest rates on loans outstanding and repayment of principal – see two possible outcomes: the fall of the dollar and the euro, or default on their foreign debts. Nonetheless, these geopolitical consequences would probably pale in comparison with the domestic dramas that a monetary meltdown would trigger in Western countries.

The most probable scenario will not center around the official 2 percent inflation target. Instead, policymakers are likely to shift their focus toward the constraints imposed by acceptable nominal interest rates and price inflation. Although there is some flexibility in these in the short term, it is clear that in the long run interest rates cannot be significantly lowered from current levels without risking rampant money supply growth. A crucial factor will be the ability of central bankers to disregard persistent calls for continued public spending and increased debt – both domestically in the U.S. and Europe, and further afield, from low-income countries.

Source: GIS

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Goldman Sachs

Economic

Trade globalization has been a major point of contention in western economies in recent years, amid concerns about the loss of manufacturing jobs and control over critical supply chains. But despite a rise in trade barriers, there are few signs that manufacturing deglobalization is underway, according to Goldman Sachs Research.

“Our research shows Asia has continued to gain market share, both in terms of world manufacturing and world manufacturing exports,” says Patrick Creuset, the senior analyst for European transport, infrastructure, and construction sectors in Goldman Sachs Research. His group’s work analyzing trade data shows both growing volume and increasing complexity in the shipment of goods around the planet. That combination of growth and rising trade friction is creating opportunities for logistics and shipping companies, he says.

We talked to Creuset about the outlook for shipping and what his data and research reveal about trends in global trade and deglobalization.

What does your research show about global trade patterns?

The wave of China-driven trade globalization that we saw in the decades leading up to the Great Financial Crisis peaked in 2008. You can see since then the ratio of global trade to GDP stalling, and the trade multiplier — the rate of growth in trade relative to growth in GDP — trending down. It’s fair to say that globalization has stalled since that pivot point about 2008. But it’s not really gone into reverse.

Global Trade is Showing Resilience Despite Rising Barriers_1

And the period we’re more interested in is basically between 2016-2018 and today, from the beginning of the US-China trade tensions during the Trump presidency, which is six or seven years of data. We wanted to know: To what extent in that period have supply chains shortened? Has there been nearshoring? Has the world been deglobalizing?

And we found, perhaps surprisingly, that the Asia-centric trade globalization trend that we saw before that period has certainly not gone into reverse. Actually, our research shows Asia has continued to gain market share, both in terms of world manufacturing and world manufacturing exports.

Why has the center of gravity of global trade in goods remained in Asia?

We’ve been mapping in recent years the fastest-growing and fastest-declining trade lanes. Out of the 10 fastest-growing routes for trade in goods, all originate in Asia. And the majority actually originate in China. A Europe-centric map doesn’t work. You naturally have China and Asia in the center, with outgoing arrows, and you start to see patterns.

Global Trade is Showing Resilience Despite Rising Barriers_2

What we see falls into three buckets for these fast-growing trades. One is friend-shoring, the realignment of trade along geopolitical fault lines, such as increasing China-Russia trade. Another is what I categorize as rerouting of Chinese exports, with Chinese goods flowing into, for example, Southeast Asia, Vietnam, and Mexico, for re-export from there into the US. In these cases, at least the intermediate goods still originate in China or Asia.

The third bucket, too often overlooked, is trade between Asia, and the Global South, the developing world outside of Asia, in Africa and Latin America. That trade seems to have followed capital exports under China’s Belt and Road network. That initiative is not necessarily the single cause of it, but we’ve seen strong, dynamic trade there, outside of the traditional east-west trade between Asia and Europe and the US.

And trade routes to and from Europe aren’t growing?

That’s right. When you look at the trade routes that have been declining in real volume terms, many of them originate in Europe. You also have some China inbound, which may reflect the weakness in Chinese consumption that we’ve seen. Essentially this amounts to a bit of market share loss in world manufacturing and exports for Europe.

You can see this also in a ranking of the world’s largest container shipping gateways that we have in our report. If you map that out, the vast majority are in Asia. If you compare it to 15 or 20 years ago, the big ports that have fallen out of the ranking are all European ports. The biggest US port, Los Angeles-Long Beach, is basically a gateway for Asian imports and has continued to grow.

Why haven’t changes in supply chains or deglobalization had a bigger effect?

It’s surprising, right? There’s so much inertia in the current system. Despite the tariffs that have been put in place and higher trade barriers, the nature of the system hasn’t changed.

One thing we would highlight is that the Chinese manufacturing labor force comprises 140 million people. If you wanted, for example, to nearshore 10% of that to Europe or North America, you would have to recreate the equivalent of 1.5 times Mexico’s or Germany’s current manufacturing labor force. That’s not impossible, but it would take quite a bit of time just given the numbers involved.

There’s also the labor cost differential between developed and emerging economies. While a typical US manufacturing wage will be close to $6,000 a month, and Germany’s similar, in China a typical manufacturing wage is still around $1,000 a month. And elsewhere in Southeast Asia, it might be half that.

We would also make a point around infrastructure, which is pretty topical in the US these days. The port and logistics infrastructure required to handle these volumes is basically all in Asia. And also the productivity of top-performing Asian ports is double the best North American port.

What are the implications of this for the logistics and shipping companies you cover?

This is perhaps surprising too. If you accept the deglobalization or nearshoring thesis, you expect that the global logistics and shipping industry would make less money, because there’s less trade. Actually, as we have shown, trade has kept growing, albeit moderately. And the complexity of those trade volumes has gone up significantly.

The increased complexity is important. Where you have multi-sourcing strategies for supply chain resilience, you have more customs paperwork and have to clear more borders. To the extent you have higher tariff and non-tariff trade barriers, again that can create more paperwork and complexity. Geopolitical friction, meanwhile, can create barriers to trade, such as the closure of Russian or Ukrainian airspace or the need to route around the Suez Canal because of attacks in the Red Sea. You can add environmental factors such as low water levels in the Panama Canal, which last year restricted capacity there. All of these different barriers create more volatility and complexity.

We think of the logistics and shipping industry on two axes, basically, that are drivers of total addressable market. One is trade growth, and the distance the trade travels. The other dimension is complexity. When you have supply chains that are still essentially global but much more complex, the profit potential for logistics and shipping increases.

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