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Saudi Arabia a precedent for fixing US-Russia relations

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Russia’s President Vladimir Putin (L) and Russian Direct Investment Fund CEO Kirill Dmitriev during a meeting with Russian Direct Investment Fund experts and representatives of international investment community at Konstantin Palace.

Mikhail Klimentyev | TASS via Getty Images

The head of Russia‘s $10 billion state investment vehicle is optimistic about repairing relations with Washington, he told CNBC on Sunday, pointing to Moscow’s growing bond with Saudi Arabia as a precedent.

Russia isn’t trying to fill a void in the Middle East left by what some describe as an inward-turning America, Kirill Dimitriev, chief executive of Russia’s sovereign wealth fund (RDIF) told CNBC’s Hadley Gamble in Riyadh. He insisted that Russia’s growing investments in and trade with Saudi Arabia should be seen as “building bridges” rather than engaging the strategic competition that many in the West regularly warn about.

“Really we are not talking about, you know, the strategic partnerships that Saudi has with the U.S., and what we are doing is not against the U.S. It’s actually building something that is very positive,” Dimitriev said. “And building something that helps Saudi economy, Russian economy — and builds the friendship between our nations.”

The CEO’s comments come at a time of frigid relations between the U.S. and Russia, as the latter remains under U.S. sanctions and has been accused by the U.S. intelligence community of meddling in the 2016 election and posing a continued threat to the presidential election in 2020.

Dimitriev pointed to his country’s blossoming friendship with Saudi Arabia — something that only four years ago was in serious doubt, given the animosity between the two during the Cold War. The last few years, by contrast, have seen the creation of a historic oil production alliance led by Riyadh and Moscow, increased trade and investment, and the first state visit by a Saudi monarch to Russia.

Russian President Vladimir Putin speaks during the 16th Valdai International Discussion Club meeting in Sochi, Russia on October 3, 2019.

Anadolu Agency | Anadolu Agency | Getty Images

“I think we need to go back to basics… I’m sure the Saudi example is very interesting to try at some point to restore the relationship with the U.S., because if we could do it with Saudi Arabia in four years, why can’t we do it with the U.S. going forward?” he asked.

“Many people didn’t believe that we’ll make much progress,” Dimitriev said of the relationship with the Saudi kingdom. “And it seemed too distant because Russia and Saudi Arabia were worlds apart. We had lots of differences during Soviet times. We had lots of differences in many politics in the Middle East. But now I can report to you that we made really breakthrough and this is a breakthrough because President Putin and King Salman and now Crown Prince Mohammed bin Salman really believed that it’s possible to bring Russia and Saudi Arabia closer together.”

New Saudi-Russia investment projects

Dimitriev, as chief of RDIF, is tasked with attracting inward investment to Russia in a wide range of sectors. In previous interviews with CNBC, he has often downplayed political tensions and espoused better relations to promote trade and investment. He has criticized U.S. sanctions on Russia, calling them unproductive. He has also vocally defended Michael Calvey, the American investor currently under house arrest in Russia on state charges of defrauding a Russian bank, allegations Calvey says are untrue.

RDIF already has investment partnerships with Saudi Arabia’s sovereign wealth funds, PIF and SAGIA. Saudi Aramco has made moves to invest in Russia’s energy industry, with the two companies agreeing on terms of an investment into Russian oilfield services firm Novomet earlier this year. The two countries also jointly invest in an energy fund through a Russian partnership with Saudi state oil giant Aramco, and are expected to announce 10 new investment projects in the oil and technology spheres on Monday.

Saudi Arabia has so far invested $2.5 billion of a $10 billion investment pledge into a number of Russian sectors, including energy, infrastructure and technology.

“This angle of Middle East-Russia-Asian markets is a very interesting angle because there are lots of growth opportunities in all those markets,” Dimitriev said. “Of course the situation in the Middle East is still quite volatile and we know about geopolitical tensions but there is no doubt that there is a major opportunity to grow the Saudi economy.”

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Weekly jobless claims reach 2.1 million, but total unemployed shrinks

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First-time claims for unemployment benefits totaled 2.1 million last week, the lowest total since the coronavirus crisis began though indicative that a historically high number of Americans remain separated from their jobs.

Economists surveyed by Dow Jones had been looking for 2.05 million. The total represented a decrease of 323,000 from the previous week’s upwardly revised 2.438 million.

Continuing claims, or those who have been collecting for at least two weeks, numbered 21.05 million, a clearer picture of how many workers are still sidelined. That number dropped sharply, falling 3.86 million from the previous week.

That decline in continuing claims “suggests that the reopening of states is pushing businesses to rehire some of the people let go when the virus hit,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. However, Shepherdson noted that some of the data, particularly from California, remains noisy and may not be an accurate representation of some states’ situations.

The insured unemployment rate, which is a basic calculation of those collecting benefits vs. the total labor force, came down sharply to 14.5% from 17.1% the previous week.

“Layoffs continue at a massive scale, according to the latest unemployment insurance report, but it may be that the job market is nearing a turning point,” said Gus Faucher, chief economist at PNC.

The four-week moving average, which helps smooth out weekly volatility, rose to 22.72 million, an increase of 760,250 from the previous week. 

Since the pandemic was declared in mid-March, 40.8 million have filed claims as social distancing measures aimed at containing the coronavirus outbreak resulted in much of the $21.5 trillion U.S. economy being in lockdown for 2½ months.

A separate report Thursday showed that first-quarter GDP contracted by 5%, while the Atlanta Fed’s GDPNow tracker is indicating a 41.9% plunge in Q2 that will be the worst in U.S. history. That would put the U.S. firmly in recession territory, though most economists are expecting a rebound in the second half of the year after restrictions are lifted.

A total 1.19 million filed claims through the Pandemic Unemployment Assistance program last week.

The high jobless numbers persist even as all states have reopened their economies to various extents. Las Vegas casinos will be resuming activities late next week, Disney resorts also have targeted July reopening dates and Los Angeles is allowing retail stores to resume business. Restrictions are likely to be loosened soon in New York as well.

Still, businesses are wrestling with multiple dynamics stemming from the biggest surge in in layoffs since the Great Depression. The Federal Reserve reported Wednesday that business owners are seeing workers reluctant to return to their jobs because of safety concerns, child-care issues and “generous” unemployment benefits from the government.

At the state level, Pennsylvania saw the biggest rise in claims last week with 6,892, according to numbers not adjusted seasonally. Many large states, though, saw declines from a week earlier Washington fell by 86,839, while California declined by 32,088 and New York decreased by 31,769.

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If Fed opts for negative rates, it will be a ‘Hail Mary’

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A woman walks past the U.S. Federal Reserve building in Washington D.C., the United States, May 21, 2020. U.S. Federal Reserve Chair Jerome Powell on Thursday said the COVID-19-induced economic downturn has inflicted acute pain across the country, noting that the burden is not evenly spread.

Ting Shen | Xinhua News Agency | Getty Images

Should the U.S. Federal Reserve opt to take its benchmark funds rate into negative territory, it will need to “go deeply negative” with a cut of between 50-100 basis points below zero, according to Standard Chartered Bank.

The Fed has unleashed an unprecedented barrage of monetary stimulus in a bid to shore up the U.S. economy against the economic impact of the coronavirus pandemic. However, Chairman Jerome Powell has denied that taking its benchmark overnight lending rate below zero is under consideration, despite pressure from U.S. President Donald Trump.

Speculation of negative rates has nonetheless persisted, and although not the bank’s base-case scenario, Standard Chartered analysts said in a note Wednesday that it could occur in the event of a disappointing economic rebound and exhaustion of other policy options. They suggested that if negative rates were to emerge as a last resort, the central bank would need to go deep.

“No one likes trying a ‘Hail Mary’ from midfield as the clock ticks down when you are losing, but you kick the ball a long way in that situation – there is no point to a short pass,” said Steven Englander, head of global G10 FX research and North American Macro Strategy at Standard Chartered.

Negative interest rates, as seen in the euro zone and Japan, effectively charge banks to hold money with the central bank in a bid to encourage them to lend and therefore stimulate the economy. However, both the euro zone and Japan have seen limited benefits since their implementation, which was before the coronavirus pandemic erupted.

Englander argued that while central banks often present breaching zero as akin to “crossing the Rubicon,” there is not necessarily a “non-linear” policy impact that would make edging from a small positive to a small negative a significant monetary policy maneuver.

“If cutting policy rates from 150bps (basis points) to 10bps was not enough to shock the economy into recovery, we (and we suspect the Fed) do not think that going from +10bps to, say -20bps would materially affect the outcome,” Englander said.

“We doubt that the Fed expects a small venture into negative territory would provide enough stimulus to offset the negative impact on banks lending and disruption of short-term money markets.”

Plunging dollar and negative yields

Englander suggested that dropping 50-100 basis points below zero would trigger a significant fall in yields on the benchmark 10-year Treasury note, along with easing debt-servicing pressures.

Standard Chartered analysts believe this would likely send Treasury yields to all-time lows across the curve, potentially taking the 10-year negative, especially since the policy action would likely be taken against a backdrop of a bleak economic outlook and rising deflation risks.

“Still, we would expect the move to be driven primarily by the real yield channel in response to the rate cuts and ongoing Fed U.S. Treasury buying,” he added.

Should the move to negative rates transpire, Englander anticipates a sharp fall in the U.S. dollar, with the timing of the drop dependent on the economic and asset market context.

“Negative rates could disrupt short-term money markets at first, so the initial response might be buying G10 safe havens, or even result in USD strength,” he said.

“Once the surprise element passed through the market, currencies with positive yield and muted fiscal policy should prosper.”

Meanwhile, gold would likely test all-time highs in this scenario, Englander projected, as negative interest rates would “lower the opportunity cost of holding gold.”

“Investors still appear to be under-allocated to gold, and negative rates could draw interest from retail to the official sector,” he added.

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Cryptocurrency fans lay into bank

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Goldman Sachs Group Inc. signage is displayed on a monitor on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Oct. 7, 2016.

Michael Nagle | Bloomberg | Getty Images

Goldman Sachs isn’t convinced there’s a case for investing in cryptocurrencies like bitcoin. Crypto evangelists — perhaps unsurprisingly — aren’t impressed with its assessment.

The U.S. bank’s consumer and investment management division released a slide deck ahead of an investor call Wednesday, examining the impact of the coronavirus outbreak on the U.S. economy. A sizable chunk of the presentation focused on bitcoin and other virtual currencies.

“Cryptocurrencies including bitcoin are not an asset class,” Goldman Chief Economist Jan Hatzius and Harvard Professor Jason Furman wrote in the opening of one slide. The deck detailed several reasons why cryptocurrencies couldn’t be considered an asset class in their own right, claiming they don’t generate cash flow likes bonds or earnings through exposure to global economic growth.

“We believe that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients,” Hatzius and Furman wrote.

“We also believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale.”

Many industry analysts have been pointing to increased interest from institutional investors like hedge funds as a potential catalyst for price rises. Such speculation grew after hedge fund veteran Paul Tudor Jones said earlier this month that he has almost 2% of his assets in bitcoin.

Crypto enthusiasts had eagerly anticipated the Goldman call, with some assuming the 151-year-old bank might lay out a case for investing in bitcoin. Needless to say, they didn’t get what they wanted on Wednesday.

The Winklevoss twins, co-founders of the cryptocurrency exchange Gemini, were among the most vocal in the backlash to Goldman’s claims.

“Hey Goldman Sachs, 2014 just called and asked for their talking points back,” Cameron Winklevoss said in a tweet.

His brother, Tyler, claimed, “The more I think about it, the Goldman report is probably a head fake,” referring to a sports tactic used to throw an opponent off by pretending you’re moving in one direction only to then move the opposite way.

Goldman’s Hatzius and Harvard’s Furman drew a comparison between bitcoin’s monster rally in late 2017 — when it surged close to $20,000 — and the Dutch “tulip mania” of the 17th century, one of the most well-known speculative bubbles in history. Similar comparisons have been made previously by bank executives — most notably J.P. Morgan CEO Jamie Dimon, who called bitcoin a “fraud” that will eventually “blow up.”

Goldman played down the idea that bitcoin is a “scarce resource,” noting that some of the most valuable coins — bitcoin cash and bitcoin SV — are “forks.” This means the new coins that have been created out of changes in the protocol of the bitcoin network.

Bitcoin bulls often claim the digital asset’s limited supply is part of what underpins its value and makes it a potential “hedge” against currencies which are vulnerable to devaluation in times of economic crisis.

The bank also called cryptocurrencies a “conduit for illicit activity,” highlighting their use in fraudulent schemes and money laundering.

“It’s important to note that Goldman Sachs’ competitors Fidelity and JP Morgan have made significant investments in cryptocurrency,” said Dave Hogson, chief investment officer and managing director of NEM Ventures, a cryptocurrency-focused venture capital firm. Fidelity last year set up a separate unit devoted to cryptocurrency clearing and custody, while J.P. Morgan developed its own internal digital currency, “JPM Coin,” for payments.

“While volatility is indeed high, the year-on-year, and now decade-long performance is a consistent uptrend based on holding the asset, not trading the volatility. By considering it unviable for its investors, Goldman Sachs has risked causing its investors to miss out on one of the best performing asset classes in the past 100 years, never mind the last 10.”

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