Tag Archives: C&E Exclusion Filter

Business

Bank of England Offers More Support for Pension Funds Amid Crisis

Leave a comment

LONDON—The Bank of England expanded its support of pension funds at the heart of the U.K.’s bond-market crisis even as borrowing costs leapt higher, a sign that stress in the financial system wasn’t going away.

The U.K.’s central bank said Monday that it would increase the daily amounts it was willing to buy in long-dated bonds before ending the program as scheduled on Friday. It also unveiled two types of lending facilities aimed at freeing up cash for pension funds beyond the end of the bond buying.

The moves failed to calm markets, with yields on 30-year U.K. gilts, as government bonds are known, jumping to as high as 4.64%, from 4.39% on Friday. Outside the past two weeks such moves would be considered unusually large for a single day.

The Bank of England launched its initial foray into markets on Sept. 28 when it offered to buy up to £5 billion, or around $5.55 billion, a day of long-dated government bonds. The program was aimed at stanching the damage from a furious selloff in U.K. government debt over previous days in the aftermath of a surprise package of tax cuts announced by the government.

“The underlying message is that there’s been too little risk reduction so far,” said Antoine Bouvet, senior rates strategist at ING. “There’s a message to pension funds and potential sellers that the window is closing and they need to hurry up.”

Turmoil in the U.K. bond market created a feedback loop that left investors like pension funds short on cash and rippled out into other markets. WSJ’s Chelsey Dulaney explains the type of investment at the heart of the crisis. Illustration: Ryan Trefes

He attributed Monday’s bond selloff to disappointment among investors who had expected the BOE to extend the bond-buying facility.

The original intervention in late September at first calmed markets, with government bond yields plunging in response. But yields shot back up in recent days after it appeared the bank was buying far less than the £5 billion a day, a possible sign that the program wasn’t working as intended.

In the history of crisis interventions, central banks often have to make multiple stabs at solving problems with different types of bond buying or lending programs before markets become convinced that a viable backstop has been created. During the Covid-19 meltdown in March 2020, the Federal Reserve expanded its lending programs several times before calm was restored.

The BOE said it would increase the daily amount of purchases on offer until the program ends, starting with £10 billion Monday, though it was unclear if there would be take-up by distressed sellers.

The lending programs announced Monday included what the BOE called a temporary expanded collateral repo facility. This lends cash to pension funds in exchange for an expanded menu of collateral than was previously available to the pension plans, including index-linked gilts, whose returns are tied to inflation, and corporate bonds.

The operations would be processed through banks working on behalf of the pension funds. The BOE also made an existing, permanent repo lending facility available to banks acting to help pension-fund clients.

The crisis centers on a corner of the market known as LDIs, or liability-driven investments. LDIs became popular in recent years among U.K. defined-benefit pension plans to make enough money in the long term to match what they owed retirees. These strategies use financial derivatives tied to interest rates.

LDIs also contain leverage, or borrowing, that amplifies pension-fund investments by as much as six or seven times. When the long-dated U.K. government bond yield that undergird LDI investments surged more than they ever have in a single day at the end of September, LDI fund managers required pension funds to post massive amounts of fresh collateral to back up the investments.

To generate that collateral, pension funds have been selling non-LDI bonds, stocks and other investments.

In a letter to lawmakers last week, BOE Deputy Gov.

Jon Cunliffe

said the bank acted to stop forced selling by LDI investors and a “self-reinforcing spiral of price falls.”

The point of the new lending programs and the bond buying is to make it easier for the pension funds to drum up cash so they can pay down the leverage on their LDI funds without causing wider market disruption.

“The Bank of England has been listening to schemes and the challenges they’re facing right now in still struggling to access liquidity quickly enough to recapitalize LDI,” said Ben Gold, head of investment at

XPS Pensions Group,

a U.K. pensions consultant. The measures also help funds avoid having to sell assets at poor prices, he said.

Mr. Gold estimates that it is going to take between £100 billion and £150 billion for the industry to shore up its collateral on LDI funds.

“I would estimate that we’re probably about halfway there,” he said. “There is still a lot of activity that’s needed to get it done before 14th October.”

Soaring inflation and expectations of swelling government bond issuance pushed bond yields up sharply in recent months. Investors in U.K. government bonds were troubled by the tax cuts announced by Prime Minister

Liz Truss’s

government in part because they weren’t accompanied by a customary analysis of the impact on borrowing by the independent budget watchdog.

U.K. Treasury chief

Kwasi Kwarteng

on Monday said he would announce further budgetary measures on Oct. 31 that will be accompanied by forecasts from the Office for Budget Responsibility, which provides independent analysis of government spending. He previously said that wouldn’t happen until Nov. 23.

—Caitlin Ostroff contributed to this article.

Write to Paul Hannon at paul.hannon@wsj.com, Chelsey Dulaney at Chelsey.Dulaney@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Elon Musk’s Revived Twitter Deal Could Saddle Banks With Big Losses

Leave a comment

Banks that agreed to fund

Elon Musk’s

takeover of

Twitter Inc.

TWTR -3.72%

are facing the possibility of big losses now that the billionaire has shifted course and indicated a willingness to follow through with the deal, in the latest sign of trouble for debt markets that are crucial for funding takeovers.

As is typical in leveraged buyouts, the banks planned to unload the debt rather than hold it on their books, but a decline in markets since April means that if they did so now they would be on the hook for losses that could run into the hundreds of millions, according to people familiar with the matter.

Banks are presently looking at an estimated $500 million in losses if they tried to unload all the debt to third-party investors, according to 9fin, a leveraged-finance analytics firm.

Representatives of Mr. Musk and Twitter had been trying to hash out terms of a settlement that would enable the stalled deal to proceed, grappling with issues including whether it would be contingent on Mr. Musk receiving the necessary debt financing, as he is now requesting. On Thursday, a judge put an impending trial over the deal on hold, effectively ending those talks and giving Mr. Musk until Oct. 28 to close the transaction.

The debt package includes $6.5 billion in term loans, a $500 million revolving line of credit, $3 billion in secured bonds and $3 billion in unsecured bonds, according to public disclosures. To pay for the deal, Mr. Musk also needs to come up with roughly $34 billion in equity. To help with that, he received commitment letters in May for over $7 billion in financing from 19 investors including

Oracle Corp.

co-founder and

Tesla Inc.

then-board member

Larry Ellison

and venture firm Sequoia Capital Fund LP.

Twitter will become a private company if Elon Musk’s $44 billion takeover bid is approved. The move would allow Musk to make changes to the site. WSJ’s Dan Gallagher explains Musk’s proposed changes and the challenges he might face enacting them. Illustration: Jordan Kranse

The Twitter debt would be the latest to hit the market while high-yield credit is effectively unavailable to many borrowers, as buyers of corporate debt are demanding better terms and bargain prices over concerns about an economic slowdown.

That has dealt a significant blow to a business that represents an important source of revenue for Wall Street banks and has already suffered more than $1 billion in collective losses this year.

The biggest chunk of that came last month, when banks including Bank of America,

Goldman Sachs Group Inc.

and

Credit Suisse Group AG

sold debt associated with the $16.5 billion leveraged buyout of Citrix Systems Inc. Banks collectively lost more than $500 million on the purchase, the Journal reported.

Banks had to buy around $6 billion of Citrix’s debt themselves after it became clear that investors’ interest in the total debt package was muted.

“The recent Citrix deal suggests the market would struggle to digest the billions of loans and bonds contemplated by the original Twitter financing plan,” said Steven Hunter, chief executive at 9fin.

People familiar with Twitter’s debt-financing package said the banks built “flex” into the deal, which can help them reduce their losses. It enables them to raise the interest rates on the debt, meaning the company would be on the hook for higher interest costs, to try to attract more investors to buy it.

However, that flex is usually capped, and if investors still aren’t interested in the debt at higher interest rates, banks could eventually have to sell at a discount and absorb losses, or choose to hold the borrowings on their books.

Elon Musk has offered to close his acquisition of Twitter on the terms he originally agreed to.



Photo:

Mike Blake/REUTERS

The leveraged loans and bonds for Twitter are part of $46 billion of debt still waiting to be split up and sold by banks for buyout deals, according to Goldman data. That includes debt associated with deals including the roughly $16 billion purchase of

Nielsen Holdings

PLC, the $7 billion acquisition of automotive-products company

Tenneco

and the $8.6 billion takeover of media company

Tegna Inc.

Private-equity firms rely on leveraged loans and high-yield bonds to help pay for their largest deals. Banks generally parcel out leveraged loans to institutional investors such as mutual funds and collateralized-loan-obligation managers.

When banks can’t sell debt, that usually winds up costing them even if they choose not to sell at a loss. Holding loans and bonds can force them to add more regulatory capital to protect their balance sheets and limit the credit banks are willing to provide to others.

In past downturns, losses from leveraged finance have led to layoffs, and banks took years to rebuild their high-yield departments. Leveraged-loan and high-yield-bond volumes plummeted after the 2008 financial crisis as banks weren’t willing to add on more risk.

Indeed, many of Wall Street’s major banks are expected to trim the ranks of their leveraged-finance groups in the coming months, according to people familiar with the matter.

Still, experts say that banks look much better positioned to weather a downturn now, thanks to postcrisis regulations requiring more capital on balance sheets and better liquidity.

“Overall, the level of risk within the banking system now is just not the same as it was pre-financial crisis,” said Greg Hertrich, head of U.S. depository strategy at Nomura.

Last year was a banner year for private-equity deal making, with some $146 billion of loans issued for buyouts—the most since 2007.

However, continued losses from deals such as Citrix and potentially Twitter may continue to cool bank lending for M&A, as well as for companies that have low credit ratings in general.

“There’s going to be a period of risk aversion as the industry thinks through what are acceptable terms for new deals,” said Richard Ramsden, an analyst at Goldman covering the banking industry. “Until there’s clarity over that, there won’t be many new debt commitments.”

—Cara Lombardo contributed to this article.

Write to Alexander Saeedy at alexander.saeedy@wsj.com, Laura Cooper at laura.cooper@wsj.com and Ben Dummett at ben.dummett@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

World

EU Likely to Approve G-7 Cap on Russian Oil Price in Two Steps

Leave a comment

BERLIN—The European Union has advanced work on a price cap for Russian oil under an approach that keeps the U.S.-led effort on track but holds off on final approval.

EU member states have agreed on a two-stage approach to the international price cap on Russian oil, which is being developed within the Group of Seven industrial economies. Member states signed off on the legislation needed to implement the measures on Wednesday morning but will hold off approving it until the rest of the G-7 is ready, diplomats and officials said.

The price-cap decision is part of an eighth package of sanctions against Russia over the invasion of Ukraine. The measures will come into effect Thursday morning.

The EU approach reflects concern among some member states about the proposal, which would place a maximum price on what can be paid for Russian seaborne oil. Hesitation is greatest in EU members with large shipping sectors, including Greece, Cyprus and Malta.

The emerging EU approach means the price-cap proposal remains on track to enter into force, but raises fresh questions about how quickly it can be implemented.

Washington has pushed the international oil-price cap as a way of minimizing the Kremlin’s revenue from foreign oil sales without inflating oil prices by preventing oil sales to Asia and Africa. The idea is to set a maximum price at which shippers from G-7 countries may legally transport Russian oil to countries in Asia and Africa. The plan would also permit those companies to buy insurance for Russian oil cargoes, a critical aspect of the shipping industry. The G-7 hopes other countries will join the system.

The G-7 still must agree on the details of the price cap, including the price at which to set the cap, its precise implementation methods and how many other countries they need to join the G-7 in launching the cap. U.S. lawmakers are advocating increasing penalties for foreign buyers who don’t abide by the price cap.

U.S. officials have been flexible about how the other G-7 countries decide to implement the cap.

The EU formally backed the measure at the G-7, but European officials have repeatedly raised concerns about how the mechanism would function and its effectiveness in crimping Russia’s oil revenues.

Greece, Malta and Cyprus have raised concerns that banning EU companies from carrying Russian oil that is sold at rates above the price cap could hurt their economies. They fear losing business to countries that stay outside the mechanism, and they have also raised concerns that some G-7 countries may not enforce the price cap as rigorously as the EU, diplomats said.

At a meeting Tuesday evening, EU ambassadors agreed on a proposal under which they could agree on the legislation, but only formally approve the mechanism at a later date if the other G-7 countries have cleared the way to implement the cap system.

That means the 27 EU member states will need to revisit the three central elements of the price cap proposal. First they would need to sign off an exemption into the June sanctions package that banned EU companies from providing insurance on Russian oil transport after Dec. 5. They would also need to implement a ban on EU shippers transporting Russian oil priced above the cap, and then they would need to sign off on the G-7’s price cap.

The European Union proposed a ban on Russian crude within six months; Moscow and Kyiv accused each other of breaking a cease-fire in Mariupol. Photo: Julien Warnand/Shutterstock

To assuage the concerns of Malta, the ambassadors agreed Tuesday to carry out an impact assessment of the oil price cap mechanism when it enters into force. That will take into account the price cap’s “expected results, international adherence to and informal alignment with the price cap scheme” of non-G-7 countries, according to diplomats. It would also assess its potential impact on the EU.

The European Commission, the EU’s executive body, last week proposed to lay the legal basis for the price cap mechanism as part of a new package of sanctions it was placing on Russia in response to the Kremlin’s claim that it was annexing four regions of Ukraine.

Those sanctions would place an import ban on €7 billion, equivalent to about $7 billion, of Russian sales to the EU and would ban the export to Russia of a number of goods that can be used by its military in the war in Ukraine.

It will also target around three dozen people and companies involved in the latest annexations by Russia of Ukrainian regions.

The EU’s backing for the price cap is critical because the bloc plays a critical role in both the shipping industry and in shipping insurance sector. Sanctions must be approved by all 27 member states.

Under a sanctions package passed in June, the EU agreed to place an oil embargo on Russian seaborne oil by Dec. 5 and, on the same date, ban the provision of services, including shipping insurance, for Russian oil sold outside the bloc. The insurance measure could have choked off oil supplies to Asia and Africa, pushing oil prices higher.

EU diplomats have said that if the G-7 price cap is fully ready and detailed well in advance of Dec. 5, then they can come back and sign off the measures. If the G-7 mechanism is only finalized a few days before the December deadline—or isn’t in place until after it—some member states may demand a transition period to fully implement the measure.

Only Australia has pledged to join the G-7 system. European and U.S. officials say it is unlikely that India, China and some other top buyers of Russian oil will formally participate. Still, U.S. officials hope that by agreeing the price cap, they will at least drive down the price that other countries are willing to pay for Russian oil.

—Andrew Duehren contributed to this article.

Write to Laurence Norman at laurence.norman@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Dow Slips Again After Entering Bear Market

Leave a comment

The Dow industrials and the S&P 500 fell again Tuesday as investors parsed a spate of economic data and comments from Federal Reserve officials.

All three indexes spent much of the morning in the green, but it didn’t last. The Dow Jones Industrial Average, which entered a bear market on Monday, fell 125.82 points, or 0.4%, to 29134.99. That marked its sixth consecutive day in the red.

The broad S&P 500 slipped 7.75 points, or 0.2%, to 3647.29, closing at its lowest level of the year for the second day in a row. The S&P is also now down for six days in a row, its longest losing streak since February 2020, according to Dow Jones Market Data.

The technology-heavy Nasdaq Composite rose 26.58 points, or 0.2%, to 10829.50.

Tuesday’s declines prolong a brutal year for financial markets. Stocks and bonds have both dropped sharply this year, an unusual tandem that reflects just how unnerved many investors feel. The Dow, the S&P and the Nasdaq are all on pace for their worst first nine months of a year since 2002.

Stubbornly high inflation has roiled markets since the start of the year. The Federal Reserve in response has been raising interest rates to try to cool the economy, stoking fears that the central bank will tip the U.S. into recession. Some investors hoped this summer that the rate increases might be coming to an end, and stocks rebounded briefly. Now, investors are coming to grips with the idea that bigger interest-rate increases—and weaker global economic growth—are here to stay for quite a while.

Neel Kashkari,

president of the Federal Reserve Bank of Minneapolis, reaffirmed the central bank’s resolve to bring down persistent and elevated inflation in a Tuesday interview with The Wall Street Journal. “There’s a lot of tightening in the pipeline,” Mr. Kashkari said, adding that the Fed is “committed to restoring price stability” but also recognizes “there is a risk of overdoing it.” 

A sharp rise in interest rates has been weighing on stocks, said

Mimi Duff,

managing director at GenTrust, a registered investment adviser with about $3 billion in assets. “I think we need to start seeing the rates stabilize before we can bottom out in equities,” she added. 

As markets react to interest-rate hikes and the threat of a recession, stocks have entered bear-market territory. WSJ’s Gunjan Banerji explains what it takes to push stocks back into a bull market and why it is hard to predict when they’ll turn around. Illustration: Jacob Reynolds

“The equity market is paying attention to this perpetual ratcheting higher of terminal rates in the U.S.,” said

Charles Diebel,

head of fixed income at Mediolanum International Funds. “The more the terminal rate goes up—while necessary to deal with the inflation threat—the bigger the economic downturn will be.”

On the economic front, data Tuesday showed that companies reduced durable goods orders for a second straight month. Home prices continued to notch big year-over-year gains, but the pace of that growth slowed. Home prices fell month over month.

However, consumers are growing more optimistic about the U.S. economy. The Conference Board’s consumer-confidence index increased in September for the second month in a row, lifted in part by falling gas prices.

Bond prices continued to fall, pushing up yields. The yield on the 10-year Treasury rose to 3.963%, once again hitting its highest level since 2010.

Traders worked on the floor of the New York Stock Exchange on Monday.



Photo:

REUTERS

Oil prices rebounded after slumping Monday to their lowest level since January. Brent crude, the international oil benchmark, rose 2.6% to $86.27 a barrel. 

Global stock markets were mixed. The Stoxx Europe 600 edged down 0.1%.

In Asia, stocks closed mostly higher. Japan’s Nikkei 225 index rose 0.5% while China’s Shanghai Composite rose 1.4%. Hong Kong’s Hang Seng Index ended the day close to flat.

Write to Will Horner at william.horner@wsj.com

We want to hear from you

By submitting your response to this questionnaire, you consent to Dow Jones processing your special categories of personal information and are indicating that your answers may be investigated and published by The Wall Street Journal and you are willing to be contacted by a Journal reporter to discuss your answers further. In an article on this subject, the Journal will not attribute your answers to you by name unless a reporter contacts you and you provide that consent.

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Stocks Waver After Suffering Worst Day Since June 2020

Leave a comment

U.S. stocks wobbled between small gains and losses Wednesday, coming off a wild day of trading spurred by a stronger-than-expected inflation report.

The S&P 500 dropped 0.1%, a day after the benchmark index plummeted 4.3% in its worst selloff since June 2020. The Dow Jones Industrial Average fell 0.3%, while the tech-focused Nasdaq Composite gained 0.1%.

The release of U.S. inflation data for August on Tuesday spurred volatile moves across asset classes. The consumer-price reading showed the core inflation index, which excludes volatile energy and food figures, increased last month from a year earlier—indicating that broad price pressures strengthened.

The hot inflation report curbed investors’ hopes the Federal Reserve might slow its aggressive pace of interest-rate increases. That led traders on Tuesday to dump stocks across all sectors, sell bonds and cryptocurrencies, and push the U.S. dollar higher.

On Wednesday, markets seemed to take data measuring U.S. suppliers’ prices in stride. The producer-price index, which measures what suppliers are charging businesses and other customers, declined 0.1% from the month before, in line with economist expectations.

“We witnessed violent moves in the market yesterday as we reprice Fed and economic risk expectations,” said

Megan Horneman,

chief investment officer at Verdence Capital Advisors. “Today we’re absorbing such a destructive day.”

The latest U.S. inflation data curbed investors’ hopes the Federal Reserve might slow its aggressive pace of interest-rate increases.



Photo:

Julia Nikhinson/Associated Press

Some of Tuesday’s sharp market moves started to unwind Wednesday. The WSJ Dollar Index lost 0.4%, after notching its largest one-day jump since March 2020. Brent crude, which fell the day before, rose 1.3% to $94.32 a barrel.

Energy stocks rose broadly as Brent crude rebounded. The sector was the top gaining segment of the S&P 500 on Wednesday.

Among the top individual gainers in the S&P 500,

Starbucks

rose 5.8% after the coffee chain raised its longer-term financial outlook. The company now sees adjusted earnings-per-share growth over the next three years of 15% to 20%, up from its previous forecast of 10% to 12%.

Also making the index leaderboard,

Moderna

shares climbed 5.1% after its CEO told Reuters the company is open to supplying Covid vaccines to China.

Shares of railroad operators declined as a possible freight labor strike looms. The White House is assessing how other transportation providers could fill potential gaps in the nation’s freight network as labor unions and railroads continue contract talks.

Union Pacific

lost 4.9%, and

CSX

fell 3.1%.

Few market watchers were willing to suggest that volatile market moves may be in the rear-view mirror—especially until the Fed’s next meeting.

The Fed will make its next interest-rate policy decision next week. Federal-funds futures, used by traders to bet on interest-rate moves, showed a 68% chance that the central bank will lift rates by 0.75-percentage point. The data also show traders are assigning a 32% probability that the Fed will increase interest rates by 1 percentage point, according to CME Group data.

U.S. Treasury yields continued their upward climb, in another signal that investors are expecting higher interest rates.

The yield on the 10-year U.S. Treasury note rose to 3.427%, from 3.422% Tuesday. The yield on the two-year note, which is more sensitive to near-term rate expectations, climbed to 3.789%, from 3.754%. Yields and bond prices move in opposite directions. 

Some investors and strategists said the market may have overreacted Tuesday, especially after Fed Chairman

Jerome Powell

already said last month in Jackson Hole that the central bank must continue raising interest rates until it is confident inflation is under control.

“You’ve got this tension with dip buyers versus those who are selling the rally,” said Viraj Patel, global macro strategist at Vanda Research. “I think you can paint a very nice bullish picture and find plenty of evidence to buy equities, and you can paint a very nice bearish picture and find plenty of evidence to sell. That naturally means we are going to bounce around for a bit.”

Overseas, global indexes fell, following the U.S. stock market’s performance Tuesday. In Europe, the pan-continental Stoxx Europe 600 lost 1%. London’s FTSE 100 fell 1.2%, after U.K. inflation data showed that core consumer prices ticked up to 6.3% in August, from 6.2% in July, even as inflation eased slightly overall

In Asia, Hong Kong’s Hang Seng Index lost 2.5%, and the CSI 300 index of the largest stocks listed in Shanghai and Shenzhen was down 1.1%. Japan’s Nikkei 225 tumbled 2.8%.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com and Dave Sebastian at dave.sebastian@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Stocks Fall on Hotter-Than-Expected Inflation Data

Leave a comment

The Dow Jones Industrial Average slumped more than 1,000 points Tuesday after hotter-than-expected inflation data dashed investors’ hopes that cooling price pressures would prompt the Federal Reserve to moderate its campaign of interest-rate increases.

Investors sold everything from stocks and bonds to oil and gold. All 30 stocks in the blue-chip average declined, as did all 11 sectors in the S&P 500. Only five stocks in the broad benchmark were in the green in recent trading. Facebook

 

META -9.36%

parent

Meta Platforms

dropped 8.3%,

BlackRock

declined 7.2% and

Boeing

fell 6.4%.

The 3.3% tumble in the Dow put the index on pace for its worst day since May. The S&P 500 declined 3.7%, while the Nasdaq Composite slid 4.5% as rate-sensitive technology stocks took a heavy beating.

The Dow is off 14% in 2022, while the S&P 500 is down 17% and the Nasdaq Composite has fallen 25%.

Investors had eagerly anticipated Tuesday’s release of the consumer-price index, which provided a last major look at inflation before the central bank’s interest-rate-setting committee meets next week. Expectations for the path of monetary policy have held sway over the markets as investors factor higher rates into asset prices and try to project how well the economy will hold up as rates rise.

“It increases the probability of recession if the Fed has to move more significantly to address inflation,” said Chris Shipley, chief investment strategist for North America at Northern Trust Asset Management.

The consumer-sentiment index and the consumer-confidence index both try to measure the same thing: consumers’ feelings. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

The new data showed the consumer-price index rose 8.3% in August from the same month a year ago. That was down from 8.5% in July and 9.1% in June—the highest inflation rate in four decades.

The figures show inflation is easing, but at a slower pace than investors and economists had anticipated. Economists surveyed by The Wall Street Journal had been expecting consumer prices to rise 8% annually in August.

Analysts had hoped that officials would consider easing their pace of interest-rate increases if data continued to show inflation subsiding. The data undercut those hopes, seeming to settle the case for the Fed to raise rates by at least 0.75 percentage point next week. After the release, stock futures fell, bond yields rose and the dollar rallied.

Traders began to consider the possibility that the central bank will raise interest rates by a full percentage point next week.

As of Tuesday afternoon, they assigned a 28% probability to a 1-percentage-point increase at that meeting, up from a 0% chance a day earlier, according to CME Group’s FedWatch Tool.

The market-based probability of a half-percentage-point increase, by contrast, fell to 0% from 9% on Monday, according to the CME data.

The most likely scenario remained an increase of 0.75 percentage point.

Beyond next week, the suggestion that inflation is sticking around raises the possibility that the Fed might ultimately raise rates higher than markets had been anticipating.

“That’s really the challenge,” said Matt Forester, chief investment officer of Lockwood Advisors at BNY Mellon Pershing. “The Fed might have to do a lot more work in order to contain inflation.”

Food prices have surged as part of a broader pickup in U.S. inflation.



Photo:

michael reynolds/EPA/Shutterstock

Fed Chairman

Jerome Powell

said earlier this month that the central bank is squarely focused on bringing down high inflation to prevent it from becoming entrenched as it did in the 1970s.

The reaction to the new inflation reading could be seen across asset classes.

The communication services, technology and consumer discretionary sectors of the S&P 500 all fell more than 4.5%. Semiconductor stocks were particularly hard hit:

Western Digital,

Nvidia,

Advanced Micro Devices

and

Micron Technology

declined more than 7%.

In bond markets, the yield on the benchmark 10-year U.S. Treasury note jumped to 3.429% from 3.361% Monday. Yields and prices move in opposite directions. The rise in bond yields was an additional sign that investors were expecting higher interest rates after the data. 

Brent crude, the international benchmark for oil prices, fell 0.9% to $93.17 a barrel. Gold prices declined 1.3%.

The U.S. dollar, by contrast, rallied Tuesday. The WSJ Dollar Index, which measures the greenback against a basket of other currencies, rose 1.3%. The strong dollar has weighed on the value of other currencies against the greenback this year.

Overseas, the pan-continental Stoxx Europe 600 fell about 1.5%. In Asia, major indexes closed mixed. South Korea’s Kospi Composite rallied 2.7% , while Hong Kong’s Hang Seng declined 0.2%. 

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Karen Langley at karen.langley@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Europe Holds Emergency Talks on Energy-Market Intervention

Leave a comment

BRUSSELS—European energy ministers are debating plans for an intervention in the continent’s energy markets at an emergency meeting that is aimed at tamping down soaring electricity prices.

Diplomats said many countries—including the European Union’s biggest economies, Germany and France—appeared to agree ahead of Friday’s meeting on the idea of imposing a cap on the revenue earned by nuclear, renewable and other nongas producers of electricity, and redistributing the money to businesses and consumers. The details of how such a plan might work weren’t clear, the diplomats said.

Other measures under discussion include a plan to cut electricity use during peak demand this winter and a temporary cap on the price of natural gas imported from Russia. Some governments want the price cap extended to other sources of gas.

Czech Prime Minister Petr Fiala on Thursday at a terminal in the Netherlands intended to help reduce dependence on Russian gas.



Photo:

Siese Veenstra/EPA/Shutterstock

Ministers also want to prevent high prices from upending electricity markets, by extending emergency credit to traders or changing the rules for the collateral that is required in electricity trading.

Friday’s discussion is unlikely to result in immediate action, diplomats said. Instead, officials expect ministers to come up with a mandate for the EU’s executive arm, which hopes to introduce formal proposals next week.

Governments across the EU are tightening their grip on the region’s energy markets, aiming to limit the economic damage inflicted by Moscow’s move to cut gas deliveries to Europe. Friday’s talks come after national governments have imposed price caps and levies on energy producers in response to fears about social unrest and factory shutdowns.

Governments are looking to craft emergency policies that would apply across the 27-nation bloc, from nuclear-energy reliant France to a handful of countries in central Europe that still consume a lot of Russian gas. At the center of the debate is Germany, the EU’s largest economy, which for decades counted on Russian gas to keep its factories humming. Moscow’s decision to shut down indefinitely the Nord Stream pipeline, the main artery for natural-gas deliveries, has the continent idling factories as it faces surging gas and electricity prices.

“Nothing is a nonstarter now,” said

Václav Bartuška,

the special envoy for energy security for the Czech Republic, which holds the EU’s rotating presidency. Mr. Bartuška added that officials’ thinking on how to tackle the energy crisis has evolved rapidly in recent months. The proposal to redistribute companies’ windfall revenue, for example, “was crazy in June, it was fringe in July, and it was mainstream in August,” he said.

Questions remain about where a potential cap should be set, how the revenue would be collected and how it would be redistributed. The European Commission, the EU’s executive arm, has floated a cap of €200 a megawatt hour, equivalent to around $200, well under current prices in western Europe of more than €340 a megawatt hour. Officials said the level of the cap and its details would be part of the discussions on Friday and the following weeks.

A French official said it might be better to have different caps on electricity depending on the technology used to generate it. “The value generated by a French nuclear plant isn’t the same as the value created by a German lignite plant or a Spanish wind turbine,” the official said.

Another concern is who will decide how the money is used. In some cases, it might not be clear which country’s government should be capturing the additional revenue, or which citizens and businesses should benefit from it.

Western leaders are preparing for the possibility that Russian natural-gas flows through the Nord Stream pipeline might never return to full levels. WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe, and how it might ripple through the world. Illustration: David Fang

Support for the idea was not universal. Lithuania’s energy minister, Dainius Kreivys, on Friday morning called the idea “absolutely a red line” because of concerns it would disrupt electricity markets and result in uneven subsidies across the continent.

The commission has been careful to avoid referring to the windfall-revenue plan as a tax because a change in tax policy would require unanimous agreement from countries, according to EU officials and diplomats. Officials believe that the way they have framed the plan would allow it to pass with a qualified majority, which requires the support of 15 of the bloc’s 27 member states representing at least 65% of the total EU population.

Another proposal that appears to have general support from many member states is a move to limit demand for electricity, particularly during peak hours of use, when prices are highest. One draft document describing the proposal, which was produced by the commission and seen by The Wall Street Journal, suggested that each country should work to reduce its overall electricity consumption by at least 10%. Governments should also identify a set of peak price hours and reduce electricity use by an average of at least 5% during those hours, the document said.

SHARE YOUR THOUGHTS

Will market intervention be enough to solve Europe’s energy crisis? Why or why not? Join the conversation below.

Earlier this summer, the EU agreed to a plan for member states to cut their overall gas consumption by 15% over an eight-month period, with the possibility of making the target mandatory. Officials said an electricity-savings plan could be modeled on the earlier plan that was focused on gas.

Diplomats said reaching an agreement on a Russian gas-price cap is a more difficult proposition. Although Russia has already sharply reduced the flow of natural gas to Europe, some central European countries continue to depend on Russian gas flows and could be hit hard if the Kremlin decided to turn off the taps entirely.

“We still have questions and worries,” about the idea of putting a cap on Russian gas, Dutch Prime Minister

Mark Rutte

said Thursday. Still, he said his government generally supports the set of proposals that have been put forward, including the idea of a revenue cap for electricity producers.

Write to Kim Mackrael at kim.mackrael@wsj.com and Matthew Dalton at Matthew.Dalton@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

SEC’s Gensler Signals Support for Commodities Regulator Having Bitcoin Oversight

Leave a comment

WASHINGTON—Securities and Exchange Commission Chairman

Gary Gensler

signaled that he would support Congress handing more authority to the SEC’s sister markets regulator to oversee certain cryptocurrencies such as bitcoin.

Mr. Gensler, speaking at an industry conference, said Thursday he looked forward to working with Congress to give the Commodity Futures Trading Commission added power, to the extent the agency needs greater authority to oversee and regulate “nonsecurity tokens…and the related intermediaries.”

The remarks come amid an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto.

Cryptocurrencies remain largely unregulated by the federal government, leaving investors without protections from fraud and market manipulation that come with many other types of investments. The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers.

The competition also reflects the industry’s ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.

Mr. Gensler, who headed the CFTC from 2009 to 2014, qualified his remarks by saying he welcomed working with lawmakers as long as it doesn’t take away power from the SEC.

“Let’s ensure that we don’t inadvertently undermine securities laws,” he said. “We’ve got a $100 trillion capital market. Crypto is less than $1 trillion worldwide. But we don’t want that to somehow undermine what we do elsewhere.”

SHARE YOUR THOUGHTS

What should be the next priorities for the SEC? Join the conversation below.

Leaders of the Senate Agriculture Committee, which oversees the CFTC, are pitching legislation that would assign oversight of the two largest cryptocurrencies—bitcoin and ether—to that agency. At present, the CFTC generally has the power to regulate derivatives—such as futures and swaps—as opposed to cash or spot markets where the underlying assets are bought and sold for immediate delivery.

The SEC has declined for years to assert jurisdiction over bitcoin and ether, which proponents say are more “decentralized” than other cryptocurrencies. Mr. Gensler noted Thursday that bitcoin is often likened to a digital form of gold, and that it doesn’t bear all of the characteristics of a security.

The bill from the leaders of the agriculture panel is one of several that lawmakers have offered to more tightly oversee cryptocurrencies. In his remarks, Mr. Gensler didn’t express support for any particular bill.

CFTC Chairman

Rostin Behnam

has asked Congress to pass a law that would allow the CFTC to regulate cash markets for certain types of cryptocurrencies and provide it with funding to conduct additional oversight.

After objecting for years to meaningful federal oversight, cryptocurrency lobbyists have recently shifted their focus to convincing lawmakers and regulators that the CFTC should have primary jurisdiction over their industry. They say the SEC’s rules for traditional securities like stocks and bonds don’t fit because cryptocurrencies aren’t organized as traditional corporations with stockholders.

Jake Chervinsky, head of policy at the Blockchain Association, a crypto lobbying group, said in a statement that “decades of legal precedent shows that most digital assets” are commodities.” He said lawmakers should address the issue.

“This is a matter for Congress rather than regulators, and we’re glad to see consensus in Congress that the CFTC, not the SEC, should regulate spot markets,” he said.

While Mr. Gensler’s comments suggest that his agency shouldn’t oversee bitcoin, he said the majority of crypto tokens are securities that fall under his agency’s jurisdiction and should comply with investor-protection laws. Mr. Gensler also said it is possible some crypto intermediaries would need to be dually registered with both his agency and the CFTC, similar to the way some brokers and mutual-fund firms are overseen by both agencies.

Mr. Gensler has also repeatedly demanded that cryptocurrency-trading platforms such as Coinbase Global Inc. register with the agency as securities exchanges akin to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of an enforcement unit focused on cryptocurrencies.

WSJ’s Dion Rabouin explains why many investors are still betting on crypto, even with the very real threat of losing all their money. Illustration: Rami Abukalam

—Paul Kiernan contributed to this article.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

European Gas Prices Surge on Nord Stream Shut Down

Leave a comment

European energy prices surged after Russia shut down natural-gas flows through a major pipeline, threatening to add to economic woes for businesses and households across the continent.

Natural-gas futures in northwest Europe, which reflect the cost of fuel in the wholesale market, jumped more than 30% in early trading Monday. They remain below the all-time high recorded in late August.

State-controlled Gazprom PJSC extended a halt to flows through Nord Stream late Friday. Moscow blamed the suspension on technical problems. European governments described it as an economic attack in retaliation for their support of Ukraine.

Over the weekend, governments in Sweden and Finland offered billions of dollars of guarantees to utilities to prevent a meltdown in energy trading. Officials fear the loss of imports through Nord Stream could lead to a further leap in power prices and saddle utilities with cash payments to energy trading exchanges that they may struggle to meet. A wave of failed payments could undermine financial stability, officials said.

“This has had the ingredients for a kind of a Lehman Brothers of energy industry,” Finland’s Economic Affairs Minister

Mika Lintilä

said Sunday. 

Swedish and Finnish government officials worked through the weekend on programs designed to make sure electricity producers can meet exchange payments known as margin calls. Stockholm is home to

Nasdaq

Clearing AB, a subsidiary of

Nasdaq Inc.

that processes most derivative trades in the Nordic power market, which includes Finland and the Baltic countries.

Under the Swedish plan, the government would provide guarantees to eligible companies, which could then use the guarantees to borrow from banks and pay the exchange clearinghouse. The Swedish government would have license to extend up to 250 billion kroner, or $23 billion, in guarantees, said a finance-ministry official.

The Finnish government plans to offer 10 billion euros, or $10 billion, in guarantees. 

Nasdaq Clearing spokesman David Augustsson said the measures would help the power market act in an orderly manner Monday. “This is an extreme time of uncertainty and the addition of government liquidity guarantees will add an extra layer of stability,” he said.

Last week, European Energy Exchange AG, the main European venue for power trading outside the Nordics, said Germany and other European Union members should help companies fund margin payments. A spokesperson didn’t respond to requests for comment on Sunday.

Russia’s state-controlled Gazprom PJSC extended a halt to flows through the Nord Stream pipeline late Friday.



Photo:

HANNIBAL HANSCHKE/REUTERS

Armed with the guarantees, utilities and other energy companies would find banks more willing to lend money to cover margin payments, the Swedish official said. The Swedish parliament will vote on the program Monday and it would take effect the same day if approved. One concern is that the clearinghouse itself might default, the official said.

“This threatens our financial stability. If we don’t act soon it could lead to serious disruptions in the Nordics and Baltics,“ Swedish Prime Minister Magdalena Andersson said Saturday at a news conference outlining the plan. “In the worst-case scenario we could fall into a financial crisis,” Ms. Andersson added.

When utilities agree to deliver gas or power, they lock in prices by selling futures contracts. Exchanges charge one payment, known as initial margin, when trades are placed to collect collateral. They then call for or return money each day depending on whether the position gains or loses value.

As prices rise, utilities’ short positions shed value and the companies pay the exchange. They recoup the money when they deliver gas or power, but the difference in timing has led to massive outflows of cash that some firms have struggled to fund. At times a vicious cycle has emerged in which extreme price moves boost margin calls, prompting companies to bail out of trades and sparking more volatility.

“No one’s got the money to pay to trade,” said Justin Colley, an analyst at Argus Media. “Putting up these margin payments every day is just causing problems for everyone—not just the small companies, but also the big companies, the national utilities.”

The guarantees could add to the mounting cost for governments of aiding households and businesses through a historic rise in energy prices largely caused by Moscow’s move to cut gas exports. On Sunday, Germany unveiled its third energy relief package this year, worth €65 billion, to shield consumers.

European energy ministers are due to hold an emergency meeting Friday to discuss options for dealing with skyrocketing electricity prices, such as a possible price cap for non-gas sources of power generation.

They will also consider energy companies’ cash concerns. The Czech Republic, which holds the EU’s rotating presidency, is expected to put forward several options for ministers to consider, including the temporary suspension of power derivatives markets and a European credit line for energy market participants, an EU diplomat said.

European gas and power prices have been wildly volatile. They shot to records in late August before slumping last week after the European Union said it would change the structure of the power market to bring down prices for consumers and businesses. Nordic and Baltic prices have been especially turbulent, in part because a drought curbed hydropower generation in Norway.

Tom Marzec-Manser, gas analyst at ICIS, said he expected gas and electricity prices to rise again Monday in response to Gazprom’s shut-off. “Meeting demand, whatever that might turn out to be, is going to be that much harder,” he said.

To a certain extent, energy markets were already girding for Russia to completely cut off gas supplies. Gazprom had reduced Nord Stream flows to 20% capacity in the weeks before the shutdown.

Some factors could act to bring prices down after an initial leap, traders and analysts said—including the action taken by Nordic governments. Weather forecasts suggest there might be greater power generation from wind farms, reducing demand for gas. 

Uniper,

one of the two biggest buyers of Russian gas in Europe until recently, said last week it had fully drawn down a €9 billion credit line from German state lender KfW. The company said it had asked to borrow an extra €4 billion to make margin payments and buy gas to make up for lost deliveries from Gazprom.

—Kim Mackrael contributed to this article.

Write to Joe Wallace at joe.wallace@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

Russia Signals Opposition to OPEC+ Oil-Production Cut

Leave a comment

Russia doesn’t support an oil-production cut at this time, and it is likely OPEC+ will keep its output steady when it meets Monday, people familiar with the matter said, as Moscow maneuvers to thwart Western attempts to limit its oil revenue following its invasion of Ukraine.

Russian opposition to a production cut highlights a debate within the Organization of the Petroleum Exporting Countries and Moscow-led allies, collectively known as OPEC+, as oil consumers globally brace for a showdown this winter with the Kremlin over the price of its crude. Oil prices soared above $100 a barrel after Russia invaded Ukraine, hurting Western consumers and filling Moscow’s coffers.

Saudi Arabia, the group’s biggest exporter, floated the idea recently that the alliance could consider reducing output. OPEC members such as the Republic of Congo, Sudan and Equatorial Guinea have said they are open to the idea, as they are already pumping as much as they can and oil prices have fallen in recent weeks. An OPEC+ production cut often lifts prices.

But Russia is concerned that a production cut would signal to oil buyers that crude supply is outstripping global demand—a position that would reduce its leverage with oil-consuming nations that are still buying its petroleum but at big discounts, the people familiar with the matter said. Though Russia has benefited from high oil prices since the Ukraine invasion, Moscow is more concerned about maintaining influence in negotiations with Asian buyers who bought its crude after Europeans and the U.S. began shunning it this year, the people said.

Last week, the Group of Seven wealthy nations rolled out a plan to ban the insurance and financing of shipments of Russian oil and petroleum products unless they are sold under a set price cap. Russia has threatened to stop supplying countries that participate in the price-cap plan.

According to the people familiar with the matter, Russia’s objections to an OPEC+ production cut became clear last week at an internal OPEC+ meeting where the group’s baseline scenario showed the world’s oil supplies would be about 900,000 barrels of oil a day above demand this year and next, a potentially bearish projection for prices.

Officials from Russia and other countries said the numbers were misleading because they assumed that each OPEC+ member would pump the full amount allowed under their agreement, the people said. In fact, OPEC+ members have fallen about 3 million barrels a day short of those targets in recent months. The commission revised its numbers after the objections, predicting a smaller surplus of 400,000 barrels a day by the end of 2022 and a deficit in 2023.

High oil prices have been beneficial for OPEC+, an alliance of oil-producing countries that controls more than half of the world’s output. WSJ’s Shelby Holliday explains what OPEC+ countries are doing with the windfall and why they aren’t likely to distance themselves from Russia. (Originally published July 7, 2022.)

“Russia may be concerned about market assessments that point to a surplus,” said

Helima Croft,

chief commodities strategist at Canadian broker RBC. “It would weaken its hand with buyers just as it negotiates to deter them from adopting the price cap.”

OPEC+ won’t decide until Monday how to proceed with oil production, and an output cut can’t be ruled out, said OPEC+ delegates from multiple countries. Some OPEC delegates said a cut of 100,000 barrels a day could be discussed Monday, the same amount that OPEC+ increased last month after President Biden’s visit to Saudi Arabia.

But the revision in data undermines the case for a production cut, they said, and delegates said there was no appetite for raising output, as the U.S. and Europe have called for.

“Most members can’t boost production so if we had kept widening quotas, we would have a credibility problem,” said an OPEC delegate. “It’s not sustainable.”

A spokeswoman for the Russian Energy Ministry didn’t respond to a request for comment.

The OPEC+ meeting takes places Monday as members are concerned Iran could bring its sanctioned crude back to markets if it strikes an agreement with global powers to revive a nuclear pact. There are also worries that oil demand could weaken if the world enters a recession or if China’s Covid-19 restrictions spur another economic slowdown there.

A U.S. official said the White House was pleased with the OPEC+ production increases over the summer and noted that Saudi Arabia is pumping at a historic high.

Saudi Arabia’s crude production rose to 10.9 million barrels a day on average in the July-to-August period, according to Kpler, compared with just under 10.7 million barrels a day in June. The kingdom’s increase was the main driver behind an overall OPEC+ boost of 400,000 barrels a day to 43.5 million barrels a day in the past two months, the data-intelligence company said.

Amos Hochstein,

the U.S. special presidential coordinator for global infrastructure and energy security, said he welcomed production increases carried out in the summer by Saudi Arabia and OPEC.

“Current production in the United States and around the world is not sufficient to meet the strong economic recovery from the pandemic and the threats posed by Russia’s continued war against Ukraine and its use of energy as a weapon,” Mr. Hochstein said.

—Michael Amon in Dubai and Vivian Salama in Washington contributed to this article.

Write to Benoit Faucon at benoit.faucon@wsj.com and Summer Said at summer.said@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here