TheChek News Flow

- Today, Board members discussed economic and financial developments and issues related to possible policy actions. In connection with this discussion, Board members considered discounts and advances under the primary credit program (the primary credit rate) and discussed, on a preliminary basis, their individual assessments of the appropriate rate and its communication, which would be discussed at the joint meeting of the Board and the Federal Open Market Committee next week.

- Subject to review and determination by the Board of Governors, the directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Chicago, and Dallas had voted on October 12, 2023, and the directors of the Federal Reserve Banks of Boston, Philadelphia, St. Louis, Minneapolis, Kansas City, and San Francisco had voted on October 19, to establish the primary credit rate at the existing level of 5.5 percent.

- Federal Reserve Bank directors generally reported strong or steady economic activity. Many directors noted strength in overall consumer spending. Labor market conditions continued to improve, with some directors citing increased labor availability and easing wage growth; still, several directors also noted persistent hiring challenges and wage pressures. In most Districts, credit conditions remained tight. Many directors noted slowdowns in residential or commercial real estate activity.

- No sentiment was expressed by the Board at today's meeting for changing the primary credit rate at this time, and the Board approved the establishment of the primary credit rate at the existing level of 5.5 percent. The Board's action today on the primary credit rate also included renewal of the existing formulas for calculating the rates applicable to discounts and advances under the secondary and seasonal credit programs. As specified by the formula for the secondary credit rate, this rate would be set 50 basis points above the primary credit rate. As specified by the formula for the seasonal credit rate, this rate would be reset every two weeks as the average of the daily effective federal funds rate and the rate on three-month CDs over the previous 14 days, rounded to the nearest 5 basis points.

National Grid to pay households to use less power as cold snap hits UK

Electricity network operator activates voluntary service first introduced during energy crisis last winter on Wednesday evening

Britain’s electricity grid operator will pay households to reduce electricity usage on Wednesday evening, marking the return of a system introduced at the height of the energy crisis last winter. 

National Grid ESO on Tuesday said it would activate its voluntary “demand flexibility service” between 5pm and 6.30pm on November 29 as it warned electricity supply margins were “expected to be tighter than normal”. 

It refused to give a reason for the intervention but analysts pointed to expected high demand for electricity as temperatures drop across the country combined with low wind speeds, which will reduce the output from wind farms that can supply more than half the UK’s electricity in blustery conditions.

“It’s cold, dark and the wind isn’t blowing in north-western Europe,” said Tom Edwards, senior modelling consultant at Cornwall Insight, the consultancy. 

Britain regularly imports power from continental Europe when supply is tight, particularly from France, but Edwards added power prices indicated demand would be high there as well on Wednesday evening.

National Grid said the activation of the flexibility service on Wednesday evening did “not mean electricity supplies [were] at risk and people should not be worried”.

It added: “These are precautionary measures to maintain the buffer of spare capacity we need.”

National Grid introduced its demand-flexibility service last year ahead of the winter to try to cope with tight power supplies after France’s fleet of nuclear power stations was hit by unexpected outages. There were also concerns gas-fired power stations could struggle to get enough fuel because of cuts in supplies from Russia following its full-scale invasion of Ukraine.

The service was activated twice last winter, excluding multiple test events. Heading into this winter, France has resolved many of the issues affecting its nuclear fleet, while fears about gas supplies have also eased.

There is no set rebate for participating households with each supplier able to decide how much to reimburse customers. The amount National Grid pays suppliers is established via competitive tenders although during tests it was set at £3 per kilowatt-hour.

Over the longer term, National Grid is seeking to encourage behavioural changes among customers to become more flexible about when they use electricity to help them manage the system as a greater proportion of power supplies comes from intermittent wind and solar farms.

Electricity supply and demand has to be constantly matched to keep the grid balanced and avoid blackouts.

Renault RNO 0.37%increase; green up pointing triangle is moving ahead with publicly listing Ampere, its electric-car unit, but some analysts think an IPO could be the wrong road forward.

The French automaker is setting Ampere up to become Europe’s top electric-vehicle producer by making cheaper cars than its rivals to attract more consumers than just the early EV adopters, according to Chief Executive Luca de Meo, who is also the head of Renault.

An IPO, scheduled for spring 2024, would help with focus and accountability that a company embedded inside Renault can’t offer, he said during a call with reporters earlier this month.

While analysts generally agree that Renault is right to separate the EV business from the 124-year-old car maker, they have questioned the decision for an IPO at a time of uncertainty around demand and pricing, and for a business that Renault said is fully funded.

Renault, which said it will own a “strong majority” in Ampere, risks diluting the share value for current investors, said Bernstein analyst Daniel Roeska. He said the move puts Renault’s long-term worth at stake. The car maker currently has a market cap of 10.3 billion euros ($11.28 billion).

“They’re cutting out terminal value in Renault, and they’re selling it in Ampere,” said Roeska. “And why would a Renault investor want to give up terminal value?”

Though De Meo said he is still open to alternatives, he and Renault CFO Thierry Pieton also said an IPO is the best way to raise money to accelerate growth and profitability and that it creates the conditions to eventually reward Renault shareholders.

“For our group stakeholders, raising cash at the Ampere level provides the best way to accelerate its development, and ultimately cash generation, without pulling on group resources,” Pieton said at Ampere’s capital markets meeting.

Slashing production costs is key to Ampere’s strategy, which includes offering a small car for EUR20,000 and putting electric-car prices on par with traditional ones by 2027 or 2028. It will rely heavily on local and joint-venture suppliers, including for batteries, which will cost half as much as today as technology advances, Ampere said. EV-specific software and manufacturing platforms will also streamline costs with fewer necessary parts and less energy.

“I think that the projects are more down to earth than avant-garde,” Stifel analyst Pierre-Yves Quemener said.

The analyst is convinced of the company’s strength, if not the IPO’s. He said the company’s roadmap for affordable EVs led him to believe that negative sentiments toward the IPO amount to a scarecrow.

“It’s going to be a minor dilution that you will have to live with as a Renault investor,” Quemener said. “But once that asset is on the market, if it’s on the market for public trading, you would be keen to invest in that asset if you believe in the road map of Ampere. And I think the group has been very convincing.”

Ampere plans to sell 300,000 cars by 2025—the same year it aims to break even—and around 1 million by 2031 with a profit margin in the double digits. Renault finished 2022 with an operating margin of 5.6% while mass-market competitors Stellantis and Volkswagen posted margins of 13% and 8.1%, respectively.

However, publicly listed electric-car makers aiming to garner Tesla’s success have had problems. Polestar, the Volvo Car electric-car spinoff, was valued at $20 billion at the time of its IPO last year but now has a market cap of close to $4.50 billion after missing production targets. U.S.-based Rivian has struggled to keep production up and costs down. It was trading at $78 a share two years ago after its IPO and is now trading at around $17.

Additionally, electric-vehicle adoption in the EU looks slower than it previously did, in part because of high costs, according to a report published by Citi earlier this month. Still, they said that new model launches, cheaper and better battery technology and improved charging infrastructure will drive growth. Ampere has seven models slated for release by 2031.

IPO or not, De Meo said EV adoption will continue because of EU policies against gas-burning cars. EVs accounted for 14% of new EU car sales in October, up from 12% a year ago, according to the European Automobile Manufacturers’ Association.

“You can be skeptical,” De Meo said. “I’m not skeptical. As I said before, the future is for people that are brave enough and optimistic about building the things. And my job is to defend the European industry and to make sure the European industry can be competitive locally.”

The CEO has estimated Ampere’s value at between EUR8 billion and EUR10 billion, while UBS analysts have pegged it between EUR3 billion and EUR4 billion, saying in a research note that Ampere’s valuation is derived from a timeline of 2025 to 2030, which offers too little visibility.

Ultimately, Ampere won’t list on the stock market at any price, CFO Pieton said.

“We’re preparing ourselves for an IPO in the first half of 2024, but will proceed only if we’re comfortable that the market will sustain the right valuation,” he said.

Chief executive of entertainment giant spoke at a companywide town hall in New York

Disney DIS -1.46%decrease; red down pointing triangle Chief Executive Bob Iger told employees Tuesday that the task he faced after returning to the company a year ago was harder than expected, and he played down his previous comments suggesting major asset sales were on the table.

“I knew that there were a myriad of challenges…I must say there were many more of them than I expected,” said Iger, who was interviewed by ABC News anchor David Muir at a companywide town hall at New York’s New Amsterdam Theatre.

Iger said he plans to spend the next year building the “modern version of the Walt Disney Company,” but offered few new details of what that would entail.

Asked about his comments regarding potential asset sales, which Iger made last summer on CNBC, the Disney CEO said a fault of his may be that he likes to “run things up flagpoles to see how they will fly” and “think out loud” to signal to the investment community that the company is open-minded about its future.

“I did not think everyone would run with a story that everything is being sold, which is not the case,” Iger said. No decisions have been made, he added.

Iger was joined on stage by ESPN Chief Jimmy Pitaro, Disney Entertainment co-chairs Dana Walden and Alan Bergman and parks and resorts head Josh D’Amaro.

Iger said that Walden and Pitaro have been examining their businesses, which include ESPN, ABC, Disney Channel and FX, to make them more efficient and assess their strategic value to the company, which he said is still “pretty significant.

Launching a direct-to-consumer version of ESPN that has all the content of the flagship cable network is top on the company’s list of construction projects. Pitaro reiterated that such a streaming service is expected to launch by 2025 at the latest.

Muir asked both Iger and Pitaro about Disney’s search for partners for ESPN. They provided few details beyond saying they have been talking with sports leagues and tech companies.

Iger said partners aren’t mandatory for ESPN’s future plans. “We could go it alone. We are fully prepared to do that. It would be a little more challenging if we did,” Iger said.

Iger spent much of his time explaining the decision to pump $60 billion into Disney’s parks and resorts business, saying, “This is a business where you spend to succeed.” The parks and resorts operations have been showing the biggest growth potential and should be allocated the most capital, he said.

Iger wasn’t asked about Disney’s battle with activist investor Nelson Peltz, whose firm has acquired a substantial Disney stake and is pushing for board seats.

Investment companies seal tie up as investors shun sector

Two investment trusts have agreed to merge their portfolios in an attempt to cut costs and increase liquidity, as the sector struggles with deep share price discounts.

The FTSE 250 £1bn Fidelity China Special Situations trust will absorb the assets of Abrdn’s China Investment Company. The deal will create a £1.2bn trust that will continue to be managed by Fidelity and portfolio manager Dale Nicholls, the companies said in a statement on Tuesday.

Investment trusts have been bulking up in a bid to prop up their share prices, which are trading just shy of the discounts seen at the end of 2008 owing to a combination of higher interest rates and a change to rules covering the way fees are reported.

Those changes have dented trusts’ appeal to investors and prompted warnings that the sector may disappear without government or regulatory action.

The Abrdn trust said: “The board [has] long been working on ways to address . . . the persistent discount at which its shares trade . . . it has become clear that the consensus [among shareholders] is for a merger with Fidelity China with the option of a partial cash exit.”

Abrdn’s trust is trading at an 18.3 per cent discount to its net asset value, and the Fidelity trust is at a 9.7 per cent discount. Both trusts said the merger would lead to cost efficiencies and result in lower charges for shareholders, as well as increased liquidity.

Another merger, between Troy Asset Management’s Income & Growth Trust and STS Global Income & Growth Trust, was also announced on Tuesday.

Investment trusts are publicly listed companies, with four of them, including the £12.1bn Scottish Mortgage Investment Trust, in the FTSE 100. They invest in companies and assets on behalf of investors, and are overseen by a board of directors.

Trusts have historically been a popular vehicle among retail investors, but recent updates to reporting rules over fees has made them appear more expensive than other investments, according to critics.

Trusts were classified as alternative investment funds under EU regulation introduced in 2013. They later became subject to Europe’s Mifid II rules, which required wealth and fund managers to aggregate fund costs and present them as one number to their client, as a percentage of NAV.

The new rules artificially inflate the cost of investment trusts, which are already factored into trusts’ share prices, said Ben Conway, head of fund management at Hawksmoor Investment Management.

“It is misleading as you do not buy the NAV [of an investment trust], you buy the share price. The role of the share price is to discount those ongoing costs,” he said.

Critics say the reporting change prompted investors to sell their holdings in investment trusts at a time when higher interest rates have also dented their appeal in some cases. Trusts in sectors such as commercial property have been hurt as investors have moved their money into bonds as yields have increased.

The average discount of share price to net asset value for trusts hit 16.9 per cent at the end of October this year, narrowly below the 17.7 per cent discount recorded at the end of 2008, according to data from the Association of Investment Companies.

The discounts have led to fund managers, wealth managers and peers to call for a change in the way investment trust fees are reported to investors.

“This is damaging to London as an investment case . . . we could lose a third of the FTSE 100,” said Baroness Bowles of Berkhamstead, who is supporting a private members’ bill tackling the issue introduced in the House of Lords by Baroness Altmann.

Last week the government said the UK financial regulator was considering “interim solutions” to mitigate the impact of cost disclosures on the investment trust sector while the government looks to implement a long-term legislative solution.