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Futures Slide On Renewed Trade War Fears, Surge In Virus Cases

Futures Slide On Renewed Trade War Fears, Surge In Virus Cases

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Futures Slide On Renewed Trade War Fears, Surge In Virus Cases Tyler Durden Wed, 06/24/2020 - 08:02

After several days of surging on "recovery and trade deal optimism", overnight sentiment took a big hit on "virus resurgence and trade deal pessimism" sending S&P futs and European stocks sliding the most in a week "following a surge in the number of coronavirus cases globally" according to Reuters. Spoos dropped following European shares lower, amid an acceleration in virus cases the American South and cautious remarks on a recovery by ECB’s chief economist.

Futures took a second leg lower following a Bloomberg report that the U.S. is weighing new tariffs on $3.1 billion of exports from France, Germany, Spain and the U.K. According to the report, the USTR wants to impose new tariffs on European exports like olives, beer, gin and trucks, while increasing duties on products including aircrafts, cheese and yogurt. The European Union is also debating whether to keep the door shut to American travelers this summer.

Risk appetite got a boost on Tuesday after data showed improving business activity in France and Germany as well as on White House reassurances about the Phase One U.S.-China trade deal. But European Central Bank chief economist Philip Lane said that solid data may not be a good guide to how the euro zone recovers from the crisis.

As a result, Europe's STOXX 600 index fell 1.5%, with the economically sensitive sectors such as travel & leisure, automakers and banks leading declines. Many U.S. states reported record daily increases in COVID-19 infections amid easing of lockdowns, while a media report that European Union countries are prepared to bar entry to Americans raised worries of further restrictions.  The top decliner on the STOXX 600 was Sweden’s Evolution Gaming Group AB, which fell 9.4% after it offered to buy NetEnt AB for 19.6 billion Swedish crowns. NetEnt’s shares jumped 27.5%. German real estate company Leg Immobilien fell 3.4% after plans to launch a capital increase through stock and debt offering. Germany's DAX was down 1.9% despite Ifo institute's survey showing the strongest rise ever recorded in the country's business morale in June.

"While the economic impact of such measures will be less than shutting down an entire economy, a recovery of this nature is a messier story for investors to digest and this could act as a drag on equities," AJ Bell's strategist Russ Mould wrote.

Asian stocks also fell, led by utilities and energy, after rising in the last session. Markets in the region were mixed, with Thailand's SET and India's S&P BSE Sensex Index falling, and Jakarta Composite and South Korea's Kospi Index rising. The Topix declined 0.4%, with Yasunaga and Land Co falling the most. The Shanghai Composite Index rose 0.3%, with Shandong Jinjing and Kunwu Jiuding Investment posting the biggest advances.

As Bloomberg notes, market sentiment is turning more negative on concern that the spreading coronavirus could force policy makers to slow the pace or reverse business re-openings. At the same time, there’s the potential for trade tensions to resurface between the European Union and the US.

"The outbreaks have given markets the unpleasant reminder that the pandemic is far from over and that the economic recovery may be slower than expected," said Mobeen Tahir, associate director of research at WisdomTree in London. But the downturn would only become serious “if infection rates rise to alarming levels and sweeping lockdowns are enforced again.”

In FX, the dollar rose against most of its Group-of-10 peers after risk sentiment soured despite encouraging business surveys from Germany and France. The dollar hovered around 1.13 per euro; Norway’s krone slipped amid lower oil prices. The pound fell for the first time in three days against the dollar amid concern the U.K.’s plan to lift lockdowns in early July could set off a second wave of infections. New Zealand’s dollar declined against all G-10 peers after the central bank flagged that the currency’s recent appreciation is placing pressure on export earnings. The Reserve Bank also said it continues to work toward having more policy tools.

In commodities, WTI and Brent crude futures extend on earlier losses as sentiment took another hit from reports the US is targetting EU and UK goods in its latest move. Prices were already ebbing lower as the complex succumed to the broader risk aversion since the European cash open. Meanwhile, spot gold continues to march on despite a firmer Buck as investors flock to the safe heaven. The yellow metal resides at fresh over-7yr highs around USD 1775/oz ahead of the psychological USD 1800/oz. Copper prices see a double whammy from the firmer USD and risk aversion as prices receed back below USD 2.65/lb despite weekly Shanghai inventories posting a decline in stocks.

In rates, yields were mostly unchanged to Tuesday’s closing levels, though long-end outperforms slightly ahead of Wednesday’s 5-year and Thursday’s 7-year auctions. The 10-year TSY yield, higher by 0.3bp around 0.715%, trails steeper increase for bund yield ahead of Austria’s 2 billion euro century bond sale.

Looking ahead, highlights include, SNB Quarterly Bulletin, DoEs, Fed's Evans, Bullard, supply from the US. Scheduled earnings include Blackberry.

Market Snapshot

  • S&P 500 futures down 0.8% to 3,094.50
  • MXAP down 0.1% to 160.94
  • MXAPJ up 0.1% to 521.04
  • Nikkei down 0.07% to 22,534.32
  • Topix down 0.4% to 1,580.50
  • Hang Seng Index down 0.5% to 24,781.58
  • Shanghai Composite up 0.3% to 2,979.55
  • Sensex down 0.7% to 35,177.50
  • Australia S&P/ASX 200 up 0.2% to 5,965.75
  • Kospi up 1.4% to 2,161.51
  • STOXX Europe 600 down 1.4% to 362.13
  • German 10Y yield fell 0.3 bps to -0.411%
  • Euro down 0.1% to $1.1294
  • Brent Futures down 0.9% to $42.24/bbl
  • Italian 10Y yield fell 3.1 bps to 1.129%
  • Spanish 10Y yield fell 0.3 bps to 0.473%
  • Brent Futures down 0.9% to $42.24/bbl
  • Gold spot up 0.2% to $1,771.49
  • U.S. Dollar Index up 0.2% to 96.81

Top Overnight News from BBG

  • Newly diagnosed Covid-19 infections soared in some of the most populous U.S. states, with California, Texas and Arizona reporting their biggest daily jumps. The EU is considering keeping travelers from the U.S. out when it reopens external borders
  • The U.S. is weighing new tariffs on $3.1 billion of exports from France, Germany, Spain and the U.K., adding to an arsenal the Trump administration is threatening to use against Europe that could spiral into a wider transatlantic trade fight later this summer
  • The coronavirus pandemic has forced a one-year delay in the opening up of Europe’s $1.5 trillion-a-day market for exchange-traded derivatives
  • “German business sees light at the end of the tunnel,” Ifo chief Clemens Fuest said. While expectations in manufacturing surged at a record pace, “a great majority of companies still assess their current situation as poor”
  • Austria pulled in record orders of more than 16 billion euros for a new century bond, after its previous one rallied to return investors about 85% since 2017
  • Companies shoring up cash to survive the global pandemic raised funds in the U.S. high- yield market at the fastest monthly pace ever

Asian equity markets traded with a slight positive bias after momentum from global peers provided the initial constructive setting for the region. This followed the advances for all major indices on both sides of the Atlantic with sentiment helped by stronger than expected data and the UK further easing lockdown restrictions, while the Nasdaq notched a fresh all-time high, although some of the gains were later pared stateside amid ongoing concerns regarding the increasing pace of infection numbers in parts of the US. ASX 200 (+0.2%) and Nikkei 225 (Unch.) were rangebound with the Australian benchmark treading water for much of the session as strength in the commodity related sectors was offset by weakness in the top-weighted financials, and a non-committal tone was also observed in Tokyo as exporters contended with the recent currency strength, while the KOSPI (+1.4%) outperformed on positive geopolitical developments in which North Korea Leader Kim decided to suspend military action against South Korea. Elsewhere, Hang Seng (-0.5%) and Shanghai Comp. (+0.3%) ended mixed after another firm liquidity effort by the PBoC and with Tencent shares posting a record high in Hong Kong, but with upside contained due to ongoing US-China tensions. Finally, 10yr JGBs were lacklustre as the mild positive tone in stocks and lack of BoJ presence in the market kept prices subdued, which also saw the 30yr yield increase to its highest since April last year during early trade.

Top Asian News

  • Bank of Thailand Sees 8.1% Contraction, Pledges More Support
  • India Stocks Mixed in Volatile Trade as Border Clash Eases
  • Relaxed ‘Hukou‘ Rules Spur China Home Rebound Beyond Beijing

European equities kicked the session off on a softer footing before extending the move to the downside (Eurostoxx 50 -1.6%) as losses were exacerbated by reports that the US is targeting USD 3.1bln of exports from France, Germany, Spain and the UK with new tariffs whilst increasing the levy on aircraft, cheese and yogurts. Nonethless from a wider lens, the main source of focus remains on the rising COVID-19 case count in certain parts of the US. However, it is hard to place too much weight on this acting as a downside catalyst for Europe given that US equities finished firmer on Wall St. and futures are faring better stateside than they are across the Atlantic. From a sectoral standpoint, weakness in Europe is predominantly being driven by cyclical names with autos, travel and banking names lagging their peers. Price action within these sectors is subject to little in the of stock-specific newsflow and as such reflects broader pessimism within the market. IT names are faring slightly better than most (albeit lower on the day) with support emanating from Dialog Semiconductor (+8.0%) after the Co. raised Q2 revenue guidance. Other individual movers include Wirecard (again) with Co. shares lower by 8.5% as questions continue to mount over the impact of recent scandals on its business relationships, particularly with Mastercard (MA) and Visa (V) with whom they hold licenses with to issue credit cards. Atlantia (+2.3%) continue to remain in focus following government talks last night whereby it was agreed that negotiations should continue regarding the Co.’s motorway concession.

Top European News

  • Merkel’s Popularity Surge Puts German Greens on the Back Foot
  • German June Ifo Business Confidence 86.2; Est. 85
  • Solvay Says Aerospace Slump to Result in $1.7 Billion Writedown
  • Google to Invest up to $2b in Cloud Data Centers in Poland: Puls

In FX, the broader Dollar and Index continue to strengthen early doors – potentially consolidating from recent losses but broader market performance points more towards safe-haven inflows, and with little by way of fresh fundamental factors driving the moves. Underlying influences linger in the form of heightened tensions between US and China and potential implications from a second outbreak as participants gear up for month/quarter end. DXY has extended gains from yesterday’s 96.379 low and now eyes 97.000 to the upside with its 10 DMA (97.028) also in range with the absence of Tier 1 data on the slate, whilst Fed non-voters Evans and Bullard are likely to sing from the same hymn sheet as from Powell’s most recent appearance.

  • NZD - Kiwi remains the G10 underperformer amid the broader risk aversion coupled with a dovish tilt by the RBNZ, which despite holding rates and large scale asset purchases steady, noted that a firmer Kiwi is weighing on exports and continued to tout future policy easing was on the cards - members discussed the pros and cons of expanding QE now, in which any expansion would need to be of a sufficient magnitude to make a meaningful difference. NZD/USD relinquished the 0.6500 handle (high 0.6514) and continues to move south of 0.6450 (10 DMA) as the pair eyes its 21 DMA at 0.6415 ahead of the round figure.
  • EUR, GBP, CAD, AUD, EM - All broadly lower vs. the USD but the high-beta FX see more pronounced pressure as the appetite for risk further deteriorates and aversion intensifies. The single currency caved in light of reports that the US is taking aim at EU and UK goods, after the EUR intiially shrugged off a mixed Ifo release with current conditions falling short of consensus and expectations exceeding; economists cautioned that in-spite of the economy now firmly being on an upward path, the situation in the industrial sector remains dire. Meanwhile, ECB’s chief economist Lane provided little by way of fresh updates but did put more credence on the outcome of the EU Recovery Fund on the future of the economy, alluding to potential impact on monetary policy. On that front, President Macron held talks with his Dutch counterpart, and known Frugal Four member, with reports pointing to progress (but no agreement) on the latter’s resistance to the Commission’s proposal ahead of the mid-July meeting. EUR/USD gave up its 1.13-handle (high 1.1325) and whipsawed lower to 1.1270 on the US tariff news ahead of its 10 DMA at 1.1261, followed by potential mild support at 1.1258 and 1.1243 (200 and 100 HMAs respectively). GBP/USD was relatively unreactive to the US levy headlines and fluctuates on either side of 1.2500, having printed a high at 1.2518 and a low near a Fib at 1.2463 (38.2% of 1.1237-2541 move), whilst some participants highlight potential bids at yesterday’s low of 1.2434. The Loonie and Aussie also bear the brunt of weakness in commodities – USD/CAD failed to sustain a break above its 10 DMA (1.3571) and hovers around its 21 DMA (1.3557), having found a base yesterday at its 200 DMA (1.3480). AUD/USD tested support at 0.6900 (high 0.6961) but currently meanders its 100 WMA (0.6909) ahead of its 10 and 21 DMAs at 0.6884 and 0.6869 respectively.
  • JPY, CHF - Both resilient against the rising Buck as safe-haven inflows counter the Dollar dominance. Overnight the BoJ Summary of Opinions added nothing to the Central Bank’s narrative, whilst the CHF awaits the findings of the SNB quarterly bulletin for Q2 later today. The safe havens failed to derive much traction from US ramping up tariffs against some EU countries alongisde the UK. USD/JPY now trades flat intraday and off its earlier peak at 107.21, now residing around 106.50 having earlier dipped to a whisker away from 106.00 ahead of the May 8th low just under the round figure. USD/CHF losses further ground below its earlier high at 0.9528 having tested 0.9420 to the downside.

In commodities, WTI and Brent crude futures extend on earlier losses as sentiment took another hit from reports the US is targetting EU and UK goods in its latest move. Prices were already ebbing lower as the complex succumed to the broader risk aversion since the European cash open. Yesterday’s private inventories only added to the bearish narrative as headlines stocks showed a larger than expected build of 1.7mln barrels vs. Exp. 300k. Participants will now be on the lookout for confirmations at the weekly DoE release in the absecnce of fundamental catalysts. WTI Aug resides sub-USD 40/bbl (vs. 40.50/bbl high) whilst its Brent counterpart meanders around USD 42/bbl (vs. 42.89/bbl high). Meanwhile, spot gold continues to march on despite a firmer Buck as investors flock to the safe heaven. The yellow metal resides at fresh over-7yr highs around USD 1775/oz ahead of the psychological USD 1800/oz. Copper prices see a double whammy from the firmer USD and risk aversion as prices receed back below USD 2.65/lb despite weekly Shanghai inventories posting a decline in stocks.

US Event Calendar

  • 7am: MBA Mortgage Applications -8.7%, prior 8.0%
  • 9am: FHFA House Price Index MoM, est. 0.25%, prior 0.1%

DB's Jim Reid concludes the overnight wrap

It’s going to be 31 degrees here in the U.K. today and hotter elsewhere in Europe so watch out you don’t look too suntanned on all those zoom calls! I’ll stay inside today as I ventured out for 45 minutes yesterday and got quite bad hey fever. Mine usually stops in April but I noticed the pollen count is currently “very high”. One strong antihistamine in the evening did the trick though.

From pollen counts to R numbers and in spite of news that 29 US states now have an R number above 1, markets continued to perform well yesterday as data improved and reopening plans progressed. That tension between stimulus and second waves/extended first waves remains, but the former continues to win out. The S&P 500 ended the session up +0.43%, while the NASDAQ rose +0.74% to reach another record high. The S&P was up as much as +1.20% until just around 2pm NY time, before case data from Florida and Texas showed that the economy may need to deal with a slower reopening process at the very least. Superior gains were seen in Europe (which closed before the dip), with the STOXX 600 advancing +1.30%, and the DAX seeing an even stronger +2.13% move higher. Meanwhile Wirecard went from the worst to the best performer in the STOXX 600 yesterday, with a +34.99% advance. Oil looked to be a beneficiary of the risk on sentiment, with Brent crude rising to its highest level ($43.19) since early March midday U.K. time before reports of a 7.1 magnitude earthquake near Oaxaca, Mexico caused Brent futures to fall around 3% to finish down -1.04% for the day.

Elsewhere in financial markets, the dollar continued to sell-off yesterday with a further -0.40% decline. Sovereign bonds also sold off, with yields on 10yr Treasuries (+0.3bps), bunds (+3.1bps) both rising, though Italian BTPs outperformed as 10yr yields fell by -3.1bps to their lowest level since late March. Meanwhile it wasn’t all bad news for the traditional safe havens, with gold advancing a further +0.80% to hit a fresh 7-year high.

In terms of the latest on the coronavirus let’s look at the US first. As discussed at the top, according to the rtlive website, 29 US states have an Rt figure above 1 now. This is up from 5 states 2 months back during lockdowns and 23 states a month back after the majority of lockdowns were lifted. Meanwhile the number of cases in Florida rose by a further +3.3%, though this was slightly below the previous 7-day average of +3.8%. The number of positive tests in the state rose to 10.9% yesterday from 7.7% over the weekend. California reported its biggest daily increase, 7923 new cases, while also seeing a slight increase in positive test rates – 4.9% from 4.8%. California Governor Newsome indicated that he did not want the return of stay-at-home orders, but is prepared to do so if numbers get worse. Arizona continues to see record case growth, with over 3779 new additions, as cases rose by 6.9%, above the weekly average of 5.8%. Dr. Anthony Fauci, the top US infectious-disease expert, has termed the surge in cases as “disturbing”.

In Texas, ICU numbers in Harris Country (3rd most populous county in the US with roughly 5 million people and encompassing Houston) will be exhausted in 11 days based on case growth over the past two weeks, according to the state. The state as a whole saw over 5195 cases yesterday, another record.

In light of the recent rise in US cases, and citing the country’s inability to control the outbreak, European Union officials may exclude the US from plans to reopen the borders next month, according to draft lists reported on by the New York Times. Europe itself continues to see small splashes of case growth. In Germany, North Rhine-Westphalia became the first state to restore a lockdown. It is only on the town in which the large meat factory saw a total of 1553 infections so far, and will initially remain until the end of June. On the other hand, the UK recorded its second day in a row with under 1000 new infections yesterday, a feat unseen since late March.

In further signs of progress here in the UK, we had Prime Minister Johnson announce a substantial easing of restrictions yesterday in England, which will come into effect from July 4. Independence Day of a different kind. The measures includes an easing in the 2m social distancing rule, to a “one metre plus” rule, meaning that people should keep one metre apart but employ measures such as changing office layouts that reduce the risks of transmission. Otherwise, the government is changing their advice such that two households of any size can meet inside, and pubs, restaurants and hairdressers (not relevant to me) will also be able to reopen. That said, there are some “close proximity” venues that will remain shut, including indoor gyms, swimming pools and nightclubs. Even as the government continues to reopen the economy, the country’s Chief Medical Officer Chris Whitty expects coronavirus to be circulating well into Spring 2021. We’re truly in for the long haul it seems.

Elsewhere, there are concerns emerging around a second wave in Australia in the state of Victoria, with the state’s Health Minister Jenny Mikakos saying overnight that the R number in the past week had risen to an “unacceptably high” rate of 2.5. Mexico also reported their highest daily new case count yesterday, at 6228, with growth rate in new cases jumping to 3.4% from a 5 day average of 3%.

Overnight, markets have been fairly uneventful in Asia with newsflow fairly light. The Nikkei (-0.09%) is down while, the Hang Seng (+0.06%), ASX (+0.36%) and Shanghai Comp (+0.15%) are modestly up. The Kospi (+1.55%) is outperforming on news that Kim Jong Un has ordered the suspension of military actions against South Korea during a military commission meeting for his ruling Worker’s Party of Korea (according to the KCNA report). Elsewhere, WTI oil prices are down -0.62% after a report from the American Petroleum Institute indicated that crude inventories climbed by 1.75 million barrels last week, marking the third consecutive weekly gain if confirmed. Futures on the S&P 500 are trading flat.

Back to yesterday and it was upside surprises on the flash PMIs that helped encourage the rising risk appetite in markets. We thought consensus was looking too low and this is what transpired. In terms of the details, the main story was that the numbers in Europe surprised noticeably to the upside. The Euro Area composite PMI rebounded to 47.5 (vs. 43.0 expected), while the composite PMIs in France (51.3), Germany (45.8) and the UK (47.6) all beat expectations too. France was the only one of the European releases to see a rebound above the 50-mark that separates expansion from contraction, but we shouldn’t over-interpret the German underperformance relative to France, since the PMI responses measure changes rather than levels, and since Germany didn’t shut down as severely it’s no surprise that its rebound isn’t as pronounced. The US PMIs for manufacturing (49.6) and services (46.7) were both slightly below expectations, but this was still a rebound from the high-30s numbers seen in May.

The other main news story from yesterday was confirmation that there would be a summit of EU leaders in person on July 17th-18th to discuss the recovery fund. That’ll come a day after the ECB’s next decision on the 16th, so certainly a week for your calendars. Remember however that our European economists wrote last week (link here) that it’s questionable whether a compromise on this issue can be found within just 4 weeks, and the issues still to be resolved are many and complex. So expect a Recovery Fund but don’t get too excited on the timings yet.

Looking at yesterday’s other data, new home sales in the US rebounded to an annualised rate of 676k in May (vs. 640k expected). Separately, the Richmond Fed’s manufacturing survey for June also beat expectations, with a 0 reading (vs. -2 expected).

To the day ahead now, and today’s data includes June’s Ifo survey from Germany, French business confidence for June, while from the US there’s April’s FHFA house price index and the weekly MBA mortgage applications. In terms of central banks speakers, we’ll hear from the ECB’s chief economist Lane, as well as the Fed’s Evans and Bullard. Finally, the IMF will be releasing their latest World Economic Outlook Update today.

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Plunging pound and crumbling confidence: How the new UK government stumbled into a political and financial crisis of its own making

Liz Truss took over as prime minister with an ambitious plan to cut taxes by the most since 1972 – investors balked after it wasn’t clear how she would…

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The hard hats likely came in handy recently for Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng. Stefan Rousseau/Pool Photo via AP

The new British government is off to a very rocky start – after stumbling through an economic and financial crisis of its own making.

Just a few weeks into its term on Sept. 23, 2022, Prime Minister Liz Truss’ government released a so-called mini-budget that proposed £161 billion – about US$184 billion at today’s rate – in new spending and the biggest tax cuts in half a century, with the benefits mainly going to Britain’s top earners. The aim was to jump-start growth in an economy on the verge of recession, but the government didn’t indicate how it would pay for it – or provide evidence that the spending and tax cuts would actually work.

Financial markets reacted badly, prompting interest rates to soar and the pound to plunge to the lowest level against the dollar since 1985. The Bank of England was forced to gobble up government bonds to avoid a financial crisis.

After days of defending the plan, the government did a U-turn of sorts on Oct. 3 by scrapping the most controversial component of the budget – elimination of its top 45% tax rate on high earners. This calmed markets, leading to a rally in the pound and government bonds.

As a finance professor who tracks markets closely, I believe at the heart of this mini-crisis over the mini-budget was a lack of confidence – and now a lack of credibility.

A looming recession

Truss’ government inherited a troubled economy.

Growth has been sluggish, with the latest quarterly figure at 0.2%. The Bank of England predicts the U.K. will soon enter a recession that could last until 2024. The latest data on U.K. manufacturing shows the sector is contracting.

Consumer confidence is at its lowest level ever as soaring inflation – currently at an annualized pace of 9.9% – drives up the cost of living, especially for food and fuel. At the same time, real, inflation-adjusted wages are falling by a record amount, or around 3%.

It’s important to note that many countries in the world, including the U.S. and in mainland Europe, are experiencing the same problems of low growth and high inflation. But rumblings in the background in the U.K. are also other weaknesses.

Since the financial crisis of 2008, the U.K. has suffered from lower productivity compared with other major economies. Business investment plateaued after Brexit in 2016 – when a slim majority of voters chose to leave the European Union – and remains significantly below pre-COVID-19 levels. And the U.K. also consistently runs a balance of payments deficit, which means the country imports a lot more goods and services than it exports, with a trade deficit of over 5% of gross domestic product.

In other words, investors were already predisposed to view the long-term trajectory of the U.K. economy and the British pound in a negative light.

An ambitious agenda

Truss, who became prime minister on Sept. 6, 2022, also didn’t have a strong start politically.

The government of Boris Johnson lost the confidence of his party and the electorate after a series of scandals, including accusations he mishandled sexual abuse allegations and revelations about parties being held in government offices while the country was in lockdown.

Truss was not the preferred candidate of lawmakers in her own Conservative Party, who had the task of submitting two choices for the wider party membership to vote on. The rest of the party – dues-paying members of the general public – chose Truss. The lack of support from Conservative members of Parliament meant she wasn’t in a position of strength coming into the job.

Nonetheless, the new cabinet had an ambitious agenda of cutting taxes and deregulating energy and business.

Some of the decisions, laid out in the mini-budget, were expected, such as subsidies limiting higher energy prices, reversing an increase in social security taxes and a planned increase in the corporate tax rate.

But others, notably a plan to abolish the 45% tax rate on incomes over £150,000, were not anticipated by markets. Since there were no explicit spending cuts cited, funding for the £161 billion package was expected to come from selling more debt. There was also the threat that this would be paid for, in part, by lower welfare payments at a time when poorer Britons are suffering from the soaring cost of living. The fear of welfare cuts is putting more pressure on the Truss government.

a man in a brown stocking hat inspects souvenirs near a bunch of UK flags and other trinkets
The cost of living crisis in the U.K. has everyone looking for deals where they can. AP Photo/Kirsty Wigglesworth

A collapse in confidence

Even as the new U.K. Chancellor of the Exchequer Kwasi Kwarteng was presenting the mini-budget on Sept. 23, the British pound was already getting hammered. It sank from $1.13 the day before the proposal to as low as $1.03 in intraday trading on Sept. 26. Yields on 10-year government bonds, known as gilts, jumped from about 3.5% to 4.5% – the highest level since 2008 – in the same period.

The jump in rates prompted mortgage lenders to suspend deals with new customers, eventually offering them again at significantly higher borrowing costs. There were fears that this would lead to a crash in the housing market.

In addition, the drop in gilt prices led to a crisis in pension funds, putting them at risk of insolvency.

Many members of Truss’ party voiced opposition to the high levels of borrowing likely necessary to finance the tax cuts and spending and said they would vote against the package.

The International Monetary Fund, which bailed out the U.K. in 1976, even offered its figurative two cents on the tax cuts, urging the government to “reevaluate” the plan. The comments further spooked investors.

To prevent a broader crisis in financial markets, the Bank of England stepped in and pledged to purchase up to £65 billion in government bonds.

Besides causing investors to lose faith, the crisis also severely dented the public’s confidence in the U.K. government. The latest polls showed the opposition Labour Party enjoying a 24-point lead, on average, over the Conservatives.

So the government likely had little choice but to reverse course and drop the most controversial part of the plan, the abolition of the 45% tax rate. The pound recovered its losses. The recovery in gilts was more modest, with bonds still trading at elevated levels.

Putting this all together, less than a month into the job, Truss has lost confidence – and credibility – with international investors, voters and her own party. And all this over a “mini-budget” – the full budget isn’t due until November 2022. It suggests the U.K.‘s troubles are far from over, a view echoed by credit rating agencies.

David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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What’s next for ancient DNA studies after Nobel Prize honors groundbreaking field of paleogenomics

Thousands of ancient genomes have been sequenced to date. A Nobel Prize highlights tremendous opportunities for aDNA, as well as challenges related to…

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Researchers need to be careful not to contaminate ancient samples with their own DNA. Caia Image via Getty Images

For the first time, a Nobel Prize recognized the field of anthropology, the study of humanity. Svante Pääbo, a pioneer in the study of ancient DNA, or aDNA, was awarded the 2022 prize in physiology or medicine for his breathtaking achievements sequencing DNA extracted from ancient skeletal remains and reconstructing early humans’ genomes – that is, all the genetic information contained in one organism.

His accomplishment was once only the stuff of Jurassic Park-style science fiction. But Pääbo and many colleagues, working in large multidisciplinary teams, pieced together the genomes of our distant cousins, the famous Neanderthals and the more elusive Denisovans, whose existence was not even known until their DNA was sequenced from a tiny pinky bone of a child buried in a cave in Siberia. Thanks to interbreeding with and among these early humans, their genetic traces live on in many of us today, shaping our bodies and our disease vulnerabilities – for example, to COVID-19.

The world has learned a startling amount about our human origins in the last dozen years since Pääbo and teammates’ groundbreaking discoveries. And the field of paleogenomics has rapidly expanded. Scientists have now sequenced mammoths that lived a million years ago. Ancient DNA has addressed questions ranging from the origins of the first Americans to the domestication of horses and dogs, the spread of livestock herding and our bodies’ adaptations – or lack thereof – to drinking milk. Ancient DNA can even shed light on social questions of marriage, kinship and mobility. Researchers can now sequence DNA not only from the remains of ancient humans, animals and plants, but even from their traces left in cave dirt.

Alongside this growth in research, people have been grappling with concerns about the speed with which skeletal collections around the world have been sampled for aDNA, leading to broader conversations about how research should be done. Who should conduct it? Who may benefit from or be harmed by it, and who gives consent? And how can the field become more equitable? As an archaeologist who partners with geneticists to study ancient African history, I see both challenges and opportunities ahead.

Building a better discipline

One positive sign: Interdisciplinary researchers are working to establish basic common guidelines for research design and conduct.

In North America, scholars have worked to address inequities by designing programs that train future generations of Indigenous geneticists. These are now expanding to other historically underrepresented communities in the world. In museums, best practices for sampling are being put into place. They aim to minimize destruction to ancestral remains, while gleaning the most new information possible.

But there is a long way to go to develop and enforce community consultation, ethical sampling and data sharing policies, especially in more resource-constrained parts of the world. The divide between the developing world and rich industrialized nations is especially stark when looking at where ancient DNA labs, funding and research publications are concentrated. It leaves fewer opportunities for scholars from parts of Asia, Africa and the Americas to be trained in the field and lead research.

The field faces structural challenges, such as the relative lack of funding for archaeology and cultural heritage protection in lower income countries, worsened by a long history of extractive research practices and looming climate change and site destruction. These issues strengthen the regional bias in paleogenomics, which helps explain why some parts of the world – such as Europe – are so well-studied, while Africa – the cradle of humankind and the most genetically diverse continent – is relatively understudied, with shortfalls in archaeology, genomics and ancient DNA.

Making public education a priority

How paleogenomic findings are interpreted and communicated to the public raises other concerns. Consumers are regularly bombarded with advertisements for personal ancestry testing, implying that genetics and identity are synonymous. But lived experiences and decades of scholarship show that biological ancestry and socially defined identities do not map so easily onto one another.

I’d argue that scholars studying aDNA have a responsibility to work with educational institutions, like schools and museums, to communicate the meaning of their research to the public. This is particularly important because people with political agendas – even elected officialstry to manipulate findings.

For example, white supremacists have erroneously equated lactose tolerance with whiteness. It’s a falsehood that would be laughable to many livestock herders from Africa, one of the multiple centers of origin for genetic traits enabling people to digest milk.

The 2010 excavation in the East Gallery of Denisova Cave, where the ancient hominin species known as the Denisovans was discovered. Bence Viola. Dept. of Anthropology, University of Toronto, CC BY-ND

Leaning in at the interdisciplinary table

Finally, there’s a discussion to be had about how specialists in different disciplines should work together.

Ancient DNA research has grown rapidly, sometimes without sufficient conversations happening beyond the genetics labs. This oversight has provoked a backlash from archaeologists, anthropologists, historians and linguists. Their disciplines have generated decades or even centuries of research that shape ancient DNA interpretations, and their labor makes paleogenomic studies possible.

As an archaeologist, I see the aDNA “revolution” as usefully disrupting our practice. It prompts the archaeological community to reevaluate where ancestral skeletal collections come from and should rest. It challenges us to publish archaeological data that is sometimes only revealed for the first time in the supplements of paleogenomics papers. It urges us to grab a seat at the table and help drive projects from their inception. We can design research grounded in archaeological knowledge, and may have longer-term and stronger ties to museums and to local communities, whose partnership is key to doing research right.

If archaeologists embrace this moment that Pääbo’s Nobel Prize is spotlighting, and lean in to the sea changes rocking our field, it can change for the better.

Mary Prendergast does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Economics

Roubini: The Stagflationary Debt Crisis Is Here

Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to…

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Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. US and global equities are already back in a bear market, and the scale of the crisis that awaits has not even been fully priced in yet.

For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.

How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China’s “zero-COVID” policy created even more problems for global supply chains. Russia’s invasion of Ukraine sent shockwaves through energy and other commodity markets. And the broader sanctions regime – not least the weaponization of the US dollar and other currencies – has further balkanized the global economy, with “friend-shoring” and trade and immigration restrictions accelerating the trend toward deglobalization.

Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.

Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario.

While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.

I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government’s reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).

Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts – after previously signaling continued rate hikes and QT – at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.

Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers’ power.

Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, US (and global) equity indices fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).

Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.

But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress.

The crisis is here.

Tyler Durden Tue, 10/04/2022 - 17:25

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