The calm before the storm at the Bank of England?Credit…Frank Augstein/Associated Press
Sterling under pressure, again
U.S. stock futures are looking up this morning, extending the market calm seen in Asia and Europe after yesterday’s whipsawing action. But all eyes are on Britain, whose pound and government debt remain under pressure from traders worried about risky new pro-growth fiscal policies.
Investors expect the pound to reach parity with the dollar. Even after the Bank of England said it was ready to keep raising interest rates to head off inflation and prop up sterling, the pound fell; it is currently holding steady at roughly $1.08. Meanwhile, the yield on British government bonds, known as gilts, continued a record-breaking climb — which will also most likely push up some British mortgage rates.
Markets fear that “bond vigilantes” have come for London. Markets and investors appear to believe that Prime Minister Liz Truss is abandoning fiscal responsibility in pursuing sweeping tax cuts even as she ramps up government spending. That has resurrected speculation that investors will push up the cost of British government bonds as punishment, treating them “more and more like they used to treat Italian government bonds,” Joachim Klement, the head of strategy at the investment bank Liberum, told DealBook.
It isn’t just bond vigilantes betting against Britain, however: Opportunistic hedge fund managers are piling on, including Crispin Odey — whose firm once employed Kwasi Kwarteng, who is now Britain’s chancellor of the Exchequer. Odey told The Financial Times that his bets against gilts were “the gifts that keep on giving.”
In response, the Treasury said yesterday that it would present a “medium-term fiscal plan” for managing the government’s jump in borrowing, and that the Office for Budget Responsibility would score the fiscal plans it announced last week.
Not all of Britain’s woes are of its own making. Analysts point to the growing strength of the U.S. dollar, which is depressing currencies around the world — and their countries’ economies. (Even China’s renminbi is falling.) And while Britain’s economic prospects look bleak, so does the global economy more broadly, according to the Organization for Economic Cooperation and Development.
But the Truss government remains under scrutiny by fellow Conservative lawmakers, who are increasingly questioning the nascent government’s strategy just weeks into its tenure. Further moves by the markets may only increase that pressure.
HERE’S WHAT’S HAPPENING
Lawmakers move to avert a U.S. government shutdown. Legislators proposed a stopgap funding measure that would keep the government running through Dec. 16. But the inclusion of a plan that would ease energy project construction has made its passage more uncertain.
A student loan forgiveness program could cost about $400 billion. That’s the conclusion of the nonpartisan Congressional Budget Office, officially putting a price tag on President Biden’s plan to erase significant amounts of education debt for millions of Americans. It’s in line with economist expectations but could revive debate about the proposal.
More on Politics in Britain
Prime Minister Liz Truss was chosen by a divided British Conservative Party to lead a country facing the gravest economic crisis in a generation.
- A Domestic Push: After a period of mourning for the death of Queen Elizabeth II, the new government led by Ms. Truss began to work in earnest, announcing several initiatives to address Britain’s economic and social problems.
- Energy Policies: The British government said it would freeze electric and gas bills for households and cut energy costs for companies in an effort to mitigate the effects of Russia’s restriction of gas supplies to Europe.
- A Turn Toward Thatcherism: Ms. Truss bet on a heavy dose of tax cuts, deregulation and free-market economics to reignite growth. The negative reaction from financial markets underscored the extent of the gamble.
Wall Street’s string of trillion-dollar quarters for deals is over. Just $640 billion worth of M.&A. was announced in the third quarter, the worst showing for deal-making since the onset of the coronavirus pandemic. Blame economic malaise, rising inflation and the collapse of the SPAC market.
TikTok may face a $29 million fine over children’s privacy. British regulators warned the video-sharing app about its mishandling of minors’ personal data. TikTok said that it disagreed with the findings, noting they were preliminary, and that it intended to push back.
Elon Musk’s Starlink offers uncensored internet access to Iranians. The satellite internet provider activated service in Iran, after the country restricted access to Instagram and WhatsApp amid antigovernment protests. But prospective users still need to import Starlink terminals into Iran to make it work.
Bitcoin bucks the trend
The surging dollar is wrecking stock portfolios, clobbering commodity prices and sinking rival currencies. The British pound has been among the most volatile currencies against the dollar, tumbling 5.6 percent over the past seven days, and briefly hitting a record low on Monday of $1.0327.
But one asset has been relatively calm over the past week: Bitcoin. The cryptocurrency has risen 6.5 percent over the past seven days, a surprisingly strong run that’s caught the eye of crypto bulls and bears.
“You know we’ve reached a unique time in history when #Bitcoin suddenly is less volatile than fiat currencies,” tweeted Sven Henrich, the founder of NorthmanTrader, a markets research firm. Henrich was one of the most prominent bears during the recent bull market, warning about overpriced assets like crypto.
When central banks raised interest rates, Bitcoin largely traded like risky assets, such as tech stocks. But that hasn’t necessarily been the case over the past month. Bitcoin has traded in the green (but only slightly) so far in September, while the tech-heavy Nasdaq is down nearly 10 percent over that period.
But zoom out further, and the picture looks more frightening for crypto bulls. Bitcoin has lost more than half its value in 2022, far underperforming stocks, bonds and most currencies.
A court fight over consolidation of the skies
The U.S. government’s antitrust lawsuit against JetBlue Airways and American Airlines heads to court today. The trial, which takes place in Boston, is scheduled to last about three weeks, and top executives from both airlines are expected to testify.
The partnership — which is not considered a full merger — between American, the world’s largest airline by market share, and JetBlue was announced in 2020 and was approved by the Trump administration. Now, President Biden’s antitrust regulators are taking a closer look at that deal.
Regulators argue that the union will lead to higher prices and eliminate competition in a rapidly consolidating market, reports The Times’s Niraj Chokshi. The airlines countered in a legal filing this month that “there is no evidence of adverse effects” in the about 18 months that the alliance has been in effect.
Under the partnership, the Northeast Alliance, the two airlines agreed to collaborate at airports in Boston and New York to help compete against United Airlines and Delta Air Lines. The alliance, they say, allows them to coordinate on schedules but not on price, and it has made it possible to offer more nonstop routes and trade smaller planes for larger ones.
The case will test the Biden administration’s effort to counter consolidation. The president called out the airline industry last year in an executive order laying out the problem of anticompetitive conduct as it relates to corporate consolidation in a number of industries, including health care and agriculture. The trial could be a harbinger of the administration’s next moves, and arrives as JetBlue is in the midst of another deal: its proposed $3.8 billion acquisition of Spirit Airlines, which was announced in July and still requires regulatory approval.
If approved, it would create the nation’s fifth-largest airline and could reshape the industry.
“There must be large holes; otherwise, pressure would not fall so quickly. There is no other way to explain it.”
— Fiete Wulff, a spokesman for Germany’s pipeline network agency, speculating about what caused a sharp drop in pressure within gas pipelines that run to his country from Russia. Germany and Denmark are investigating the leaks, and the Kremlin has said it could not rule out sabotage.
The mysterious case of the $100 million deli
U.S. prosecutors yesterday charged three men — James Patten, Peter Coker Sr. and Peter Coker Jr. — with orchestrating a brazen market manipulation scheme, in the latest twist in the bizarre tale of a tiny New Jersey deli that somehow achieved a market capitalization of more than $100 million.
Your Hometown Deli became an emblem of a frothy stock market in April 2021, when the hedge fund manager David Einhorn criticized the incongruous rise of the deli’s parent company, Hometown International, in a letter to clients, quipping, “The pastrami must be amazing.” The deli, which is in Paulsboro, near Philadelphia, was the sole asset of Hometown International, and, according to the S.E.C., brought in less than $40,000 in sales a year.
The three men, including a father-son duo, face 12 federal charges, including conspiracy to commit securities fraud, securities fraud and conspiracy to manipulate securities prices, for apparently engaging in “a number of coordinated trading events, often referred to as match and wash trades,” in the stock of Hometown and another company, E-Waste Corp.
The S.E.C. also accused the men of securities fraud. Coker Jr. sold multimillion-dollar stakes in the firm to several Asian hedge funds, The Times Magazine reported last year, in the hopes that Hometown International could serve as a vehicle for a SPAC-like reverse merger. This year, it merged with Makamer, a bioplastics start-up. The deli, which apparently served “a mean cheesesteak,” closed after the merger, according to a regulatory filing.
After the charges were announced yesterday, Einhorn tweeted: “I guess the Pastrami wasn’t so great. I never really got a chance to try it 😆.”
THE SPEED READ
Shares in Porsche appear likely to begin trading this week at the top of their price range, amid strong demand from investors. (Reuters)
The maker of Bowflex fitness equipment said it was weighing a sale. (WSJ)
The embattled SPAC seeking to take Donald Trump’s social media platform public has changed its address to a UPS Store from a Miami office. (CNBC)
Beijing is reportedly revamping its troubled $1 trillion “Belt and Road” infrastructure investment program. (WSJ)
Biogen will pay $900 million to settle claims that it paid kickbacks to doctors to encourage them to prescribe its drugs. (NYT)
An executive at Meta apologized for letting a British teenager who died by suicide see graphic posts about suicide and self harm on Instagram that should have been removed. (FT)
Best of the rest
“New York City’s Empty Offices Reveal a $456 Billion Problem” (Bloomberg)
A profile of Vivek Ramaswamy, the self-proclaimed anti- “woke” investor. (FT)
Alec Baldwin and others may be charged in a fatal shooting on the set of the film “Rust” last year. (NYT)
Did Harry Styles fans save the opening weekend of “Don’t Worry Darling”? (WSJ)
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