Quoteworthy: "There is a sense that we’re much closer to the end of this than to the beginning." –— US Fed chairman Jerome Powell, announcing what should be the last rate hike of this cycle.
Global trade slows in blow to Maersk as further hit expected
A.P. Moller-Maersk — a bellwether for global trade — signalled weaker results for the rest of the year after reporting first-quarter operating profit that tumbled by more than half, with transport volumes slowing and freight rates plunging.
Maersk, which transports close to one-fifth of the world’s containers, warned that the first three months of 2023 “will be the best quarter of the financial year,” the Copenhagen-based company said in a statement on May 3. It expects global economic growth to remain “weak” at around 2% this year. There are “still a lot of clouds that we need to handle,” CEO Vincent Clerc said in an interview with Bloomberg TV.
As business activity slows, companies seek to reduce inventories at warehouses rather than moving new goods from Asia to Europe and the US. That is a sharp turnaround from 2021 and 2022, when a spike in demand for consumer goods during the pandemic, coupled with supply-chain issues limiting vessel supply, led to record profits in the freight industry.
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Maersk reported a 56% drop in earnings in the first quarter before interest, tax, depreciation and amortisation to US$3.97 billion ($5.27 billion). That compares with a median estimate of US$3.55 billion in a survey of analysts. Volumes declined 9.4% in the quarter, and freight rates fell 37% and are close to the break-even level, according to the CEO.
The shares fell as much as 3.2% and were down 1% at 11,915 kroner ($2,346) at 9.30am in Copenhagen trading. The decline pushed Maersk’s stock to its lowest level in a month. The shipping company repeated its forecast that the world’s container transport volumes might shrink as much as 2.5% this year. It also stuck to its full-year financial forecast of underlying ebitda of US$8 billion to US$11 billion, roughly a quarter of the 2022 figure.
Clerc indicated that the shipping industry needs to be disciplined on the capacity to avoid a more severe downturn and may have to idle more vessels later this year. “We’ve already seen a lot of capacity being blanked to match the lower volume demand,” he told Bloomberg TV. “There’s also some supply side risks in the form of new ships coming into service in the second part of the year and the next. This will create a new challenge for the industry.” — Bloomberg
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Credit Suisse AT1 holders in Asia add to claims over wipeout
A group of Credit Suisse Group AG bondholders in Asia challenged Switzerland’s banking regulator over the decision to write down about CHF16 billion ($23.9 billion) of the bank’s riskiest debt, the first known move by wealthy investors in the region.
The filing was made in the Swiss courts on May 3, said Mahesh Rai at Singapore-based law firm Drew & Napier. Rai is acting for more than 60 investors across Asia for the case. He declined to specify the losses involved, but added that the move appeals to Finma’s decision to prioritise shareholders over the additional tier-one bondholders. The investors are seeking to “revoke the Finma order to write off the bonds” and also for the claimants to be awarded compensation, said Rai, who is working with colleague Benedict Teo on the case.
Finma declined to comment. It has previously published its position on the write-down, explaining that it was part of a takeover plan that was the least bad option after Finma and the government rejected a resolution of Credit Suisse or temporary nationalisation.
Bondholders in Asia are joining more than a thousand others in Europe and the US in seeking damages from the Swiss authorities. Law firm Pallas Partners filed a suit last month and is seeking full compensation for its clients — 90 institutional investors and asset managers with US$1.35 billion ($1.79 billion) in so-called additional tier-1 bonds and 700 retail and family office clients accounting for some US$300 million.
US law firm Quinn Emmanuel also filed a claim in a Swiss court representing more than 400 institutional investors who held about US$4.5 billion worth of AT1s. Besides these, at least two other complaints have been filed.
Created after the 2008 financial crisis, AT1s are the lowest rung of bank debt, producing juicy returns in good times but taking the first hit when a bank runs into trouble. Shareholders salvaged some value from the takeover engineered by Swiss authorities, while Credit Suisse’s AT1 holders walked away with nothing. Many bondholders were furious at the move. European regulators hurried to reassure investors that the Swiss arrangement was an exception.
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Separately, about 100 investors from Singapore to the Philippines have expressed interest to Drew & Napier in commencing a treaty claim against the Swiss government about the loss from the Credit Suisse AT1 notes, Rai said. The treaty claim has not yet been filed, he added.
A spokesperson for Switzerland’s Federal Department of Finance declined to comment on potential lawsuits. “Investors who have suffered losses are free to take legal action, which is their right. Switzerland is a constitutional state,” the spokesperson said. — Bloomberg
Concerns about China’s economic outlook
China’s economic recovery showed further signs of imbalance, with manufacturing activity contracting for the first time in months while a surge in holiday travel fuels consumer spending.
The China Caixin manufacturing purchasing managers index dropped to 49.5 last month from 50 in March, pointing to a contraction in factory output for the first time since January, Caixin and S&P Global said in a statement on May 4.
That contrasts with strong tourism figures over the five-day Labour Day holiday, with domestic trips surging 19% above 2019 levels before the pandemic struck. However, tourism spending recovered less strongly, indicating consumers have become more frugal. The latest data suggest the economy’s recovery is increasingly patchy, clouding the outlook for growth after a better-than-expected expansion in the first quarter.
China’s rebound is following a similar pattern to other countries after reopening, with demand for goods slowing as consumers increase spending on services like travel and restaurants. There are several other risks as well: The rebound in the property market has only just started, with investment continuing to fall, unemployment — especially among young people — remains high while households are still boosting savings.
“The easy part of China’s post-reopening recovery — which includes the full recovery of mobility and the release of pent-up demand in select sectors — is done,” Goldman Sachs Group economists, including Wang Lisheng, wrote in a report on May 4. “The next leg of the consumption recovery will rely on higher income growth and improved consumer confidence, making the recovery model more sustainable.”
Chinese stocks edged lower on the morning of May 4, with the CSI 300 Index falling as much as 0.7%, weighed down by concerns about an uneven recovery. The lopsided recovery underscores Chinese leaders’ cautious outlook on the recovery and pledge last week to keep monetary and fiscal policy supportive amid insufficient economic demand. This week, a top International Monetary Fund official said China “has the policy space to keep monetary policy accommodative because inflation is very much muted.”
The Caixin PMI report noted domestic demand as a “main drag” on the April manufacturing PMI figures. A subindex for total new orders fell back into contraction last month. “This suggests that China’s economic recovery significantly slowed after Covid-19 infections peaked at the start of this year,” Wang Zhe, senior economist at Caixin Insight Group, said in a statement accompanying the data. “It remains to be seen if the rebound is sustainable after a short-term release of pent-up demand.”
The job market also deteriorated, Wang said, adding that “as market demand remained subdued, businesses trying to slash costs were reluctant to hire more workers, with some even announcing layoffs.”
Growth in in-person services will likely slow down in the coming months as pent-up demand wanes, Nomura Holdings economists, including Lu Ting, said in a May 3 report. “The lacklustre property recovery, a global slowdown and rising geopolitical conflict remain major challenges for China’s recovery to be sustained.” — Bloomberg
