TheChek News Flow

Central bank announces short-term lending facility and says it is ready to boost daily bond buying

The Bank of England has unveiled measures to stave off further rushed asset sales by pension funds as the central bank looks to steady UK financial markets before its emergency bond-buying programme ends.

In a statement before markets opened in London on Monday, the BoE said it would allow a broader range of collateral, including corporate bonds, to be pledged at its new short-term funding facility. The central bank also confirmed it would conclude its £65bn bond purchasing scheme as planned on October 14.

The BoE’s latest plans come in the wake of turbulence in UK financial markets following Kwasi Kwarteng’s “mini” Budget on September 23, in which the chancellor announced £45bn in unfunded tax cuts. That ignited a historic sell-off in the UK government bond market, which in turn caused a crisis in the pension industry and prompted the BoE to set up its bond-buying scheme.

The bank said on Monday that it was prepared to increase the size of its daily purchases of UK government bonds in order to “ensure there is sufficient capacity for gilt purchases” before the programme ends on Friday.

The new measures “send a powerful message about the strength of the BoE’s commitment to maintaining stable market conditions,” said Daniela Russell, head of UK rates strategy at HSBC. “I suspect they realise that they have provided a useful circuit breaker, but this problem will take longer to be resolved, so pension funds are still exposed to another surge in yields in the near-term.”

While the central bank can buy a maximum of £5bn in gilts a day during its intervention, over the first eight days it purchased less than £4bn — meaning that it retains significant headroom for additional purchases if needed this week.

The Bank also announced a new short-term lending facility designed to ease strains on pension funds that use liability-driven investing strategies, which are at the centre of the market turmoil.

The sell-off in UK government bonds meant pension funds needed to rapidly sell assets such as corporate debt and property funds to make collateral payments to keep their LDI strategies in place, creating a vicious circle that created strains in the sterling-denominated debt market.

In its announcement on Monday, the BoE said it would allow a broad range of collateral, including corporate bonds, to be used in the new repo facility to “enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations”.

The repo market acts as a vital lubricant in movements of billions of dollars and euros. Banks and investors use the market to find cash for the short term, offering high-quality collateral such as government bonds in return.

Peter Chatwell, head of macro trading strategies at Mizuho, said the new facility would “reduce the need for LDI accounts to force sell to find liquidity, when they can borrow cash versus a wider range of existing collateral from the BoE”. He added that the “liquidity crisis [among funds using LDI] may be better addressed via this facility”.

Morgan Stanley predicts US carmaker has hit its peak in the country

Tesla’s sales in China have hit a new monthly high just as Elon Musk garnered praise from Beijing for proposing to resolve the geopolitical crisis over Taiwan by placing it in a special administrative zone similar to Hong Kong.

The US electric vehicle maker reported sales of 83,000 cars in September, up 8 per cent from the previous month, according to the China Passenger Car Association. The record monthly tally suggested supply chain bottlenecks in the country were easing and upgrades at its Shanghai facility were boosting production.

The strong performance comes at a critical juncture for Musk and his relationship with China. After receiving special treatment from Chinese regulators in the late 2010s, Tesla’s grip on the luxury EV market is being loosened by a clutch of local rivals.

Separately, over the weekend Beijing praised comments Musk made on Taiwan in an interview with the Financial Times. China’s ambassador to the US thanked Musk for the remark, saying in a tweet that the proposal was “the best approach to realising national reunification”.

Beijing has offered Taiwan a “one country, two systems” policy as a route to unification with China. However, Beijing has not ruled out annexing the island by force.

Under the one country, two systems model, Hong Kong was guaranteed a high degree of autonomy, although critics say this has since been eroded by a new national security law for the territory.

Bi-khim Hsiao, Taiwan’s de facto ambassador in Washington, responded: “Our freedom and democracy are not for sale.”

Tesla’s sales data follow a bruising period for the carmaker’s stock, which has fallen almost 16 per cent in October and more than 36 per cent year to date.

Analysts have been monitoring for signs that Tesla’s growth is slowing in China against the backdrop of rising competition and geopolitical tensions.

“We believe Tesla is passing through its ‘peak China’ dependency stage over the next 12 months,” Morgan Stanley analysts said in a recent note. “Tesla China is facing its biggest ever competition in China from domestic Chinese EV companies.”

They added that they expected a “natural dilution” of Tesla’s position in China as the company fell in line with US and EU efforts to reduce reliance on Chinese industry.

Tesla’s September sales were less than half of more than 201,000 vehicles sold by rival BYD, though many of the Chinese carmaker’s models are plug-in hybrid vehicles, which use a large battery in addition to a traditional engine for longer journeys.

Chinese automakers, including Geely, BAIC, SAIC and Changan Automobile, are launching their own premium EV brands. Shanghai-based Nio has also targeted the top end of China’s EV market with luxury models. It sold 10,878 cars in September, a nearly 30 per cent jump year on year.

Tesla is confronting rising geopolitical tensions in China. Musk’s plan to buy Twitter has sparked concern, including from rival tech billionaire Jeff Bezos, that Tesla’s dependence on Chinese manufacturing for about a third of its business exposes him to pressure from Beijing over censorship.

Beijing, which enforces strict online censorship and internet controls, has also sought assurances that Musk’s commercial rocket and satellite business SpaceX — which has been used to provide internet access in Ukraine and Iran — will not be deployed in China.

Travel spending and movie receipts fell during the seven-day-long National Day holiday as restrictions spread

HONG KONG—A renewed wave of pandemic-related lockdowns in major Chinese cities is hampering hopes for a recovery in consumer spending, showing how difficult it is for Beijing to rekindle growth without loosening Covid restrictions.

Official data released in recent days showed consumer spending falling sharply during the seven-day National Day holiday when compared with a year earlier, while a private survey of services activity fell into contraction in September.

Travelers in China made 422 million trips during the National Day holiday between Oct. 1 and 7, down 18% from a year earlier and 39% lower than prepandemic levels in 2019, China’s Ministry of Culture and Tourism said Friday.

Tourism revenues underwhelmed by an even larger margin, dropping 26% from last year to the equivalent of about $40 billion during the holiday, which is typically one of the busiest travel seasons of the year, the official figures showed. Tourism spending was less than half of the level in 2019.

China’s box office, another closely watched measure of consumption, also suffered. Movie revenues fell 66% during the National Day holiday from a year earlier, to the equivalent of about $210 million, according to online ticket service platform Maoyan Entertainment. The result marked the worst box office result for a National Day holiday since 2014, according to OCBC Bank.

On Saturday, the Caixin China Services purchasing managers index, a private gauge of service sector activity, fell sharply to 49.3 in September from 55.0 in August, according to Caixin Media Co. and S&P Global. The decline marked the first fall below the 50 line, which separates expansion from contraction, after three straight months of growth.

Expectations for future service sector activity recorded the lowest reading in six months, noted Wang Zhe, a senior economist at Caixin Insight Group.

“The market was much less optimistic,” he said.

The restrained travel and consumption comes as government officials across China reimpose strict controls on travel ahead of a closely watched Communist Party conclave that will kick off on Oct. 16 in Beijing. Authorities across China have called on residents to minimize intercity travel and cancel unnecessary gatherings, as many locations imposed new Covid testing requirements on visitors.

The fresh signs of weakness add to evidence of the crippling impact from China’s stringent Covid-19 restrictions, dimming growth prospects for the world’s second-largest economy, which is also struggling to limit the damage from a sharp government-induced slowdown in the property sector. An official gauge of consumer confidence is hovering near its lowest level since 1991.

Nationwide, the number of new locally transmitted Covid-19 cases jumped during the weeklong holiday to hit a 50-day high on Sunday, prompting local officials to step up restrictions on the flow of goods and people ahead of the twice-a-decade Communist Party congress.

A new wave of lockdowns swept through some tourism hot spots last week, including northwestern China’a Xinjiang province, home to about 22 million people, where officials suspended passenger trains from entering or leaving. Starting Tuesday, travelers are banned from entering Hohhot, capital of the region of Inner Mongolia, which reported more than 100 new infections on Sunday, the tally highest nationwide.

In Shanghai, which suffered through a punishing two-month lockdown beginning in April, some residential compounds were placed under confinement after two cases were detected, government officials said Sunday. People traveling from high- or medium-risk areas must undergo seven days of self-quarantine in Shanghai. The city’s Xuhui district released information circulars saying that 12 hotels had disobeyed Covid prevention measures. Green fences were also erected on some streets, preventing residents from coming and going, according to photos circulating on social media.

Over the course of the first eight days of October, Shanghai reported 91 new infections, with 34 more cases reported on Sunday.

Investors and economists will be looking closely for any signs that Beijing is dialing back its Covid measures or reining in its growth ambitions at next week’s party congress, where leader Xi Jinping is widely believed to secure a third term in office.

Since September, a string of global institutions, investment banks and research firms have slashed their forecasts for Chinese economic growth this year to 3% or below, a far cry from the roughly 5.5% growth target unveiled by China’s leadership in March.

Last month, the World Bank said that it expects China’s economy to expand by just 2.8% this year, down from a previous forecast of 4.3%. Last week, Washington-based Peterson Institute for International Economics cut its growth projection to 3% from 4.7%, citing Beijing’s unyielding zero-tolerance Covid containment policies and the continuing property market downturn.

“Looking ahead, the Covid strategy will be the single most important factor for consumption recovery,” Citibank economists told clients Sunday.

Arranger banks wary of mopping up shares in event investors shun them

Monte dei Paschi di Siena’s management could begin to explore alternative options to a €2.5bn capital increase planned this month, after some arranger banks signalled their unwillingness to mop up shares in the ailing Italian lender should investors shun the sale.

Chief executive Luigi Lovaglio, a turnround specialist appointed this year by Mario Draghi’s government to revamp and privatise MPS, said in the summer that the Tuscan lender would launch a cash call partially backed by the Italian Treasury to restore capital buffers.

However, over the past two months both domestic and international investors signalled they would steer clear of the share issue. Two bankers in Milan said on Sunday that following a last-minute turn of events they still believed the capital raise was likely to succeed.

The bank has yet to secure large-scale commitments from investors, although French insurer Axa and Anima Holding, an Italian asset manager in which Banco BPM holds a 20 per cent stake, have both indicated their willingness to contribute at least a combined €250mn as a way to strengthen their existing commercial partnerships. Axa and Anima did not respond to requests for comment.

Local media reports said last week that without their commitment the capital raise would not go ahead. The Treasury, which has owned a controlling stake in MPS since a 2017 bailout, can only underwrite an amount, up to €1.6bn, that is proportional to the private investors’ uptake.

“According to the structure of the operation, the Treasury can contribute up to 64 per cent of the capital increase,” said one banker, adding: “For every euro committed by private investors, the Treasury can invest €1.78, so if investors commit €400mn, for example, the Treasury can put in €712mn and the cash call would raise a total of €1.2bn and fall short of the target.”

In order to meet the deadlines to launch the share issue, details of it must be presented to domestic regulator Consob by Wednesday.

According to three people close to the talks, advisers are suggesting that MPS look at alternative routes to raising funds such as a debt-to-equity swap and the potential sale of business units.

Details of the alternative plan are yet to be hammered out and would have to be evaluated by EU regulators. In conversations with banks and investors, Lovaglio has strongly insisted the rights issue should launch on October 17 but analysts, bankers and investors doubt it can go ahead. One other banker said additional commitments from investors would come this week.

Banks including Mediobanca, Citigroup, Credit Suisse and Bank of America have signed a pre-underwriting agreement with MPS. However, they have asked the ailing lender to secure substantial commitments from investors before agreeing to enter an underwriting agreement.

According to several bankers in Milan and four investors in London, investors have little appetite to buy into the rights issue for reasons that go beyond the current negative market environment.

They cited uncertainty over the bank’s privatisation path, its poor performance, its stress test record despite multiple capital increases over the past decade, and potential litigation costs which though reduced, still exist.

“When they put the bank up for sale in 2021 only Apollo and UniCredit entered the data room, which means it wasn’t a very attractive asset to begin with, then UniCredit made additional demands to the Italian Treasury after carrying out the due diligence,” which was a red flag according to one London-based investor.

A voluntary exit plan, which will see more than 4,000 staff leave MPS, is cited by investors as good news for the bank’s cost-saving strategy.

Finance minister Daniele Franco told parliament this year that the capital increase was a prelude to the bank’s privatisation. Italy missed the deadline to privatise the bank last year after a deal with Milan-based UniCredit fell through at the last minute.

The Italian Treasury declined to comment. MPS declined to comment.

Austria files lawsuit against European Commission classification of contentious fuels as climate-friendly

The challenge to an EU system labelling gas and nuclear as “green” investments has gained momentum with a lawsuit filed by Austria against the European Commission.

The Commission is already facing two separate legal challenges from environmental groups — one from Greenpeace and one from a coalition including Client Earth and the WWF — over the classification of the fuels as sustainable for investment purposes.

Austria formally submitted its complaint to the Court of the European Union on Friday, asking for the rules under the EU’s “taxonomy”, or financial classification system, to be quashed.

“We need to safeguard the trust of consumers and investors,” which must be sure that if a product “is labelled green, it’s actually green in content,” said Austria’s minister for climate action and Green politician, Leonore Gewessler.

The inclusion of nuclear and gas in the taxonomy “increases the risk of greenwashing” and of an uptick in investments into projects “that do not help us reach our climate ambition,” she said.

The EU passed a law in July deeming the two controversial fuels as sustainable energy sources, in a system designed to help direct investments into clean-energy projects.

The system is part of a broader package of legislation to support the EU’s goal of reaching net zero greenhouse gas emissions by 2050.

The decision came after months of tense discussions — and as European legislators scrambled to wean the continent off Russian gas and accelerate the shift to renewable energy.

The commission did not originally include nuclear and gas in its proposed legislation for the taxonomy, and only added them in January this year.

Austria and Luxembourg flagged their intention to challenge the law, and Austria, an anti-nuclear country since a referendum in 1978, has been the first to follow through by filing its case on Friday.

The taxonomy “is not a question of energy policy” but a matter of “whether consumers and investors . . . can trust if they have a green investment product,” said Gewessler. Given the EU’s net zero target, “there’s an inherent and quite big risk of stranded [fossil fuel] assets,” she said.

The complaint argues that nuclear and gas energy do not fulfil the requirements of the taxonomy because green technologies must not cause significant environmental or climate-related harm.

It argues that certifying gas as green could delay Europe’s transition to clean energy by encouraging further investment in the fossil fuel.

The complaint also argues that the last-minute inclusion of the fuels in the taxonomy is unlawful, since “procedural requirements, such as a required impact assessment, public consultation, and timely consultation of member states, were insufficiently met”.

One senior European development finance official said there was a role for new gas infrastructure under “limited circumstances” but “we would not claim it is green”.

While activists and others have pushed back against the classifications, Brussels has said that only gas and nuclear-related activities that meet certain criteria may be labelled “green”.

The conditions include that the fuels be used to move away from dirtier fossil fuels such as coal, and that gas projects limit their emissions to a certain intensity.

Analysts have questioned how seriously the EU will be taken at the UN COP27 climate summit in November given the inclusion in the taxonomy of gas, and the continent’s scramble to find alternative gas supplies to replace those no longer being imported from Russia.

Gewessler said she hoped that the taxonomy would not make COP27 negotiations harder, adding that the global north had a “responsibility” to support countries in the global south to transition to cleaner energy sources.

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