Economy

The pound slumped 3.6% on Friday below $1.09, a new 37-year low against the dollar, while gilts suffered their worst day in decades as the market digested finance minister Kwasi Kwarteng’s announcement of a borrowing-funded drive for growth.”Let’s be clear, the interest rates payable on government gilts is about the same in the United Kingdom now today as it is in the United States,” Chris Philp, Britain’s deputy finance minister, told Sky News when asked about the market moves.”You mention the dollar, that’s been strong against a number of currencies, including the yen and the euro.”The pound has fallen more than 11% against the dollar over the last three months, making it the worst-performing major currency recently. It fell to its lowest since January 2021 against the euro on Friday.Kwarteng scrapped the country’s top rate of income tax and cancelled a planned rise in corporate taxes – all on top of a hugely expensive plan to subsidise energy bills for households and businesses.The Resolution Foundation think tank, which focuses on living standards, said the plans pointed to an extra 400 billion pounds of borrowing over the next five years.”(The reason) we’re doing this isn’t for intraday moves in the currency market, Philp said. More

NEW YORK (Reuters) – A blank-check company backed by private equity firm TPG Inc said on Friday it plans to wind down its operations and return money to investors after failing to find a suitable target to merge with during market volatility. TPG Pace Beneficial Finance Corp said it would begin returning money to investors after reaching the two-year deadline for finding a target company. It raised about $350 million in an initial public offering (IPO) in October 2020.”With our second anniversary of the closing of TPGY’s IPO approaching in October, we do not believe that we will be in position to complete a business combination that meets our expectations,” Karl Peterson, the company’s chairman said in a regulatory filing.The TPG-backed special purpose acquisition company (SPAC) had struck a deal with electric car charging company EVBox Group two months after its IPO in December 2020, but that agreement was terminated a year later after unsatisfactory issues were uncovered during due diligence, Peterson said.TPG has been a prolific sponsor of SPACs among private equity firms. Its TPG Pace Beneficial II had raised $350 million in an IPO in April 2021, while the TPG Pace Tech Opportunities II canceled a plan to raise $450 million from investors in April this year owing to choppy markets.A TPG spokeswoman declined to comment.SPACs are shell companies that raise funds to acquire private firms with the purpose of taking them public, allowing such companies to sidestep a traditional IPO to enter public markets.Investor appetite for SPACs has cooled over the past year due to tougher regulations, rising interest rates and a downturn in public market valuations. Several prominent SPAC sponsors, including Chamath Palihapitiya and hedge fund manager Bill Ackman, have in recent weeks shuttered blank check companies after failing to find suitable targets. More

NEW YORK (Reuters) -A week of heavy selling has rocked U.S. stocks and bonds, and many investors are bracing for more pain ahead. Wall Street banks are adjusting their forecasts to account for a Federal Reserve that shows no evidence of letting up, signaling more tightening ahead to fight inflation after another market-bruising rate hike this week. The S&P 500 is down more than 22% this year. On Friday, it briefly dipped below its mid-June closing low of 3,666, erasing a sharp summer rebound in U.S. stocks before paring losses and closing above that level.With the Fed intent on raising rates higher than expected, “the market right now is going through a crisis of confidence,” said Sam Stovall, chief investment strategist at CFRA Research. If the S&P 500 closes below the mid-June low in the days ahead, that may prompt another wave of aggressive selling, Stovall said. This could send the index as low as 3,200, a level in line with the average historical decline in bear markets that coincide with recessions. While recent data has shown a U.S. economy that is comparatively strong, investors worry the Fed’s tightening will bring on a downturn.A rout in bond markets added pressure on stocks. Yields on the benchmark 10-year Treasury, which move inversely to prices, recently stood at around 3.69%, their highest level since 2010.Higher yields on government bonds can dull the allure of equities. Tech stocks are particularly sensitive to rising yields because their value rests heavily on future earnings, which are discounted more deeply when bond yields rise.Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation will likely push U.S. Treasury yields as high as 5% over the next five months, exacerbating the selloff in both stocks and bonds.”We say new highs in yields equals new lows in stocks,” he said, estimating that the S&P 500 will fall as low as 3,020, at which point investors should “gorge’ on equities.Goldman Sachs (NYSE:GS), meanwhile, cut its year-end target for the S&P 500 by 16% to 3,600 points from 4,300 points.”Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable,” wrote Goldman analyst David Kostin.Investors are looking for signs of a capitulation point that would indicate a bottom is near. The Cboe Volatility Index, known as Wall Street’s fear gauge, on Friday shot above 30, its highest point since late June but below the 37 average level that has marked crescendos of selling in past market declines since 1990. Bond funds recorded outflows of $6.9 billion during the week to Wednesday, while $7.8 billion was removed from equity funds and investors plowed $30.3 billion into cash, BofA said in a research note citing EPFR data. Investor sentiment is the worst it has been since the 2008 global financial crash, the bank said.Kevin Gordon, senior investment research manager at Charles Schwab (NYSE:SCHW), believes there is more downside ahead because central banks are tightening monetary policy into a global economy that already appears to be weakening. “It will take us longer to get out of this rut not only because of slowdown around the world but because the Fed and other central banks are hiking into the slowdown,” Gordon said. “It’s a toxic mix for risk assets.”Still, some on Wall Street say the declines may be overdone.“Selling is becoming indiscriminate,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. “The increased probability of breaking the June S&P 500 price low may be what it takes to invoke even deeper fear. Fear often leads to short-term bottoms.”A key signal to watch over the coming weeks will be how steeply estimates of corporate earnings fall, said Jake Jolly, senior investment strategist at BNY Mellon (NYSE:BK). The S&P 500 is currently trading at around 17 times expected earnings, well above its historical average, which suggests that a recession is not yet been priced into the market, he said. A recession would likely push the S&P 500 to trade between 3,000 and 3,500 in 2023, Jolly said. “The only way we see earnings not contracting is if the economy is able to avoid a recession and right now that does not seem to the odds-on favorite,” he said. “It’s very difficult to be optimistic on equities until the Fed engineers a soft landing.” More

WASHINGTON (Reuters) – U.S. President Joe Biden will announce on Friday nearly $1.5 billion to fund access to medications for opioid overdoses, sanctions against traffickers, and increased funding for law enforcement, the White House said.The Biden administration is keen to show it is taking action on a worsening nationwide opioid crisis, which according to U.S. Centers for Disease Control and Prevention data fueled more than 107,000 drug overdose deaths in 2021, a nearly 15% increase from the previous year.”Our nation is facing 108,000 overdose deaths in just 12 months. That’s one life lost every five minutes around the clock,” said Dr. Rahul Gupta, director of National Drug Control Policy at the White House.”The Biden-Harris administration is announcing several key investments and actions to reduce overdose deaths, ensure public health and law enforcement officials on the front lines have the resources they need, support people in recovery, and finally beat this epidemic,” Gupta told reporters on a press call.Biden will announce nearly $1.5 billion in grants from the U.S. Department of Health and Human Services to states, tribal lands and territories, said Miriam Delphin-Rittmon, assistant secretary for mental health and substance use.The funds will go toward treating substance-use disorders and removing barriers to key tools like naloxone, a medication that can reverse opioid overdoses, Delphin-Rittmon said.The grants will also fund recovery support services, overdose education efforts, peer support specialists in emergency departments, and care for stimulant use and misuse disorders including cocaine and methamphetamine, she added.The U.S. Food and Drug Administration will release new guidance to ease restrictions on naloxone, said Gupta.Currently, there are legal barriers limiting access to naloxone in some states, and in others it is not always available to those most at risk of an overdose because patients are more likely to receive a prescription if they had a prior diagnosis of opioid misuse or dependence along with an overdose than if they have had those diagnoses without an overdose.Biden is also announcing an additional $12 million in funding for law enforcement in areas suffering the worst of drug trafficking, on top of $275 million announced in April, and sanctions on individuals and groups involved with drug cartels. More

The writer is editor-in-chief of Money WeekIt is hard not to feel sorry for Arthur Burns, chair of the US Federal Reserve, when you look back at the unpleasant inflationary years of the 1970s. He clearly felt his failure deeply (and it was a failure — inflation ran at an average of 6.5 per cent a year during his tenure) if the title of a lecture he gave in 1979 in Belgrade is anything to go by. He called it “The Anguish of Central Banking”. It is useful reading today for any investor wondering where to put their money in an era in which inflation is climbing again.The problem, Burns said, was that the Fed had “in the abstract” the power to “have restricted money supply and created sufficient strains in financial and industrial markets to terminate inflation with little delay”. That it did not was a function of two things. First, politics. The Fed was “caught up in the philosophic and political currents that were transforming American life and culture” — in particular, the idea that “provision for bad times” was no longer a private but a public responsibility. Add the consequent bias to deficit spending to the rise in regulation across the economy and the high taxes that discouraged business investment and the result was inevitable: an automatic “inflationary twist”.Second, monetary policy is very tricky. Contrary to the belief of most central bankers, there is no definitive model that works: “monetary theory . . . does not provide central bankers with decision rules that are at once firm and dependable”, as Burns put it. We might know that “excessive creation of money” will cause inflation, for example, but this knowledge “stops short of mathematical precision”. The result? Surprises and mistakes at “every stage of the process of making monetary policy”.

In the audience in Belgrade sat Paul Volcker, the new Fed chair, and the man now known for doing exactly what Burns felt he could only do in abstract: slaying inflation. By mid 1981 monetary policy’s hard man had interest rates up to near 20 per cent and inflation on the run. By the time he left in 1987 it was knocking around 3.5 per cent.A few years later Volcker gave a talk titled “The Triumph of Central Banking?” No wonder today’s central bankers all want history to remember them as a Volcker not a Burns. But note the question mark in his title. A recent paper from the analysts at Ned Davis Research points out that Volcker had the kind of back up from domestic and global politics Burns could barely have dreamt of. Volcker had Ronald Reagan’s supply side revolution. Reagan slashed regulation and broke the air traffic controllers union in 1981, firing 11,359 air traffic controllers in one go. Volcker saw this as a “watershed” moment in the battle against the wage-price spiral. There was also a sharp rise in low tax-incentivised investment in the US, alongside a very helpful productivity boom. Add to all that the eventual oil price crash of 1986, the dawn of globalisation and the beginning of the computer age, and you get the picture: Volcker got lucky. This history matters. Look at the environment in which current Fed chair Jay Powell is operating and you might wonder how he can be a Volcker without Volcker’s luck. There seems little chance of a low-tax, low-regulation productivity boom under President Joe Biden. There is no scope for another burst of globalisation and, with the US labour market still very tight, the risk of a (not unjustified) wage price spiral remains very high. If you are using the 1980s as a reference point for the speed at which inflation can be slain by smart central bankers, you might want to bear the lessons of Volcker and Burns in mind. Central banking success is more a matter of luck than skill. Outside the US you might also want to keep a close eye on UK prime minister Liz Truss. There is something of the Reaganomics in the tax slashing, regulation ripping, productivity pumping rhetoric her government offers — as Friday’s mini-budget unveiled by chancellor Kwasi Kwarteng demonstrated. The Bank of England may be about to get lucky. None of this helps us particularly in knowing where inflation will end up: given most forecasts have been wrong so far, we must I am afraid ignore most forecasts. But the fact that we cannot know does help us a little with our investments — in that it should remind us that we must build in some insurance. That is almost impossible to do in the US. The S&P 500 is trading on a forward price-to-earnings ratio of around 17 times — a bit above the historical average at a time when most other things are rather worse than average. You could argue it is just about fair value if you assume interest rates won’t go beyond 5 per cent and think in terms of earnings yields. But nothing else quite works: the current 7-year forecast from GMO suggests an annual real return for US equities of minus 1 per cent. Anguish indeed. There is, however, a market where things look rather better. The UK, with the help of Trussonomics, is on a forward P/E of 9 times. Earnings will be downgraded of course, note JPMorgan, who now consider the UK their top developed market pick. But this still represents a significant “valuation cushion.” Investors should use it. More

TORONTO (Reuters) – Canada’s resource-heavy main stock index posted its biggest decline in more than three months on Friday and the Canadian dollar extended its recent decline as oil prices tumbled and investors grew more worried about the global economic outlook.The Toronto Stock Exchange’s S&P/TSX composite index ended down 521.70 points, or 2.8%, at 18,480.98, its biggest decline since June 16 and its lowest closing level in more than two months.Wall Street’s main indexes also closed sharply lower but not as much as the Toronto market.[.N/C]For the week, the TSX lost 4.7% as worries about the economic impact of central bank tightening overshadowed domestic data showing an easing of inflation pressures. The index has fallen about 16% from its record closing high in March. “It’s the realization that we are seeing a general slowdown in the global economy,” said Philip Petursson, chief investment strategist at IG Wealth Management. “That’s working its way into softer commodity prices.”Oil prices settled down 5.7% at $78.74 a barrel, an eight-month low, as the U.S. dollar notched its strongest level in more than two decades, while copper and gold prices fell.The Toronto market’s energy group tumbled 7.8%, while the materials group, which includes precious and base metals miners and fertilizer companies, was down 4.5%. Together, those two groups account for nearly 30% of the TSX’s weighting.Domestic data showed that retail sales fell 2.5% in July, which was more than expected, indicating interest rate increases by the Bank of Canada are slowing consumer spending.That added to pressure on the Canadian dollar. It was down 0.7% at 1.3580 to the greenback, or 73.64 U.S. cents, after touching its weakest intraday level since July 2020 at 1.3612.Meanwhile, Canadian bond yields eased across much of a flatter curve. The 10-year was down 4.8 basis points at 3.080%, unraveling some of the upswing since June.That move higher for yields in recent weeks could make bonds “an attractive opportunity over the course of the next 12 to 36 months,” Petursson said. “While yields can continue to move up you are seeing a coupon that will at least absorb some of that.” More

By David Shepardson and Joseph White(Reuters) -Rental car company Hertz Global Holdings (OTC:HTZGQ) plans to order up to 175,000 General Motors Co (NYSE:GM) electric vehicles over the next five years, its latest move toward zero-emission models.The multi-billion dollar, multi-year deal could be the first of many GM agreements to supply electric vehicles to rental car companies, said Steve Carlisle, the automaker’s North American operations chief, on a conference call.”It’s an enormous first step,” Carlisle said, adding that GM is in talks about similar deals with other rental car companies.GM shares fell more than 5% Tuesday afternoon following rival Ford Motor (NYSE:F) Co’s warning late Monday that supply chain costs were $1 billion higher than expected in the third quarter. Ford shares were down more than 11%. Automakers have cut reliance on low-profit, bulk sales to rental car agencies as supply chain problems curtailed production. Carlisle said GM expects to deliver electric vehicles to Hertz at close to retail profit margins.GM Chief Executive Mary Barra said in a statement “each rental experience will further increase purchase consideration for our products and drive growth for our company.”GM aims to have capacity to build 1 million EVs annually in North America by 2025. Carlisle said the sales to Hertz fits within that previously announced goal.Such deals would ease pressure on GM to hit EV sales targets through individual customer sales, a market dominated by Tesla (NASDAQ:TSLA) Inc.Hertz’s current goal is for one-quarter of its fleet to be electric by the end of 2024. In April, Hertz said it would buy up to 65,000 electric vehicles over five years from EV maker Polestar, a joint venture between China’s Geely and its Swedish Volvo unit. In October 2021, Hertz announced plans to purchase 100,000 Tesla electric cars, primarily the Model 3.The GM deal “spans a wide range of vehicle categories and price points — from compact and midsize SUVs to pickups, luxury vehicles,” the companies said.The first GM electric vehicles to ship to Hertz will be Chevrolet Bolt models starting early next year, Carlisle said.GM expects Hertz to deploy many of its EVs in Los Angeles and San Francisco, helping to meet California electric vehicle quotas. Hertz Senior Vice President Jeff Nieman said the company plans to offer EVs across its network, with priority to Los Angeles, San Francisco, Miami and Orlando.Hertz estimated customers could travel more than 8 billion miles in these EVs and save about 1.8 million tonnes of carbon dioxide-equivalent emissions versus gasoline-powered vehicles. More

WASHINGTON/PITTSBURGH (Reuters) -The White House on Friday said it condemned recent comments on climate change by World Bank President David Malpass, who came under fire this week after he declined to say whether he accepts the scientific consensus on global warming.“We condemn the words of the president” of the World Bank, White House press secretary Karine Jean-Pierre told reporters. “We expect the World Bank to be a global leader of climate ambition and mobilization.The Treasury Department, which oversees the U.S. engagement with the bank, “has and will continue to make that expectation clear to the World Bank leadership,” she said.Jean-Pierre spoke shortly after President Joe Biden’s top climate adviser John Podesta said Malpass, a Republican nominated by former President Donald Trump, should “not mince words” on the scientific consensus on climate change.Malpass came under fire this week from some world leaders and environmental groups after he declined to say whether he accepts the scientific consensus on global warming.Malpass on Friday acknowledged that his remarks were “unfortunate”, but said none of the bank’s shareholders had asked him to resign.Podesta, appointed earlier this month to oversee $370 billion in new U.S. climate spending, criticized Malpass at the Global Clean Energy Action Forum in Pittsburgh without mentioning his name. Malpass first addressed the concerns on Thursday in an interview with CNN International and in a separate note to staff, saying it was clear that human activity is fueling climate change and defending his record at the helm of the development bank.On Friday, he told Politico it was “unfortunate” that he responded as he did on Tuesday: “When asked, ‘Are you a climate denier?’ I should have said ‘no.’ … I really wasn’t prepared and didn’t do my best job in answering that charge.”Nonetheless, Podesta said that the World Bank leader’s hesitation on climate change is troubling given his mandate to help improve the well-being of billions of people around the world.”It is time for a leader of an organization that is responsive to billions of poor people around the world not to mince words about the fact that the science is real,” Podesta told the audience at the Pittsburgh summit.When asked if Malpass should resign, Podesta did not answer but told Reuters on the sidelines of the event that “Malpass should represent the people that the World Bank serves.” Malpass, whose five-year term is due to end in spring 2024, reiterated on Friday that he believed human activity caused climate change, while defending what he called the bank’s “forceful leadership” on climate change and its role as the leading financier of climate change projects.Asked if any shareholder had asked him to resign over the issue, Malpass said, “No, none have.”He said his comment about not being a scientist “wasn’t a good phrase for me to use,” adding, “We have a lot of input from the global scientific community. … We interact with scientists.”The president of the United States traditionally nominates World Bank presidents, subject to confirmation by the bank’s board. The Treasury declined to comment when asked if it supported a second term for Malpass when his term ends in 2024. More