Finance

Most people hate fluctuating prices. When they fall too far, they are seen to be threatening firms. When they rise too high, they are seen to be unjustly enriching them. But economists look at price movements and see the revelation of crucial information. The recent frenzy about interventions in European electricity markets is an especially brutal example of this age-old dynamic. In recent weeks, forward prices for daytime electricity for the fourth quarter of the year briefly spiked above €1,200 ($1,200) per megawatt hour in Germany and above a surreal €2,500 in France. The usual price is around €50. The reason for this is simple: scarcity. The loss of generating capacity to maintenance (in France), closure (in Germany) and drought (across the continent) brought more and more gas plants into action, and their fuel has become extremely expensive since Russia wielded its energy weapon. Just like in any other market for a homogenous good, the price of power is set by the most expensive supplier. This means that even power plants with low operating costs, such as nuclear ones or wind farms, receive the high prices that gas plants are charging. The result is vast profits—and public outrage. Based on forward curves, Morgan Stanley, a bank, reckons that electricity spending in the eu could rise by more than €800bn, an increase worth an astonishing six percentage points of gdp. Thus politicians have started to ask whether a different pricing mechanism is needed. The problem is that designing an electricity market is hard. The juice cannot yet be stored at scale, and has to be delivered at the exact moment it is needed. Producers need to spend a lot of money upfront to build a windmill or power plant, and need to be able to recover it and make a profit over decades. Climate-change policies dictate that more and more renewable electricity is fed into the system, despite being mostly at the whim of wind and sunshine. Europe’s current design is a sequence of markets, some continent-wide, where electricity providers such as power plants meet retail suppliers, large industrial customers and others. Some deals are made months or even years before electricity is delivered, as suppliers and customers need clarity over revenues and costs. The reference price for electricity and for the settlement of many long-term agreements is set on the spot market, where the physical delivery of electricity is traded for the next day. Suppliers bid according to how much it would cost to provide an extra unit of power, known as its marginal cost. The idea behind this is straightforward. To generate electricity at low cost and in an increasingly carbon-free manner requires a lot of information. Some technologies, such as nuclear, are good at providing a constant stream of power. Gas is good for firing up quickly. Solar is best around lunchtime. The marginal price of power provides the information needed to switch between them, by signalling the value of an additional unit of electricity. The market also provides incentives to use power when it is cheapest to generate. Currently, prices are lowest at lunchtime and in the night. The transition to renewable energy means that prices will become more volatile. But that volatility is what drives innovation and investment in storage, smart meters and hydrogen. A high-capacity battery, and the storage it provides, will be most useful when prices oscillate between extremes. For a while, it looked as though the problem with Europe’s market was that prices were too low. With more and more renewable energy entering the market, the price of electricity sometimes fell to zero and even turned negative. The question was how marginal gas power plants—that might be needed to cover a windless, cloudy winter day—could make enough money during the rest of the year to survive. Some countries opted to add a capacity market; that is, they auctioned off payments to generators just for being there. Others stuck with an “energy-only market”. The question now is very different. Europe’s markets face sky-high prices for electricity, as the result of a war. It is a situation for which they were not designed. Thus policymakers face three challenges. The first is to preserve the marginal-price signal, for both generators and consumers, in the face of political pressure to weaken it. Lowering prices, for example by subsidising gas used in electricity generation, as Spain and Portugal have done, would elsewhere require some other form of rationing to allocate scarce energy. (Spain and Portugal can get away without rationing because Spain is an important gas hub, so can easily import more.)The second is how and if to redistribute profits. The German government has recently decided to grab those it considers excessive, while leaving the price signal alone. (The European Commission may advise countries to do something similar.) It will do this through what is essentially a windfall tax that limits the share of the spot-market price that suppliers can keep. The problem is that generators have hedged their exposure to differing degrees, meaning the true recipients of the windfall profits may prove hard to find, and may in fact sit outside the energy market. Bright sparks neededThe third is to ensure that Europe’s energy market is ready for the next crisis, and to do so without sacrificing its advantages. At present, the spot market efficiently allocates capacity and provides signals on energy scarcity, offering an incentive for investment in renewables. But to guard against sustained shortfalls in capacity, and thus another price crunch, Europe’s energy markets must adapt. Long-term hedging markets are not very liquid, because consumers used to see little need for price security. In the future, they will probably see more. Regulators could help. A proposal by researchers at the Massachusetts Institute of Technology advises them to buy “affordability options” from generators, a form of insurance that would return profits from excessive prices to consumers, in effect creating an automatic windfall tax. How politicians would love to have something like that in place now. ■Read more from Free Exchange, our column on economics:Central bankers worry that a new era of high inflation is beginning (Sept 1st)How to avoid energy rationing (Aug 27th)Does unemployment really have to rise to bring down inflation? (Aug 20th)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Most people hate fluctuating prices. When they fall too far, they are seen to be threatening firms. When they rise too high, they are seen to be unjustly enriching them. But economists look at price movements and see the revelation of crucial information. The recent frenzy about interventions in European electricity markets is an especially brutal example of this age-old dynamic. Listen to this story. Enjoy more audio and podcasts on More

Halfway through the year, as commodity prices soared and stockmarkets plunged, it looked as if emerging-market stocks might do something they had managed only once in the past decade: to beat the returns of American ones. Two months on and the hope is gone. A small bounce in rich-world share prices means emerging-market underperformance will probably continue.America’s interest-rate rises—and the expectation of more to come this year—have not helped emerging-market economies, especially those with large import bills and dollar-denominated debts. Over the past decade, though, the performance of the dollar has been mixed and interest rates low. In the same period, the msci em index has returned just 2.9% a year, against 9.5% for rich-world stocks. A big problem is the growing gap between emerging-market and rich-world profits. In the heyday of emerging-market returns, before the global financial crisis of 2007-09, margins for the two indices were similar. But unlike American stocks, emerging-market profits never recovered. Forward margins—net profits expected by analysts this year and next—sit at 7.5% in emerging markets, compared with 12.8% in America and 8.9% in the euro zone. The gap is the widest it has been this century.Several factors explain this. For commodity-exporting countries like Indonesia, Brazil and Mexico, enormous margins before the collapse of Lehman Brothers reflected sky-high prices of commodities as varied as soyabeans, oil, coal and nickel, rather than good management. Since then, prices have come back down to earth. Even at the Bloomberg Commodity Index’s recent peak, after Russia’s invasion of Ukraine, it sat 43% below its high in that period. More than a fifth of the msci em Index is made up of state-owned enterprises, which are lumbered with responsibilities beyond profits. Many are also in energy and finance, which have had a poor decade. In the ten years to the end of June, state-owned firms in the index offered annual returns of 2.6%, against the 4.2% offered by their private counterparts.The change in which countries make up the index, something investors hoped would give them more exposure to fast-growing economies, has done little to help. In 2005 four markets—Brazil, South Africa, South Korea and Taiwan—each made up larger shares of the index than China. Now, Chinese stocks listed in Hong Kong and the mainland account for a third of the index, by far the largest share. But despite economic growth, Chinese profits remain depressed. The msci China index sits, astonishingly, below its peak in dollar terms, which it hit in 2007. In 2013 Yu Yongding, then of the China Society of World Economics, a think-tank, said that the profit on a few tonnes of steel was “just about enough to buy a lollipop”. Overcapacity in crucial Chinese industries, which have been flooded with investment, is still a problem.Will profits grow? it outsourcing offers a chance to pair the traditional emerging-market strength of lower wages with an increasingly digital global economy. But digitisation is also reason to be sceptical of an emerging-market resurgence. The rise of firms with large stocks of intangible assets, such as software and intellectual property, explains much of the increase in profits in the rich world, and America in particular. One estimate suggests that intangible assets, mostly undisclosed, were worth 90% of s&p 500’s market value in 2020, up from 50% in 1990. Developing economies spend far less on r&d. Of those typically included in emerging-market indices, only South Korea and Taiwan surpass American r&d spending, which sits at 3.5% of gdp. The equivalent figure in China is 2.4%, and the government’s campaign against the country’s most successful consumer-tech firms—like Didi, in ride-sharing, and Alibaba, in e-commerce—bodes ill for intangible-focused firms. According to the World Bank, r&d investment runs to less than 1% of gdp in India, Indonesia, Mexico and South Africa. Firms that invest in intangibles are often found in bustling cities, of which emerging markets have no shortage. But they also need reliable governance and legal systems, so that investments can be protected from copycats. Openness to foreign expertise and cross-border collaboration are also crucial. Given the absence of these conditions in many developing economies, it may be a while until emerging-market returns, and thus the performance of emerging-market stocks, match those in the rich world. ■Read more from Buttonwood, our columnist on financial markets:Why investors are reaching for the astrology of finance (Sept 1st)Investors are optimistic about equities. They have no alternative (Aug 18th)Reminiscences of a financial columnist (Jul 30th)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Last week, Nvidia disclosed the U.S. will require the chipmaker to get a license for future export to China for certain products, in an effort to reduce the risk they are used by the Chinese military.
“We believe this will not have an impact on our business operations,” William Li, founder, chairman and CEO of Nio, said via the company’s translator during an earnings call Wednesday. That’s according to a StreetAccount transcript.
The Nvidia Drive Orin chip has become a core part of assisted driving tech for Nio and other electric car companies in China.

Chinese electric car company Nio said it doesn’t expect U.S. restrictions on Nvidia to affect the start-up’s business operations.
Vcg | Visual China Group | Getty Images

BEIJING — Chinese electric car maker Nio joined others in the industry in saying that U.S. restrictions on Nvidia chip sales to China won’t affect the automaker’s business.
Nvidia disclosed last week that the U.S. will require the chipmaker to get a license for future export to China for certain products, in an effort to reduce the risk of them being used by the Chinese military.

“We believe this will not have an impact on our business operations,” William Li, founder, chairman and CEO of Nio, said via the company’s translator during an earnings call Wednesday. That’s according to a StreetAccount transcript.
“Based on our estimations, our computing power is sufficient for our autonomous driving technology development in the aspect of the AI training for now,” Li said. “And we have been working very closely with our partner Nvidia.”
The Nvidia Drive Orin chip has become a core part of assisted driving tech for Nio and other electric car companies in China. An online Nvidia blog post described how Nio’s new ES7 SUV came with four such chips, including one that enabled the car to learn from individual driver preferences.
The new U.S. restrictions target Nvidia’s A100 and H100 products, whose sales are part of the company’s far larger data center business. The products are graphics processors that can be used for artificial intelligence.

Li said Wednesday there are many companies in China with artificial intelligence training chips, and that Nio is evaluating opportunities to work with different companies.

But he said the U.S. restrictions would not affect Nio’s long-term strategy.
Last week, automaker Geely said it won’t be affected by the new restrictions, as did autonomous driving start-ups WeRide and Pony.ai.

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Earlier this week, Chinese financial news site Caixin reported that He Xiaopeng, chairman of electric car start-up Xpeng, said the restrictions would bring challenges for all autonomous driving algorithm training on cloud computing platforms.
But he said the company has bought enough of the high-tech products to meet demand for the coming years, according to the report. Caixin cited He’s post on a personal WeChat account, which is similar to a private Facebook news feed post.
Xpeng did not immediately respond to a CNBC request for comment.
— CNBC’s Arjun Kharpal contributed to this report.

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The probability of a three-quarter point hike this month moved to 82% on Wednesday morning, according to the CME Group.
As traders ramped up their bets on Fed tightening, stock market futures turned slightly negative after being higher.

Traders are now seeing a near certainty that the Federal Reserve enacts its third consecutive 0.75 percentage point interest rate increase when it meets later this month.
The probability of a three-quarter point hike moved to 82% on Wednesday morning, according to the CME Group’s FedWatch tracker of fed funds futures bets.

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That follows a series of positive economic data and statements from Fed officials indicating that tight policy is likely to persist well into the future. In a pivotal speech Aug. 26, Fed Chairman Jerome Powell warned that increases will proceed and higher rates likely will stay in place
Even as traders ramped up their bets on Fed tightening, stocks were higher shortly after the market open. A Wall Street Journal report noting the likelihood of a 0.75 percentage point increase coincided with traders pricing in the more aggressive move, and stock futures momentarily slipped.
“In June a 75 [basis point] rate hike from the Federal Reserve was seen as surprising acceleration from the 50bp and 25bp delivered at the two previous meetings. Less than three months later, 75bp has become something of a global norm with both the [European Central Bank] and Bank of Canada set to raise rates by 75bp,” Citigroup economist Andrew Hollenhorst said in a client note Wednesday.
“These ‘expeditious’ rate hikes come from a similar logic — in economies where inflation is running well above target, there is little argument against at least returning policy rates and financial conditions to a ‘neutral’ setting if not moving into restrictive territory,” he added.

Indeed, Powell in his speech during the Fed’s annual retreat in Jackson Hole, Wyoming, said the central bank will need to go beyond the neutral rate, which is considered neither supportive nor restrictive of growth. He said restrictive policy is necessary to quell inflation running near its hottest pace in more than 40 years.

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%,” he said. Looking into the future, Powell added that “restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
The Fed has increased interest rates four times this year for a total of 2.25 percentage points. Those hikes included two 0.75 percentage point moves in June and July, the most aggressive since the Fed began using its benchmark funds rate as its chief policy tool in the early 1990s.
Markets were set for a strong dose of Fed speeches Wednesday, the highlight of which will be remarks from Fed Governor Lael Brainard at 12:40 p.m. ET. Fed Governor Michael Barr will make his first public comments since being confirmed as vice chair for supervision, the Fed’s powerful banking overseer.
Another speaker, Cleveland Fed President Loretta Mester, repeated her assertion that the fed funds rate, currently pegged in a range between 2.25%-2.5%, should rise above 4% by next year and stay elevated until inflation comes down.
“In my view, it is far too soon to conclude that inflation has peaked, let alone that it is on a sustainable downward path to 2%,” Mester said.
Powell will speak Thursday in a Q&A session with the Cato Institute.
Fed officials will be closely watching the remaining big data points before the Sept. 20-21 Federal Open Market Committee meeting. Paramount among them will be the consumer price index reading next week, along with the producer price index.
However, Hollenhorst thinks those reports will have a bigger influence on moves beyond September, with a three-quarter point hike highly likely this month.
“Rather than the size of hike in September, markets may begin to focus more on the next increment in November. Our base case is for a slowdown to 50bp but this will depend on the details of the next two CPI inflation reports as well as the jobs report for September (released in early October),” he wrote.

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Fed Vice Chair Lael Brainard vowed Wednesday to press the fight against inflation that she said is hurting lower-income Americans the most.
Without committing to a specific course of action, Brainard said the Fed needs to remain vigilant.

Federal Reserve Vice Chair Lael Brainard vowed Wednesday to press the fight against inflation that she said is hurting lower-income Americans the most.
That will mean more interest rate increases and keeping rates higher for longer, she said in remarks prepared for a speech in New York. Brainard cushioned the comments with an acknowledgement that policymakers will be data dependent and conscious of overdoing tightening.

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“We are in this for as long as it takes to get inflation down,” the central bank official said, just two weeks before the Fed’s next policy meeting. “So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further.”
Stocks rallied after the remarks as investors look for signs the Fed is committing to bringing down inflation without going too far.
“At some point in the tightening cycle, the risks will become more two-sided,” Brainard added. “The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with overtightening.”
Markets are betting that the rate-setting Federal Open Market Committee enacts its third consecutive 0.75 percentage point increase in benchmark rates when it meets again Sept. 20-21.

Lael Brainard, vice chair of the US Federal Reserve, speaks during an Urban Institute panel discussion in Washington, D.C., US, on Friday, June 3, 2022.
Ting Shen | Bloomberg | Getty Images

Brainard’s remarks reflect recent comments from multiple officials who have said rates likely will remain elevated “for some time” even after the Fed stops hiking. The commitment has come from the highest levels of central bank policymakers, including Chairman Jerome Powell and New York Fed President John Williams.

The federal funds rate currently is targeted in a range between 2.25%-2.5% following four consecutive FOMC increases this year.
Though inflation has shown signs lately of plateauing, year-over-year increases are near the highest levels in more than 40 years. Supply shocks, record-setting fiscal and monetary stimulus, and the war in Ukraine have contributed to the surge.
Without committing to a specific course of action, Brainard said the Fed needs to remain vigilant.
“With a series of inflationary supply shocks, it is especially important to guard against the risk that households and businesses could start to expect inflation to remain above 2 percent in the longer run, which would make it much more challenging to bring inflation back down to our target,” she said.
Those inflationary pressures are “especially hard on low-income families” who spend most of their household budgets on food, energy and shelter costs, Brainard added.
She noted that there is some anecdotal evidence of prices coming down in the retail sector, as store owners address a pullback in spending due to inflation.
In addition, Brainard said there “also could be scope for reduction” in profit margins for the auto industry, which she said are “unusually large” as gauged by the gap between wholesale and retail prices.
Conversely, she said the labor market remains unusually strong, with rising labor force participation in August a positive sign.
Brainard said policymakers will be watching the data closely as the economy slows, hopefully tempering inflation along the way.
“Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target. The economic environment is highly uncertain, and the path of policy will be data dependent,” she said.
Powell speaks Thursday as the central bank approaches its quiet period before the September meeting.

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Fed Governor Michael Barr, whose title of vice chair for supervision gives him broad powers over the nation’s banks, gave his first policy speech since being confirmed by the Senate.
He pushed for action on stablecoins, climate change preparations and both the safety and fairness of the finance industry.
Barr presides now over a financial system that is generally thought to be well capitalized but was still hit by market disruptions requiring Fed intervention in the early days of the Covid crisis.

President Joe Biden will nominate Michael Barr to be the Federal Reserve’s top regulator in charge of big banks. Barr, who served as assistant Treasury secretary for financial institutions during the Obama administration, seen here at a Treasury Department meeting in Washington, D.C. on Nov. 30, 2010.
Andrew Harrer | Bloomberg | Getty Images

The Federal Reserve’s new banking regulator outlined a broad agenda in a speech Wednesday that pushed for action on stablecoins, climate change preparations and both the safety and fairness of the finance industry.
Fed Governor Michael Barr, whose title of vice chair for supervision gives him broad powers over the nation’s banks, gave his first policy speech since being confirmed by the Senate.

Among his priorities: a push for Congress to enact comprehensive regulation over stablecoins, or cryptocurrencies pegged to other assets, often currencies.
He also said that next year the Fed will launch an exercise “to better assess the long-term, climate-related financial risks facing the largest institutions.”
And he said a push for a system that is not only financially sound but also fair, particularly to those at the lower end of the income spectrum with less access to banking services, would be a major priority.
“Fairness is fundamental to financial oversight, and I am committed to using the tools of regulation, supervision, and enforcement so that businesses and households have access to the services they need, the information necessary to make their financial decisions, and protection from unfair treatment,” Barr said in a speech at the Brookings Institution in Washington, D.C.
Barr presides now over a financial system that is generally thought to be well capitalized but was still hit by market disruptions requiring Fed intervention in the early days of the Covid crisis. The rise of cryptocurrencies and stablecoins also has posed challenges for the Fed, which is exploring a potential digital currency of its own.

He called for increased scrutiny of the crypto industry and the risks that it poses.
“Stablecoins, like other unregulated private money, could pose financial stability risks,” Barr said. “I believe Congress should work expeditiously to pass much-needed legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter.”
On climate change, Barr waded into an area that has drawn criticism from some Republican congressional leaders who believe the Fed is overstepping its mandate.
Barr said the Fed wants to understand the risks that climate events pose to the system, while acknowledging that the central bank’s interest on the issue is “important, but narrow.”
Along with the Office of the Comptroller of the Currency and the FDIC, the Fed is working up ways it wants banks to “identify, measure, monitor, and manage the financial risks of climate change. In addition, we are considering how to develop and implement climate risk scenario analyses.”
On the fairness issue, Barr said he wants a system that provides consumers with access to services and information to protect them from abuse.
“As innovative financial products develop and grow rapidly, excitement can outrun the proper assessment of risk,” he said. “As we have seen with the growth of crypto assets, in a rapidly rising and volatile market, participants may come to believe that they understand new products only to learn that they don’t, and then suffer significant losses.”
Barr said he also will work to ensure that banks that participate in crypto-related endeavors have risk controls in place.

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The logo and trading symbol for Twitter is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York City, July 11, 2022.
Brendan McDermid | Reuters

Check out the companies making headlines in midday trading.
UiPath — The stock tumbled 12.9% after UiPath issued weaker-than-expected third-quarter and full-year revenue guidance. Still, the robotic process automation software company beat earnings and revenue expectations in its most recent quarter.

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Coupa Software — Coupa Software climbed 13% after posting earnings that exceeded expectations in its most recent quarter, as well as outlining strong full-year earnings and revenue guidance.
ChargePoint — ChargePoint spiked 8.2% after Credit Suisse initiated coverage of the operator of electric vehicle charging stations with a buy rating, saying shares can jump roughly 50% from here. The firm’s analyst said ChargePoint stations should get a boost from favorable U.S. regulatory policies.
Gitlab — Shares jumped 6.7% after the software developer reported a smaller loss than expected in its most recent quarter. Gitlab also issued better-than-expected third-quarter guidance.
Pinterest — The social media stock rose 4.6% after Wolfe Research upgraded it to outperform. The firm was positive on Pinterest’s new CEO, who analysts say could improve execution on the company’s long-term user and monetization goals.
Twitter — Twitter shares jumped 4.8% after a Delaware court shut down Elon Musk’s request to postpone a trial focused on his move to abandon a $44 billion deal to purchase the social media company. The court, however, said it would allow Musk to add claims from a Twitter whistleblower to his countersuit.

Starbucks — Shares of the coffee chain jumped 3% after Barclays said there was buying opportunity for the stock ahead of its upcoming investor day. Barclays said in a note to clients that it is confident in incoming Starbucks CEO Laxman Narasimhan.
Petco Health and Wellness — Shares of the pet products retailer jumped 4.5% after RBC initiated coverage with an outperform rating. Analysts noted that much of the weakening consumer environment is already reflected in the share price and believes Petco is well-positioned to take share of the U.S. pet category “given its revised company strategy, structurally advantaged real-estate portfolio and vet expansion opportunity.”
Baker Hughes — Energy stocks fell as oil prices fell to seven-month lows, with Brent crude futures and U.S. West Texas Intermediate crude sliding by more than $3 each. Shares of Baker Hughes dropped 3.2%. Halliburton declined 2.5% and Occidental Petroleum and Marathon Oil both eased 2.1%.
— CNBC’s Jesse Pound, Samantha Subin, Michelle Fox Theobald contributed reporting.

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