Vladimir Putin has been forced to raid Russia’s dollar reserves to pay creditors in a U-turn that has staved off the country’s first international default since the Bolshevik revolution.
Investors started to receive $650m of late payments on two bonds on Tuesday as part of a last-gasp bid to avoid a formal default before a deadline elapsed on Wednesday.
The interest payments on the bonds have faced intense scrutiny since the Kremlin missed them in early April after the money was caught up in Western sanctions.
Experts warned the country was almost certain to suffer its first foreign debt default in a century but Bloomberg reported Moscow unexpectedly used US currency not impacted by sanctions, sapping its domestic reserves.
A 30-day grace period was due to expire on Wednesday and the Kremlin’s move came after it attempted to make the payments in roubles.
However, the payments made to creditors could be just a stay of execution for the Kremlin.
Russia is still facing a series of crunch moments in its battle to avoid default in the coming weeks, particularly when temporary measures by the US allowing American bondholders to accept Russian debt payments expire on May 25.
Attention is now shifting to a payment due on May 27.
Richard Briggs, an emerging market investment manager at GAM, said that May 25 is the “next hurdle” for the Kremlin’s debt saga.
“Unless [the US] Office of Foreign Assets Control extends that authorisation, they won’t be able to continue to make payments,” he told Bloomberg on the US measures that will elapse later this month.
Russia owes creditors around $40bn with half of the debt held by foreign investors. Half of its $640bn war chest of Russia’s foreign reserves have been frozen by Western central banks.
A debt default typically trashes a country’s reputation with investors and makes it harder and more expensive to tap markets, worsening an economic downturn Charlie Robertson, chief economist at Moscow-based Renaissance Capital, said a default would be largely “academic” as sanctions mean investors are not “going to be buying the debt anyway”.
He said Russia was not seeing the economic fallout associated with a debt default.
Mr Robertson added: “What you’re seeing in Russia is a currency doing the opposite of collapsing, getting much, much stronger, and an economy continuing to function pretty well. In terms of functioning, at least there are fuel supplies at the petrol stations and food in the shops.”
Russia is expected to suffer a two-year recession after being bombarded by Western sanctions and corporate boycotts.
Last month the IMF predicted that Russian GDP will plunge 8.5pc this year and fall a further 2.3pc in 2023 as its trade and financial ties are severed.
However, the Kremlin appears to have staved off a full-blown financial crisis with a series of measures to shore up the economy, including capital controls to slow the flow of money out of the country.
05:10 PM
Wrapping up
That’s all from us, thank you for following! Before you go, have a look at today’s stories from the business desk:
05:09 PM
Cazoo struggles to step up a gear as supply problems hold it back
Alex Chesterman is a master of imitation. The 52-year-old entrepreneur’s previous successes, Zoopla and Lovefilm, were inspired by US players Zillow and Netflix, respectively. James Titcomb writes:
Cazoo, Chesterman’s used vehicle online retailer that was set up in 2018, is modelled on Arizona-based Carvana. The “Amazon of cars”, founded six years earlier, delivers used vehicles to purchaser’s doors. Having gone public at a $2bn (£1.6bn) valuation in 2007, Carvana exploded to a $70bn (£56bn) valuation by last summer on a promise to rewrite the rules of how cars are bought and sold.
When Cazoo followed it onto the US stock market in August, it was unsurprising that investors were desperate to snap up a stake.
Now, however, the wheels appear to be coming off. As the cost-of-living crisis bites, alongside a shortage of vehicles and a market shift away from tech stocks, Cazoo’s share price is deep in the red.
04:53 PM
Elon Musk vows to restore trust in Twitter
That is why we must clear out bots, spam & scams. Is something actually public opinion or just someone operating 100k fake accounts? Right now, you can’t tell.
And algorithms must be open source, with any human intervention clearly identified.
Then, trust will be deserved.
— Elon Musk (@elonmusk) May 3, 2022
04:36 PM
Brewdog boss gives 5pc of stake to staff in attempt to regain reputation
BrewDog’s chief executive is handing 5pc of his stake in the business to staff as the company seeks to shake off allegations of a toxic culture. Hannah Boland has more:
James Watt, who also co-founded the Scottish brewer, said its 750 salaried workers would receive a total of 3.7 million shares over the next four years, with a 1.25pc stake distributed each year.
The move will take Mr Watt’s shareholding down from 24.2pc to 19.2pc and comes alongside a new profit scheme for bar staff.
Mr Watt said the two moves would “ensure that we are all in this together as we look to write the next chapter in the BrewDog story”.
The company is taking the steps in the wake of allegations last summer that executives had created a “culture of fear” and that staff were “treated like objects”. It has admitted it was tougher to recruit staff last year.
04:17 PM
FTSE 100 closes higher
The FTSE 100 has moved higher as energy shares lifted by upbeat results from oil major BP outweighed weakness in mining shares.
After falling as much as 0.9pc, the blue-chip index recouped early losses to end 0.2pc higher at 7,561.
BP gained 5.8pc as the oil major boosted its share buyback programme after net profit soared to its highest in more than a decade on strong oil and gas trading results. Miners were hit by lower copper and aluminium prices.
“I expect a lot of choppiness. The upside is challenging if you look at the way price action has been going,” said Michael Hewson, chief market analyst at CMC Markets UK.
“Much will depend on not only what the Fed does tomorrow but also on its guidance, balance sheet reduction and how fast it goes there, obviously the Bank of England on Thursday and the non farm payrolls data on Friday. Looking at the longer term, we’re still in a downtrend for equity markets.”
03:58 PM
Estee Lauder posts slower sales growth outlook due to China lockdowns
Estee Lauder said pandemic lockdowns in China contributed to what one analyst called a “catastrophic” forecast cut.
The fragrance and beauty company now sees sales growth this year of just to 5pc to 7pc, down from a prior view of 8pc to 10pc growth.
Estee Lauder attributed the bleaker guidance to store closures and supply-chain disruptions in China, higher costs, and disruptions in Europe due to Russia’s invasion of Ukraine.
The company cited the lockdown in Shanghai, which limited capacity at distribution facilities beginning in the middle of March. Chief Fabrizio Freda said the company is “confident that our business in China will rebound when Covid abates.”
The implied outlook for the current quarter looks “catastrophic,” according to Bernstein Autonomous analyst Callum Elliott. By his estimates, the company is suggesting sales will fall 10pc to 18pc this quarter. He said it’s possible that “management is just being incredibly conservative.”
03:38 PM
Morrisons buyer offers to sell 87 petrol stations to get £7bn takeover past competition watchdog
The private equity firm that paid £7bn for Morrisons has offered to sell 87 petrol stations to ensure the deal is cleared by regulators. Laura Onita reports:
The Competition and Markets Authority said it was “minded” to accept Clayton Dubilier & Rice’s proposal after it previously warned that the takeover could push up prices at the pump.
CD&R also owns Motor Fuel Group, the largest independent operator of petrol stations in the UK, with 921 sites, while Morrisons has 339 petrol stations.
The CMA previously identified 121 local areas where the two businesses overlap.
On Tuesday, the watchdog said a sale “appeared to be suitable” but cautioned that CD&R was seeking to divest fewer petrol stations than the number of areas in which concerns were identified. The sale of some forecourts would impact multiple areas, it added.
03:18 PM
Pfizer disappoints with Covid vaccine and treatment sales outlook
Pfizer has kept its outlook for annual sales of its Covid vaccine and treatment, disappointing investors who looked for the products to continue driving growth.
The pharma giant said it has secured $32bn (£25bn) in 2022 contracts for the shot, Comirnaty, and $22bn for its Covid pill, Paxlovid.
Wall Street analysts had estimated about $34bn in annual sales from Comirnaty, which the company makes in partnership with BioNTech, and $27bn in Paxlovid sales.
02:52 PM
Top leaser faces $304m hit after Russia ‘steals’ planes
The world’s second-biggest aircraft leasing company has taken a $304m (£242m) hit after some of its planes were “stolen” by the Kremlin. Dublin-headquartered Avolon wrote down the value of 10 aircraft trapped in Russia to zero.
My colleague Oliver Gill reports:
It comes as Lloyd’s of London, the world’s insurance market, prepares for a legal showdown over £8bn worth of planes seized by Vladimir Putin’s regime.
Avolon is the second large leasing company to write down the value of its jets as a result of the Kremlin’s decision to put them out of reach of their foreign owners.
US-based Air Lease announced $802m of writedowns in relation to 27 aircraft that are being held hostage in Russia.
02:24 PM
Segro tumbles after Amazon’s growth warning
Segro, Britain’s biggest warehouse landlord, is leading fallers on the FTSE 100 today after Amazon said its rapid expansion had left it with excess warehousing capacity.
The admissions by the ecommerce titan last week has rattled real estate companies, amid worries a warehousing boom may be slowing down.
Segro’s, which counts Amazon as a top-20 customer, dropped as much as 10.6pc, the most since March 2020.
02:05 PM
Sterling edges higher as FTSE slips
With just over an hour of trading left, European equities have flattened out with the FTSE 100 remains in the red. London’s blue-chips are catching a bit of pressure from the pound, which has risen 0.4pc today.
Sterling has had a pretty poor run lately, in bad news for British households, as my colleague Tom Rees explains:
Sterling has dropped by 8pc this year, which in itself will add 0.7 percentage points to inflation. Price rises have already hit a 30-year high of 7pc.
Markets are betting that the US Federal Reserve will hike interest rates at a quicker speed than the Bank of England. Combined with fears of a recession in Britain, this contributed to the pound sinking to a 21-month low against the dollar last week.
Economists fear the UK will be among the hardest hit by the cost of living squeeze.
Paul Dales, chief UK economist at Capital Economics, said: “The weak pound is another inflationary source at a time when inflation is already at a 30-year high of 7pc and is heading to a 40-year high of 10pc.”
01:38 PM
Facebook gives up on podcast products
Facebook has ditched its podcasting product after just one year, appearing to cede the field to established players such as Spotify and Amazon’s Audible.
My colleague Gareth Corfield reports:
Meta, Facebook’s parent company, confirmed on Tuesday that the social network is discontinuing its Soundbites and Podcasts products after a note sent to partners revealing the change was leaked to Bloomberg.
Podcasting features will disappear from Facebook by June 3, according to Bloomberg, which also reported that the social media site will not alert users but “leave it up to the publishers to decide how they want to disclose that information”.
Facebook launched its “social audio experiences” last April with its chief executive Mark Zuckerberg saying at the time: “When we launched video rooms earlier last year, groups and communities were one of the bigger areas where that took off. So, I think around audio, just given how much more accessible it is, that’ll be a pretty exciting area as well.”
Podcasting has enjoyed a boom in popularity over the last couple of years, coinciding with COVID-19 pandemic induced lockdowns.
01:23 PM
Germany raids Morgan Stanley Frankfurt office
German prosecutors are in the process of raiding Morgan Stanley’s Frankfurt office, as part of a probe into the multi-billion euro cum-ex scandal.
Bloomberg reports:
Authorities are searching a bank and the homes of two suspects in a probe over Cum-Ex and related strategies, according to a spokesman for Cologne prosecutors. More than 75 officers are taking part in the action, he said.
Morgan Stanley confirmed that its premises were targeted and said the investigation relates to a “historic activity” and that the bank is “continuing to cooperate with the German authorities.”
Cum-ex was a trading strategy in which traders took advantage of a loophole in German tax law that allowed multiple investors to claim refunds per single payment made as part of a tax on dividends.
12:57 PM
Full report: BP boss claims profit jump will boost pensions
My colleague Rachel Millard has a full report on this morning’s BP results. She writes:
BP’s boss has insisted the company’s rising profits will benefit Britain’s pension savers, as Boris Johnson appeared to rule out a windfall tax.
Bernard Looney said the company was rewarding shareholders who are “real people” as it posted underlying quarterly profits of $6.2bn [£5bn] – its highest in more than a decade.
The results have fuelled further calls for oil and gas producers to face windfall taxes as they benefit from surging wholesale oil and gas prices which are pushing households into poverty.
Rishi Sunak, the chancellor, last week suggested the measure could be introduced if companies did not invest enough in producing energy.
12:30 PM
Kwarteng: Some suppliers are overcharging for energy
In a tweet, Business Secretary Kwasi Kwarteng has said some energy suppliers have increased direct debit payments “beyond what is required”.
Some energy suppliers have been increasing Direct Debits beyond what is required.
I can confirm @Ofgem has today issued Compliance Reviews. Suppliers have three weeks to respond.
The regulator will not hesitate to swiftly enforce compliance, including issuing substantial fines.
— Kwasi Kwarteng (@KwasiKwarteng) May 3, 2022
11:44 AM
Citi: We were behind ‘flash crash’ on Monday
Citigroup has admitted that its London trading desk was behind a “flash crash” that sent shares across Europe tumbling on Monday.
My colleague Simon Foy reports:
The Wall Street giant said one of its traders made a mistake “inputting a transaction” that triggered a knee-jerk selloff in Swedish stocks, wiping out as much as €300bn (£251bn) in a matter of minutes.
The bank said it identified the error “within minutes” and corrected it, but the mistake will come as a fresh blow to Citi which has spent years attempting to improve its financial controls.
Jane Fraser, the Scottish native who became the first woman to run a Wall Street bank when she took over in September 2020, has ordered thousands of employees to focus on improving Citi’s risk and controls systems.
11:20 AM
Musk seeks to lower his contribution to Twitter takeover – Reuters
Elon Musk is trying to reduce the amount he has to pay as part of a $44bn takeover of Twitter, Reuters reports.
The wire says:
Musk is the world’s richest person, with Forbes estimating his net worth at about $245 billion. Yet most of his wealth is tied up in the shares of Tesla, the electric car maker he leads. Last week, Musk disclosed he sold $8.5bn worth of Tesla stock following his agreement to buy Twitter.
The new financing, which could come in the form of preferred or common equity, could reduce the $21bn cash contribution that Musk has committed to the deal as well as a margin loan he secured against his Tesla shares, the sources said.
10:50 AM
How we got here
Here’s a quick reminder of how Russia got to the brink of its first foreign debt default since the Russian revolution:
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Russia had been due to make dollar coupon payments on two Eurobonds in early April
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It attempted to make the payments in roubles, a move that was blocked by the US Treasury
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Several ratings agencies said rouble payment would contravene the contracts investors had bought, and therefore constitute a default
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Having failed to pay, Moscow entered a 30-day ‘grace period’ (due to lapse tomorrow), after which it would be deemed to have defaulted
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On Friday, the Kremlin U-turned, tapping its limited domestic dollar stockpiles in order to make the payment
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Those payments have gone through the system in recent days and have now arrived with some investors, suggesting a default has been averted
10:22 AM
Default averted as Russian bond payments reach investors
Russia appears to have dodged its first foreign debt default in a century after the Kremlin tapped domestic dollar reserves in a humiliating U-turn for Vladimir Putin.
Investors have begun to receive overdue payments on two bonds, Bloomberg reports.
Russia initially failed to make the payments, before attempting to do so with roubles instead of dollars, a move that was blocked by the US Treasury.
The White House is likely to hail the move as a victory for sanctions, as it had forced the Kremlin to erode its domestic cash stockpiles.
Bloomberg adds:
US sanctions currently include a broad exemption for sovereign bond payments. That runs out on May 25, and the Treasury’s Office of Foreign Assets Control hasn’t said if it will be extended. If it isn’t, that raises a major hurdle for payments due just days later for interest owed on sovereign notes.
“May 25th is the next hurdle,” said Richard Briggs, a money manager at GAM. “Unless OFAC extends that authorization, they won’t be able to continue to make payments.” That decision will come down to whether Washington deems it better to allow Russia to make payments and tap into its dollar cash pile kept at home, “or whether the optics of forcing a default is preferable,” he said.
09:58 AM
Fitch cuts China growth forecast
Ratings agency Fitch has cut its forecast for Chinese GDP growth this year from 4.8pc to 4.3pc, blaming Beijing’s Covid-19 policies.
In a statement, it said:
We expect the disruption to ease this month, as nationwide infections appear to be down from their mid-April highs and the politburo has indicated its desire to improve coordination between pandemic control and economic development.
It expected growth of 5.2pc next year, up from the 5.1pc previously expected.
09:32 AM
FTSE in the red as Europe advances
With just over two and half hours of cash trading gone, the FTSE 100 is sliding along in the red, despite a 3pc gain for BP following those record profits.
There’s a pretty big drag coming from commodities trading giant Glencore, which is slipping 3pc as waning demand puts pressure on industrial metals prices.
09:16 AM
Australian central bank catches market off-guard with bumper mid-election rate rise
The Reserve Bank of Australia surprised economists and markets today with a 25 basis points rate hike in its key interest rate to 0.35pc.
The move, in the midst of elections in Australia, came two months of Governor Philip Lowe abandoned a pledge to remain patient on rates.
The RBA is one of the last rich-national central banks to turn hawkish, leaving the European Central Bank looking increasingly isolated.
It expects inflation of 6pc by the final quarter of this year, which will moderate to a still-elevated 3pc by 2024 if it presses ahead with interest rate increases/
Marcel Theiliant from Capital Economics said:
The statement shed any vestiges of the Bank’s long-standing dovishness, arguing that inflation had picked up faster and to a higher level than previously anticipated and that there were also signs that inflation is picking up.
08:57 AM
Money round-up
Here are some of the day’s top stories from the Telegraph Money team:
08:45 AM
Russia likely to avoid default after tapping domestic dollars
Russia is poised to avoid a historic default on its foreign debt after Moscow tapped its domestic dollars stockpiles to pay overdue coupons on two bonds.
The US Treasury is said to have approved the $650m in coupon and principal payments, as part of its strategy to force Russia to erode domestic reserves (and in doing so force up its import costs).
Now, the payments on eurobonds due in 2022 and 2042 have passed at least one clearinghouse, Bloomberg reports.
The wire says:
The funds were initially blocked in early April, triggering a 30-day grace period that ends on Wednesday. Russia said it made the payment in rubles, but that’s not allowed under the terms of the bonds. Then, with a default seemingly just days away, the government unexpectedly announced on Friday that the cash was finally moving through the financial system.
08:27 AM
Slovakia says it would seek exemption from EU oil embargo
The backdrop to these bumper BP profits is of course the conflict in Ukraine, and the ongoing disruption being caused by Russia’s ostracisation from the Western financial system.
European Union officials are still stuck in a debate over whether to impose a full embargo on Russian oil, with Slovakia today become the latest country to warn it would oppose such a measure.
Its Economy Ministry said today:
If it comes to an approved embargo of Russian oil as part of a further package of sanctions against Russia, then Slovakia will request an exemption.
08:14 AM
Italy steps up windfall tax as UK demurs
Boris Johnson has shown himself to be one for turning, but it looks like the PM is sticking to his ‘no windfall’ stance for now.
Meanwhile, Italy is stepping up its raid on energy companies, with the Government announcing last night it would tax energy profits at 25pc, up from 10pc.
Prime minister Mario Draghi said the measures, which will work alongside tax breaks for the industry, “include reforms to streamline and boost renewable investments that will allow us to speed the transition to a green economy”.
He added:
This will allow us to become independent from Russia’s gas.
The former ECB president has resisted calls to expand the country’s deficit to tackle the rising cost of living.
07:54 AM
Johnson: Windfall tax would discourage investment
Speaking to Good Morning Britain, Boris Johnson has once again opposed an energy windfall tax, saying it would discourage investment in the UK.
He said:
If you put a windfall tax on the energy companies, what that means is that you discourage them from making the investments that we want to see that will, in the end, keep energy prices lower for everybody.
The PM is also batting some tough questions on the cost-of-living crisis, and whether his Government is doing enough to help:
PM says that government is looking at extra help for those who have disability needs meaning high electricity bills – though doesn’t expand on that. He says a windfall tax on energy companies “discourages them making the investments that will in the end make energy prices lower.”
— Jessica Elgot (@jessicaelgot) May 3, 2022
Boris Johnson warns of “very severe” inflationary risk that “could get worse” with knock on effect on interest rates if benefits are increased.
“I’m sorry to say this but we have to be prudent in our approach”.#GMB
— Pippa Crerar (@PippaCrerar) May 3, 2022
Here’s a reminder, via my colleague Mason Boycott-Owen, of where we had got to in the windfall debate ahead of today:
A windfall tax on oil and gas companies would be “arbitrary and unexpected”, Kwasi Kwarteng has said, after the Chancellor threatened to implement the policy.
The Business Secretary said on Sunday that the one-off tax on the profits of energy firms when the UK is trying to invest in them “doesn’t make sense”.
It comes after Rishi Sunak said earlier this week that the tax would be “something I’d look at” if companies did not do more to support the economy, adding: “nothing is ever off the table in these things”.
07:40 AM
Those profits in context…
Here’s a look at how BP’s quarterly underlying profit on a replacement cost basis – the measure analysts look at most closely – has shifted over the last ten years:
07:30 AM
BP highlights UK investment plans amid windfall concerns
BP is clearly well-aware of how its profit boom looks, and has tried to hedge off some of the backlash today.
In a call with the media following its first-quarter results, the company has highlighted it plans to spending £18bn in the UK by 2030 on oil and gas, wind farms, hydrogen, and electric vehicle infrastructure.
07:12 AM
Shadow chancellor: Case for windfall tax ‘cannot be ignored’
Labour’s shadow chancellor Rachel Reeves has reiterated her party’s call for a windfall tax in response to those BP results:
NEW: $6.2bn profits for BP in first three months of this year.
The case for a one-off windfall tax on oil & gas producer profits cannot be ignored.
Yet still the Tories won’t back Labour’s plan to use it to cut energy bills.
On Thursday #voteLabour for a party on your side.
— Rachel Reeves (@RachelReevesMP) May 3, 2022
07:10 AM
BP boom likely to fuel windfall tax calls
Here’s more on those BP results, via Bloomberg:
The company followed its peers Exxon Mobil, Chevron and TotalEnergies, all of which saw their first-quarter net income – excluding Russia-related writedowns – soar in tandem with oil and gas prices after the invasion of Ukraine.
BP comfortably surpassed analysts’ expectations and offered one clue as to how it managed to do so – an “exceptional” three months for its oil and gas trading business. Other commodities traders from Bunge to Glencore have also posted stronger profits, aided by the unprecedented volatility caused by the war.
That trading boom is likely to fuel calls for a windfall tax on energy companies to help the Government tackle Britain’s cost of living crisis – a Labour policy that has divided the Conservatives.
As my colleague Tom Rees wrote last week:
A windfall tax is a one-off raid on the profits of a company.
In this case, the profits of energy companies have been boosted by the surge in oil and gas prices in the wake of Russia’s invasion of Ukraine.
A year-long and one-off levy on their profits, which critics say are being lifted by factors they cannot control, could help pay to support squeezed households.
06:56 AM
Agenda: BP prepares $2.5bn more in buybacks
Good morning. BP has announced plans to make share buybacks of $2.5bn this quarter after surging oil prices helped its cash flows surge.
The energy giant said booming prices had helped it offset a $25.5bn charge incurred after exiting its stake in Russian producer Rosneft. It posted a first-quarter profit of $6.2bn, the highest in a decade.
5 things to start your day
1) Brussels accuses Apple of competition breach over contactless payments The iPhone maker has been accused of breaking competition law by limiting rivals’ ability to create contactless payment apps.
2) Why London’s Russian restaurateurs fear a backlash over Ukraine Dining hotspots that once boasted of their links to Putin are now speaking out against invasion.
3) London is battered by the rise of work from home Capital lags behind other cities as commuters shun the office.
4) Britain turns to South Korea in scramble to boost nuclear power Kwasi Kwarteng in talks over new generation of reactors as UK seeks stronger energy security
5) Julian Jessop: Brexit is not to blame for the surge in inflation and soaring food prices Experts are relying more on predictions and models than hard facts in recent commentary on Britain.
What happened overnight
Asia stocks mostly fell on Tuesday as markets brace for a sharp US interest rate hike. Hong Kong returned from a long weekend break to lead the retreat, shedding more than 2pc at one point. Sydney also fell ahead of an expected interest rate hike by the Reserve Bank of Australia later in the day, while Taipei and Wellington were also down. Seoul edged up slightly, while Tokyo, Shanghai, Mumbai, Singapore and Jakarta were closed.
Coming up today
Full-year results: Card factory
Interims: BP
Economics: Manufacturing PMI, BRC shop price index (UK); unemployment rate (EU); factory orders (US)
Source: finance.yahoo.com