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Potential subzero rates adds to woeful 2020 for British banks

Banking|: London: The possibility of negative interest rates is adding to the cocktail of headwinds facing UK lenders. Britain’s consumer-facing banks including Lloyds Banking Group Plc, Natwest Group Plc and Barclays Plc face seeing their earnings from mortgages and other loan products dwindle even further after policy makers at the Bank of England gave their strongest signal yet that they’re considering using subzero interest rates. Shares in the lenders fell Friday, adding to steep declines this year. See more Midas touch: Singapore exchange touts gold to the masses Photos: New products, services rolled out by Apple Photos: Dubai cruise industry ready to set sail again Assembling a solar powered future in China Mexico holds symbolic raffle for unwanted presidential jet The firms are already being hit by a pandemic at the same time as their home market is negotiating its exit from the European Union, its biggest trading partner. There’s also the risk of a jump in unemployment that could hit loan repayments and push up defaults. “Its a big risk for the banks in terms of lower revenues,” Colin Jackson, an analyst at Goodbody, said “The outlook for revenue is already bleak under lower for longer rates exacerbated by Covid.” Drag on interest margins A foray into negative rates in the U.K. would drag net interest margins lower still at lenders and further squeeze the supply of the riskiest mortgages, said Bloomberg Intelligence’s Jonathan Tyce. That would dent house prices and consumer confidence, he added. The banks didn’t respond to requests for comment. Europe’s half a decade experiment with negative interest rates has put pressure on lending revenue and burdened banks with billions of euros in penalties for parking cash with the central bank. There are concerns that the traditional dynamics of borrowing and lending are being distorted, with some wealth managers charging for deposits. “In the long run, negative rates ruin the financial system,” Deutsche Bank AG Chief Executive Officer Christian Sewing said in 2019. But with the threat of negative rates looming, banks are bracing themselves. Bank Lending Sterling Libor - the rate that banks can theoretically borrow from each other - is near record lows across most tenors. But there are signs that financial institutions are worried about exposure and pricing themselves out of some lending. Fixed mortgage rates on the riskiest loans jumped in August by the most in at least seven years, according to Bank of England data compiled by Bloomberg. It’s probably driven by banks wanting to reduce or slow the growth of their lending books to improve their capital ratios and offset the cost of risk or default in other parts of their loan book, said Antoine Bouvet, a senior rates strategist at ING Groep NV. The result is that the gap between the loan rates and the yield on two-year government bonds is the widest since 2017, suggesting that the ultra-low borrowing costs among financial companies isn’t being filtered into the economy. “Negative rates haven’t generated much inflation in the eurozone so as a policy tool there are questions marks over its effectiveness,” said Goodbody’s Jackson. “It does do a lot of harm to banks and weakens confidence so you need to be sure that you get an economic benefit from it.”

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Prolonged pandemic to leave lasting scars on the world economy

Analysis|: Dubai: As the pandemic affects some countries more than others, economists now view most economies losing its current recovery momentum, snuffing any signs of a quick return to pre-pandemic levels this quarter. “The extremely uneven distribution of the pandemic’s pain will leave economic and social scars, hampering the recovery of the global economy,” cautioned Nariman Behravesh and Sara Johnson, global economists at IHS Markit. See more Syrian olive trees put down roots in Kurdish Iraq Pandemic turns summer into European tourism's leanest season Architectural marvel: Apple to open Marina Bay Sands store Gulf Investors flood the London property market Japan's tuna market, the world's largest, hit hard by coronavirus pandemic “One of the most troubling and challenging aspects of the current recovery is its glaringly unequal and inequitable allocation of pain across demographic and income groups, industries and economies.” K-shaped economic recovery? As the economy struggles to shake off the pandemic effects, worries are growing that the recovery could look like a K – one where growth continues, but is uneven, split between sectors and income groups. “Although the unbalanced allotment of recession and crisis costs — sometimes called a K-shaped cycle — is not an unusual feature of recoveries, the difference in the prospects of the ‘have nots’, the ‘haves’, and the ‘have much more’ is especially stark in the post-COVID-19 world,” the economists warn. After a record-breaking drop in second-quarter real GDP in most of the world’s, the third-quarter rebound is likely to be unusually strong, but after that, however, they revealed that they expect recoveries in most of the top economies to falter — as evidenced by high-frequency indicators. Reasons for uneven recovery The reasons for fading growth are well understood, one being continued extreme caution on the part of consumers and businesses, until an effective vaccine becomes widely available, which is not likely until mid-2021, the economists added. The economic drag is also attributed to a surge in layoffs and bankruptcies, rising levels of debt and financial stress, despite massive monetary stimulus and record stock prices, much weaker fiscal stimulus going forward and continued sizeable increases in virus cases in some countries and pervasive flare-ups in others. The K-shaped recovery brings back the bifurcation of the economy during the Great Financial Crisis, which is about the growing inequality seen since the early 1980s across the country and the economy. When looking at a K-shaped cycle now, the upper path of the K is financial markets, the lower path is the real economy, and the two are separated. Disconnect between economies, markets Among economists, a renewed rise in new COVID-19 virus infection rates had been increasing the risk of a W-shaped economic cycle. A ‘W-shaped’ recovery is when any economy passes through a recession into recovery and then immediately turns down into another recession. However, compounding these concerns in the alphabet-obsessed economics profession is the dichotomy of the stock market versus the real economy, especially considering that 52 per cent of the market is owned by the top 1 per cent of earners – essentially favouring the wealthy. “The demand for high-end goods thrives while many go hungry. Evictions rise in poor neighbourhoods as suburban housing booms. Work from home is an option for highly skilled workers, but not for others in low-skilled service jobs,” the economists explained. “Similarly, companies in the technology, online retail and entertainment, biotech and pharmaceuticals, and work-from-home services flourish. Other sectors such as energy, banking, and utilities languish. This disparity is reflected in the stock market, where the recent record run was largely fuelled by the tech sector.” Uneven economic recovery hurt prospects With the global economy currently in its deepest recession since World War II, there was earlier reason for hope as nations worldwide reopened after the worst of the pandemic in March, with the economic impasse seen ending in record time. But economists later viewed that any rebound would be brief. The divide among the world’s economies is also glaring, with Europe and some of the emerging world experiencing much deeper downturns than mainland China, South Korea, and the United States, noted IHS Markit, which publishes widely watched surveys of business and economic activity seen worldwide. “There has been a vigorous debate over the impact of the lockdowns on the deep economic and social wounds of the past six months. Both academic research and empirical observation suggest the unequal effects of the pandemic are largely the same with and without lockdowns,” the economists said. “Sweden, which did not institute a lockdown, has suffered high per-capita death rates and a deep recession. At the same time, India’s severe lockdown has not prevented a sharp rise in infections rates yet triggered the worst downturn in four decades.”

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No buyers for Air India may mean divestment to be put off

Aviation|: New Delhi: Air India is not finding any takers and the privatisation may be put off by three years, delivering a blow to the efforts to divest the national carrier. It seems that due to the turbulence caused in the aviation sector by the Covid 19 pandemic, airlines are already struggling and in that scenario, there are no buyers for Air India. Tatas were supposedly frontrunners for the divestiture, but for some reason have backed out of the race for the moment after completing the due diligence process. The question is therefore whether the books revealed a bigger financial mess than what was anticipated. See more Midas touch: Singapore exchange touts gold to the masses Photos: New products, services rolled out by Apple Photos: Dubai cruise industry ready to set sail again Assembling a solar powered future in China Mexico holds symbolic raffle for unwanted presidential jet The government has already postponed the last date for inviting bids after having said that the date would not be advanced. Civil Aviation Minister Hardeep Puri has remarked that the options on the table are either to sell the airlines or close it down. October 30th was the latest deadline for finalizing the sale of Air India, but Govt will be forced to extend that as well. The deadlines of Air India sale have been extended quite a few times in the last couple of years. If the privatisation is put off by three years then the government will have to find a plan to keep the national carrier running for that period. Reports suggest that the huge debt of Air India is a major reason for buyers not being extended. The government is examining how the debt exposure of the potential buyer can be reduced. Out of Rs 60,074 crore debt of Air India, the government had already announced a reduced debt exposure of Rs 23,286 crore for the buyer. This means, that instead of Rs 60,074 crore debt, the new buyer will be needed to repay only Rs 23,286 crore of debt. The rest of the debt will be transferred to a special purpose vehicle called Air India Assets Holding Ltd. Discussions are on to evolve a formula where the buyers can put in a bid based on the enterprise value and bids will be evaluated based on that. However, due to the stress in the aviation sector, buyers may not interested even with reduced debt given that their core operations are pressure.

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IPO frenzy nets billions for venture capital backers

Markets|: New York: Billions of dollars could be on the way to Sand Hill Road this week, home base for Silicon Valley’s venture capital elite, after a string of initial public offerings. Venture firms netted handsome returns on paper for their early investments. While the firms mostly won’t be able to sell their shares until lockup periods expire, proceeds from exits could provide the cash for them to fund the next generation of startups. See more Photos: New products, services rolled out by Apple Get set to climb UAE’s tallest restaurant location from October 1 Mexico holds symbolic raffle for unwanted presidential jet Chinese firms bet on plant-based meat as COVID-19 fuels healthy eating trend With airline fleets grounded, plane recyclers bet on parts boom Snowflake Inc., which was trading at a $65 billion valuation Friday, has provided the biggest windfall so far for its early shareholders. Sutter Hill Ventures, which invested when the cloud-computing business was a nascent startup, owned more than 20% of the company’s Class B shares going into the IPO, according to a filing. Its 41.9 million shares are now worth more than $10 billion. Sutter Hill’s windfall wasn’t happenstance. Managing Director Mike Speiser also served as Snowflake’s first chief executive officer. Venture firms Sequoia Capital, Altimeter Partners Fund, Redpoint Ventures and multifamily office Iconiq Strategic Partners, also own Snowflake stakes worth billions, filings showed. Gaming Victory Gaming technology company Unity Software Inc., raised $1.3 billion in an initial public offering and rose 31% in its trading debut Friday, giving it a market value of $18 billion. Unity provided a big return for early investor Sequoia, which owns 57.5 million shares, worth $3.9 billion. Private equity firm Silver Lake owns 43.3 million shares worth almost $3 billion. Firms also benefited from smaller technology IPOs this week, JFrog Ltd. and Sumo Logic Inc. Gemini Israel Ventures, Sapphire Ventures and Insight Partners were the largest JFrog shareholders. Greylock Partners, Sapphire Ventures and Accel had the largest Sumo Logic stakes. Companies are going ahead with IPOs while the market is strong, particularly for technology stocks, venture capitalists said. “It’s a little bit of all the stars aligning,” said Jai Das, managing director at Sapphire Ventures. “There are a lot of companies with significant revenue run rate that can go public.” And Das added, “There is a demand.” Carl Eschenbach, a partner at Sequoia, said the market for IPOs is “very robust” now. “There’s a lot of capital sitting on the sidelines,” he said. Enterprise technology companies find that being a public company enhances their credibility when selling to new customers, he said. More returns Venture capital firms stand to gain from returns from deals involving startups merging with special purpose acquisition companies, also known as SPACs or blank-check companies. This week, real estate-startup Opendoor agreed to go public by merging with a blank-check company led by Social Capital’s Chamath Palihapitiya. Opendoor’s backers include GGV Capital, Norwest Venture Partners and SoftBank Vision Fund. Venture firm Founders Fund, co-founded by Peter Thiel, will also be a beneficiary of direct listings on deck this month. It backs both Palantir Technologies Inc. and workplace software company Asana Inc., which is backed by venture capital firm Benchmark. Palantir is planning to go public via a direct listing on Sept. 29 that will be unusual because it will impose a partial lockup period - though less strict than in a traditional IPO. Asana is set for a direct listing the following day that won’t include such restrictions.

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China launches sanctions regime after US moves on TikTok, WeChat

Asia|Americas|Business|: Shanghai: China on Saturday launched a mechanism that would allow it to sanction foreign companies, upping the ante in a tech war with the United States a day after Washington moved to curb popular Chinese apps TikTok and WeChat. China's long-expected "unreliable entities list" is seen as a weapon for Beijing to retaliate against the United States, which has used its own "entity list" to shut Chinese telecom giant Huawei out of the US market, while also moving against TikTok and WeChat. Its implementation comes just a day after the US Commerce Department stepped up the pressure by ordering a ban on downloads of video app TikTok and effectively blocking use of WeChat, the Chinese super-app. An announcement by China's Ministry of Commerce did not mention any specific foreign entities that could be targeted. But it said the new system would consider sanctions on entities whose activities "harm China's national sovereignty, security, and development interests" or violate "internationally accepted economic and trade rules". That language closely tracks wording that Beijing has used to repeatedly denounce US actions against Chinese companies. Punitive measures may include fines against the foreign entity, banning it from conducting trade and investment in China, and restrictions on the entry of personnel or equipment into the country. It covers "foreign enterprises, other organisations and individuals", the ministry said. 'Unreliable' Under Friday's US order against the Chinese apps, Tencent-owned WeChat would lose functionality in the United States from Sunday. TikTok users will be banned from installing updates but could keep accessing the service through November 12. That timeframe potentially allows for a tie-up between TikTok, owned by China's ByteDance, and a US company to safeguard data for the wildly popular app to allay Washington's security concerns. With President Donald Trump facing a tough re-election campaign, US officials have described the measures as essential to safeguard national security from potential Chinese espionage through the platforms. But in a response to the US steps, China's Commerce Ministry on Saturday condemned what it called US "bullying", saying it violated international trade norms and that there was no evidence of any security threat. "If the US insists on going its own way, China will take necessary measures to resolutely safeguard the legitimate rights and interests of Chinese companies," it said, without specifying the potential measures. A short time after that statement, the ministry announced the new sanctions regime. TikTok vowed to fight the Trump crackdown in court, saying it impedes a tool "for entertainment, self-expression and connection." Critics said that while the security risks were unclear, the sweeping ban raises concerns about the US government's ability to regulate free expression. "It's a mistake to think of this as (only) a sanction on TikTok and WeChat. It's a serious restriction on the First Amendment rights of US citizens and residents," said Jameel Jaffer, director of the Knight First Amendment Institute at Columbia University. Some analysts say Trump's moves are motivated more by reasons for business competition than security concerns. The moves would effectively disable US use of WeChat - a so-called super-app used for messaging, shopping, payments and other services - and TikTok from the online marketplaces operated by Apple and Google. After Sunday, services on WeChat will be "degraded", said a senior US Commerce Department official, who added that existing users may retain some capability. WeChat is widely used among Chinese expats to keep in touch with people back home. A court challenge to the ban by US-based WeChat users is pending. The US ban on WeChat does not affect its service in China where the app is much more widely used. Pressure grows for a deal Existing TikTok users will be able to continue using the app until November 12 - when it would also face a full ban on its US operations if no deal is reached, according to officials. TikTok's brand of brief, quirky phone videos has become hugely popular, especially among young people, with 100 million users in the US alone. The move ramps up pressure on ByteDance to conclude a deal to sell all or part of TikTok to allay US security concerns. A potential deal would allow Silicon Valley giant Oracle to become the tech partner for TikTok, but some US lawmakers have objected to allowing ByteDance to keep a stake. Trump said Friday a deal could happen quickly. "For ByteDance, their back is against the wall to accept the terms of the deals outlined over the past few days," Daniel Ives at Wedbush Securities said in a research note. "We still believe a deal can be reached and this shutdown averted although it's a critical 48 hours ahead for deal negotiations between all parties involved."