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Analysis-‘TINA’ keeps stocks and bonds going their own way

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October 29, 2021

By Yoruk Bahceli and Tommy Wilkes

LONDON (Reuters) – The readout from this week’s brutal selloff in government bond markets seems clear: rising inflation will hustle central banks into panicky interest rate rises, quashing economic growth.

Yet stocks, currencies and corporate bonds are sending a different picture: keep calm. Maybe even buy more.

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Time will tell who has it right. What’s for sure is many bond investors were caught out by fears that central banks, despite their inflation-is-transitory mantra, may end up tightening policy sooner than signalled.

A timid message from the European Central Bank, a hawkish one in Canada and the Reserve Bank of Australia’s reluctance to defend its 0.1% T-bill yield target all helped light a fire under short-dated debt yields. Those in Germany and the United States zipped to their highest since last March while Australian bill yields saw their biggest three-day surge since 1996.

(GRAPHIC: Aussie bonds – https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnoalopq/Aussie%20bonds.JPG)

Ordinarily, such moves would cause significant disruption across asset classes.

But instead they have barely registered, with the S&P 500 equity index hitting a record high on Thursday. While stocks fell on Friday, losses are relatively muted and Lipper data shows that in the week to Wednesday, investors purchased equities at the fastest pace since March.

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Currency and equity volatility remain subdued, with Wall Street’s “fear gauge”, the VIX index, just off 2021 lows. In Europe, rates volatility has rocketed, while stocks have remained calm.

(GRAPHIC: European vol – https://fingfx.thomsonreuters.com/gfx/mkt/xmvjolmwnpr/European%20vol.JPG(

Some attribute the sanguine reaction to the relative calm in longer-dated bonds, where yields appear to signal confidence that swift central bank action will in time quash inflationary pressures without upending economic momentum.

And “real” bond yields, adjusted for inflation, remain deeply negative: despite a surge on Friday they remain around -1% and -2% in the United States and Germany respectively.

“It’s surprising that stocks have not responded more but with real yields so negative, markets are not too worried,” said Charles Diebel, head of fixed income at Mediolanum International Funds.

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“If you decompose the forward curve on inflation it’s about the near-term pressure on inflation … so breakevens are moving up but central banks are starting to respond, which means slower activity and meaning inflation will not be a problem in the longer-term.”

Breakevens refer to the difference between nominal and inflation-linked bond yields and are often used as a market gauge of inflation expectations.

Nor do riskier corporate debt markets seem spooked. The risk premiums they pay on top of government bonds remain historically low.

“(Low real rates), I think that is having an effect on markets in the sense that it’s creating the ‘TINA’ effect: There Is No Alternative to buy higher-yielding securities,” said Barnaby Martin, head of credit strategy at BofA in London.

TYPICAL MID-CYCLE

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The short-dated bond moves are also partly down to positioning. Traders caught out by the yield rise had to dump their positions, exacerbating the selloff and making some pricing look far-fetched.

Traders now expect the United Kingdom and Canada to raise interest rates by more than 100 basis points over the next 12 months. Even the ultra-dovish European Central Bank is seen hiking twice by October 2022.

(GRAPHIC: Global money markets raise central bank rate hike bets  Global money markets raise central bank rate hike bets  – https://graphics.reuters.com/GLOBAL-MARKETS/klvykzkylvg/chart.png)

Chris Iggo at AXA Investment Managers expects higher rates to tighten financial conditions a little but said it would be akin to “normalisation, in a sense because we’re going to pre-COVID conditions”.

    “It’s typical mid-cycle type of economic conditions, where inflation has gone up a bit, rates have gone up, growth starts to slow, but it’s not a recession yet.”

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And if serious growth concerns do emerge, many remain confident of the central bank “put”.

“The real widening (in stocks and corporate spreads) would come on a recession, not so much rates risk, just because we’ve seen time and time again that if markets begin struggling because of interest rate fears, central banks try to push back dovishly again,” Martin of BofA said.

But bond repricing should eventually ripple out more broadly, meaning some pain is inevitable.

“Expect tantrums in risk if central banks respond to inflation – and tantrums in bonds if they don’t,” Citi strategist Matt King told clients.

(Reporting by Yoruk Bahceli, Tommy Wilkes, Sujata Rao and Saikat Chatterjee; Editing by Sujata Rao and Catherine Evans)

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Deutsche Post CEO favourite to become Telekom chairman – sources

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December 5, 2021

BERLIN (Reuters) – Frank Appel, the chief executive of German logistics company Deutsche Post, is the favourite to become the next supervisory board chairman of Deutsche Telekom, two sources close to the matter told Reuters.

The sources said Deutsche Post’s supervisory board is due to meet on Wednesday and Deutsche Telekom’s board will meet a week later to discuss the matter.

Both companies declined to comment.

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The Handelsblatt newspaper reported on Saturday that Appel would potentially be proposed for election at Deutsche Telekom’s annual meeting on April 7.

The term of office of Telekom chairman Ulrich Lehner, who has headed the Telekom supervisory body since 2008, ends at next year’s shareholder meeting. He had already confirmed that an external search for a successor was under way.

Appel’s predecessor at Deutsche Post, Klaus Zumwinkel, also served as supervisory board chairman of Telekom.

The German government holds stakes in both companies.

Appel, a former McKinsey consultant, has been with Deutsche Post since 2000. In 2002, he became a member of the board of management, and in 2008 he moved up to the post of CEO.

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His contract runs until 2022 and a decision on his future at the Post had been expected soon. Some industry insiders have speculated that Appel could be ready to move on given that Deutsche Post has posted record results through the pandemic.

(Reporting by Matthias Inverardi and Nadine Schimroszik; Writing by Emma Thomasson; editing by David Evans)

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Canadian employers, facing labor shortage, accommodate the unvaccinated

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December 5, 2021

By Julie Gordon and Steve Scherer

OTTAWA (Reuters) – Canada’s tight labor market is forcing many companies to offer regular COVID-19 testing over vaccine mandates, while others are reversing previously announced inoculation requirements even as Omicron variant cases rise.

Canadian Prime Minister Justin Trudeau’s government adopted one of the strictest inoculation policies in the world for civil servants and has already put more than 1,000 workers on unpaid leave, with thousands more at risk.

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Airlines, police forces, school boards and even Canada’s Big Five banks https://www.reuters.com/world/americas/canadas-major-banks-require-employees-entering-premises-be-vaccinated-2021-08-20 have also pledged strict mandatory vaccine policies. But following through has proven less straightforward, especially as employers grapple with staffing shortages and workers demand exemptions.

Job vacancies in Canada have doubled so far this year, official data shows, and vaccine mandates can make filling those jobs harder, potentially putting upward pressure on wages. That could fuel inflation https://www.reuters.com/world/americas/canadas-annual-inflation-rate-hits-47-oct-highest-since-feb-2003-2021-11-17, already running at a near two-decade high.

“It’s already difficult to find staff, let alone putting in a vaccine mandate. You’d cut out potentially another 20%” of potential workers, said Dan Kelly, chief executive of the Canadian Federation of Independent Business.

There are pitfalls to employing the unvaccinated. Companies run a higher risk of COVID-19 outbreaks and many vaccinated employees are uncomfortable working with those who have not had the jab, said industry groups and marketing experts.

At Luda Foods, a Montreal-based soup and sauce maker, president Robert Eiser said he has 14 open jobs, no vaccine mandate and no plans to restrict new hires to the vaccinated.

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“I don’t know that I want to reduce the (labor) pool, which is already quite low,” said Eiser. “We need to attract people to meet the demand. If we don’t, our competitors will.”

Data released on Friday underpinned Canada’s tight labor market, with a hefty 153,700 jobs https://www.reuters.com/markets/us/canada-posts-hefty-job-gains-outlook-clouded-by-omicron-variant-2021-12-03 added in November. It also showed a growing mismatch between available workers and unfilled jobs. And job postings are far above pre-pandemic levels. (Graphic: Canada job postings surge above pre-pandemic level Canada job postings surge above pre-pandemic level, https://graphics.reuters.com/HEALTH-CORONAVIRUS/CANADA2/klvyknzklvg/chart.png)

WALKING BACK

The province of Quebec backtracked on a vaccine mandates for healthcare workers last month, saying they could not afford to lose thousands of unvaccinated staff. Ontario, which was also eyeing a mandate, said it would not go ahead.

Toronto-Dominion Bank and Bank of Montreal have both softened their vaccine policy to allow regular testing for workers who missed their Oct. 31 inoculation deadline.

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In Canada, 86% of adults are fully inoculated, though that drops under 80% among 18-40 year olds. At least 15 cases of the new Omicron https://www.reuters.com/markets/rates-bonds/canada-has-reported-total-11-cases-omicron-variant-health-official-2021-12-03 variant in Canada have been reported in the past week.

John Cappelli, vice president of onsite managed services in Canada for global recruitment firm Adecco, said half of his clients are mandating vaccines with the other half allowing regular testing for the unvaccinated.

But he expects the Omicron variant will prompt more workplaces to get strict on vaccination, even as they grapple with the tightest job market he’s seen in his 25-year career.

“We are now starting to see our first workplace (COVID-19) cases in five months,” he said.

The number of Canadian job postings on search website Indeed mentioning vaccine requirements has quadrupled since August. (Graphic: Canada job postings and vaccine mandates, https://graphics.reuters.com/HEALTH-CORONAVIRUS/CANADA3/byvrjqrlmve/chart.png)

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In the hard-hit manufacturing sector, where 77% of firms say their top concern is attracting and retaining workers, vaccine mandates are more rare.

Dennis Darby, CEO of Canadian Manufacturers and Exporters, said most of Canada’s factories have operated safely throughout the pandemic. While CME encourages vaccination, “some companies are still using rapid testing if somebody doesn’t want to get vaccinated,” he added.

But companies risk a hit to their reputation if they are overt in efforts to tap into the unvaccinated as a labor pool, said Wojtek Dabrowski, managing partner at Provident Communications.

“If you go out and say, ‘We are intentionally seeking to hire unvaccinated people,’ many customers are equating that with you being anti-science and anti-safety,” said Dabrowski.

(Reporting by Julie Gordon and Steve Scherer in Ottawa, additional reporting by Rod Nickel in Winnipeg and Nichola Saminather in Toronto; Editing by Alistair Bell)

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Israeli firm to sell HSBC Tower in New York for $855 million

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December 5, 2021

By Steven Scheer

JERUSALEM (Reuters) – Israel’s Property and Building Corp said on Sunday it agreed to sell the HSBC Tower building in midtown Manhattan for $855 million to New York-based real estate firm Innovo Property Group, recording a net loss of $45 million.

The Israeli company, which is 63% owned by Discount Investment Corp, said it had also sold property in Israel for 390 million shekels ($123 million).

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Doron Cohen, chief executive of both Property and Building and Discount, said management was focusing on income-producing properties in Israel and that the amount it was receiving from both transactions would allow it to advance this policy.

“We are continuing the policy and examining the possibility of realising additional properties in the United States and in Israel,” Cohen said, noting the sale of the HSBC building came despite “gloomy” predictions over U.S. commercial real estate market.

He cited Tivoli Village, an upscale apartment complex in Las Vegas that opened this year, which may be put up for sale as part of the company’s efforts to boost liquidity and reduce debt.

Along with conglomerate Koor Industries, Property and Building, bought the 30-storey, 80,000 square metre HSBC Tower in 2009 for $353 million. In 2011, Property acquired Koor’s stake in the tower which has an occupancy of 99%, it said. HSBC had bought the building in the 1990s.

Property and Building said the value of the HSBC Tower in its books was $864 million as of Sept. 30. After costs, it said it would record a net loss of $45 million from the sale.

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Completion of the sale is expected by April 1, 2022 subject to Innovo’s right to advance the date while also receiving options to postpone the completion twice for 30 days each.

Property said after the sale it will have a net cash flow of $343 million.

Its shares were 0.7% lower in afternoon trading in Tel Aviv.

($1 = 3.1605 shekels)

(Reporting by Steven Scheer;Editing by Elaine Hardcastle)

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