AFP

An auction to pay out insurance on Russia’s unpaid debt was due to take place on Monday, an event formally marking the sanctions-hit country’s first foreign default in more than a century.

Moscow was unable to transfer funds to creditors in June due to Western sanctions over its invasion of Ukraine.

The failure to pay its debt kicked off a complicated process to compensate investors who bought credit default swaps (CDS), a sort of insurance that bondholders purchase to protect against default by borrowers.

But the auction was repeatedly delayed as organisers had to ensure that the sanctions would not block the CDS payouts.

The country last defaulted on its foreign debt in 1918, when Bolshevik revolution leader Vladimir Lenin refused to recognise the massive debts of the deposed tsar’s regime.

Russia defaulted on domestic debt in 1998 when, due to a drop in commodity prices, it faced a financial squeeze that prevented it from propping up the ruble and paying off debts that accumulated during the first war in Chechnya.

The latest default follows a series of unprecedented Western sanctions that have isolated Russia from the global financial system, including a freeze on Moscow’s $300 billion in foreign currency reserves held abroad.

Russia lost the last avenue to service its foreign-currency loans after the United States removed an exemption in May that had allowed US investors to receive Moscow’s payments.

Russian authorities have insisted throughout that they have the funds to honour the country’s debt, calling the predicament a “farce” and accusing the West of pushing an “artificial” default.

Moscow’s foreign currency debt is relatively low, at around $40 billion.

But the sanctions prevented it from paying bond holders in June.

– ‘Credit event’ –

International ratings agencies, the institutions that decide whether are country is in default, were unable to officially declare whether Russia was in default due to sanctions prohibiting them from covering Moscow’s debt.

But Moody’s ratings agency released a less formal “issuer comment” saying missed payments on interest totalling $100 million amounted to a default.

The official ruling was therefore left in the hands of a little-known panel of investors, the Credit Derivatives Determinations Committee (CDDC), which organises CDS auctions.

In late June, the London-based CDDC — made up of 15 leading banks and financial firms — declared that Russia’s missed payment constituted a “credit event”.

CDS auctions are usually held around 30 days after the committee declares a credit event, but doubts over whether the sanctions allowed the process to take place caused the three-month delay.

Foreign investors are no longer able to trade Russian bonds, and the auctions are essentially transactions involving such assets.

But the US Treasury Department issued a waiver in July to allow the auction on eight Russian bonds to take place this month.

JPMorgan, the investment firm, says the CDS against Russian default are worth almost $2.4 billion.

The auction takes place in two stages. The first stage will set an initial price on the eight bonds, which will serve as a base to fix the final price for compensation in a second stage open more widely to investors.

The CDDC said the settlement dates for the auction could be slightly delayed due to a bank holiday for the funeral of Queen Elizabeth II on September 19.

Asian and European markets rallied on Monday, building on the momentum of gains in the United States and elsewhere at the end of last week, as investors price in the expectation of further interest rate hikes aimed at taming inflation.

The euro surged in early trading, a day after German central bank chief Joachim Nagel signalled that the European Central Bank (ECB) would probably continue raising its key rate.

The European single currency rocketed more than 1.4 percent against the dollar and 1.6 percent versus the yen.

The ECB raised the key rate by a historic 75 basis points last week, and markets expect a similar-sized hike at an October meeting.

Nagel predicted inflation in Europe might peak at more than 10 percent in December.

London, Paris and Frankfurt all opened higher on Monday, with bourses in Japan, Australia, Singapore, Taiwan, Jakarta, Malaysia and Thailand also rising.

Markets in Hong Kong, China and South Korea were closed for a public holiday.

This week, investors worldwide will be closely watching US inflation data for August, due to be released on Tuesday, with the consumer price index (CPI) expected to ease slightly to eight percent — still well above the Fed’s two-percent target.

Traders expect the Fed to impose another large rate hike next week, after two 75-basis-point increases already.

“A downside surprise in US CPI is likely more of a concern and that could see the dollar weakening further,” Charu Chanana, a strategist at Saxo Capital Markets, told Bloomberg Television.

Clifford Bennett, chief economist at ACY Securities, said he expected stocks to “continue to drift higher” ahead of Tuesday’s US CPI data.

“(US CPI) may well see further improvement as petrol prices have continued to pull back,” he said. 

“Other components are still likely to be pointing higher, but fuel prices could well dominate this CPI number.” 

Oil began the week flat, as investors weigh the possibility of global demand weakening as growth slows and China’s harsh zero-Covid policy continues to sap economic activity.

On Monday, new data showed British GDP expanded by 0.2 percent in July, according to the Office for National Statistics. 

Concerns remain, however, about the overall health of the UK economy. 

“July’s GDP remains below the level seen in May, pointing to an overall contraction over the first two months of summer,” said Yael Selfin, chief economist at KPMG UK. 

– ‘Soft landing’ hopes –

US Treasury Secretary Janet Yellen on Sunday said she was hopeful the US economy could avoid a recession, but that the Fed would need to skilfully manage interest rates and also rely on “some good luck to achieve what we sometimes call a soft landing”.

“My hope is we will achieve a soft landing, but Americans know it’s essential to bring inflation down and, over the longer run, we can’t have a strong labour market without inflation under control,” she told CNN.

Yellen said that while the US economy’s growth rate was slowing, the labour market remained “exceptionally strong”, with almost two openings for every jobseeker.

In addition to the US CPI figures on Tuesday, traders will be closely watching UK CPI on Wednesday, and European CPI and China home sales, retail sales and industrial production data on Friday.

In Tokyo, stocks closed higher on Monday with gains by tech shares and a weaker yen boosting the market.

The dollar fetched 143.18 yen in Asian trade, against 142.56 yen on Friday in New York.

“A cheaper yen is positive for corporate performances, despite recent media reports” that highlight the negative aspects of the weak yen, said chief strategist Masayuki Kubota of Rakuten Securities.

On Friday, Bank of Japan chief Haruhiko Kuroda met Prime Minister Fumio Kishida, saying the rapid weakening of the currency was “undesirable”, an indication of possible upcoming action to arrest the fall.

– Key figures at around 0830 GMT –

Tokyo – Nikkei 225: UP 1.2 percent at 28,542.11 (close) 

Hong Kong – Hang Seng Index: closed for public holiday

Shanghai – Composite: closed for public holiday

New York – Dow: UP 1.2 percent at 32,151.71 (close)

New York – S&P 500: UP 1.5 percent at 4,067.36 (close)

New York – Nasdaq: UP 2.1 percent at 12,112.31 (close)

London – FTSE 100: UP 1.2 percent at 7,436.07 

Frankfurt – DAX: UP 1.4 percent at 13,268.26 

Paris – CAC 40: UP 1.0 percent at 6,275.81 

EURO STOXX 50: UP 1.2 percent at 3,612.75

Euro/dollar: UP at $1.0185 from $1.0046 

Pound/dollar: UP at $1.1691 from $1.1587  

Euro/pound: UP at 87.12 pence from 86.84 pence

Dollar/yen: UP at 142.77 yen from 142.56 yen 

Brent North Sea crude: UP 0.1 percent at $92.92 per barrel

West Texas Intermediate: DOWN 0.1 percent at $86.73 per barrel

The UK’s recession-threatened economy rebounded in July, data showed Monday, but is set to receive a further hit from a public holiday marking next week’s funeral of Queen Elizabeth II.

British gross domestic product expanded 0.2 percent after a drop of 0.6 percent in June, the Office for National Statistics said in a statement.

June’s big decline had been attributed partly to an extra public holiday for the queen’s Platinum Jubilee marking 70 years on the throne before her passing last week.

Another public holiday is scheduled next Monday for the queen’s state funeral.

“The feeble 0.2-percent bounce back in July was driven by weak GDP in June due in part to the loss of working days from the Jubilee long weekend,” noted Yael Selfin, chief economist at KPMG UK.

“More concerning, July’s GDP remains below the level seen in May, pointing to an overall contraction over the first two months of summer.”

Britain usually has only one public holiday in early summer but the amount was doubled for the Jubilee.

Time off work for millions of Britons next Monday means the economy will have had two more public holidays than usual in 2022.

The Bank of England (BoE) expects the UK economy to enter recession before the end of the year on decades-high inflation fuelled by surging energy and food bills.

– ‘More damaging’ –

“Looking ahead, the extra public holiday for the queen’s funeral on September 19 has the potential to be more damaging for the economy than the extra day off for the Jubilee in June,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said following Monday’s data.

“That said, many businesses will be able to catch up work, as most of them did in June.” 

Pantheon is predicting the funeral to hit September GDP by 0.2 percent. 

“That suggests that a technical recession — widely defined as two quarters of declining GDP — is hanging in the balance.”

The BoE forecasts UK inflation — already at a 40-year high above 10 percent — to keep surging this year.

In a bid to tame runaway prices, the central bank has hiked its main interest rate several times since the end of last year.

More tightening of borrowing costs had been nailed on at a BoE meeting this week but its latest monetary policy gathering has been delayed until after the funeral.

Mourners later Monday get the first opportunity to pay respects before the coffin of Queen Elizabeth II, as it lies in an Edinburgh cathedral where successor King Charles III will mount a vigil.

The queen died in Scotland last Thursday, aged 96.

Mongolia has launched a rail line that could help boost coal exports to China to 50 million tonnes a year, the country’s president said, ending a decade-long wait for the crossing.

A ceremony to mark the launch of the rail service between the Tavan Tolgoi coal field and Gashuun Sukhait on the Chinese border was held on Friday.

Mongolian President Ukhnaa Khurelsukh was among the dignitaries in attendance, according to his website.

Heavily dependent on mining, Mongolia has long sought cheaper and more efficient ways to export its minerals abroad and has a national strategy to expand its rail network connections with Russia and China. 

Mining makes up a quarter of the country’s gross domestic product.

China has stepped up its investment in coal in the face of extreme weather, an economic slowdown and a global fuel crisis.

The 233-kilometre (145-mile) Tavan Tolgoi rail line has the capacity to export between 30 million and 50 million tonnes of coal to China annually, according to Tavantolgoi Railway LLC, the state agency that built the line. 

In 2020 the North Asian country exported 28.6 million tonnes of coal. Last year, exports fell to 15.9 million tonnes. 

The railway is also expected to lower the cost to transport coal to $8 per tonne, compared to $32 per tonne when coal is delivered by truck, according to the railway authority. 

Tavan Tolgoi is rich in coking coal, an essential ingredient in the steel-making process. 

For years coal has been transported in trucks to China, a process that has led to long queues at the border and frequent accidents. 

Mongolian governments have attempted to build a railway from Tavan Tolgoi to the Gashuun Sukhait border for more than a decade. 

Tavantolgoi LLC was formed in 2018 to complete the project. Ulaanbaatar-based Bodi International served as the general contractor. 

The Gashuun Sukhait-Gantsmod border crossing is now the second Mongolia-China border point with a rail crossing, with the other at Zamyn-Uud-Erlian. 

Progress Rail, a division of Caterpillar, agreed to supply 16 locomotives to support operations for the railway project. 

The new locomotives are designed to fit the 1,520 mm gauge used in Mongolia, Russia, and other former Soviet republics. 

Mongolia’s current 1,900 km rail network was almost entirely constructed during the 20th century with help from the Soviet Union. 

It consists mainly of the Trans-Mongolia line between Russia and China, and a spur line to the city of Erdenet.

Asian markets rallied in early trading on Monday, building on the momentum of gains in the United States and Europe at the end of last week, as investors price in the expectation of further interest rate hikes aimed at taming inflation.

Equities in Japan, Australia, Singapore, Taiwan and Jakarta surged, while markets in Hong Kong, China and South Korea were closed for a public holiday.

The euro continued to gain against the dollar, with investors in Europe weighing the prospect of the European Central Bank (ECB) following the US Federal Reserve’s lead and raising key rates.

On Sunday, German central bank president Joachim Nagel signalled the ECB would probably continue raising interest rates to curb runaway inflation.

Nagel predicted inflation in Europe might peak at more than 10 percent in December.

The ECB raised the key rate by a historic 75 basis points last week, and markets expect a similar-sized hike at an October meeting.

This week, investors worldwide will be closely watching US inflation data for August, due to be released on Tuesday, with the consumer price index (CPI) expected to ease slightly to eight percent — still well above the Fed’s two-percent target.

Traders expect the Fed to impose another large hike in interest rates next week, after two 75-basis-point increases already.

“A downside surprise in US CPI is likely more of a concern and that could see the dollar weakening further,” Charu Chanana, a strategist at Saxo Capital Markets, told Bloomberg Television.

“We’ve seen some glimpses of that… towards the end of last week. That could potentially be a risk to watch particularly this week.”

– ‘Soft landing’ hopes –

On Sunday, US Treasury Secretary Janet Yellen said she was hopeful the US economy could avoid a recession, but that the Fed would need to skilfully manage interest rates and also rely on “some good luck to achieve what we sometimes call a soft landing”.

“My hope is we will achieve a soft landing, but Americans know it’s essential to bring inflation down and, over the longer run, we can’t have a strong labour market without inflation under control,” she told CNN.

Yellen said that while the US economy’s growth rate was slowing, the labour market remained “exceptionally strong”, with almost two openings for every jobseeker.

In addition to the US CPI figures on Tuesday, traders will be closely watching UK CPI on Wednesday, and European CPI and China home sales, retail sales and industrial production data on Friday.

In Tokyo, stocks opened higher on Monday, driven by positive market sentiment off the back of last week’s gains and a weaker yen.

The dollar fetched 142.65 yen in early Asian trade, against 142.56 yen on Friday in New York.

“A cheaper yen is positive for corporate performances, despite recent media reports” that highlight the negative aspects of the weak yen, said chief strategist Masayuki Kubota of Rakuten Securities.

On Friday, Bank of Japan chief Haruhiko Kuroda met Prime Minister Fumio Kishida, saying the rapid weakening of the currency was “undesirable”, an indication of possible upcoming action to arrest the fall.

– Key figures at around 0300 GMT –

Tokyo – Nikkei 225: UP 1.1 percent at 28,528.90 

Hong Kong – Hang Seng Index: UP 2.7 percent at 19,362.25 (closed for public holiday Monday)

Shanghai – Composite: UP 0.8 percent at 3,262.05 (closed for public holiday Monday)

New York – Dow: UP 1.2 percent at 32,151.71 (close)

New York – S&P 500: UP 1.5 percent at 4,067.36 (close)

New York – Nasdaq: UP 2.1 percent at 12,112.31 (close)

London – FTSE 100: UP 1.2 percent at 7,351.07 (close)

Frankfurt – DAX: UP 1.4 percent at 13,088.21 (close)

Paris – CAC 40: UP 1.4 percent at 6,212.33 (close)

EURO STOXX 50: UP 1.6 percent at 3,570.04 (close)

Euro/dollar: UP at $1.0085 from $1.0046 

Pound/dollar: UP at $1.1609 from $1.1587  

Euro/pound: UP at 86.86 pence from 86.84 pence

Dollar/yen: UP at 142.65 yen from 142.56 yen 

Brent North Sea crude: DOWN 1.4 percent at $91.57 per barrel

West Texas Intermediate: DOWN 1.5 percent at $85.49 per barrel