Category: Business

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Draghi urges reform, massive investment to revive lagging EU economy

By Philip Blenkinsop

BRUSSELS (Reuters) – The European Union requires significantly more coordinated industrial policies, swifter decision-making processes, and substantial investments to stay economically competitive with the United States and China, Mario Draghi highlighted in a highly anticipated report released on Monday.

The European Commission had tasked the former European Central Bank President and Italian Prime Minister a year ago to draft a strategy on maintaining the EU’s competitive edge in an increasingly digital and environmentally sustainable global economy amid rising international tensions.

In the initial segment of the report, which spans approximately 400 pages, Draghi emphasized that the EU needs additional annual investments ranging between 750-800 billion euros ($829-884 billion), equating to up to 5% of GDP. This figure far exceeds the 1-2% investment of the Marshall Plan, which was instrumental in rebuilding Europe post-World War Two.

While EU member states have already begun adapting to these new global challenges, Draghi’s report notes that their efforts are hampered by a lack of coordination.
Variations in subsidy levels between countries were disrupting the single market, while fragmentation hindered the scale necessary for global competition. Additionally, the EU’s decision-making process remained complex and slow.

“The EU must refocus its efforts on the most urgent issues, ensure efficient policy coordination towards common goals, and utilize existing governance procedures in innovative ways that allow member states desiring faster progress to do so,” stated the report.

For the past two decades, EU growth has consistently lagged behind that of the United States, with China rapidly closing the gap. Much of this disparity is attributed to lower productivity.

Draghi’s report emerges amidst growing concerns over Germany’s economic model, historically the EU’s engine, as Volkswagen considers its first-ever plant closures.

Draghi highlighted that the EU is grappling with higher energy prices following the loss of access to cheap Russian gas and can no longer depend on open foreign markets.
The former central banker emphasized the need for the bloc to enhance innovation and lower energy costs while maintaining its commitment to decarbonization. Additionally, he highlighted the importance of reducing dependencies on external sources, particularly China for critical minerals, and increasing investment in defense.

($1 = 0.9051 euros)

(Reporting by Philip Blenkinsop; Editing by Hugh Lawson)

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Market expert says the Kamala Harris-backed unrealized capital gains tax would be an ‘unmitigated disaster’

Vice President and Democratic presidential candidate Kamala Harris has expressed her support for the Biden administration’s proposed tax increases.

A particularly contentious proposal aims to implement a 25% minimum tax on total income, including unrealized capital gains, for individuals with wealth exceeding $100 million.

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    Jason Katz, managing director and senior portfolio manager at UBS, is a vocal critic of the proposed measure targeting the wealthiest Americans. In an interview with Fox Business, Katz vehemently opposed the proposal, labeling it “an unmitigated disaster.”

Capital gains refer to the increase in value of an asset over time. When an asset is sold and this increase is converted into cash, it results in realized capital gains, which are generally subject to taxation. Conversely, unrealized gains are the increases in value that have not yet been realized through a sale and are not currently taxable.

While Vice President Harris has largely endorsed President Biden’s tax policy proposals, she has indicated a preference for a smaller increase in the capital gains tax rate for the wealthy compared to Biden’s plan. This suggests that she might also diverge from his approach in other aspects, potentially opting not to tax unrealized capital gains.

‘Accounting nightmare’
Katz raised concerns about the practical challenges of implementing a tax on unrealized capital gains, emphasizing its complexity in execution and calculation.

To illustrate his point, he presented a hypothetical scenario: “Consider an ultra-high-net-worth individual who purchases $100 million worth of Amazon stock, which then appreciates to $150 million. If a 23% tax is applied to the $50 million gain in the first year, what happens if the stock value drops back to $100 million in the second year? Will the government rebate the tax from the previous year?”

This question highlights the difficulties of taxing assets in a highly volatile market where values can fluctuate dramatically. In the stock market, substantial gains in one year, often referred to as “paper gains,” can disappear the next. The concept of being taxed on gains that have not been realized in cash is particularly troubling, especially when those gains are no longer present.
Katz foresaw several negative outcomes for the proposal, stating, “It would be an accounting nightmare, and it would also drain money from the capital markets.”

Additionally, Katz criticized the tax’s extension to other asset classes, such as real estate, where investors also see unrealized gains. He questioned the policy’s practicality, asking, “Are real estate owners expected to liquidate their properties to pay these taxes? It makes no sense whatsoever.”

Who Should Be Concerned?
In the “Reasons for Change” section of the Treasury Department’s explanation of the revenue proposal, it is noted, “Preferential treatment for unrealized gains disproportionately benefits high-wealth taxpayers and provides many high-wealth taxpayers with a lower effective tax rate than many low- and middle-income taxpayers.”

This raises an important question: Will the proposed tax impact the average American?
The proposal explicitly targets “taxpayers with wealth (defined as assets minus liabilities) exceeding $100 million.”

This category encompasses only a minuscule portion of the population. A 2023 report by Henley & Partners indicates that around 10,660 Americans possess wealth of $100 million or more, representing roughly 0.003% of the U.S. populace.

Consequently, this tax would not directly impact the overwhelming majority of Americans. Nonetheless, given the significant capital held by those subject to the tax, there could be indirect repercussions on the markets.
However, Katz remains skeptical about the ultimate impact of the tax, recalling a conversation with publishing magnate Steve Forbes. “While they claim this will only apply to those with a net worth exceeding $100 million, as I discussed with Steve Forbes, it often begins there but eventually permeates other areas of the tax system,” Katz explained.

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Hedge funds flock to Japan as market heats up

HONG KONG (Reuters) – Amidst a generally subdued $400 billion hedge fund sector in Asia, Japan has distinguished itself by attracting new fund launches while other regions experience closures. This trend indicates that the significant market volatility in August has not hindered the revival of Japanese capital markets.

Since 2023, hedge fund closures have outnumbered new launches across Asia, primarily due to the struggling Chinese stock market.

Contrastingly, Japan-focused funds have seen a net increase of over 10 during the same period, according to data from Preqin. Additionally, at least five more Japan-focused funds are either launching or preparing to debut in the third and fourth quarters of the year. These funds encompass a range of strategies, from equity long-short to quantitative approaches, as reported by fund managers or individuals familiar with their plans.

Both domestic and international launches are gaining traction and are being well received by investors.
They highlight a renewed confidence in Japan, long neglected by hedge funds and a wide range of other investors, recently shaken by the biggest single-day stock market drop since 1987. This suggests that Japan’s financial markets are revitalizing after decades on the sidelines for many major investors.

“Japan is finally changing in a positive way, with inflation and wage growth,” said Soichi Utsumi, founder of Shinka Capital Management, which is launching a Japan equity long-short fund.

“I’ve never seen such significant trends in my entire professional career,” added Utsumi, who was previously a partner at hedge fund Asia Research & Capital Management Limited.

In July, Japanese equity markets reached all-time highs, driven by a surge in foreign interest and a push for corporate governance reforms. Interest rates have entered positive territory and are rising for the first time in recent memory, coinciding with economic growth.
Utsumi stated that his fund will concentrate on governance changes and opportunities arising from increasing interest rates, and advisors report that these themes are gaining traction with investors.

“We’ve observed a growing interest in Japan-focused managers,” said Jon Caplis, CEO of hedge fund research firm PivotalPath.

JAPANESE MARKET TURBULENCE

The resurgence of Japanese markets was abruptly halted in early August when a rate hike by the Bank of Japan, coupled with weakening U.S. economic data, led to a sudden appreciation of the yen and a subsequent stock market decline.

Despite these fluctuations, hedge funds remain undeterred by the Japanese market’s volatility.

Hong Kong’s $700 million ActusRayPartners is preparing to launch a new Japan strategy later this month, aiming to raise $100 million by year-end.

The quant fund viewed the market selloff positively, interpreting it as a reversal of a crowded short position on the yen.

Additional encouragement comes from the fact that interest rates have been raised twice this year.
As interest rates are projected to rise further, “this inevitably introduces some market volatility, making it difficult for ‘zombie companies’ to survive, which benefits the long-short strategy,” remarked Tetsuo Ochi, CIO at MCP Group. MCP Group is a $2.5 billion alternative investment firm that predominantly assists Japanese institutions in making global investments.

In August, MCP Group launched a rare Japan-focused fund of hedge funds, attracting a 10 billion yen ($70 million) investment from Japanese insurer Dai-ichi Life, according to MCP.

Dai-ichi Life’s investment is intended to support emerging managers and contribute to revitalizing Japan as an asset management hub, the insurer noted in a separate statement.

Additionally, two other new Japan-focused funds have been introduced: the multi-manager platform Penglai Peak Offshore Fund and OQ Funds Management’s new Japan strategy. Bloomberg previously reported on the latter, citing the fund’s manager. Lighthouse Investment Partners, the owner of Penglai Peak, did not respond to requests for comment.
A recent Preqin survey conducted in August revealed that an increasing number of global investors intend to decrease hedge fund allocations in their portfolios, citing returns that have fallen behind certain benchmarks.

In contrast, Japan’s long-short equity funds have shown a strong performance, achieving positive returns in 70% of quarters over the past five years up to the second quarter of 2024, as reported by With Intelligence.

($1 = 143.6000 yen)

(Reporting by Summer Zhen; Editing by Tom Westbrook and Shri Navaratnam)

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Morgan Stanley cuts oil forecast again as concerns deepen

Morgan Stanley has again revised its Brent crude price forecasts downward, citing mounting demand challenges and abundant supply. According to a note from analysts led by Martijn Rats, the global benchmark is now expected to average $75 a barrel in the fourth quarter. This is a decrease from an earlier projection of $80 for the same period, which had already been reduced from a prior forecast of $85 just last month. Forecasts for most of the coming year have also been slightly adjusted downward.

Recently, Brent crude prices have plummeted to their lowest levels since late 2021. This decline is attributed to persistent concerns over weakening demand from China and indications of a potential slowdown in the US economy. Concurrently, ample output has led OPEC+ to postpone plans to ease its production curbs.
“The recent trajectory of oil prices bears similarities to previous periods marked by significant demand weakness,” Rats and his colleagues noted in their report dated Sept. 9. They observed that time spreads—price comparisons along the futures curve—suggested the potential for “recession-like inventory builds.” However, they emphasized that it was too early to adopt this scenario as the bank’s base case.

Morgan Stanley’s reassessment of the oil market outlook has been echoed by other leading financial institutions. Last month, Goldman Sachs Group Inc. downgraded its forecast, and more recently, Citigroup Inc. indicated that the market appeared oversupplied, predicting that prices could average $60 a barrel in 2025 unless OPEC+ implements deeper production cuts.

Brent crude, which plummeted almost 10% last week, traded near $72 a barrel on Monday. Major commodity trader Trafigura Group, speaking at an industry conference in Singapore, forecasted that prices are likely to decline into the $60s in the near future.

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Spanish Inflation at One-Year Low With ECB Set to Cut Rates

(Bloomberg) — Inflation in Spain has dropped to its lowest level in a year, a trend that is expected to be reflected throughout the euro zone. This development may enable the European Central Bank to continue its policy of lowering interest rates.

According to data released on Thursday by the national statistics agency, consumer prices rose by 2.4% compared to the same period last year. This figure is slightly below the 2.5% median estimate from a Bloomberg survey of economists.

This marks the third consecutive month of slowing inflation, driven primarily by reduced costs for fuel, food, and non-alcoholic beverages. An index that excludes energy and some food prices, which provides a measure of underlying inflation pressures, also eased to 2.7%.

Bloomberg Economics comments…
“Spanish inflation dropped further in August and is likely to hit the European Central Bank’s 2% target next month. However, this decline may be short-lived. Energy base effects, which have contributed significantly to the recent decrease in price gains, are expected to reverse direction later this year. We anticipate headline inflation to gradually rise to just below 3% by the end of the year, also influenced by the reversal of previous tax cuts.”

Spain’s data align with expectations of a widespread decline in inflation across the 20-nation euro area. Data scheduled for release later on Thursday will indicate whether this trend holds true for Germany, the region’s largest economy. Reports from France, Italy, and the euro area as a whole are due on Friday, with estimates suggesting that prices rose by 2.2% this month, down from 2.6% in July.
For the European Central Bank (ECB), the recent data strengthens the argument for another reduction in borrowing costs scheduled for September 12—a move that policymakers have indicated is probable and that investors have already factored into their expectations. Markets are anticipating one or two additional cuts this year following the September decision.

In Spain, the government has been gradually withdrawing support measures introduced to counteract the inflation spike triggered by Russia’s invasion of Ukraine. However, some initiatives, such as free public transportation for commuters, remain in place.

Overall, the Spanish economy is performing well, with record tourism and robust exports driving one of the fastest growth rates in Europe. Job creation is also strong, with unemployment near its lowest level in approximately 17 years.

Despite these positive indicators, fiscal policy is presenting a challenge. The government’s failure to pass a new budget is impeding its economic objectives, forcing reliance on last year’s spending plan until political disagreements are resolved.

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IBM lay-offs at China R&D teams send shock waves across local tech community

Chinese employees at IBM, the prominent US computing giant once seen as a nurturing ground for mainland engineers, have expressed dismay following a brief conference call with the company’s American executives on Monday. The firm, affectionately known as Big Blue, is cutting hundreds of jobs at two local research labs.

The town hall meeting, organized for the affected workers, was scheduled to last half an hour but concluded in just three minutes, according to an internal meeting transcript reviewed by the South China Morning Post and confirmed by an employee.

During the meeting, US-based executives informed staff that IBM had decided to relocate some Chinese operations overseas, attributing the move to market dynamics and intense competition in the mainland’s infrastructure business. They did not entertain any questions.
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IBM did not immediately respond to a request for comment on Tuesday. However, a company representative stated on Monday that the firm adjusts its operations as necessary to best serve its clients. The representative assured that these changes will not impact IBM’s ability to support clients across the Greater China region.

Over the weekend, China-based IBM employees were blocked from accessing the company’s intranet system. They were subsequently informed that the IBM China Development Lab and China Systems Lab were being shut down. According to reports from local news outlets, over 1,000 employees across Beijing, Shanghai, and the northern port city of Dalian are being laid off.
An anonymous IBM employee disclosed that numerous staff members in Beijing braved heavy rain to attend a meeting at the office on Monday, only to be disappointed by its brevity.

Present on the call were Jack Hergenrother, Vice President of Global Enterprise Systems Development, Ross Mauri, General Manager of IBM Z Mainframe Computers, and Danny Mace, Vice President of Storage Software Engineering.

According to the transcript, Hergenrother encouraged affected employees to arrange private discussions with their respective managers, while Mauri and Mace expressed gratitude for their contributions.

The Beijing employee mentioned that he spoke with his manager, who was also laid off. Employees have been offered severance packages based on tenure, plus three months’ salary if they sign the termination agreement by September 13.

Their last working day will be October 31.
The closure of IBM’s two research labs in China has sent shockwaves through the local tech community. For years, the tech giant had been one of the most sought-after employers for the nation’s top computing graduates.

A former employee, known as “Room e” on the social media platform Xiaohongshu, noted that most of his team members at the China Development Lab were graduates from the country’s top 10 universities in the early 2000s.

However, US companies have been losing their appeal in recent years as China intensifies its self-reliance campaign and strives to reduce dependence on foreign technologies amid growing geopolitical tensions.

In 2014, state-owned banking and telecom enterprises—once major customers of IBM, Oracle, and EMC (now merged with Dell)—initiated a “de-IOE” campaign to replace US products with domestic alternatives.
IBM has become the latest multinational tech giant to implement job cuts in China. This year’s extensive layoffs have impacted employees at various companies including Ericsson, Tesla, Amazon.com, and Intel.

IBM has witnessed a continuous decline in its sales in China over the past few years.

According to the company’s annual report, IBM’s revenue in China plummeted by 19.6% in 2023, in stark contrast to a 1.6% revenue increase across the Asia-Pacific region. Additionally, the financial statement revealed that for the six months ending June 30, sales in China fell by 5%, whereas revenue in the Asia-Pacific region grew by 4.4%.

Additional reporting by Xinmei Shen.

This article originally appeared in the South China Morning Post (SCMP), which has been the leading source for news on China and Asia for over a century. For more SCMP stories, please check out the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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US senator presses Intel CEO on chips award after job cut plan

By David Shepardson

WASHINGTON (Reuters) – On Wednesday, Republican Senator Rick Scott requested further clarification from Intel CEO Pat Gelsinger regarding the company’s decision to cut over 15,000 jobs, despite being slated to receive nearly $20 billion in U.S. grants and loans aimed at bolstering chip production.

In a letter obtained by Reuters, Scott expressed concerns over whether the Commerce Department’s planned awards lacked sufficient safeguards to ensure taxpayer funds were allocated to companies that could meet rigorous standards for U.S. manufacturing and job creation.

In May, the Commerce Department announced a preliminary agreement to provide Intel with $8.5 billion in grants, up to $11 billion in loans, and access to a 25% investment tax credit. However, the finalization of this chip production award is still pending.

The Commerce Department declined to comment on Scott’s letter, and Intel has yet to respond to requests for comment.
In May, the Commerce Department announced that funding would support the creation of over 10,000 manufacturing jobs and nearly 20,000 construction jobs for projects in Arizona, New Mexico, Ohio, and Oregon.

Earlier this month, Intel revealed plans to cut costs by $10 billion in 2025 and reduce its workforce by more than 15%, with the majority of layoffs occurring this year.

At the time, CEO Pat Gelsinger noted that Intel’s workforce is 10% larger than it was in 2020, despite the company’s revenue being $24 billion higher that year compared to 2023. He emphasized the need for fewer employees at headquarters and more in the field to support customers.

Senator Scott has called on Intel to specify the number of U.S. employees who will be affected by the layoffs and to clarify whether these cuts will impact Intel’s planned semiconductor manufacturing investments.

“What is Intel aiming to achieve with these job cuts, and why have billions of U.S. taxpayer dollars in investments not been enough to prevent these layoffs?” Scott questioned.
(Report by David Shepardson; Edited by Jamie Freed)

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Nvidia’s forecast dampens AI enthusiasm in other tech stocks

If Nvidia’s late-day dip on Wednesday continues into Thursday, it would fall significantly short of the 11% price swing anticipated by the options market, as per data from options analytics firm ORATS.

The company’s recent performance, driven by surging demand for its AI chips, has consistently exceeded consensus analyst estimates for several quarters. This trend has led investors to expect increasingly higher margins by which Nvidia would surpass forecasts.

However, Nvidia’s subdued forecasts overshadowed its strong second-quarter revenue and adjusted earnings, as well as the announcement of a $50 billion share buyback.

“They beat expectations, but this was one of those instances where the bar was set incredibly high. I don’t think any number could have satisfied investors,” said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.
The tepid reaction to Nvidia’s earnings report may influence market sentiment as we approach a historically volatile period. According to CFRA data, the S&P 500 has declined an average of 0.8% in September since World War II, marking it as the worst-performing month.

Investors are also closely monitoring next week’s U.S. employment report for indications of whether the labor market weakness, which unsettled stocks in early August, has improved.

Optimism surrounding AI technology, partly driven by Nvidia’s significant growth, has been a key driver of gains on Wall Street over the past year.

However, confidence in this rally has faltered recently, following an earnings season where investors penalized tech companies whose results did not meet high expectations.
Investors are increasingly worried about the rising expenditures by Microsoft, Alphabet, and other key players vying for dominance in the burgeoning AI technology sector. The stocks of Microsoft and Alphabet have remained depressed since their reports last month.

Nvidia has projected revenue of $32.5 billion, with a margin of error of 2%, for its fiscal third quarter, surpassing analysts’ average estimate of $31.8 billion, as per LSEG data. This revenue forecast suggests an 80% increase compared to the same quarter last year.

The company, based in Santa Clara, California, anticipates an adjusted gross margin of 75%, with a possible variance of 50 basis points, for the third quarter. Analysts, on average, predict a gross margin of 75.5%, according to LSEG data.

Nvidia’s stock declined by 2.1% during Wednesday’s trading session, prior to the report. However, it remains up approximately 150% for 2024, positioning it as the leading performer in Wall Street’s AI sector surge.
Nvidia’s stock was trading at a price-to-earnings ratio of 36 ahead of its quarterly report, which is relatively low compared to its five-year average of 41. In contrast, the S&P 500 is trading at 21 times expected earnings, higher than its five-year average of 18.

(Reported by Noel Randewich in San Francisco; Additional reporting by Saqib Ahmed in New York; Edited by Ira Iosebashvili and Lisa Shumaker)

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