How Ukraine Reconstruction Could Help Europe

Justin

Political

Economic

Russia-Ukraine Conflict

Summary:

Hopes and hurdles for enlargement process spurred by Russian war.

‘Ask not what you can do for Ukraine – ask what Ukraine can do for you.’ President John Kennedy’s paraphrased inaugural 1961 address provides a foretaste of potential benefits across Europe if reconstruction and integration of the war-torn country go ahead.

Although the war triggered by Russia’s invasion in February 2022 shows no signs of ending, it has significantly accelerated planning for Ukraine’s European Union membership. EU leaders last week broadly endorsed plans for reform to enable membership of the bloc by Ukraine, and up to eight other aspirants, over the next decade. The meeting in the southern Spanish city of Granada was overshadowed by member countries’ differences on immigration – just one indication of the hurdles ahead.

An OMFIF seminar in Brussels on 5 October on the euro area’s economic and monetary position and Ukraine’s gigantic reconstruction needs analysed the many challenges. Public and private sector experts agreed that the fates of Ukraine and the EU are intertwined. Even though the US and China will be the main players in engineering an eventual Russo-Ukrainian settlement, the EU will play a role in the diplomacy, if only to help with funding and integration outcomes.

Ukraine’s possible reconstruction and integration

Efforts to resolve Ukraine’s reconstruction problems overlap with its EU accession request, linked to growing co-operation with the North Atlantic Treaty Organisation – the subject of further talks with President Volodymyr Zelenskyy in Brussels on 11 October. A major condition for moving private and public capital into Ukraine will be enactment of reforms for transparency and robust governance. The use of technology, for example, through blockchain systems that can track and guide reconstruction spending and constrain opportunities for corruption, loomed large in the OMFIF discussions.

Along with a war on its doorstep, the EU faces colossal spending pressures and challenges of energy security and strategic autonomy. These are interlocking issues that demand bloc-wide answers. On an optimistic view, Ukraine’s accession – assuming a relatively favourable geopolitical environment – can help overcome these difficulties, promoting additional economic activity and delivering important strategic resources.

A pessimistic reading would produce a less benevolent set of outcomes. The fresh Middle East war following the murderous 7 October Hamas assault on Israeli territory will complicate the Ukrainian conflict in ways which cannot yet be fully assessed.

A change of plan and ‘concentric circles’

The EU will have to change its internal procedures to cope with a wave of accession that could take membership from 27 to 36 by the early 2030s. This would include Ukraine together with Moldova and possibly Georgia, as well as six western Balkan countries – Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia. The informal EU timetable for bringing in the new members by 2030 is highly ambitious. Yet without a rigorous target, the aim is likely to be missed by a still larger margin.

The EU would like to advance new adherents as a group to intensify pressure for necessary reform by would-be members. But adherence will be ‘on merit’, so some could be left behind. Ukraine is at the head of the queue, although its size, relative poverty and rebuilding requirements increase immeasurably the complexity of its candidature.

European officials speak about a balance of costs and rewards for the aspirants. A system involving long transition periods for access to EU funds and markets, and trade-offs over rights to both votes and access, seems likely. This has revived talk of ‘concentric circles’ encompassing different EU membership categories – an idea that could prove relevant for the UK if British attempts to rejoin the European mainstream accelerate in coming years.

Overshadowing everything is the scale of reconstruction for Ukraine, where specialists are only beginning to prepare estimates. There is positive news about life returning to normal in many parts of the country and the relative localisation of military activity. Big question marks surround the conditions which could help spur the return of the 8m Ukrainian citizens, now refugees abroad. Reassembling this human capital in Ukraine is essential for the country’s future.

Governance framework and blockchain solutions valuable for controlling disbursements

Meanwhile, the European Council is due to deliver an accession endorsement decision on 8 November. Officials warn against inflated expectations, saying ‘nothing revolutionary’ is likely. Support is already similar to structural funds channeled to many EU member states, totaling around €50bn over four years, of which 80% is in loans and 20% in grants – unprecedented funding for a non-member.

Coordination challenges among various partners are similar to those facing the EU over disbursing Next Generation EU funds for member countries. As is frequently the case in international aid, the recipient’s governance framework is pivotal. Lenders and donors will be reluctant to send money into an environment where they cannot be confident that it will be used as intended. The reforms required for EU accession will go some way towards establishing a robust governance architecture, but Ukraine faces operational challenges to ensure that it has the capacity to track how the money it receives is used and what impact it has. Blockchain solutions may prove valuable here. The systems being used to track NGEU spending also provide a valuable opportunity to learn what is technically required to deliver a high degree of oversight on the use of recovery grants.

Ukraine’s agriculture and energy sectors, if handled properly, could contribute to Europe’s strategic autonomy and growth. While the war is active, insurance and reinsurance require careful attention and even afterwards, some investment projects are unlikely to be commercially viable and must be funded with grants. But much of the work needed represents a major opportunity for private investors. Some features of Ukraine’s economy are particularly suitable. The prevalence of large scale agribusiness makes this sector easier to finance than the relatively small farms that are common in parts of Europe. Securing access to both bank lending and capital markets will be a significant factor.

The scale of investment required is far beyond Ukraine’s absorption capacity. The cross-border effects – for example, for Polish construction companies – could boost Ukraine’s neighbours. One participant at the seminar outlined Ukraine’s potential for improving Europe’s security in military technology, energy, food and materials. In lithium extraction, nuclear generation, development of hydroelectricity and other renewables and harnessing of large-scale agriculture, Ukraine has much to offer, the delegate said. None of these fields is free from controversy. All of them offer grounds for hope as well as plentiful debate in years to come.

Source:David Marsh

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Thomas

Stocks

The Tokyo Stock Exchange (TSE) started trading carbon credits on Wednesday, a key element in Japan's strategy to tackle climate change.

The world's fifth-largest carbon dioxide (CO2) emitter is the latest among Asian nations to formulate plans for a carbon pricing mechanism and emissions trading system, aiming to cut emissions by 46 per cent from 2013 levels by 2030 and achieve net zero by 2050.

What is Japan aiming to accomplish with the scheme?

The carbon pricing scheme, which Japan launched in April in a staged rollout, is aimed at speeding up decarbonisation to help limit global warming in a country that has lagged other major economies in implementing policies to curb emissions.

Japan believes the scheme, which combines emissions trading and a carbon levy, will help make the world's third-largest economy greener while maintaining the global competitiveness of its industries, including heavy emitters like steelmakers.

Europe and the United States have developed state support tools to help the private sector meet risks and costs associated with green investments.

The Japanese government estimates the public and private sectors will need to invest more than 150 trillion yen ($1 trillion) in decarbonisation measures over the next 10 years.

It will contribute 20 trillion yen of the total by issuing bonds, with the revenue from the carbon levy and emission allowances to be used to finance the redemption.

How is the emissions trading scheme being rolled out?

The scheme, based on proposals mainly by Japan's ministry of economy, trade and industry and approved by the cabinet this year, consists of emissions trading and a carbon levy.

As a first step, the TSE launched a new carbon credit market on Oct. 11, 2023 to trade the existing carbon credits, known as J-Credits.

In the next step, Japan's version of an emissions trading system (ETS) will start in 2024 involving a forum for "green transformation" called the "GX League".

Participants - about 680 companies as of the end of January accounting for more than 40 per cent of Japan's emissions - will be given emissions allowances and required to set emissions-cutting targets that will help the country meet its 2030 and 2050 goals.

Companies that beat their targets and the country's target, will be able to sell emissions allowances, while those that do not meet their targets would need to buy allowances.

Details have yet to be finalised on GX League emissions trading, due to begin on the TSE next October.

By the 2026/27 fiscal year, Japan aims to set guidelines for the ETS and introduce a mechanism for third-party certification of companies' targets to make the system fair and effective.

Official supervision may also be introduced for those abusing the system.

From around 2033/34, auctions for emission allowances for power producers will begin.

A carbon levy will be introduced from around 2028/29 on fossil fuel importers such as refiners, trading houses and electricity utilities. The initial tax will be set low but will gradually rise.

How will TSE's carbon trading work?

A total of 188 entities had registered as participants of TSE carbon credits trading as of Sept. 19. Trading hours are 9:00-11:29 a.m.(0000-0229 GMT) and 12:30-2:59 p.m. (0330-0559 GMT).

Via the new market, registered members can trade J-Credits on the TSE, a unit of Japan Exchange Group Inc. Transaction prices are set twice a day and published after trading hours.

Under the J-Credit system, the government certifies as a "credit" the amount of greenhouse gas emissions, such as CO2, reduced or removed through efforts to introduce renewable energy, energy-saving equipment or forest management.

($1 = 148.6400 yen)

Source: Reuters

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Devin

Economic

Europe plans to end the anti-trust exemption for container alliances

The European Commission has announced it will not extend the block exemption for container liners which expires 25 April 2024. This exemption enabled container shipping companies with a combined market share of up to 30% to provide joint services to clients, and resulted in the formation of three large alliances, 2M (Maersk, MSC), The Alliance (Hapag-Lloyd, HMM, Ocean Network Express and Yang Ming) and The Ocean Alliance (CMA CGM, Cosco, OOCL, Evergreen), as companies sought to manage capacity and share their networks.

The exemption in the cyclical container liner market was first introduced during the global financial crisis in 2009 and extended in 2014 and again in 2022. In the early stage of the pandemic - when container liners suffered unprecedented uncertainty - the regulation was again extended. But with consumers stuck at home shifting their spending to goods, and ports and supply chains across the world congested due to closures and events such as the blockage of the Suez Canal, freight rates skyrocketed, and profits reached record highs in 2021 and 2022. This sparked criticism around the rationale for the exemption among shippers and policymakers.

The golden age in container shipping has ended - but the market structure has also changed

Container rates have collapsed since early 2022 and spot rates on Asia to Europe trade have dropped below pre-pandemic levels. The sector has also faced a combination of faltering demand and a flood of newly ordered vessel capacity coming online. However, the European Commission has acted in light of what it sees as structural market changes. There has been consolidation. And on top of this, several liner companies including Maersk, CMA CGM and MSC have actively taken stakes in port terminals, logistics services providers and even air freight services over the past two years. With this ‘integration,’ these companies have developed a presence across supply chains and an ability to offer end-to-end logistics solutions.

End of the exemption makes offering joint services and capacity management more difficult

The expiry of the block exemption means that cooperation in terms of joint services will be restricted and managing capacity (by for instance taking out (‘blanking’) sailings) will be more difficult. For some container liners, it will also be more difficult to offer specific port calls to clients. Profits in container shipping have been on a downward track from elevated levels since the second quarter of 2022. Global container volumes have been falling this year and are expected to grow only slightly this year amid global headwinds for trade. At the same time, the market is set to be flooded by a wave of new vessels coming online (TEU-capacity will be expanded by some 27% in 2023-2025) making the conditions in container shipping more challenging.

Alliances won't (necessarily) cease to exist, but room to manoeuvre will be more limited

The EU and US have followed the same approach regarding the exemption, with the ruling also under review in the US. Either way, the EU is already part of large trade routes and the lifting of the exemption will limit the room to cooperate and weigh on market conditions, especially for pure container liners. MSC and Maersk decided earlier to dismantle their cooperation, possibly because market leader MSC has become big enough by itself. The other two alliances won’t necessarily cease to exist, but there will probably be a higher regulatory burden for joint operations under general competition rules.

Source: ING

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Economic

Stocks

Tesla slashes prices

For most of this year, Tesla has been cutting the price of its vehicles in an attempt to stimulate demand. The company also slashed the price of its premium driver assistance software for similar reasons.

Demand for Tesla cars has struggled amid growing competition from Chinese producers, who are increasingly taking market share in the electric vehicle space. High interest rates have also made it more difficult for consumers to get new auto loans.

Prices for the affordable Model 3 have come down nearly 17% this year, while editions like the long-range Model Y have seen price declines of over 25%. But despite these tremendous discounts, car deliveries still fell short of Wall Street expectations in the third quarter.

Can Tesla's Earnings Overshadow Valuation Risks?_1

The company blamed some planned factory shutdowns for this shortfall, but in reality, high inventory levels amid subdued demand probably played a role as well.

Price cuts squeeze margins

With the company selling its products for lower prices, it seems that sales received a boost, at the expense of profits. In the third quarter, analysts expect Tesla to report a revenue increase of 12.8% from the same quarter last year.

But earnings are expected to have declined by more than 29% over the same period. Hence, while the price cuts seem to have helped Tesla juice up its sales, they have also eaten into profit margins.

One can argue Tesla was forced into this situation because of the unfolding ‘electric vehicle wars'. Either way, profits are going in the wrong direction and the competition is unlikely to relent anytime soon.

Can Tesla's Earnings Overshadow Valuation Risks?_2

The market reaction will depend on whether earnings exceed or miss analyst forecasts, and on any commentary about the future outlook. Tesla has a history of exceeding analyst estimates, having done so in 7 of the last 8 quarters. Considering how low the bar has been set this time, it might be relatively easy for Tesla to report above-expectations figures again.

If so, that might help boost its share price. Looking at the charts, the most important region to watch on the upside is the recent high of 279.00, while on the downside, the spotlight would probably fall on the 235.00 region.

Valuation doesn't reflect risks

As always, the elephant in the room is Tesla's exorbitant valuation. The carmaker's shares are currently trading for almost 64 times what analysts expect earnings to be next year, and that is under the assumption that earnings are going to rise by 30% next year.

That is a wild valuation. Any stock that trades for 64 times next year's earnings is either growing earnings at an impressive pace or is simply overvalued. Tesla seems to fall in the second category, since its earnings are in freefall. Can Tesla's Earnings Overshadow Valuation Risks?_3

Can Tesla's Earnings Overshadow Valuation Risks?_3

And the assumption by analysts that earnings will grow 30% next year is highly suspicious. The electric vehicle price war is unlikely to dissipate so soon and there are no guarantees Tesla will be the winner. Additionally, such tremendous earnings growth seems unrealistic heading into a global economic slowdown, particularly in Europe and China.

Most likely, analysts are incorporating future growth opportunities into their models, such as Tesla licensing its driverless AI technology to other traditional carmakers. The problem is that these projects are not running yet, and might never come to fruition.

In short, there's heightened risk around the company and its earnings outlook, which the rosy valuation doesn't seem to reflect. This leaves Tesla vulnerable to a selloff, as elevated bond yields could eventually compress valuations.

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Thomas

Economic

Commodity

India is expected to impose restrictions on its sugar exports, after dry weather parched cane crops in the world's second-biggest grower, a move that will tighten global supplies of the sweetener.

The South Asian nation is likely to curb shipments during the new season that started on Oct 1, and a decision will be made soon, said people familiar with the matter, who asked not to be identified as the talks are confidential. Quotas for some overseas sales can be issued if domestic supply improves, they said.

India recorded its weakest monsoon in five years, and any drop in agricultural output will heap pressure on the government of Prime Minister Narendra Modi to control food inflation, ahead of elections next month and in 2024. Export curbs will squeeze the market and likely boost futures in New York and London.

A spokesperson who represents India's food and commerce ministries didn't immediately respond to a request for comments. India Set to Restrict Sugar Exports in Threat to Global Supply_1

India Set to Restrict Sugar Exports in Threat to Global Supply_1

India introduced a quota system in 2022-23, and restricted sugar exports to about six million tons after late rains reduced production, compared with an unrestricted 11 million tons a year earlier.

According to a Bloomberg survey of 14 analysts, traders and millers last month, most said India may not export any sugar this season due to lower output. Two respondents said shipments could total at least two million tons.

Raw sugar futures surged to a 12-year high in September on concerns around tight supply, despite a bumper harvest from Brazil, the world's top producer. Some parts of India's Karnataka and Maharashtra states — key growing regions — were among the driest areas this monsoon, according to the weather office.

Output from Thailand, the world's second-largest exporter, is poised to slide by almost a fifth in the upcoming harvest because of a severe drought, according to an industry group estimate last month. The onset of El Niño this year has led to drier conditions and lower rainfall across many parts of Asia.

Source: Bloomberg

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FxPro Group

Cryptocurrency

The crypto market did not support the impressive rise in risk appetite on traditional finances. Their combined capitalisation fell 1.7% over the past 24 hours to $1.055 trillion – the lowest in almost two weeks.

Bitcoin fell below $27K in early trading on Wednesday. This is the fifth consecutive day of decline after a failed attempt to consolidate above the 200-day MA late last week. Currently, BTCUSD has pulled back to the upward channel's lower boundary. The ability to push back from there will confirm the formation of an uptrend. For now, this is the preferred scenario.

A consolidation below $27K will likely intensify the sell-off and open the way for a quick drop to $26K (previous local highs) and further to $25K. Crypto Nosedive Amid Stock Upturns_1

While Bitcoin tries to stay within an uptrend, Ethereum has fallen to $1550, not far from the September lows. This dip below the 200-week MA could demonstrate the market's bearish bias. And Bitcoin's stronger momentum is a result of institutional buying.

Ethereum came under pressure amid asset sales. The Ethereum Foundation sold some of its assets – 1,700 ETH – on the decentralised exchange Uniswap and converted the proceeds into USDC $2.7 million worth of stablecoins. Crypto Nosedive Amid Stock Upturns_2

News background

Bitfinex points out that the number of bitcoins available to speculators has continued to fall to its lowest level in almost eight years. On the other hand, holders have increased the number of coins in their wallets to a new record.

According to Bloomberg, Binance has closed the widely publicised project to support the cryptocurrency industry's Industry Recovery Initiative, to which it had pledged at least $1 billion following the collapse of FTX. The initiative only managed to raise $64 million from one of the announced participants.

According to Santiment, cryptocurrency purchases could start soon. According to its data, investors have withdrawn $10 billion worth of Tether stablecoins to exchange wallets. The replenishment of addresses has been observed since mid-September, and now the volume of USDT on trading platforms is at its highest since March 2023.

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Economic

Central Bank

Forex

Fed dovish chorus grows louder

The US dollar continued drifting lower against most of the other major currencies on Tuesday, as several Fed officials appeared in their dovish suits this week, signaling that they may not need to tighten as much as initially thought. The only currency failing to post gains against the greenback was the Japanese yen.

Following remarks on Monday by Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan that the tightening in financial conditions due to the surge in Treasury yields might negate the need for additional hikes, Atlanta Fed President Rafael Bostic and Minneapolis Fed President Neel Kashkari expressed similar views yesterday.

That said, Kashkari, who has been an outspoken hawk during this hiking cycle, added that if higher long-term yields are higher due to expectations about what the Fed might do, then they may need to satisfy those expectations in order to maintain yields at those levels.

The slide in both the dollar and yields following the latest Fed rhetoric suggests that indeed the market may be mainly driven by such expectations, and thus, calling with certainty the end of this hiking crusade and a trend reversal in the dollar may be premature.

PPIs to set the stage for CPIs, Fed minutes also on tap

Currently, investors are assigning around a 30% probability for another rate hike by December, but that could well change if upcoming data suggests that inflation is stickier than previously thought. Traders may be sitting on the edge of their seats in anticipation of tomorrow's CPI numbers for September, but they may get an earlier glimpse of where inflation may be headed as the PPIs for the month are due today.

The headline rate is forecast to have held steady at 1.6% y/y, while the core one is anticipated to have ticked up to 2.3% y/y from 2.2%. That said, conditional upon the core PPI accelerating, the risks surrounding the headline rate may be tilted to the upside as oil prices have been in a steep uptrend during most of September. An upside surprise may raise speculation that Wednesday's CPI rates could also come in higher than expected and thereby allow the dollar to recover some of its recently lost ground.

The minutes of the latest FOMC gathering are also on today's schedule but given that the market has already heard updated views by several policymakers this week, any reaction may be limited. Investors may pay more attention to a speech by Fed Governor Christopher Waller. Waller spoke yesterday, highlighting the central bank's determination to bring inflation down to 2%, but he did not comment on upcoming monetary policy moves. It will be interesting to see whether he does today.

China hopes allow aussie and kiwi to add gains

The currencies that took most advantage of the dollar's slide were the risk-linked aussie and kiwi, which may have been helped by a report saying that China is considering new stimulus measures to shore up its wounded economy. With recent data suggesting that the world's second-largest economy may have begun bottoming out, aussie and kiwi traders may now turn their attention to China's inflation and trade numbers, due out on Friday.

Should the data corroborate the view that the Chinese economy is stabilizing, both currencies may extend their recoveries. However, with China's property sector still suffering, those recoveries may just be treated as decent upside corrections rather than the beginning of healthy long-lasting uptrends.

Wall Street cheers prospect of no more rate hikes

Wall Street closed in the green on Tuesday as equity investors cheered the prospect of no more hikes by the Fed. The gains also suggest that investors may have turned their focus away from the conflict in the Middle East between Israel and Palestine, despite Israel retaliating against Hamas with missile attacks in Gaza.

Although they may keep an eye on the conflict due to concerns of further escalation, market participants may pay more attention to the upcoming inflation data for now. Anything pointing to hotter-than-expected inflation could prompt some selling as the probability of another rate increase by the Fed could increase again. Dollar Extends Slide on More Dovish Fed Remarks_2