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Few options for G7 trade chiefs to alleviate supply pinch

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October 21, 2021

By David Lawder

WASHINGTON (Reuters) – Trade chiefs from the developed world’s economic powerhouses gathering on Friday have few options at hand for a rapid fix to the supply chain woes driving up inflation and crimping growth, a problem trade experts say arises from market forces outside their reach.

The G7 trade ministers meeting in London may call for stronger efforts to clear backlogs at container ports and other transport bottlenecks, more infrastructure improvements to speed goods to market and diversification of sources of key components such as semiconductors, including more domestic output.

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But these are all long-term solutions. Market forces that created excess demand for goods may already be well on their way to correcting the problem.

“These officials have very few arrows in their quiver to address this problem,” said Harry Broadman, a managing director at Berkley Research Group and a former U.S. trade official. “This is ultimately driven by consumer demand.”

With demand and supply out of sync and the logistics struggling to catch up, it could take up to six months for many goods shortages to ease, he said, with much of the shift brought about by market forces and private sector firms filling the gap.

U.S. President Joe Biden last week announced new 24 hour-a-day port operations in Los Angeles and called on private sector logistics firms to “step up” along with big retailers such as Target and Wal-Mart to speed goods to shelves in time for the Christmas holidays. But logistics experts, economists and labor unions have warned that the efforts may be only incremental steps in unwinding the backlog.

U.S. Republican lawmakers, seizing on the bottlenecks for political gain, urged Biden in a letter to “address the global supply chain and ports crisis before Congress even considers any additional social spending and taxation legislation.”

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But addressing some of the most critical supply chain needs will take time, said William Reinsch, a trade expert at the Center for Strategic and International Studies and a former Commerce Department export official.

Adding domestic production capacity for more semiconductors to reduce reliance on a handful of Asian countries will take years and upgrading port infrastructure to increase efficiency and throughput is also a long term effort, he said.

International Monetary Fund European Department Director Alfred Kammer said policymakers can take steps to try to ease transportation bottlenecks, but strengthening supply chains will require investments in infrastructure and diversification of sources of key components. He said the current inflationary effects from supply chain disruptions and energy shortages should fade in Europe next year.

“It’s going to be a very complex issue. The market will deal with some of it, but government policy can support adjusting as well, especially on the infrastructure side,”

TOO MUCH MONEY

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Much of the current problem is a mismatch of strong pent-up demand for goods fueled by coronavirus aid checks and savings built up during pandemic lockdowns against supplies constrained by production shutdowns, dwindling inventories and shortages of workers.

U.S. Treasury Secretary Janet Yellen described the phenomenon as a “very, very unusual shock” that shifted spending away from services such as travel, lodging and restaurants.

“Instead, we’ve been gobbling up goods and commodities like we’ve never seen before,” Yellen told MSNBC in an interview that aired on Wednesday.

British Finance Minister Rishi Sunak last week called on G7 governments to work together to tackle supply chain disruptions.

But the boom in consumption that has pushed U.S. consumer spending on durable goods 25% above trend this year won’t last and will likely be replaced by below-normal demand in 2022, UBS Chief Economist Paul Donovan said in a note to clients. This will slow GDP growth and cool inflation.

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“Once the pent-up demand has been satisfied, there is no further need to spend. The person who has bought a new washing machine this year does not rush to buy another new washing machine next year,” Donovan wrote.

PEAK CRISIS?

Equity analysts at Jefferies said the supply chain crisis may have already peaked with the passing of a mid-October shipping deadline for holiday goods, freeing up capacity for “baseline” shipping of machinery, automotive goods and home furnishings.

“There are signs that we are past the peak pinch and Jefferies’ analysts expect to see significant improvement by the second half” of 2022, the firm said in a research report.

Data from Tradeshift, a digital platform that facilitates and processes business-to-business trade transactions, indicates that an equalization of demand and supply is already underway.

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The group’s index of third quarter order volumes fell by 24 points from the second quarter to 85, well below the 100-point score that is equal to pre-pandemic trend forecasts.

Index – https://2aq8232w304w1v4dpt1zpxs8-wpengine.netdna-ssl.com/wp-content/uploads/sites/3/2021/10/TS-Index-of-Global-Trade-Health-Q3-2021.pdf

“Buyers are starting to question the wisdom of putting fresh orders into a system that is buckling under an enormous backlog,” Tradeshift CEO Christian Lanng said in a statement. “The longer this situation continues, the more likely we’ll see a more prolonged reversal heading into 2022.”

(Reporting by David Lawder; additional reporting by Philip Blenkinsop and Andrea Shalal; Editing by Dan Burns and Chizu Nomiyama)

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Wood’s ARK fund fails to join broad market rally as lockdown stocks slip

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November 30, 2021

By David Randall

NEW YORK (Reuters) – The broad market relief rally on Monday left many so-called stay-at-home stocks behind, dealing another blow to Cathie Wood’s ARK Innovation fund.

The $18.6 billion ARK Innovation fund, which outperformed all other U.S.-based equity funds last year due to its outsized holdings of stocks that rallied during the economic lockdowns, dropped 0.5% in morning trading Monday, well behind the 1% gain in the S&P 500.

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The benchmark index dropped nearly 2.3% Friday on news a new coronavirus variant, now known as Omicron, had been identified in southern Africa, spurring new travel restrictions worldwide. Yet global equity markets made up some of that lost ground Monday on reports the new variant may produce mild symptoms.

Signs Omicron will not deal a severe blow to the economy are prompting investors to remain in cyclical stocks, said Phil Orlando, chief equity market strategist at Federated Hermes.

“This is not February of 2020 when the world is about to shut down. If anything we think the economy will continue to improve from here,” he said.

ARK Innovation’s declines were widespread Monday, with 8 out of the fund’s 10 largest holdings down for the day. Telemedicine company Teladoc Health Inc, the fund’s second-largest holding, fell 5.1%, while streaming company Roku Inc shed 2.6% and Zoom Video Communications Inc lost 3.2%.

For the year, ARK Innovation is down 14%, while the benchmark S&P 500 is up 23.4%. That underperformance places ARK Innovation among the worst-performing mid-cap growth funds for the year to date, according to Morningstar. It remains among the top-performing funds over the last 5 years.

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Ark did not respond to a request to comment for this story.

(Reporting by David Randall; Editing by Mark Porter)

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Oil prices rise on bets OPEC+ will hold off output hike

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November 30, 2021

By Sonali Paul

MELBOURNE (Reuters) – Oil prices climbed on Tuesday, extending a rebound from last week’s plunge on growing expectations major producers would pause plans to add crude supply in January amid uncertainty over the severity of the Omicron coronavirus variant.

U.S. West Texas Intermediate (WTI) crude futures jumped 99 cents, or 1.4%, to $70.94 a barrel at 0105 GMT, adding to a 2.6% rise on Monday.

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Brent crude futures climbed 82 cents, or 1.1%, to $74.26 a barrel, after gaining 1% on Monday.

Oil plunged around 12% on Friday along with other markets on fears the heavily mutated Omicron would spark fresh lockdowns and dent global growth.

The World Health Organization said on Monday Omicron posed a very high risk of infection surges, and several countries stepped up travel curbs. It is still unclear how severe the new variant is and whether it can resist existing vaccines.

With the demand outlook under a cloud, expectations are growing that the Organization of the Petroleum Exporting countries, Russia and their allies, together called OPEC+, due to meet on Dec. 2 will put on hold plans to add 400,000 barrels per day (bpd) of supply in January.

“We think the group will lean towards pausing output hikes in light of the Omicron variant and the oil stockpile release by major oil consumers,” Commonwealth Bank commodities analyst Vivek Dhar said in a note.

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Pressure was already growing within OPEC+ to reconsider its supply plan after last week’s release of emergency crude reserves by the United States and other major oil-consuming nations to address soaring prices.

“Following the global strategic reserve releases and the announcement of dozens of countries restricting travel to and from South Africa and neighbouring nations, OPEC and its allies can easily justify an output halt or even a slight cut in production,” OANDA analyst Edward Moya said in a note.

Also weighing on the market is the prospect of a resumption of oil exports from Iran, following upbeat comments from diplomats as talks resumed on Monday between world powers and Iran on reviving a nuclear pact.

(Reporting by Sonali Paul. Editing by Gerry Doyle)

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Main IKEA retailer’s profits jump despite ‘unprecedented challenges’

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November 30, 2021

By Anna Ringstrom

STOCKHOLM (Reuters) – Ingka Group, the owner of most IKEA stores world-wide, reported on Tuesday a jump in annual profit on the back of record demand for home furnishing as people stay at home more due to the pandemic.

Despite more temporary store closures due to pandemic related restrictions than the year before, and product shortages due to the global supply chain crisis, operating profit in the 12 months through August was up 31% at 1.9 billion euros. Sales were up 6%, to above pre-pandemic levels, with online sales jumping to account for 30% of total sales, against 18% the year before.

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Compared to the pre-pandemic fiscal 2019, profit was still down, by 8%, due to high investment levels. Capital expenditure was up 52% on the year, at 3.2 billion euros, as Ingka accelerated investments in digitalisation, new inner-city store formats, existing stores, and distribution and delivery networks.

Chief Financial Officer Juvencio Maeztu told Reuters he expected sales to grow also in the current fiscal year, and profits to be at least as high as in the past year. Investment levels would probably remain at least as high as in the past year, he said.

“Our journey to create a better IKEA forges ahead in a world that faces unprecedented challenges. COVID-19 will continue to impact our business and the communities we are a part of,” the company said in a statement.

“The global supply and transport crisis will require a resilient, flexible response. Efforts across the value chain will continue to mitigate the challenges with product availability, inflation, prices of raw materials and transport that are expected to continue into FY22.”

Budget furniture brand IKEA operates through a franchise system, with Ingka the main franchisee to brand owner Inter IKEA with 392 stores including city stores, and 73 smaller store formats.

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Inter IKEA, which is in charge of design and supply, in the past year absorbed substantially higher costs for raw materials and transports, but has flagged it will raise prices to its retailers this year in the face of continued high supply related costs.

Ingka’s Maeztu said in the interview that he could not rule out that Ingka would also raise prices this year.

(Reporting by Anna Ringstrom; editing by Richard Pullin)

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