FT : South Africa’s Eskom hit by nuclear woes

South Africa’s Eskom hit by nuclear woes
Delays to refurbishment at flagship plant add to fears over supply

South Africa’s Eskom is struggling to complete refurbishment of its flagship nuclear facility, raising doubts about its future and threatening even worse energy blackouts in the continent’s most industrialised country.

South Africa’s homes and businesses are routinely left without power for up to 10 hours a day as years of under-investment have left electricity monopoly Eskom struggling to meet demand. While it mostly relies on coal-fuelled power, Eskom is hoping to extend the lifespan of the 40-year-old Koeberg station, the only nuclear plant in Africa, by 20 years. The licence is due to expire in 2024-2025.

André de Ruyter, Eskom’s chief executive, told South African legislators this week that Koeberg’s extension project had been “extremely poorly managed” with delays and escalation of costs beyond an estimated R20bn ($1.1bn). The utility declined to give a new figure.

On Friday, President Cyril Ramaphosa’s government appointed a new board for Eskom.

Pravin Gordhan, the minister overseeing the utility, said that Eskom’s overall generating performance “is just not good enough”, but added that Koeberg’s extension was still on schedule. “Clearly there has been some mishaps around some of the processes . . . but I’m informed that this is well on its way,” Gordhan added.

Koeberg generates about 5 per cent of South Africa’s electricity but will be central to the country’s energy security as Ramaphosa’s government faces a two- to three-year wait for ambitious plans for private renewable supply to come to fruition.

“In South Africa right now, there is not very much else that is available if Koeberg does close [in 2024-2025],” said Hartmut Winkler, professor of physics at Johannesburg university and an analyst of South Africa’s nuclear sector.

International Atomic Energy Agency observers gave the green light this year to what was considered the routine extension of what has long been Eskom’s most reliable plant. “If everything had gone to plan, they would have had the upgrades finished a year before the licence runs out,” Winkler said. “They should be telling people exactly what is going wrong.”

Eskom did not respond to requests for comment on what has been the problem with the lifespan extension, or a recent exodus of nuclear personnel, including Eskom’s chief nuclear officer and Koeberg’s acting general manager.

About 85 per cent of Eskom’s supply is from decades-old coal plants and two newer ones, Medupi and Kusile, that constantly malfunction. “They break down as fast as they are repaired,” Winkler said. “That is really the problem. There might be periods where we go whole months without any load shedding [power cuts], but also where suddenly we go into stage six load shedding. That’s the pattern we can expect for the next three years.”

Any further delays to renewing Koeberg or completing the still unfinished Kusile plant “will further exacerbate load shedding in 2023 to catastrophic levels exceeding three times those experienced in 2021,” Meridian Economics, an energy consultancy, warned this year.

Elsewhere in Africa, this year Egypt began construction of a nuclear power station with Russian assistance, and the IAEA approved a plan for Uganda to build east Africa’s first plant. In South Africa, Gwede Mantashe, the energy minister, has advocated building a new 2,500 megawatt nuclear plant in the Eastern Cape by 2024.

Previous corruption scandals have cast a shadow over nuclear procurement. Jacob Zuma, the former South African president, wanted to construct nearly 10,000 megawatts of nuclear power with Russian help at an estimated cost of R1tn. South African courts ultimately blocked his plans.

“I just don’t see [new nuclear power in South Africa] ever taking off,” Winkler said. “We have seen Medupi and Kusile, which are the main reasons Eskom is in such financial difficulty. I don’t see how building a new nuclear plant is going to lead to anything better than that.

>>> Genetically engineered, cancer-killing herpes virus may be able to fight tum

Genetically engineered, cancer-killing herpes virus may be able to fight tumors

The notion of using viruses to treat cancer is old. However, using genetically modified viruses to treat cancer started to be further investigatedTrusted Source in the 90s.
Different viruses have different properties and researchers are investigating the effect of different transgenes in this search.
In a small trial that has not yet been published, a small number of patients with advanced cancers have seen their cancer progression halted or even cured with a genetically engineered version of the herpes virus.
Genetically engineering viruses to create an injection that can treat cancer is the aim currently being pursued by a number of different laboratories around the world.

Referred to as oncolytic viruses, these viruses replicate in cancer cells, rather than healthy cells and then kill them by making them burst. When the cells burst, they release tumor antigens and proteins which the body recognizes as foreign, which then triggers the immune system to attack the tumor cells.

Not only does this kill the cancer cells, but it can also help to reduce cancer recurrence as the immune system now recognizes these antigens and protein biomarkers and knows to attack cells containing them.

Oncolytic viruses have both natural cancer-killing properties, and additional properties from being genetically engineered to include genes that have an immune effect. Viruses that have been used as oncolytic virusesTrusted Source include the herpes simplex virus, adenovirus, pox viruses, and Coxsackievirus, with genetic modification used to introduce transgenes to enhance their ability to kill cancer cells.

The first oncolytic virus therapy, T-VEC, which is based on the herpes simplex virus, was approved by the FDATrusted Source in 2015 after a phase III trial showed it was effective against melanoma.

Scientists are also exploring further oncolytic viruses such as Vaxinia, a genetically modified smallpox vaccine virus, designed to be used with any cancer, which entered Phase 1 of a clinical trial following promising results in animal models in June 2022.

Most recently, results from the first part of a phase 1 trial of an injection based on a genetically modified herpes virus, known as RP2, were announced at the 2022 European Society for Medical Oncology Congress (ESMO) by researchers from the Institute of Cancer Research, London, and the Royal Marsden NHS Foundation Trust.

The testing had been funded by the company which produces RP2.

Dr. Grant McFadden, director of the Biodesign Center for Immunotherapy, Vaccines, and Virotherapy at Arizona State University, who is currently working on a cancer treatment using the myxoma virus, explained to Medical News Today that the information provided by this testing in humans was useful, as it was difficult to obtain information about the effect of the body’s immune response from animal models.

“There are really two phases with the oncolytic virotherapy. The first phase is the virus infecting and killing cancer cells. But that’s just the first phase. If that’s the only thing that happens, you can never kill the cancer cells and they’ll always come back,” he said.

“The second phase is the immune system responding to the virus infection of the tumor cells. And the goal is to have the immune system see not only the virus, but also what we call tumor antigens that have been exposed by the virus replication in the tumor cell. But when both things happen, the potential for long-term regression of the cancer exists even after the virus has been cleared by the immune response. So it’s that that second immune phase is highly critical to long-term tumor aggression,” he further explained.

“And that phase is unique to people in human immune system systems. That’s why we’re dependent upon human clinical data to evaluate how well the virus is actually going to work for the long-term,” he added.

Halting cancer growth
In this early-stage study, scientists monitored the effects of an injection injected directly into the tumor in 39 patients.

Alongside destroying cancer cells, the virus used in the treatment has had genes inserted to make it produce molecules called GM-CSF (similar to T-Vec), in addition to GALV-GP-R, which have been shown to have anti-tumor properties and anti-CTLA-4 antibody-like molecule, which helps to take the “brakes off” the immune system.

The results showed that of the nine patients who received the viral injection on its own, one experienced their tumor disappear completely and remained cancer free 15 months later. Two other patients with oesophageal cancer and uveal melanoma experienced their tumors shrink. Eighteen and 15 months later, respectively, their cancers had not progressed.

A further 30 patients were given the injection alongside the cancer immunotherapy drug nivolumab, which works by activating immune cells which attack cancer cells.

Of these patients, seven saw their cancer’s growth halt or shrink, and six of these patients experienced no cancer progression 14 months after treatment.

All patients involved in the trial had very advanced cancers which had already failed to respond to other treatments or they were not eligible for existing treatments. Biopsies showed more immune cells around the tumors and increased expression of genes that could help kill cancer cells.

The team hopes to identify the patients it should test the therapy on in phase II trials, said study leader Professor Kevin Harrington, professor of biological cancer therapies at The Institute of Cancer Research, London, and consultant oncologist at The Royal Marsden NHS Foundation Trust.

Using different viruses as platforms
Prof. Harrington told Medical News Today in an interview that the herpes virus really offered the “full package” as a candidate for genetic modification to create such treatments.

“There’s no question that, to my mind, the virus strain that has the strongest credentials for use in epithelial tumors, is the herpes virus platform. The virus infects epithelial tissues extremely effectively, it is easily genetically manipulable. It has a relatively large capacity for carrying genes that you want to put into the virus, so is a good vector vehicle for those genes,” he said.

He explained that there were also approved drugs available that could treat a herpes infection if the virus ended up replicating in places it shouldn’t, though that had not happened in testing.

“Many of the other viral platforms are either limited in the scope of cells that they infect, have relatively small gene packaging capacities, are indeed are not genetically manipulable at all, with simple means,” he added.

Dr. McFaddent said a limitation of using herpes viruses as the basis for these treatments was that they have to be injected directly into the tumor, whereas it was hoped that treatments based on pox viruses could be provided intravenously.

“No one really knows at this point, what is the ideal platform for either intratumoral injection or intravenous injection? So that this will only be determined by future clinical trials. And as I said, the current data is a step in the right direction,” he added.

CrunchBase : The Week’s 10 Biggest Funding Rounds: Smaller Dollars Across Indust

The Week’s 10 Biggest Funding Rounds: Smaller Dollars Across Industries
Rounds were not that big this week, as only a handful were $100 million or more. Much like last week, investment was all over the board, as storage, grocery and energy startups led the way in what was a pretty down week.

1. Wasabi Technologies, $125M, storage: The cloud services sector is dominated by the big tech names we all know. Boston-based Wasabi would like to change that, and just this week became a unicorn as it travels down that road. The “hot” cloud storage company raised $125 million in Series D equity led by L2 Point Management at a valuation of $1.1 billion. The company also expanded its existing debt facility to $125 million. The startup claims it can offer its hot cloud storage—which refers to data that is readily available—at a fifth of the price of the big guys and now has 40,000 customers in over 100 countries. The cloud data market is big, but dominated by incumbents not likely to let new players in. We’ll see if Wasabi can heat things up. Founded in 2015, the company has raised more than $535 million, according to Crunchbase.

2. GrubMarket, $120M, grocery: It was reported this week that San Francisco-based GrubMarket raised $120 million from new investors including General Mills’ venture arm. The company develops software and has an e-commerce platform that connects farmers and wholesalers with customers. It’s been quite busy in the last few years, making 60 acquisitions in the last four years and just last year raised $200 million at a $1.2 billion valuation. Per the story, GrubMarket now has an annual run rate of about $1.5 billion. Founded in 2014, the company has raised approximately $500 million, according to Crunchbase.

3. Moxion Power, $100M, energy: Sustainable and cleaner alternatives for power has been a big theme this year for investors. So far this year, the cleantech industry has seen 17 funding rounds worth $100 million or more, according to Crunchbase. This week included one of those rounds, as Richmond, California-based Moxion Power locked up a $100 million Series B led by Tamarack Global. Moxion manufactures mobile batteries and energy storage to enable last-mile electrification in sectors that include construction, transportation, events and entertainment, film production and telecommunications. Although venture capital in general has slowed this year, cleantech is on pace to see a slight uptick from last year, according to Crunchbase. Last year, VC-backed cleantech startups saw $7 billion of investmentment, while already this year investors have poured more than $6.6 billion into the sector. Founded in 2020, the company has now raised just more than $113 million, according to Crunchbase.

4. Strike, $80M, payments: While digital payments can be convenient, they can also be slow and cluttered with fees. Chicago-based Strike, built on Bitcoin’s Lightning Network, is looking to allow customers to avoid those hassles. The Lightning Network is known for fast transactions and could be a solution to Bitcoin’s scalability issues. Strike is looking to leverage that and make cheaper, faster, global payments a real thing for everyone. To that end, the company raised an $80 million funding round led by Ten31, its first funding round, according to Crunchbase. The company will look to use that new cash to attract large merchants, marketplaces and financial institutions to its payments platform.

5. Ventus Therapeutics, $70M, biotech: Waltham, Massachusetts-based Ventus Therapeutics announced an exclusive license agreement with Novo Nordisk and received an upfront payment of $70 million in cash as part of the deal. Under terms of the agreement, Novo will help develop and commercialize therapies from Ventus’ portfolio. Ventus has developed a platform to identify and develop small molecule therapeutics for a broad range of diseases. Ventus will be eligible to receive up to an additional $633 million in potential milestone payments as well under the agreement. Founded in 2019, the company has raised $370 million, according to Crunchbase.

6. Sitetracker, $66M, SaaS: Montclair, New Jersey-based Sitetracker, a developer of deployment operations software servicing critical infrastructure, closed a new round of equity and debt financing totaling $96 million.The round includes $66 million in equity and was led by Energize Ventures. Sitetracker has raised nearly $200 million since 2013, per the company.

7. Workstream, $60M, human resources: San Francisco-based Workstream extended its Series B funding round with an additional $60 million, bringing the total Series B to $108 million. The extension was led by GGV Capital. The company had developed a mobile-first hiring and onboarding platform for the deskless workforce. Founded in 2017, Workstream has raised $118 million to date, according to Crunchbase data.

8. (tied) Flatfile, $50M, cloud data services: Denver-based Flatfile, a AI-assisted data exchange platform, locked up a $50 million Series B funding led by Tiger Global. Founded in 2018, Flatfile has raised $100 million, per the company.

8. (tied) Unravel Data, $50M, big data: Palo Alto, California-based observability platform startup Unravel Data closed a $50 million Series D led by Third Point Ventures. Founded in 2013, the company has raised $107 million, according to the company.

10. Candle Labs, $48M, blockchain: Santa Barbara, California-based blockchain technology platform Candle Labs raised a $48 million funding round. Lead investors in that round were not disclosed. The startup develops software for decentralized services in sectors like finance.

Big global deals
Rounds were on the small side this week for U.S.-based startups. However, there was a large global deal.
  • Saudi Arabia-based Almosafer, a flight booking firm, raised a $1 billion venture round.

WSJ : ConEd Agrees to Sell Clean Energy Business for $6.8 Billion to RWE

ConEd Agrees to Sell Clean Energy Business for $6.8 Billion to RWE
German energy company says the acquisition will nearly double its U.S. renewable energy position

Consolidated Edison Inc. ED -2.17% has agreed to sell its renewable energy business to German energy company RWE AG RWEOY -1.27% for $6.8 billion, the companies said Saturday.

The deal nearly doubles RWE’s renewable energy portfolio in the U.S. and will make it the second-largest solar operator in the country, the company said in a statement. ConEd’s portfolio includes more than 10 gigawatts of renewable projects in operation or under development.

“The unique combination of complementary portfolios in onshore wind, solar and batteries creates one of the leading renewable companies in the U.S. market,” RWE Chief Executive Markus Krebber said in a statement.

ConEd, an electric and natural-gas utility serving about 10 million people in New York, earlier this year indicated its intent to sell its renewable energy business as it looks to invest heavily in its regulated utility operations.

The company said it would now forgo a plan to issue up to $850 million in equity this year and withdrew its guidance for 2023 and 2024.

“The transaction we announced today will allow Con Edison to sharply focus on our core utility businesses and the investments needed to lead New York’s ambitious clean energy transition,” CEO Timothy Cawley said in a statement.

A number of U.S. utilities have sold competitive generation portfolios in recent years as they work to improve earnings and make major infrastructure investments. Public Service Enterprise Group Inc., which serves 2.3 million electric customers and 1.9 million gas customers in New Jersey, earlier this year sold a fleet of conventional power plants and last year sold a portfolio of solar farms with the intent to focus more closely on its regulated utility business.

Barrons : FedEx’s Economic Warning Sank This Stock. Now It Could Be an Opportuni

FedEx’s Economic Warning Sank This Stock. Now It Could Be an Opportunity.

FedEx ’s unexpected profit warning may have delivered a buying opportunity for shares in Deutsche Post DHL Group .

The global package-delivery and supply-chain company’s stock (ticker: DPW.Germany) was caught up in its peer’s gloomy economic outlook, slipping to 30.51 euros ($29.29), 15% below where they were before FedEx’s warning in mid-September. Those fears may have been overdone, however, as Deutsche Post said in August that it would meet its full-year earnings forecast range under a span of economic scenarios.

CEO Frank Appel reiterated that stance in an emailed statement to Barron’s: “While much remains uncertain in the coming months, we have reconfirmed our Ebit guidance for 2022 of €8 billion (+/-5%).” He added that even if the global economy falls sharply in the coming months, the company still expects €7.6 billion to €8 billion.

In contrast, FedEx (FDX) withdrew its full-year guidance entirely as it warned that “macroeconomic trends significantly worsened” later in the June quarter.

So, despite looming concerns over the global economy, Deutsche Post’s recent decline—down 45.5% this year—means that the shares are worth another look. The stock is cheap, for starters, trading at eight times forward earnings, compared with an average of more than 11 times among its competitors.

There’s also the chance of an upside surprise for full-year earnings. If business performance is maintained at current levels in the second half, Deutsche Post said earnings would top €8.4 billion ($8.15 billion), beating its own forecasts.

Stifel analyst Johannes Braun described that tidbit as a “guidance raise in disguise.” He has a Buy rating on the stock with a target price of €70, implying a 129% gain to a recent price of €30.51. Analysts covering the stock don’t see that earnings scenario as being farfetched, forecasting earnings before interest and taxes, or Ebit, of €8.5 billion, per the FactSet consensus.

It’s worth noting that Deutsche Post expects business-to-consumer, or B2C, volumes to slow in the second half as trends normalize. In another of its scenarios for a gradual economic slowdown, earnings would still be in the upper half of its range. That wouldn’t be a disaster and doesn’t justify the stock’s recent dips.

The company also has an ace in the pack—its DHL Express unit. The business has about a 40% share of the premium cross-border deliveries market. DHL Express has a presence in more than 220 countries and territories worldwide and operates more than 320 dedicated aircraft across its network.

Newsletter Sign-up
Review & Preview
Every weekday evening we highlight the consequential market news of the day and explain what's likely to matter tomorrow.

PREVIEW
SUBSCRIBE
The Express segment’s revenue grew 17%, to €13.4 billion, in the first half of 2022, accounting for close to 30% of total revenue. Analysts see Express’ full-year revenue reaching €24.5 billion, or 13% annual growth. The company’s air, ocean, and land freight division was the biggest revenue driver in the first half, and although the high freight rates of earlier in the year are likely to normalize, it is still on track for a strong year.

“Deutsche Post DHL remains the most structurally attractive business among the larger names,” wrote J.P. Morgan analyst Samuel Bland in a note. That’s mainly down to the Express business, he added. While the B2C part of Express will probably struggle in the next year, the long-run outlook is still positive, he said. He has a Buy rating and a target price of €52.50.

Deutsche Post is popular among analysts who cover the stock, with about 83% rating it as Buy. The average target price of €56.39, is an 85% jump from recent prices. Deutsche Bank raised its target to €43 from €40 in September, saying the stock is “one for the long term—buy any dips.”

A dip has come around and investors should take a closer look.

Barrons : Lithium Demand From EVs Is Strong. Shortages Will Keep Prices High.

Lithium Demand From EVs Is Strong. Shortages Will Keep Prices High.

Lithium prices have tripled in a year, and the chemical element, which is used in batteries for electric vehicles, faces a long-term supply shortage.

The increase “is largely due to increasing demand for electric vehicles and the inelastic nature of supplies,” says Alec Lucas, research analyst at Global X. Bringing new production capacity online can take three to five years or more, “for studies, permitting, capital raising, and capital expenditure before any lithium is produced.”

The August reading for the lithium price index, which is tied to the global weighted average price for lithium carbonate and hydroxide—two primary lithium chemicals—stood at 1,024.9, gaining 307% year over year, and up 122% so far this year, according to data from Benchmark Mineral Intelligence.

Cameron Perks, senior analyst, lithium, at Benchmark Mineral Intelligence, believes “we are already in a supply shortage, as evidenced by current and sustained high prices.” Benchmark’s battery-grade lithium carbonate price within China has climbed to just over $70 per kilogram from just below $19 a year ago, he says. “It’s fairly simple really—there just isn’t enough lithium available.”

“Considering it can take over a decade from mine to discovery, there is naturally a lag,” Perks says. “Eventually, investment will allow supply to catch up, but this will take time,” he says.

For 2022, supply and demand appear to be balanced. Lithium chemical supply is forecast at 671,782 metric tons of lithium carbonate equivalent this year, with demand forecast at 670,406 metric tons, according to an August report by Alice Yu, a senior analyst at S&P Global Commodity Insights. That points to a surplus of 1,376 metric tons, and compares to an estimated deficit of 4,429 metric tons in 2021, the report said.


Uncredited
Battery applications are driving about 75% of lithium demand in 2022, and battery demand is primarily driven by EVs and grid energy storage, says Tony Fusco, president of Blue Horizon Capital, the firm behind the Blue Horizon BNE exchange-traded fund (ticker: BNE), which provides exposure to the new energy economy, a term which refers to a transition from fossil fuels to renewable energy sources.

Whether supply can keep up with demand next year is not the issue, says Fusco. “The gap widens as we approach 2030.”

The Biden administration plans to make half of all new vehicles sold in 2030 zero-emissions vehicles. “Clean energy is at an inflection point, creating long-term investment opportunities,” says Charl Malan, senior analyst for the VanEck Natural Resources Equity Strategy. Globally, sales of electric cars doubled in 2021 to a record of 6.6 million, according to the International Energy Agency.

China and Europe should drive global EV demand in the near term, says Malan, while Australia and Chile are “in the front row” regarding lithium supply and reserves.

In China, the EV market is the largest in the world. China maintains “dominant market shares in lithium chemical processing, cathode and anode production, and lithium-ion cell manufacturing—industries which all contribute to demand for raw lithium, says Global X’s Lucas.

For the “next several years, the inelastic nature of lithium supply simply will not be able to keep up with the projected increases in demand for EVs,” he says, though supply dynamics may stabilize around 2025 or 2026, as new capacity has a chance to enter the market.

Lucas believes it is a “good time to invest in the lithium market given that the long-term growth prospects for [EVs] and energy storage remain strong, and both technologies will likely require lithium for the foreseeable future.”

Barrons : U.K. Might Look Cheap, but It’s Hardly a Bargain Yet

U.K. Might Look Cheap, but It’s Hardly a Bargain Yet

It was a strange way to launch a new monarchy and a new government.

The immediate antecedents to the multiple crises now gripping the United Kingdom go back years—to the 2008-09 financial crisis, the weakening of the pound sterling, austerity budgets, Brexit, the pandemic, and the fall of Boris Johnson.

So, it was never going to be easy for a new Tory government led by Prime Minister Liz Truss. But her decision to provide a massive subsidy to help consumers pay for spiking energy costs, and then to offer the largest tax cuts since 1972, threatened to drive inflation higher and resulted in the pound plunging, government debt yields rising, and the Bank of England intervening in the bond markets to save a pension system stuffed with gilts.

And those are just the immediate economic problems. The Truss government also faces restiveness in Scotland and Northern Ireland, tough negotiations on trade with the European Union, chronic productivity shortcomings, and decades of economic stagnation. Not to mention the war in Ukraine and an energy crisis.

Which raises the question: Is it time to buy U.K. yet?

The answer isn’t an easy one. Investible assets, from blue-chip companies to prime real estate, have grown relatively cheaper in the U.K., particularly if you’re paying in dollars, which have strengthened as the pound has weakened. Blackstone BX –0.90% (ticker: BX) CEO Steve Schwarzman recently paid $85.5 million for a 2,500-acre historic property in Wiltshire. As Bloomberg noted, the property would have cost $110 million last year, purely on a currency-exchange basis.

Jefferies global equity strategist Sean Darby thinks many U.K. companies are healthy, and a weaker pound makes them likelier to attract attention as investments or acquisition targets.

In fact, some U.K. stocks, many of which have large international interests, have held up despite the turmoil. The best performer on the blue-chip FTSE 100UKX +0.18% index this year has been defense contractor BAE Systems BA –4.27% (BA.UK), up about 44% in local terms. Not surprisingly, Shell SHEL +0.22% (SHEL.UK) and BP BP +0.24% (BP.UK) have benefited from higher energy costs. They dodged a bullet when Truss ruled out a windfall profits tax on energy companies.

The FTSE 100 is down 6.65% this year in local currency and 23% in dollar terms. The only time in the past 20 years that the iShares MSCI United Kingdom exchange-traded fund’s (EWU) price/earnings ratio—8.5—was lower on a monthly basis was during the financial crisis of 2008-09.

“Sterling and many British corporate assets may now be cheap enough to discount all but the most catastrophic outcomes,” wrote Anatole Kaletsky, an analyst at Gavekal, in a note. “Modest speculative investments on British assets may therefore be worthwhile.”

But the recent moves by the government threaten to worsen an already fragile fiscal and macroeconomic situation. Contradictory forces have been unleashed, making uncertainties greater. The government plans a strongly inflationary program but hasn’t said how it would be funded, and initially resisted an independent cost analysis by the Office of Budget Responsibility. On Friday, Truss and Chancellor of the Exchequer Kwasi Kwarteng met with the head of the OBR, which will conduct the analysis.

Meanwhile, to deal with inflation, the Bank of England will have to raise interest rates, a contractionary policy that might crash a housing market ultrasensitive to mortgage rates, and send the rest of the economy spiraling down. And a rare rate hike between BOE policy meetings might spook the markets or leave them wanting more.

“We’d caution against fighting fire with fire,” says Nomura economist George Buckley. “Raising rates by more than is warranted by the inflation outlook to deal with higher market yields and lower sterling is likely to backfire.”

This is not a pretty picture. “The U.K. had an excellent reputation, and it’s in danger of losing that extremely quickly,” says Campbell Leith, professor of macroeconomics at the University of Glasgow. “It’s unprecedented.”

Of course, the government could backtrack on tax cuts, but that might be political suicide for Truss, after having campaigned for the prime minister’s job on promises to ditch economic orthodoxy and seek radical solutions. Despite being scolded by everyone from the International Monetary Fund to former U.S. Treasury Secretary Lawrence Summers, Truss will hold fast, early signs indicate. She insists that she’s making difficult decisions to strengthen growth.

If Truss does stick to her guns, she and Kwarteng may be able to placate markets by announcing fiscal rules for the years ahead, says Nomura’s Buckley. This would mean detailing how the government will pay for tax cuts and how it will reduce debt in the long term. But Truss might find it difficult to push through more reforms. Not only would she risk another market backlash, but also she could face opposition from her own MPs, worried about their chances for re-election if the economy melts down. One poll last week showed Labour with a 33% favorability lead over the Tories.

The least likely scenario is a currency intervention to prop up the pound, which has dipped to a record low of $1.03; it was $2 in 2007. Duncan Weldon, an economist and the author of the book Two Hundred Years of Muddling Through, an economic history of Britain, says that the U.K. not only lacks the reserves to get far with such an effort, but also the experience of being forced to withdraw from the European Exchange Rate Mechanism in 1992—the last time the government tried to boost the currency with purchases—has left scars.

That was the notorious Black Wednesday, when currency traders, including George Soros, made billions by shorting sterling at the government’s expense. Ironically, getting booted from the ERM ultimately helped the U.K. economy, which went on to experience 16 years of economic expansion that ended only in 2008.

The standoff can end in only one of two ways, says Leith. The first is that the government convinces markets that Truss’ policies are sustainable. While she’s politically unable to backtrack, she might opt to raise other taxes to cover shortfalls and reduce the need for more borrowing. That might ease the need for more BOE rate rises. The second is that the BOE allows inflation to run hot, sacrificing its independence. “If the Bank of England helps out by softening monetary policy, then that’s going to be painful,” he says. “That’s not the best way of resolving this, but it would resolve it.”

In an interview with Barron’s this past week, Raghuram Rajan, a finance professor at the University of Chicago and former head of the Reserve Bank of India, noted the buildup of stresses in institutions and politics of countries like the U.K. “The differences between industrialized and emerging markets was that politics was much worse in emerging markets, with more conflicts and less consensus on direction,” he said. “Now we have industrial countries that have more conflicts of policy direction.”

Stephen Cucchiaro, CEO and chief investment officer of 3EDGE Asset Management, a global investment firm based in Boston, thinks it’s too early to get in. “At some point, we expect the U.K. market to outperform the U.S.,” based on the former’s low valuation. “We’d first want to see a sustainable recovery in the bond and currency markets.”

Barrons : Junk-Bond Yields Top 8%. It Could Be a Good Time to Buy.

Junk-Bond Yields Top 8%. It Could Be a Good Time to Buy.

High-yield bonds are finally living up to their name after the broad selloff in fixed-income markets this year.

Better known as junk, the $1.5 trillion sector looks appealing, as yields have risen to an average of 8.8% from 4.4% at the start of 2022, according to the ICE BofA US High Yield Index. Junk debt offers an alternative—or supplement—to stocks.

Junk bonds aren’t without risk. The ICE index had a negative total return of 12.6% in 2022 through this past Thursday, though that’s better than the 20% decline (including dividends) of the S&P 500 index. And many investors understandably balk at buying debt of leveraged companies heading into a potential recession.

“Avoid junk bonds and junk equities,” warned Ariel Investments’ portfolio manager Rupal J. Bhansali, a Barron’s Roundtable member, at MarketWatch’s Best Ideas in Money conference on Thursday. “Risk assets” like junk, she said, aren’t the place to be now.

A counterargument is that junk-bond math looks pretty good at current levels. The yield gap between junk debt and risk-free Treasuries has widened to five percentage points from three points at the start of 2022, based on the ICE index. Now, it would take a default rate of 8%, coupled with a bond recovery rate of just 40%, to effectively match the yield on Treasuries (8% times a loss rate of 60% is nearly 5%, the current spread of junk to Treasuries). The market overall appears to be in good shape, with the default rate running below 1%, although likely to head higher.

One underappreciated plus is that more than half of the market now consists of double-B-rated issues, the highest junk rating, from solid companies such as Charter Communications (ticker CHTR), Alcoa (AA), and Ford Motor Credit, the auto maker’s finance arm. Just 10% of the market is in the most speculative triple-C category.

“Most companies should be able to withstand a soft recession. Companies took advantage of historically low rates to refinance debt and have padded their balance sheets with liquidity,’ says Dan DeYoung, co-manager of the Columbia High Yield Bond fund (INEAX). “The lower interest burden coupled with pushing out near-term debt maturities have given most high-yield companies increased financial flexibility to navigate an economic slowdown.”

The new-issue market is quiet as speculative companies balk at rates needed to attract investors. A high-profile financing for the leveraged buyout of software maker Citrix Systems (CTXS) was done recently at 10%. Royal Caribbean Group (RCL) sold $2 billion of debt on Thursday that included 9.25% bonds due in 2029. Other big junk deals waiting in the wings will finance the buyouts of Nielsen Holdings (NLSN) and Tenneco (TEN). Companies might not like those yields, but investors should.

Investors can play junk bonds through open-end mutual, closed-end, or exchange-traded funds, and individual issues. There is also another $1.5 trillion of so-called leveraged loans, which are privately issued senior obligations sold to institutional investors. That market also has funds and ETFs.

Many investors like the liquidity of junk ETFs, such as iShares $ iBoxx High Yield Corporate (HYG) and SPDR Bloomberg High Yield Bond (JNK), which hold some of the largest issues and yield about 8%. The VanEck Fallen Angel High Yield Bond ETF (ANGL), which buys corporate debt that was once investment grade, is an alternative that holds bonds from issuers like Las Vegas Sands (LVS) and Royal Caribbean. The fund’s performance has bested the two larger junk ETFs in recent years.

There’s a case to be made for active management in the junk market, where astute investors can add value. Closed-end junk funds offer higher yields than open-end funds and ETFs, thanks to leverage, which results in greater price volatility. “We believe there are great opportunities,” says Eric Boughton, co-manager of Matisse Discounted Bond CEF Strategy (MDFIX), which buys discounted closed-end bond funds in many sectors, including junk and municipals.

He says junk yields are attractive and closed-end funds are a cheap way to play the sector because the average fund discount to net asset value is 9%, versus 5% in the past two years.

The BlackRock Corporate High Yield fund (HYT), the largest junk closed-end fund at $1.2 billion, trades around $9 a share, a 9% discount to net asset value. It yields over 10%. Nuveen Credit Strategies Income (JQC), which buys leveraged loans, trades around $5, a 14% discount to NAV, while yielding 9.5%.

Leveraged junk closed-end funds have negative returns in the high teens this year, but if the market rallies, they could rise smartly.

Even individual bonds look attractive. Columbia’s DeYoung is partial to debt of American Airlines Group (AAL) and Uber Technologies (UBER). He favors a $3.5 billion issue from American backed by its AAdvantage program. Those 5.5% bonds due in 2026 now yield 8%. DeYoung says they’re safe, given the value of the mileage program and its importance to American. Uber, the big ride-sharing company, was profitable by one measure in the second quarter, which lifted its stock by over 30%. Its 4.5% bonds due in 2029 yield about 7%.

It’s not easy for retail investors to buy individual junk bonds, because many are issued as private placements under Rule 144A and available only to institutions (retail buyers can purchase some deals).

Barron’s has written about the high yields of “busted” convertible bonds, often issued by formerly popular growth companies, such as Peloton Interactive (PTON), Wayfair (W), and MicroStrategy (MSTR). These trade at steep discounts to their face value and carry yields to maturity of 10% or more. Peloton’s zero-coupon convertible due in 2026 trades for 67 cents on the dollar and yields 12%, while Wayfair’s 0.625% issue due in 2025 fetches 70 cents and yields more than 12%. Bitcoin owner MicroStrategy’s zero-coupon bond due in 2027 trades under 50 cents on the dollar and yields 18%. Most convertibles lack ratings and probably would be junk grade if they had them.

There is plenty to choose from now in the junk market.

FT : Outflows from emerging market bond funds reach $70bn in 2022

Outflows from emerging market bond funds reach $70bn in 2022
Investors head for exit as rising rates in big economies and strong dollar hit sentiment

Investors have withdrawn a record $70bn from emerging market bond funds this year, in a sign that soaring interest rates in advanced economies and the strong dollar are heaping pressure on developing countries.

Investors took $4.2bn out of EM bond funds in the past week alone, according to an analysis by JPMorgan of data from EPFR Global, a fund flow monitor — bringing the annual outflows to the highest level since the US bank began recording the data in 2005.

The investor flight underscores how emerging markets are facing mounting risks from surging interest rates in developed markets, which make the typically high yields on EM debt look less attractive. Powerful gains in the greenback also make it more expensive for EM countries to service dollar denominated debt and increase the cost of importing commodities, which are often priced in the US currency.

JPMorgan in September raised its forecast for EM bond outflows in 2022 to $80bn, having previously forecast $55bn.

Milo Gunasinghe, emerging market strategist at JPMorgan, described the outflows as relentless, with just seven weeks of net inflows in the year to date. They have also been broad, with investors pulling money from funds holding both local and foreign currency bonds.


Rather than weighing the relative risks of currency exposure, investors are simply getting out. It marks a sharp turnround: flows were positive into both types of bond funds for each of the previous six years, at a combined average of more than $50bn a year.

Gunasinghe said rate rises and bond sales by central banks, which have markedly reduced liquidity pulsing through global markets, “will keep a high bar for inflows for the foreseeable future”.

Shilan Shah, a senior economist at Capital Economics, said cross-border flows by non-resident investors to the limited group of emerging markets that provide timely data tell a similar story: bond flows have been consistently negative this year, while equity flows have gyrated, turning steeply negative for the past few weeks.

Many analysts saw an improvement in the outlook for EM assets earlier this year as economies began to emerge from the pandemic. Russia’s war in Ukraine derailed that, even though some commodity exporters were beneficiaries of sharply rising prices — until global inflation and the rising dollar turned against them. Some analysts, again, see an opportunity in today’s deeply discounted valuations.

But Shah, like Gunasinghe, expects outflows to persist for the rest of the year. Slowing global growth and global trade, with an associated decline in investors’ appetite for risk, will keep the headwinds coming, he said.

FT : Cold weather warning adds to Europe’s gloom as it battles energy crisis

Cold weather warning adds to Europe’s gloom as it battles energy crisis
Less wind and rain could hit renewable power as continent seeks to wean itself off Russian gas

Europe could suffer a colder winter with less wind and rain than usual, according to the European weather forecasting agency, adding to the challenges for governments trying to solve the continent’s energy crisis.

Florence Rabier, director-general of the European Centre for Medium-Range Weather Forecasts (ECMWF), said early indications for November and December were for a period of high pressure over western Europe, which was likely to bring with it colder spells and less wind and rainfall, reducing the generation of renewable power.

The forecast, which is based on data from the ECMWF and several other weather prediction systems including those in the UK, US, France and Japan, is a potential problem for policymakers as they try to battle soaring energy costs for businesses and households owing to huge cuts in gas imports from Russia.

“If we have this pattern then for the energy it is quite demanding because not only is it a bit colder but also you have less wind for wind power and less precipitation for hydro power,” she told the Financial Times.

The EU has vowed to wean itself off Russian gas by 2027 by diversifying into more renewable power and pursuing gas deals with other countries. Gas exports from Russia to the EU have already dropped from around two-fifths of total supply to 9 per cent since it launched its invasion of Ukraine in February.

Rabier said recent hurricanes across the Atlantic could cause milder, wetter and windier weather in the short term. But cooler weather later in the year would be consistent with the atmospheric conditions known as La Niña, a weather pattern derived from the cooling of the Pacific Ocean’s surface, which drives changes in wind and rainfall patterns in different regions.

Weather in Europe is typically difficult to predict as the conditions are dictated by several remote factors including winds in the tropical stratosphere and surface pressure across the Atlantic.

ECMWF, an inter-governmental organisation backed by 35 countries, provides short- and long-term forecasts. It also oversees the Copernicus climate change and atmosphere monitoring services which tracks marine, land and atmospheric data.

Two new Copernicus satellites to observe carbon dioxide emissions from space should be in place by 2026, allowing countries to improve monitoring of pollution levels and refine their emissions reduction targets.

Rabier said Europe was already in a fragile state having experienced one of the hottest summers on record, with temperatures over in August 1.7C higher than the average from 1991 to 2020 and particularly dry soil conditions. The share of wind and hydro power in Europe electricity generation declined this summer as a result of the hotter and drier weather.

More extreme weather events brought on by global warming such as tropical cyclones and heatwaves were harder to predict, the ECMWF chief said.

Claude Turmes, Luxembourg’s minister for energy and spatial planning, said on Friday that ministers were calling on ENTSO-E, the EU’s electricity grid operators’ network, to present its update on risks to the security of winter electricity supply in October, a month earlier than usual.