Aurelia Butler

Good morning and we start with another big step forward for Joe Biden’s flagship climate, tax and healthcare legislation.Last night Kyrsten Sinema, the Senator from Arizona, expressed support for the plan following days of heated intraparty negotiations.Sinema’s backing was clinched after a last-minute change to the bill introducing a 1 per cent excise tax on share repurchases by large companies. A measure cracking down on preferential treatment of private equity and hedge fund profits known as “carried interest” was scrapped.The deal paves the way for the first procedural vote on the bill in the upper chamber of Congress as soon as Saturday. Final passage of the bill in the Senate is possible by the end of the weekend, Democrats said, before it is taken up by the House of Representatives.If enacted, the bill would invest $369bn in clean energy incentives designed to boost the fight against climate change, as well as measures to lower the cost of prescription drugs by empowering the government to negotiate prices. It would also impose a 15 per cent minimum tax on large corporations, helping reduce the budget deficit by $300bn over the next 10 years.The deal with Sinema followed an agreement last month with Joe Manchin, the West Virginia senator and another Democratic holdout.The legislation is fiercely opposed by corporate America and congressional Republicans, who have criticised it for being an extension of Biden’s 2021 spending policies that they blame for overheating the economy.How well did you keep up with the news this week? Take our quiz. Thanks for reading FirstFT Americas and have a great weekend — GordonFive more stories in the news1. China’s war-games enter second day Chinese warplanes and warships entered Taiwan’s waters today, according to the country’s defence ministry. The breaches come a day after China fired 11 ballistic missiles into waters close to Taiwanese ports to punish the country for hosting a visit by US House Speaker Nancy Pelosi. Pelosi met Japanese prime minister Fumio Kishida today, hours after some of the Chinese missiles strayed into Japanese territorial waters.2. Russia ready to discuss prisoner swap after Griner sentenced Russia indicated today that it was ready to discuss a prisoner swap with the United States in private, according to foreign minister Sergei Lavrov. Yesterday Russian prosecutors sentenced US basketball star Brittney Griner to nine years in prison on charges of drug smuggling.3. Europe and Asia intensify battle to secure gas supplies Japan and South Korea, the world’s second and third-biggest importers of liquefied natural gas, are intensifying their efforts to secure supplies out of fear of being priced out later in the year as Europe seeks to replace energy from Russia.4. Bank of England predicts deep recession The Bank of England yesterday raised interest rates by the biggest amount in 27 years but it was the commentary from the UK’s central bank that shocked investors and economists. It said Britain faced a protracted recession and the worst squeeze on living standards for more than 60 years as it predicted inflation would top 13 per cent by the end of the year.5. Coinbase forges BlackRock deal over crypto access Coinbase has announced a deal with BlackRock that will give the asset manager’s clients easier access to digital asset markets, in the latest sign of traditional investors dabbling in cryptocurrencies. For premium subscribers only we have launched a new weekly cryptocurrency newsletter. Sign up here.The days aheadEconomic data Jobs data from the US labour department today is expected to show hiring slowed last month, the latest sign of easing demand for labour owing to high inflation, tighter monetary policy and waning fiscal support. Canada’s unemployment rate is expected to move slightly higher, to 5 per cent from 4.9 per cent the previous month, according to economist estimates from Refinitiv.Company earnings Data storage and hard disc drive maker Western Digital and sports betting company DraftKings report before the market opens. Warren Buffett’s Berkshire Hathaway reports tomorrow. Erdoğan meets Putin Turkish president Recep Tayyip Erdoğan will meet his Russian counterpart Vladimir Putin in the Black Sea resort of Sochi to discuss military co-operation. What else we’re readingMarket rally delivers hard lessons Oh, poor fund managers. Why the long faces? July was one of the best months of all time. But it might not be the rebound we’ve all been waiting for. Too much money has been tied up in a safe hidey hole and too little deployed on the upswing, writes Katie Martin.Conspiracy theorist ordered to pay $4.1mn to parents of Sandy Hook victim A court in Texas yesterday ordered far-right conspiracy theorist Alex Jones to pay $4.1mn in damages to the parents of a Sandy Hook shooting victim. While the firebrand has courted controversy for more than two decades on his website InfoWars, the Sandy Hook action is the first big legal reckoning for Jones’s media business.Ukrainian refugees relying on the kindness of strangers More than 6mn people have fled Ukraine since Russia invaded. Hundreds have shared their stories with the Financial Times of the anxiety of fleeing a war zone, the difficulty of adjusting to unfamiliar countries and their hopes for the future. Hardship, heartache and uncertainty were constants, but so too were acts of kindness.Britain’s anxious generation Across the country, schoolchildren this year are probably the most fragile, inadequately prepared and unhappy group ever to collect A-level results. Lucy Kellaway explains why, and what schools are doing to tackle a looming mental health crisis.Wildfires consume almost all forest carbon offsets in 100-year reserve Wildfires have depleted almost all of the carbon credits set aside in reserve by forestry projects in the US to protect against the risk of trees being damaged over 100 years, a new independent study has found.Related views Simon Kuper writes that global warming is threatening the world’s most liveable country.Obituary Tributes poured in this week for basketball legend Bill Russell, who died aged 88. He was the most successful professional ever to play the game, with 11 championships in 13 years, two collegiate titles and an Olympic gold. But the former Celtics’ star was more than a sporting legend — he was also a great campaigner for social justice.

Mohammad Ali (then Cassius Clay) is dwarfed by Russell, left, the 6ft 11in player-coach of the Boston Celtics, and the 7ft 3in college star Lew Alcindor (later Kareem Abdul-Jabbar), right, in 1967 © Bettmann Archive More

Bank of England governor Andrew Bailey has rejected claims from Conservative MPs that the UK’s central bank acted too slowly to tackle surging inflation and defended its operational independence and mandate. Asked on Friday about whether he would remain in post no matter what changes were implemented by the successor to outgoing prime minister Boris Johnson, Bailey told BBC Radio 4’s Today programme: “I made a commitment, it’s an eight-year term and that’s part of the fabric of the independence of the Bank of England.” He added: “Central bank independence is critically important in our view. Our job is to get inflation back down to target.” Bailey has come under growing criticism since inflation rose to a 40-year high of 9.4 per cent in June. In response, the BoE on Thursday increased interest rates by 0.5 percentage points to 1.75 per cent, the largest increase in 27 years. It also revised upward its inflation forecasts, saying it would reach 13 per cent by December, and predicted that the economy would enter a prolonged recession at the end of this year. Attorney-general Suella Braverman, a key ally of Tory leadership contender Liz Truss, told Sky News that if she became PM the foreign secretary would look at whether the BoE was “fit for purpose in terms of its entire exclusionary independence over interest rates”.Bailey argued that the independence of the BoE was not really in question. “I do not think when you look there is a large desire in this country to question central bank independence,” he said. “I am very happy to discuss with the new government the details and the nature of the regime that is in place, how it works, and how the BoE operators and how we are accountable,” he added. Bailey rejected accusations that the BoE was slow in raising rates, saying that before December the uncertainty over the more than 1mn people still on furlough schemes meant a rate increase risked derailing the UK’s fragile post-pandemic economic recovery.To those arguing interest rates should have increased earlier, Bailey said: “I’m sorry, I don’t agree with that point.”Instead, he said that “what has happened is there has been a series of big supply side shocks, most of which were outside”.“I would challenge anybody to be sitting here two years ago saying ‘There is going to be a war in Ukraine’,” he added.

He reiterated that while the majority of inflationary pressure was the result of surging gas prices following Russia’s invasion of Ukraine, raising rates was necessary to prevent high inflation from becoming embedded.“If everybody tried to beat [inflation], it does not come down, it gets worse . . . in that world it is the people least well off who are worst affected. That is something we all have to be very very aware of,” said Bailey. He also disregarded accusations that excess quantitative easing caused the historical high inflation, saying: “If that was what was causing inflation today, then it would be the case in my view that domestic demand in this country would be much stronger than it is.” More

China’s missile launches into Taiwan’s coastal waters this week have underlined the risks to global supply chains from any sustained escalation of tensions between Beijing and Taipei. The military exercises in response to a visit by US House Speaker Nancy Pelosi to Taiwan resembled a rehearsal for a blockade of the export-dependent island, over which Beijing claims sovereignty, with some cargo ships forced to adjust course and airlines cancelling flights.Three of the six areas blocked off for the exercises are in or near the Taiwan Strait — the body of water between the island and Chinese mainland that is only 130km wide at its narrowest point. The Strait is the primary shipping route between China and Japan, the world’s second- and third-biggest economies, respectively, and Europe. It also serves as a trading route for technology powerhouse South Korea, carrying manufactured goods from the factories of Asia to many of the world’s consumers. “In an environment where China tries to take a more assertive role and tries to block the Strait . . . it’ll be hugely disruptive,” said Anoop Singh, principal analyst at shipbroker Braemar. “Everything will get impacted.”China’s military drills in the Strait and the East China Sea this week — which are significantly broader in scope than war games staged during the last such crisis in 1995 and 1996 — were only scheduled to last a few days. But analysts said the manoeuvres could initiate a sustained period of heightened tensions across the Strait. Beijing claims Pelosi’s visit, the first by a Speaker to Taiwan in 25 years, is part of a “hollowing out” of Washington’s “one China” policy, under which America recognises Beijing as the sole government of China and acknowledges, but does not accept, its claim to the island. “Prolonged or regular drills in the Taiwan Strait could create significant disruptions in Taiwan’s trade with the rest of the world, and in global supply chains,” Homin Lee, Asia macro strategist at Lombard Odier, wrote in a note. Half of the global container fleet and 88 per cent of the world’s largest ships by tonnage passed through the Strait this year, according to data reported by Bloomberg.While live fire exercises are “an extremely common event at sea”, they are usually restricted to less heavily trafficked areas, Braemar’s Singh said. He added that 1mn barrels of crude oil and oil products normally pass through the Strait per day. “This water is typically very, very congested.”Singh said he knew of at least two big ship owners that had asked vessels to avoid the Strait following reports of live fire in the area. “Most others are likely to follow [their] lead,” he added.Elsewhere in Asia-Pacific, Japanese shipping group NYK Line issued a warning to avoid the Strait, while South Korean carrier Korean Airlines cancelled all flights between Seoul and Taipei on Thursday and Friday. Korean media also reported that Asiana Airlines cancelled its flights between Seoul and Taipei, while Hong Kong’s Cathay Pacific said it was “monitoring the developments very closely”.Any prolonged attempt to impede international commerce from Taiwan, with several of the main military exercises occurring near two of the island’s main ports, would hurt global trade.

Taiwan is a crucial link in global technology supply chains. Taiwan Semiconductor Manufacturing Co accounts for 90 per cent of the world’s cutting-edge chip capacity, while downstream electronic contract manufacturers such as Apple supplier Foxconn produce components and assemble products from smartphones to servers for some of the world’s biggest companies.Further cross-Strait fallout could be devastating for Taiwan’s economy, with 40 per cent of its exports going to China and Hong Kong, according to figures from Capital Economics. China has already announced the suspension of thousands of agricultural imports from the island.“In the event of a disaster that actually shut down Taiwan for a period of time, really I don’t know how the global supply chain for the tech industry could survive,” said Dan Nystedt, vice-president at TriOrient Investments.“You’ve got at least $3tn to $4tn worth of work that’s not going to get done, potentially.”Paul Tsui, managing director of Hong Kong-based logistics services firm Janel Group, which serves companies such as General Electric, said some clients had raised concerns about disruptions to business from Pelosi’s visit to Taiwan.“If tensions in the Taiwan Strait do escalate, cost and transit times would hike significantly [and] could be even worse than Covid disruptions,” said Tsui.Additional reporting by Kathrin Hille in Taipei, Song Jung-a in Seoul, Eri Sugiura in Tokyo and Maiqi Ding in Beijing More

Ukraine has called for the deal that relaxes Russia’s blockade of its Black Sea grain exports to be extended to other products such as metals after the first successful use of the route.Taras Kachka, Ukraine’s trade negotiator and deputy economy minister, said he was hopeful the agreement between Ukraine and Russia allowing the resumption of grain traffic would hold and suggested that it could serve as a template for other commodities because traders and exporters “always test the limits”.“This agreement is about logistics, about the movement of vessels through the Black Sea,” he said. “What’s the difference between grain and iron ore?” Kachka spoke after the Lebanon-bound Razoni, which had been stuck in Odesa since Russia started its full invasion of Ukraine, had made its way through Russian and Ukrainian mines laid at sea and cleared inspections in Turkey.More than a dozen ships carrying grain are waiting to set sail from Ukrainian ports, while another ship is heading to the Ukrainian port of Chornomorsk.Under the deal brokered by the UN and Turkey, Russia agreed not to attack ships carrying food and fertilisers so long as it could — together with officials from Ukraine, Russia, Turkey and the UN — inspect the vessels at a location in the Bosphorus strait.Ukraine is the world’s fifth-largest wheat exporter and some vulnerable countries such a Lebanon, Syria and Somalia rely on it for the majority of their wheat imports.The tentative resumption of the Black Sea trade route has raised hopes that some 20mn tonnes of wheat, corn and other grains trapped in Ukraine could make their way to global markets and bring revenues to Ukrainian farmers ahead of the winter planting season. Mykhailo Podolyak, a senior adviser to Ukrainian president Volodymyr Zelenskyy, said the deal would probably hold “for some time” as long as it served the economic interests of Russia too. “It seems to me that these [sea] caravans will for some time go back and forth, in parallel with Russian caravans, who are also keen to ship their grain,” he said. But he warned: “Russia will seek some way to block this all again. This is my pessimistic and optimistic scenario cobbled together.”Podolyak and others in the Ukrainian government believe that Russia agreed to this plan because its invasion of Ukraine had not gone according to Moscow’s schedule. Russia had planned to take the ports of Odesa and Mykolayiv to seize control of the export routes in the Black Sea region, Podolyak said.Russia has hailed the deal. “This is not a one-time mechanism but a mechanism that is designed to ensure the export of the grain that has accumulated in these ports,” Kremlin spokesman Dmitry Peskov said on Thursday. “Therefore, we hope that this mechanism will continue to work just as effectively.”

Oleg Ustenko, economic adviser to Zelenskyy, said the lifting of the blockade could help avert economic calamity. Before the war, the majority of Ukrainian exports transited through the Black Sea, he estimated.However, the postwar increase in logistics costs stemming from efforts to redirect exports via rail or road has made Ukrainian products uncompetitive on the global market, he added.“This was part of the plan [by Russia] . . . to weaken the Ukrainian economy,” he said.The only sunflower seed product Kyiv has been able to export consistently since war broke out is non-edible grade sunflower oil, with about 300,000 tonnes transported by lorries to be mixed into fuels in Europe. The country managed to export about 3mn tonnes of grains via road, rail and the river Danube last month, Kachka said, or less than half of volumes exported mostly through the Black Sea before the war. Ukraine estimates it will harvest 67mn tonnes of grain this year, down from a record 86mn tonnes in 2021.Even with a relaxed Black Sea blockade, Ukrainian farmers will be planting prudently this winter, said Kachka. More

Much of the damage to bond and share prices we expected this year has been done. Markets are adjusting rapidly to a new world of higher inflation in most advanced countries. They are getting used to the need for interest rates to go up to combat price rises by slowing economies. The markets have been ruled by the leading central banks. Studying them has been crucial to seeing into the future for economies and financial assets.Asian markets have been led by China and Japan, which have managed inflation well, keeping it to around 2.5 per cent, despite being exposed to big surges in energy and food costs. Both also exercised reasonable control over their money supply and credit during the Covid lockdowns, with the People’s Bank of China maintaining its money target. In contrast, the leading western central banks — the Federal Reserve, the European Central Bank and the Bank of England — did not target or worry about money and credit, while actively promoting a major expansion to offset the impact of lockdowns and supply chain interruptions on general activity. Each of them continued the money creation drive well into the recovery and have ended up with inflation nudging double figures. The Fed provided the biggest boost to its economy, and has decided from the second quarter of this year to end all money creation, to reduce its bloated balance sheet and raise interest rates aggressively from ultra low levels to show its determination to stamp out inflation. This has led to a sharp sell off in bonds and many shares, especially the growth successes of the long bull market. The Bank of England was the first to end money creation, stopping it last December. It is now trying to balance the need for higher rates to tackle inflation against the risk of being so tough as to cause a recession next year, choosing on Thursday to raise its main interest rate by 0.5 percentage points. However, the central bank with by far and away the biggest headaches is the ECB.I have kept the FT fund out of continental shares for a variety of reasons, other than a small, indirect exposure through holding the world index. The EU economy is suffering from an energy shortage, made far worse by the violent invasion of Ukraine by Russia and the need to take Russian energy out of Europe’s supply sources.

It has been damaged more directly by the war and sanctions than the US. On climate change, it has embarked on a vigorous net zero path which means closing or adapting a lot of its more traditional industries.The euro area is still split between the surplus countries generating more euros from trade and economic success, and the deficit countries short of currency and needing to borrow more. The original euro scheme had strong Germanic elements. Each member state had to keep its own budget deficit under control and was responsible for its own borrowing. The central bank is not allowed to assist member states in financing excessive deficits. Countries in deficit needed to cut spending or raise taxes. Today there are many wishing to ease these strict rules. The need to keep state deficits to 3 per cent and state debt to 60 per cent of GDP have been suspended. The surpluses of Germany and some others are deposited in the ECB, which lends them on to the deficit countries at zero interest rates to ensure smooth settlements within the zone.The ECB is debating how it can ensure the transmission of its policy throughout the area. This is posh talk for trying to keep borrowing rates lower for longer and shorter term loans at similar rates of interest in all the member states. The ECB sets the same short-term interest rate for the whole zone but it does not set the rates at which individuals and companies can borrow from commercial banks in different countries and it cannot set the rates states have to pay to cover their own bills by borrowing for longer periods. It is worried by the way Italy’s cost of borrowing is well above Germany’s. It wants to avoid the heavily indebted Italian state having to pay too much for new borrowing and getting into financial difficulties with its large interest bills. Over the two decades Italy has been in the euro, it has been unable to get its state debt down, and it remains far higher than the required figure. The EU is now trying to assist Italy by sending a large portion of central EU recovery funds to reduce the need for Italy herself to borrow. These funds are being raised as EU debts.The ECB continued to create money and buy bonds until the end of June, only then ending its bond purchase programmes. There are now five countries in the zone with inflation above 10 per cent. It is, however, worried about the current sluggish performance of many of the national economies, and wants to be able to buy the bonds of the deficit-burdened countries to stop their rates going too high. This is likely to prolong the policy muddle in seeking to bring about the almost impossible task of preventing recession, stopping inflation and keeping bond rates together all at the same time. I continue to look for ways to earn a better return on the substantial cash the fund has been running, now that markets recognise more of the stresses ahead. Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. [email protected]

The Redwood Fund, July 27 2022Name% PortfolioLyxor Core MSCI Japan (DR) UCITS ETF Dly Hgd GBP A2.91%L&G Hydrogen Economy UCITS ETF1.66%Cash Account [GBP]25.56%Ishares Core MSCI EM IMI UCITS ETF USD Acc1.85%Lyxor FTSE Actuaries UK Gilts Inflation Linked (DR) UCITS ETF D4.61%iShares Global Clean Energy2.06%Legal & General Cyber Security UCITS ETF1.85%Ishares Core MSCI World UCITS ETF GBP Hgd (Dist)20.73%L&G All Stocks Index-Linked Gilt Index I Acc3.48%Legal & General ROBO GI Robotics and Automation UCITS ETF1.87%iShares $ Short Duration Corporate Bond (USD) ETF10.16%SPDR BofA ML 0-5 Yr EM $ Govt Bd UCITS ETF2.15%iShares $ TIPS 0-5 UCITS ETF GBP Hedged5.71%Vanguard FTSE 250 UCITS ETF GBP Dist4.18%XTRACKERS S&P 500 UCITS ETF5.64%X-trackers MSCI Korea ETF1.50%X-trackers MSCI Taiwan ETF4.08%100.00%Source: Charles Stanley More