Aurelia Butler

Swaps tied to ECB meetings show that money markets are pricing in a 66 basis point increase, about 3 basis points less than a recent high. It will be the ECB’s first monetary policy meeting since July, when officials raised the key rate for the first time since 2011.  German data added to concerns on Tuesday, as factory orders in Europe’s largest economy fell for a sixth month. A deep euro-area recession could damp inflation, limiting the need for aggressive tightening. Still, the majority of economists surveyed by Bloomberg expect a 75 basis point raise. Searing inflation has bolstered bets on a large move and Governing Council members have committed to lift policy above the so-called neutral rate if necessary.  European bonds rallied Tuesday, led by shorter maturities. The two-year German yield — which is the most sensitive to changes in monetary policy — is about 5 basis points lower at 1.08%, around 20 basis points below a recent peak on Sept. 1. Read more: ECB’s Kazaks Says Broad, Protracted Recession Could Slow Hikes©2022 Bloomberg L.P. More

London housebuilder Berkeley Group is taking a more cautious approach to buying land, in a sign that a cooling housing market and high inflation may slow development activity in the capital.The FTSE 100 group said on Tuesday that with expectations of a property downturn growing and cost inflation running at between 5 and 10 per cent, “new land will only be added to the land holdings very selectively”.Rising costs will weigh on development across the industry. But they are a particularly difficult for private residential developers in London, which were already struggling to compete in the land market, according to Rob Perrins, Berkeley’s chief executive.He said tariffs on housebuilders to deliver new affordable housing, improve infrastructure and ensure development was environmentally friendly made competing with office or warehouse developers increasingly difficult.“Because of taxes on residential, other uses have higher value: hotels and industrial in zones 1 and 2 and industrial in zones 3-6 . . . that’s why private housing starts have halved since 2015, and I think will halve again,” he added.Work started on 16,673 new homes in the capital last year, fewer than half the 33,792 started in 2015, according to data provider Molior London. Mayor Sadiq Khan has focused his efforts on boosting affordable housing starts, which are up over the same period. Despite the extra costs, Berkeley said it expected to book a pre-tax profit for the year to the end of April 2023 of £600mn, up from £552mn in the previous financial year and in line with expectations.Berkeley’s share price rose 4 per cent to £35.92p on Tuesday, recovering from a dip last week after analysts at HSBC predicted house prices in London could fall as much as 15 per cent and downgraded the company.Berkeley added that there was still strong demand from buyers and that it was selling homes for more than it had anticipated.The company benefits from a strong balance sheet and the chronic undersupply of houses in the UK, according to Ami Galla, an analyst at Citi. But “weak consumer confidence, tight affordability and political uncertainty have seen a steady drop in house prices in London,” she said in a note. Berkeley already has a large land bank in London thanks to a deal struck with National Grid in 2014. The utilities company sold its stake in that joint venture earlier this year, and Berkeley can build until 2028 without requiring new sites, said Perrins.The company is considering bidding on two sites outside of London, but is not looking at anything within the M25, he added. Berkeley also narrowly signed off on a remuneration plan that could see Perrins take home £8mn a year, and other directors as much as £3.25mn in total subject to the company’s long term share price performance. The plan was approved at Tuesday’s AGM, but 40 per cent of shareholders voted against it. More

Reinsurers such as Swiss Re (OTC:SSREY), Munich Re and the Lloyd’s of London market help insurers share the risk of disasters in return for part of the premium.They have been raising rates in the past few years to recoup losses from natural catastrophes such as hurricanes and wildfires, the COVID-19 pandemic and from sanctions on Russia and countermeasures due to the Ukraine war.”We do expect rate rises to continue,” S&P Global (NYSE:SPGI) lead analyst for insurance Ali Karakuyu told a media briefing.”Depending on the segments that you are looking at, the rate rises will vary, but on average, I’d say mid-single digit (percent).”A survey of reinsurance buyers published by ratings agency Moody’s (NYSE:MCO) on Tuesday showed most respondents expect reinsurance rates to rise next year.Property rates in the United States and Caribbean market – exposed to natural catastrophes – were expected to rise particularly strongly, in the “high-single to low-double” digit percent range, the survey showed.But pressure on reinsurance premiums in the energy sector may lessen as reinsurers have pulled back from underwriting Russian firms due to sanctions, Helena Kingsley-Tomkins, senior analyst at Moody’s, told Reuters by phone.”Demand from Russian companies is obviously disappearing from the market.”Reinsurers meet in Monte Carlo next week for their annual conference for the first time since 2019, after the event was halted during the COVID-19 pandemic. They will be discussing rates with their insurer clients ahead of the Jan. 1 reinsurance renewal season.Reinsurers’ capital dropped by 11% in the first half to $647 billion, hurt by financial market declines, broker Gallagher Re said in a report on Tuesday. More

LONDON (Reuters) – One of British politics’ firmest critics of China became prime minister on Tuesday as Liz Truss, a self-styled defender of the post-war western world order, replaced Boris Johnson whose policy towards Beijing failed to harden fast enough for many in his party.Relations between London and Beijing have worsened in the last decade as Britain has grown worried that an open door to Chinese investment could pose national security risks, and that China’s military and economic assertiveness may be acting against its post-Brexit free trade agenda. Truss views China as a threat to the rules-based international order that has governed post-World War Two trade and diplomacy, and she sees it as her role to build a bulwark against that. “Countries must play by the rules and that includes China,” she said in a high-profile speech earlier this year, adding that Beijing was “rapidly building a military capable of projecting power deep into areas of European strategic interest”.Truss warned that if China failed to play by global rules it would cut short its rise as a superpower and it should learn from the West’s robust economic response to Russia’s invasion of Ukraine. She said that China’s rise was not inevitable and the West should ensure that Taiwan, which Beijing says is its own territory, can defend itself.The Global Times, published by China’s Communist Party’s official newspaper the People’s Daily, has dubbed Truss a “radical populist” and said she should drop the “outdated imperial mentality”.Chinese Foreign Ministry spokesperson Mao Ning said on Tuesday that she hopes relations with Britain will remain “on the right track”. James Rogers (NYSE:ROG), co-founder of the London-based Council on Geostrategy think tank, said Truss would impose more restrictions on China buying up British companies and would do more to bind together countries to counter China’s rise.”She understands the way short-term economic benefits may have a long-term strategic and political impact, and will try to balance those more effectively than in the past,” he said.    ‘TYRANNY OF THE LARGEST’Under Prime Minister David Cameron, Britain and China forged what he called the “golden era” of relations. He said in 2015 he wanted to be Beijing’s closest friend in the West. But in the last seven years, with three changes of prime minister along with growing criticism of Beijing’s trade practices and rows over freedoms in Hong Kong and Xingang, Britain has moved from being China’s greatestsupporter in Europe to one of its fiercest critics.The Conservative Party has become more hostile to China even as Johnson called himself “fervently Sinophile”.The government has recently moved to limit China’s involvement in Britain’s nuclear power sector. Truss also signed the defence pact to supply Australia with the technology to build nuclear submarines to help push back against China’s growing power and influence. Last year as trade secretary, Truss warned that the West could lose control of global trade unless it got tough with Beijing and drove through World Trade Organization reform.”If we fail to act, then we risk global trade fragmenting under the tyranny of the largest,” she said.Later in 2021, she convinced fellow G7 foreign ministers to include a line in their closing communique that condemned China’s economic policies – a reference to Beijing’s global investment policy that critics say can leave poorer countries caught in debt traps.    Truss is expected to appoint a foreign secretary aligned with her world view – with ally James Cleverly tipped to be in line for the job and assisted by Tom Tugendhat, a known China hawk, as security minister.Charles Parton, a former UK diplomat who spent 22 years analysing China and is now an associate fellow at the Royal United Services Institute think tank, said although China was likely to make threats about withdrawing investment this is unlikely to happen.”China is not a charity. It doesn’t invest because it likes the colour of our eyes. It does it with very specific reasons,” he said. “It will continue to invest, and our job is to see if that investment continues to suit our interests.” More

Look, we’re not going to lie. The UK has had a rough decade, and the outlook is even worse. It has the highest inflation rate of any G10 country, the weakest growth forecasts, and an external deficit that would make Argentina blush.That has led to an outpouring of angst over the UK. Just yesterday, Deutsche Bank warned that the country faced a balance of payments crisis that could send sterling hurtling down 30 per cent against other major currencies. Just to moderate the current account deficit back to its 10-year average would require a 15 per cent drop. Here’s DB’s Shreyas Gopas. A balance of payments funding crisis may sound extreme, but it is not unprecedented: a combination of aggressive fiscal spending, severe energy shock, and a slide in sterling ultimately resulted in the UK having recourse to an IMF loan in the mid 1970s. Today, the UK does retain some key lines of defence against a sudden stop, but we worry that the risks are rising nevertheless.FTAV went through the DB note yesterday, and although we’re also (very) worried about the UK, we’re wondering whether people aren’t getting a little overwrought?First of all, as our colleague Adam Samson pointed out earlier today, while sterling has been jittery lately, in trade-weighted terms its still well above the lows seen after Brexit and the coronavirus nadir in 2020. Sterling is definitely having a terrible time. But it’s worth noting that it is still significantly above its historic lows of 2016 and 2020 on a trade-weighted basis. (EUR is a rly big weight and while it’s up against GBP this year, it’s not up nearly as much as USD). pic.twitter.com/vjaGUp8qfv— Adam Samson (@adamsamson) September 6, 2022
Of course, sterling can and probably will have to fall further. But the UK does have some important advantages that makes chatter over an IMF bailout seem a bit preposterous. There are two classic ingredients in a vintage emerging-markets crisis: managed exchange rates and borrowing in an overseas currency. When the local currency depreciates, that overseas debt burden mounts, weakening the currency further and triggering a spiral that can end in sovereign bankruptcy, an IMF bailout and dreaded “structural reforms”. But the UK has an entirely floating exchange rate and zero foreign debt, which allows it to absorb the necessary external adjustment without things spiralling into insolvency. The overall result is likely to be economic pain, faster inflation as the cost of imports climb, fewer overseas holidays for Brits and more English football clubs “owned by dubious oil states”, as former IMF economist Chris Marsh said in an excellent Twitter thread on the situation. Not great, but not a cataclysm. Is the UK experiencing a balance of payments crisis? There is some chatter about this given the deteriorating fiscal position and sterling weakness. Indeed, the @FT’s @alphaville point us to Deutsche Bank note that a “sudden stop” is not a mere tail risk.A thread…— General Theorist (@GeneralTheorist) September 5, 2022
Barring a truly atrociously bad policy response — like stripping the Bank of England of its independence — the idea that investors will refuse to fund the UK is simply fanciful. UK government debt remain a popular haven among central bank reserve managers. Indeed, their gilt holdings have climbed in recent years to $580bn worth at the end of the first quarter. The UK also has a large domestic buyer base that can be cajoled into buying gilts, and international buyers that simply need greater compensation for the risks of the currency falling further. At the moment, 10 year gilt yields are still below 3 per cent, and credit default swap prices indicate a de minimis fear of any UK creditworthiness problems. They’ve nudged up, but the UK is not Greece-on-Thames quite yet. So we need to get a grip. Things are bad. Really bad. But not IMF bad. More