Freefalling markets get a healthy dose of cold weather from the Bank of England

0

This story is part of CNN Business’ Nightcap newsletter. To receive it in your inbox, subscribe for free, here.


New York
CNN Business

All the UK government drama is keeping me from catching up on the only UK drama I really want to consume, which is Love Island season 8, which I still haven’t finished (no spoilers, please!)

But since this newsletter is ostensibly about, like, the economy or whatever, I’ll do my best to unpack what, in God’s name, is going on with this whole… thing.

Here’s the deal: Following the drastic drop in the value of the pound, the Bank of England staged an emergency intervention on Wednesday to try to calm the panic in the financial markets.

Investors have been dumping UK assets for days, threatening to crash the massive bond market and create volatility in pockets of the financial world that are normally stable and, dare I say, incredibly boring.

KEY CONTEXT:

  • All this chaos stems from the newly installed British government’s sweeping tax cut plan. And when I say ‘radical’, I promise I’m not doing editorials: you’ll be hard pressed to find an economist or mainstream analyst who backs Prime Minister Liz Truss’ cuts, which will require huge government borrowing to pay .
  • Without stressing it too much: the International Monetary Fund issued a highly unusual rebuke of the UK tax plan, saying it would likely increase inflation and inequality. That’s the kind of thing the IMF might say to an emerging economy — not a G7 country with a track record of stable finances.
  • And Charlie Bean, former deputy governor of the Bank of England, told my colleague Julia Horowitz that the government was making “really stupid” decisions.

So, where were we? Oh yes, the bond markets are collapsing…

Thus, on Wednesday afternoon in the United Kingdom, the Bank of England, which is independent of the government, intervened to administer the financial equivalent of a Valium in the form of bond purchases “on whatever scale necessary” to restore order.

It seemed to work, at least for now: bond markets on both sides of the Atlantic reacted positively, as yields fell off their highs and investors breathed a sigh of relief. The 10-year US Treasury yield, which had briefly topped 4% for the first time in over a decade, reversed course and settled around 3.70%. US stocks, which had opened in the red, rallied on Wednesday afternoon, ending a six-day losing streak.

BIG PICTURE

The BOE may have eased market concerns for the time being, but the Truss administration has so far only doubled down on plans to boost growth through tax cuts. The three-week-old government appears determined to push through its marginal policy at a time when the global economy is counting on stability.

Nor can we let the United States off the hook as the Fed’s most aggressive rate hikes in four decades are painfully rippling through the global financial system. Rising rates strengthen the US dollar and help fight inflation at home. But it’s forcing central banks around the world to follow suit, raising their interest rates faster and higher as the strong dollar weakens their currencies, Julia writes.

The global financial system is “like a pressure cooker” at the moment, said Chris Turner, global head of markets at ING. “You must have strong and credible policies, and any political missteps are punished.”

Volkswagen is pricing Porsche’s IPO at $80.22 per share, which will raise about $9.1 billion. That puts the deal at the top of Volkswagen’s original estimate and values ​​the company at around $73 billion.

The IPO could become one of the largest ever in Europe when Porsche goes public on Thursday in Frankfurt.

Buying a car, which was no picnic before the pandemic, has become an even more difficult endeavor in an era of supply chain lockdowns and high inflation.

Once, the idea of ​​paying the list price at a dealership was laughable – a trap that only suckers would fall into. But now the average new car is selling well above the manufacturer’s suggested retail price as demand remains high and automakers are still trying to get back to pre-pandemic production levels.

But, writes my colleague Peter Valdes-Dapena, the brand with the largest percentage markup of the total cost may surprise you.

It’s not the Jeep Wranglers with their cult followings or those sexy Porsche sports cars, although people are certainly paying a premium for those.

No, the brand with the craziest markup is the ever-reasonable and economical Kia.

The South Korean company’s sedans and SUVs are selling for around 6% above their list price, according to data from Edmunds.com. Honda, Hyundai and Land Rover are roughly tied for second, 4% above list price on average. (And put simply, Land Rovers, which tend to sell for $94,000, have the biggest margin, with customers paying almost $3,700 per sticker.)

Still, Kia customers pay an average of $2,183 per sticker, second only to luxury Land Rovers in dollar terms. This is particularly remarkable considering that a Land Rover costs around 2.5 times what a Kia costs.

There are several reasons for this.

  • Kia has won loyal fans by being a value for money car. It’s not flashy. And in this economy, people are mostly looking for reliability and value for money.
  • The brand has also (rather successfully) diverted its marketing from this economical car image. It wants to be associated with good design and a ~coolness~ that also happens to be affordable.
  • Kia sells a relatively large number of hybrid and electric models, giving it an edge at a time when consumers are worried about the environment and high gas prices. People tend to be willing to pay a bit more for electric and hybrid models, expecting to save money on gas.
  • The trend above the sticker may not go away for some time as new car production is still hampered by slowly easing supply shortages.

But there’s a tiny piece of good news for buyers who aren’t in a hurry and aren’t determined to buy a new car. Used car prices – which soared to skyrocketing heights at the start of the pandemic – have finally started to come down.

“Talk to any (very) large used car dealership and you’ll hear the same thing – an absolute deflation vortex is coming to used car prices,” tweeted Ophir Gottlieb, CEO of Capital Market Laboratories, earlier this month.

Do you like the nightcap? Register and you’ll get all of this, plus other fun internet stuff we’ve loved, delivered to your inbox every night. (OK, most nights – we believe in a four-day work week here.)

Share.

Comments are closed.