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Asian shares waver with coronavirus, focus turns to corporate earnings

SYDNEY/NEW YORK (Reuters) – Asian stocks dithered on Wednesday as an increase in coronavirus cases in some parts of the world undermined prospects for a quick economic recovery while oil prices eased on oversupply fears.

European futures weakened with those for Eurostoxx 50 and Germany’s DAX down 0.7% each. London’s FTSE futures slipped 0.85%.

MSCI’s broadest index of Asia-Pacific shares outside Japan inched up but was still lower than a 4-1/2-month high reached just on Tuesday.

Chinese shares flickered between green and red through most of the day and were last up 0.9%.

Australian shares ended 1.5% lower on renewed fears about the coronavirus pandemic after a rise in cases in the country’s second biggest city.

New Zealand finished 0.3% lower while South Korea was off 0.2%. Japan’s Nikkei fell 0.8%.

E-mini futures for the S&P 500 declined 0.25%.

Overnight, U.S. stocks fell, halting a five-day winning streak by the benchmark S&P 500 index, its longest this year and driven by better-than-expected economic data.

Following the recent rally, the declines looked like a consolidation, with the markets largely in “wait and see mode” ahead of the upcoming earnings session, said NAB economist Tapas Strickland.

Second-quarter earnings season will begin in earnest from next week.

“It will be important to watch the number of U.S. deaths in coming weeks and whether greater questions will be asked about the extent of necessary restrictions,” Strickland said.

California reported more than 10,000 coronavirus cases on Tuesday, a record rise for a single day that also surpassed the number of contact tracers recently trained by the state to detect and prevent potential outbreaks.

Coronavirus cases were also on the rise in the Australian state of Victoria, which led to lockdown measures being reimposed in Melbourne, the country’s second-biggest city.

“The second wave of infection will see Victorian economic activity fall sharply and it will continue to lag the rest of Australia,” said NAB economist Kaixin Owyong.

Victoria makes up around a quarter of Australian economic activity, she said.

Citi analysts predicted global equities would hang around current levels in twelve months’ time.

“We expect bullish and bearish forces to cancel each-other out,” they said in a note. “We would not chase markets higher from current levels, but would prefer to wait for the next dip.”

Citi has “overweight” positions on U.S. and Emerging Markets equities.

Most major currencies were trapped in a range.

The U.S. dollar was flat on the Japanese yen at 107.52.

The risk sensitive Australian and New Zealand dollars were a shade weaker at $0.6936 and $0.6541, respectively.

The euro was barely changed at $1.1272.

In commodities, gold hovered near a recent 8-1/2 year peak as investors preferred safe-haven assets. Spot gold was last flat after two straight days of gains at 1,794.1 per ounce.

Brent crude futures fell 11 cents, or 0.28%, to $42.96 a barrel. U.S. West Texas Intermediate (WTI) crude futures slipped 15 cents, or 0.15%, to $40.47 a barrel.

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Embraer union seeks planemaker's board ouster after failed Boeing deal

SAO PAULO (Reuters) – A union representing workers at Embraer filed a lawsuit on Friday seeking to dismiss the company’s board, after a $4.2 billion deal with Boeing Co (BA.N) collapsed amid the pandemic, claims the Brazilian planemaker said were an act of “bad faith.”

The failed deal left the Brazilian jetmaker scrambling for a new path forward as the coronavirus pandemic hammered travel demand.

Embraer said the union was “using unfounded allegations and distorting information in order to confuse public opinion and the company’s workers.” It added it had yet to be served.

The lawsuit is the latest headache for Embraer in the aftermath of its breakup with Boeing. Under the deal signed in 2018, Boeing was going to buy the majority of Embraer’s commercial aviation unit in order to take on Airbus in the mid-range jet segment.

But the deal collapsed at the 11th hour in April, leaving Embraer and Boeing pointing fingers at each other.

The lawsuit accuses Embraer’s board of having allowed Boeing to conduct what amounted to “espionage,” by having its U.S. engineers work within Embraer’s research and development unit during the time when the deal seemed like it would in fact materialize.

In the wake of the pandemic, Embraer is now being supported by the government through a $600 million loan and said this week it was negotiating a buyout program. It posted a loss of $210 million last quarter.

Embraer’s board “operates creating billionaire losses and passing on the cost of its incompetence to workers,” the union alleged in court papers.

The planemaker said the union’s claims showed “ignorance about the company and its management.”

The Boeing-Embraer deal was subject to several lawsuits, including by the metalworkers union which sought to stop it. Some judges initially agreed to block the deal, but appeal judges ultimately overturned all allegations.

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Business

Embraer union sues to oust planemaker's board after failed Boeing deal

SAO PAULO (Reuters) – A union representing workers at planemaker Embraer filed a lawsuit on Friday seeking to dismiss the company’s board, after a $4.2 billion deal with Boeing Co (BA.N) collapsed amid the pandemic, leaving the Brazilian jetmaker scrambling for a new path forward.

The lawsuit is the latest headache for Embraer in the aftermath of its breakup with Boeing. Under the deal signed in 2018, Boeing was going to buy the majority of Embraer’s commercial aviation unit in order to take on Airbus in the mid-range jet segment.

But the deal collapsed at the 11th hour in April, having already cleared several regulatory hurdles, and left Embraer and Boeing pointing fingers at each other. Arbitrations filed by both sides are pending.

Now, the metalworkers union in Sao Jose dos Campos is asking a judge to dismiss Embraer’s board. The lawsuit accuses the board of having allowed Boeing to conduct what amounted to “espionage,” by having its U.S. engineers work within Embraer’s research and development unit during the time when the deal seemed like it would in fact materialize.

Embraer did not have immediate comment.

Embraer is now dealing with the coronavirus pandemic that has battered demand for travel, received government support in the form of a $600 million loan and has said it is negotiating a buyout program. It posted a loss of $210 million last quarter.

Embraer’s board “operates creating billionaire losses and passing on the cost of its incompetence to workers,” the union alleged in court papers filed in a Sao Paulo court.

The lawsuit does not seek to oust management. Embraer is currently led by Francisco Gomes Neto, who came to the company only after the deal with Boeing had already been signed.

The Boeing-Embraer deal has been affected by lawsuits in the past, including by the metalworkers union which sought to stop it. Several judges initially agreed to block the deal, but appeal judges ultimately overturned all allegations.

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Business

Fiat sticks by terms of PSA deal after divided cut report

MILAN (Reuters) – Fiat Chrysler (FCA) said the terms of its merger with France’s PSA had not changed after an Italian newspaper report that it was looking to spin off assets to reduce a planned 5.5 billion euro ($6.2 billion) cash pay-out to its shareholders.

FCA (FCHA.MI) said on Friday that it was sticking to the deal agreed with PSA (PEUP.PA) in December before the coronavirus crisis hit demand for cars.

“The structure and terms of the merger are agreed and remain unchanged,” a spokesman for the Italian-American automaker said.

FCA and PSA plan to finalise their merger by the first quarter of next year. PSA declined to comment.

Italian business newspaper Il Sole 24 Ore said that FCA could conserve cash by reducing the special dividend, possibly by handing shareholders assets as compensation.

Il Sole reported that talks were at a very early stage and no decision had been taken, adding the that aim was to keep the 5.5 billion euro value of the special dividend but to turn its “nature” from cash to assets.

FCA, has just agreed a 6.3 billion euro state-backed loan to help its Italian unit and the whole country’s automotive industry to weather the crisis.

Although this does not bar FCA from paying the dividend, as it is not due until 2021 and would be paid by Dutch parent company Fiat Chrysler Automobiles NV, Italian politicians have called into question such a large cash pay-out.

Options being considered include spinning off the Sevel van business, a 50-50 joint venture between the two groups, or FCA’s Alfa Romeo and Maserati brands, Il Sole said.

Sevel, which produces vans in Atessa’s plant in central Italy, Europe’s largest van assembly facility, could be valued between 2.5 and 3 billion euro, Il Sole said.

Its spin-off to FCA shareholders could also help address European Union concerns about the merger’s consequences on competition in the van segment.

This option looks however complicated, Il Sole said, as it would require PSA transferring its 50% stake in Sevel to FCA.

Another option is scrapping a planned spin-off of PSA’s controlling stake in parts maker Faurecia, Il Sole said.

A source close to the matter said that PSA could instead sell its Faurecia (EPED.PA) stake before the merger and keep the cash proceeds of the sale within the new merged company.

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World News

Merkel fury: German Chancellor urges EU to prepare for no-deal Brexit in latest outburst

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The German chancellor’s comments came on Wednesday in a speech to the German parliament.

Merkel said that talks have so far produced “limited” progress, even after agreements from both sides that the negotiations should be intensified.

The German official said she would “continue to press for a good solution”, but added that both the EU and Germany should “prepare for the event that an agreement is not reached after all”.

Indeed, the most recent round of post-Brexit trade deal talks between the UK’s negotiator David Frost and his EU counterpart Michel Barnier concluded yesterday, with both later stating that little progress had been made.

Barnier said: “Our goal was to get negotiations successfully and quickly on a trajectory to reach an agreement.

“However, after four days of discussions, serious divergences remain.”

While Frost, on a slightly more optimistic note, added that although the week’s talks had been “comprehensive and useful”, they “also underlined the significant differences that still remain between us on a number of important issues”.

Trade talks have been at an impasse for several weeks, with competition rules understood to be a key sticking point.

Barnier said yesterday that the UK had set out demands including that the European Court of Justice have no future role in the UK.

The EU, meanwhile, has set about ensuring that the aforementioned competition rules are agreed and that “effective dispute settlement mechanisms” are in place.

READ: Boris Johnson ends furlough: PM says no more taxpayer support beyond October

In high level talks a couple of weeks ago, Boris Johnson and EU presidents agreed that trade talks needed “new momentum” following the lack of progress.

Pressure has perhaps intensified following the Prime Minister’s assertion that the UK would not extend the negotiation period with the EU beyond this year, meaning that the new rules between the UK and the EU will come into force on January 1 2021 whether there is a trade deal or not.

Boris Johnson said last month that there was a “very good” chance of both sides avoiding such a no-deal scenario and clinching a trade agreement this year.

The prime minister even added that he saw “no reason” why a deal could not be reached by July.

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Businesses in the UK will likely be eager for an agreement either way soon rather than later, as it would give them time to prepare for whatever the situation may be come 2021.

Indeed, the EU is the Britain’s largest trading partner. More than half of UK imports in 2019 were from the EU, worth a total of £372 billion according to the House of Commons Library.

Conversely, the EU accounted for 43 percent of all UK exports last year, worth around £300 billion.

It’s perhaps particularly important for Wales, which exported a higher percentage of its goods to the EU in 2019 than any other region of the UK.

As such, it’s important to know what the rules might be when 2020 comes to a close.

The next round of UK-EU trade talks are due to commence on the week beginning July 20 – though it’s understood that “talks” will be continuing in London next week.

Meanwhile, the UK’s trade talks with Japan are steaming ahead in comparison.

It’s though that negotiations between the two countries could conclude as early as this month, with Japan’s chief negotiator to Britain, Hiroshi Matsuura, noting at the end of May that Japan wanted to secure a deal with the UK as a matter of “highest priority”.

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Business

Fed's offered flood of credit so far just a trickle in practice

(Reuters) – The Federal Reserve’s promise in the early days of the coronavirus pandemic to flood the U.S. economy with trillions of dollars seemed like the proverbial central bank bazooka.

It has been more of a trickle in practice, with activity outside the U.S. Treasury and other core financial markets so far only a fraction of what’s available, and with lending to companies in the “real” economy virtually nonexistent.

When Fed chair Jerome Powell appears before the House Financial Services Committee on Tuesday to discuss the central bank’s crisis response he will likely be pressed on that: More than three months into the worst economic meltdown since the Great Depression the Fed so far has made no loans under a vaunted “Main Street” program for small and medium sized companies, provided only $1.2 billion to local governments, and holds just $8.3 billion in corporate bonds.

It may, as Fed officials contend, be overall good news, and evidence their mere announcement of support for the economy has kept private lenders and borrowers transacting on their own, kept financial markets stable, and lifted confidence the Fed could keep the worst from happening.

Still, analysts including former Fed chair Ben Bernanke have questioned whether the Fed has been too strict in setting up its programs. While many worked as intended, the fact no Main Street loans have been issued “is a concern both politically and also in terms of getting liquidity to the firms that need it,” Bernanke said last week in a Brookings Institution webinar.

Bernanke said the Fed may need to make its laboriously designed Main Street program “more generous,” with lower costs for borrowers or subsidies for banks initiating the loans, if it wants to keep otherwise healthy small and medium businesses from ruin in the crisis.

“What we need is a compromise where we assist short term survival for small firms while not creating zombie firms,” that survive on cheap credit alone, Bernanke said. “It is not clear that the Main Street program … is going to be enough.”

LITTLE UPTAKE

So far none of the programs set up to backstop companies and markets outside the financial sector have seen much use. By contrast more traditional programs to ensure financial institutions keep doing business in a crisis have been more extensive and by most accounts successful.

Since late February the central bank has increased its overall balance sheet – a measure of its footprint in the economy – from $4.2 trillion to $7.1 trillion.

Most of that stemmed from keeping the government bond and mortgage-backed securities markets on track: holdings of U.S. Treasuries and MBS increased around $2.4 trillion. Foreign central banks swapping their currencies for dollars accounted for another roughly $230 billion.

What distinguished the response to this crisis from the 2007 to 2009 financial meltdown was the offer to lend directly to private firms and local governments. Announced with fanfare in early April, the Fed said it would, among other steps, provide around $2 trillion to buy bonds to finance large corporations; lend directly to small and medium sized businesses; and help state and local governments raise funds to meet expenses.

Weeks later those programs are up and running – the Fed on Monday launched its latest effort to purchase new corporate bond issues – but of the $1.85 trillion notionally available only about $9.5 billion has been tapped.

The Fed of course can’t make people apply for loans, and the credit costs and other measures that might trigger more aggressive purchases of corporate bonds, for example, have improved since the early days of the pandemic.

Powell in prepared remarks for Tuesday’s hearing said Main Street lending may prove valuable “in the months ahead” for firms hit by the dramatic drop in economic activity during the pandemic.

Still, analysts are cutting estimates of how large the Fed’s balance sheet might grow during a crisis some thought might test its capacities.

The CARES Act raised the possibility of $4.5 trillion in credit flowing from the central bank. The total may end up less than a fourth of that.

“The usage of the Fed credit facilities has been much slower and smaller than we had anticipated,” Oxford Economics analyst Kathy Bostjancic wrote last week, estimating perhaps only half of the Main Street loans available will be taken and perhaps less than a third of the corporate bond fund be used.

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Lazarus Chakwera sworn in as Malawi president

Lazarus Chakwera has been sworn in as president of Malawi after winning an election rerun.

He defeated incumbent Peter Mutharika with 58.57% of the vote in Tuesday’s poll, the electoral commission announced late on Saturday.

In February, Malawi’s constitutional court annulled Mr Mutharika’s victory in the May 2019 election, citing vote tampering.

The country was bitterly divided in the run-up to this week’s election.

Other countries in Africa have had elections annulled – it happened in Kenya in 2017 – but for the opposition candidate to then go on and win a rerun is unprecedented, correspondents say.

Speaking ahead of Saturday’s results, Mr Mutharika said that while he found the election “unacceptable”, it was his “sincere hope that we should take this country forward instead of backwards.”

Saulos Chilima, Mr Chakwera’s running mate, was also sworn in as vice-president at a ceremony in the capital, Lilongwe.

Mr Chakwera, a Pentecostal preacher and former theology lecturer, will first have to heal a nation that has been through many months of political turmoil.

Why was there a new vote?

A rerun of the 2019 election was ordered after the Constitutional Court found the original ballot had been marred by widespread irregularities.

That election saw President Mutharika narrowly re-elected by fewer than 159,000 votes.

Mr Chakwera, who came second in that election, argued that tallying forms had been added up incorrectly and tampered with.

First electionon 21 May 2019

Mutharikasworn in on 27 May 2019

Thousands proteston 20 June 2019, complaining of fraud

Constitutional courtoverturns result on 3 February 2020 and orders re-run

Court rejectsMutharika's appeal on 8 May 2020

Uncertainty around the result sparked months of tension, which spilled over into clashes between opposition supporters and police.

February’s annulment led some to celebrate, but Mr Mutharika described it as a “serious subversion of justice” which marked the death of the country’s democracy.

There were concerns over the logistics and safety of carrying out an election in the midst of the worldwide coronavirus pandemic.

Who is Lazarus Chakwera ?

The opposition leader, a former cleric, heads up the opposition Malawi Congress Party (MCP).

Born in Lilongwe to a subsistence farmer, the philosophy and theology graduate has pledged to raise the national minimum wage, among other reforms.

Candidate for the Tonse Alliance

Born 5 April 1955

Studied theology in Malawi, South Africa and USA

Pastor and lecturer worked at the Assemblies of God School of Theology

Authored several books on religion including Reach the Nations

Ran for president in 2014 and came second

Mr Chakwera leads a nine-party coalition, the Tonse Alliance, and had the backing of former President Joyce Banda as well Mr Chilima, who served as deputy to Mr Mutharika.

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