FT : Lufthansa accuses EU of damaging its business model

Lufthansa accuses EU of damaging its business model
Airline forced to surrender slots in return for approval of a €9bn state bailout

Lufthansa has accused the European Commission of causing permanent damage to its business model by forcing it to surrender slots at its Frankfurt and Munich hubs in return for approval of a €9bn bailout by the German government.

Last month, Margrethe Vestager, the EU’s competition chief, warned there was a “high risk” of market distortion if Lufthansa’s rescue package did not include remedies such as the relinquishing of take-off and landing slots.

After prolonged negotiations, the airline’s supervisory board agreed to give up 24 slots in Germany to competitors, and the bailout deal was subsequently voted through by shareholders.

But in a briefing published on Tuesday, Lufthansa said it was “incomprehensible that the EU Commission should intervene in this sensitive production structure during the worst crisis in civil aviation”.

Using Frankfurt and Munich as international transfer hubs is crucial to the airline’s competitiveness, the briefing said, because no single German airport has the number of potential customers living nearby that Heathrow does in London and Charles de Gaulle in Paris.

Without carrying passengers from connecting flights, long-haul flights from Germany “can no longer be operated economically”, said Lufthansa, adding: “In future, [the surrender of slots] will directly or indirectly strengthen long-haul providers outside Europe.”

The Lufthansa bailout, which involved the German government taking a stake in the carrier almost a quarter of a century after it was first privatised, has been criticised by European rival Ryanair, which has said it will launch a legal challenge.

In June, Carsten Spohr, Lufthansa chief executive, admitted the aid package was larger than what the airline needed to survive, and was designed to ensure it maintains a “global leading position”.

Ryanair boss Michael O’Leary said the excess aid “massively distorts the playing field” and accused the German government of “saving jobs in Germany at the expense of jobs in every other country”.

Lufthansa is burning through €1m an hour, with hundreds of its planes still grounded because of the pandemic, and has warned it will be left with 22,000 excess staff as it becomes a permanently smaller business.

The final number of job cuts is subject to negotiations with unions.

FT : Tax rises of £60bn needed to stabilise finances, says watchdog

Tax rises of £60bn needed to stabilise finances, says watchdog
OBR warns that coronavirus could raise government borrowing to peacetime UK record of £370bn this year

Tax increases of £60bn or a return to austerity will be needed to restore the UK’s public finances to stability after coronavirus, the fiscal watchdog said on Tuesday, predicting government borrowing will reach £370bn this year.

Describing the long-term public finances as “clearly . . . on an unsustainable path”, the Office for Budget Responsibility said that a combination of borrowing to address the consequences of Covid-19 and the government’s decision to limit immigration after Brexit would increase the necessity for tax increases.

In its central scenario, it calculated that the country now needed to raise 50 per cent more from tax increases each decade to keep public debt stable as a share of national income than would have been required before the pandemic, assuming the prime minister keeps his promise of not imposing austerity measures. There was now a need for £60bn of tax rises per decade to stabilise the public finances, it said.

“Given the structural fiscal damage implied by our central and downside scenarios, and its implications for long-term sustainability, in almost any conceivable world there would be a need at some point to raise tax revenues and/or reduce spending to put the public finances on a sustainable path,” the OBR said.


In its Fiscal Sustainability Report, the watchdog started its analysis with an updated account of the likely level of public borrowing this year, which was hindered by chancellor Rishi Sunak refusing to share details of £50bn of extra borrowing in his summer statement with the watchdog before the report’s publication.

Without the chance to include Mr Sunak’s additional borrowing in its main forecasts, the OBR estimated in a back-of-the-envelope exercise that government borrowing this year was likely to exceed £370bn and be in the range 15 to 23 per cent of gross domestic product, close to the annual level of borrowing in the second world war.

Uncertainty over the economic outlook was rife, the watchdog said. It chose to include three scenarios for its analyses based on different speeds of recovery and three guesses of longer-term economic scars from higher unemployment, bankruptcies and continued social distancing after the crisis.

In these scenarios, gross domestic product would drop between 10 and 14 per cent this year before rebounding between 5 and 15 per cent in 2021.

Unemployment would rise to at least 10 per cent in all three scenarios after the furlough scheme closes, significantly worse than in the 2008-09 recession and back to 1980s levels of 13 per cent in the pessimistic scenario, the OBR said.


The OBR calculated the outlook for the public finances on the basis that in the medium term, the economic growth rate would return to the annual 1.5 per cent level it forecast in the March Budget for all three scenarios, but with different levels of persistent scars from the crisis. There would be no damage in the upside scenario, while there would be scars of 3 per cent and 6 per cent of GDP in the central and downside scenarios respectively.

In the central scenario, the deficit this year rises to twice the level of the 2008-09 financial crisis at about 19 per cent of national income before falling back to 4.6 per cent of national income by 2024-25, well above the 2.2 per cent forecast at the time of the Budget.

But the improvement in output and borrowing would not be sufficient to stop underlying public debt rising persistently as a share of GDP.

This, the fiscal watchdog forecast, would rise from just over 100 per cent of GDP in 2020-21 to 111 per cent by 2030 and then explode to 150 per cent by 2040 as population ageing and accumulated debt put even greater pressure on the public finances.

“In practice, no government could allow net debt to persist for long on these explosive paths, as it would find it hard to finance its mounting deficits,” said Robert Chote, the OBR chair.


In the near term, the OBR highlighted the difficulty the government faced over the triple lock on pensions, which guarantees that state pensions will rise by the highest of CPI inflation, average earnings or 2.5 per cent.

This year, with inflation and earnings growth artificially low, the 2.5 per cent uplift will kick in at a cost of £6bn, the OBR said, raising the possibility that the government will suspend the lock for two years until the economy stabilises.

It added that state pension costs would be £3.2bn higher than if the pension was just increased by earnings alone, and £1.8bn more than under a double lock based on just inflation and earnings.

The OBR is prevented by law from commenting on government policies, but suggested that the chancellor would want to take the sharp deterioration in the forecasts for public debt into account when he sets new fiscal rules in the autumn Budget.

The ability of the government to borrow cheaply rests on investors believing they would not see the value of their investments “deliberately eroded” by higher inflation in the future and that required higher taxes or lower public spending, the OBR said.

This presented some financing risk in future and with the Bank of England buying up a further £300bn of debt, it meant that financing the UK government debt was even more sensitive to official levels of interest rates than it was previously.

“This and future governments will face a huge challenge in judging when and how public spending and tax policy levers should be pulled to place the public finances on a sustainable path,” the OBR concluded.

>>> US Gapping down


Gapping down
In reaction to disappointing earnings/guidance:

  • WFC -5.5%, TRV -1.5%, DAL -1.1%, FRC -0.9%

Other news:

  • OSMT -18.1% (prices offering of 5 mln shares of common stock at $6.55 per share)
  • VRCA -8% (received Complete Response Letter regarding NDA for VP-102)
  • MSB -6.4% (lowers distribution to $0.05 per unit, down from $0.56 per unit)
  • MHK -4.7% (discloses receipt of subpoenas)
  • VXX -3.1% (trading lower with modest bounce in futures this morning)

Analyst comments:

  • SPOT -3.2% (downgraded to Sell from Buy at UBS)
  • EVER -3% (downgraded to Underperform from Neutral at BofA Securities)
  • CCL -1.4% (downgraded to Sell from Hold at SunTrust; downgraded to Neutral from Outperform at Macquarie)
  • RCL -1.1% (downgraded to Sell from Hold at SunTrust; downgraded to Neutral from Outperform at Macquarie)
  • NCLH -0.7% (downgraded to Neutral from Outperform at Macquarie)
  • ADP -0.5% (initiated with a Sell at Goldman)

>>> US Gapping up

Gapping up
In reaction to earnings/guidance:

  • FLXN +9.7%, KPTI +6.7% (prelim Q2 sdales for XPOVIO), XYL +4%, JPM +1.5%, FAST +1.5%

Other news:

  • IMV +159.7% (provides update on vaccine development for COVID-19 prevention)
  • VNRX +74.6% (comments on clinical trials results for its novel COVID-19 triage test)
  • RIGL +20.8% (Rigel Pharma and Imperial College London initiates two-stage trial to evaluate the efficacy of fostamatinib for the treatment of COVID-19 pneumonia)
  • CYAD +12.4% (receives FDA clearance of IND application for CYAD-211)
  • BPMC +9.6% (to collaborate with Roche (RHHBY) to develop and commercialize Pralsetinib)
  • ALT +8.2% (prices offering of $115 mln of common stock and pre-funded warrants)
  • VNDA +5.6% (receives FDA authorization for protocol for the use of tradipitant for gastroparesis)
  • APRN +4% (peer HelloFresh reported better than expected earnings)
  • BA +2.6% (awarded $22.9 bln Air Force contract)
  • SPAQ +2.6% (Fisker, which is being acquired by SPAQ, reportedly in talks to use Volkswagen platform to power its SUV, according to The Verge)
  • IMMU +2.1% (expands collaboration with Roche to evaluate Trodelvy with Tecentriq)
  • CDXC +1.8% (external research program achieves 200th material transfer agreement for Niagen Research)
  • EW +1.3% (ABT and EW settle patent cases)

Analyst comments:

  • MTDR +6.6% (upgraded to Buy from Neutral at MKM Partners)
  • HBI +5.6% (upgraded to Outperform from Neutral at Credit Suisse)
  • TSM +2.4% (upgraded to Buy from Outperform at CLSA)
  • HOG +2.1% (upgraded to Outperform from Market Perform at BMO Capital Markets)
  • HMC +1.5% (upgraded to Buy from Underperform at CLSA)
  • NVDA +1.5% (target raised to $475 at Cowen)
  • MA +1.3% (initiated with a Buy at Goldman and added to Conviction Buy List)
  • V +1% (initiated with a Buy at Goldman)

NYT : The blank-check boom (A. Ross Sorkin)

The blank-check boom
The specialized deal machines known as blank-check companies — formally “special purpose acquisition companies,” or SPACs — are having a moment, striking ever-bigger takeovers and raising billions in new funds.
First, a primer. SPACs raise money from stock-market investors for the explicit purpose of buying unspecified privately traded companies. (Shareholders in blank-check funds don’t have a say on picking deals.) The targets essentially assume the SPAC listing, transforming them into public companies. If no deal is struck within a certain time, usually two years, the funds are dissolved.
They’re hot commodities now, having last enjoyed a popularity in the 1980s. At least 41 SPACs have gone public so far this year, according to SPACInsider.com, compared with 59 for all of 2019.
• The hedge fund magnate Bill Ackman added $1 billion to his target for his forthcoming SPAC, Pershing Square Tontine, for a total of $4 billion. That would make it the biggest blank-check fund to date.
• Fisker, an upstart electric-car maker, plans to go public by merging with the blank-check fund Spartan Energy, which is backed by Apollo Global Management, in a $2.9 billion deal. Nikola went public last month through another such deal (with VectoIQ, backed by Fidelity and ValueAct).
• The health services company MultiPlan agreed on Sunday to merge with Churchill Capital Corp III, a SPAC created by the high-profile banker Michael Klein, in a deal valued at $11 billion, the biggest blank-check merger to date.
• Richard Branson’s Virgin Galactic space-tourism business and the fantasy-sports site DraftKings both went public last year via blank-check mergers.
For selling companies, SPACs are quicker and easier than staging an I.P.O., which involves wooing prospective investors, S.E.C. document reviews and uncertainty caused by volatile markets. And they’re often more feasible than direct listings, which tend to be better for well-known businesses like Spotify.
• As stock markets remain vibrant, the average I.P.O. for blank-check funds this year has been about $321 million, according to SPACInsider, far more than in recent years.
But there are downsides, The Wall Street Journal notes. SPACs were once associated with stock-market frauds, and investors in blank-check companies don’t get a say in target businesses.
• Sometimes deals don’t happen: Far Point, a SPAC backed by the hedge fund mogul Dan Loeb and Thomas Farley, a former president of the New York Stock Exchange, is urging its investors to reject the $2.6 billion takeover of Global Blue, a tax-free shopping company.T

NYT : These are the Deutsche Bank Execuitves Responsible for serving J. Epstein

NYT : These are the Deutsche Bank Execuitves Responsible for serving J. Epstein
When NY Regulators punished the bank for its work with Mr Epstein, no individuals were named. The Times identified them.

Jeffrey Epstein, the sex criminal and financier, didn’t act alone. Now we know in vivid detail who some of his financial enablers were: executives and bankers at Deutsche Bank.

Last week the New York Department of Financial Services laid bare at least some of the financial underpinnings of Mr. Epstein’s sophisticated enterprise. Deutsche Bank agreed to pay a $150 million fine for its dealings with Mr. Epstein, who committed suicide last August, and for two other matters.

Mr. Epstein’s bankers “created the very real risk” that payments through the bank “could be used to further or cover up criminal activity and perhaps even to endanger more young women,” the department asserted.

Deutsche Bank executives approved Mr. Epstein as a client in 2013 and then kept working with him, even though employees worried about the fact that “40 underage girls had come forward with testimony of Epstein sexually assaulting them,” as the bank put it in internal communications about Mr. Epstein in early 2015.

And even though such high-risk clients are required to be carefully monitored to detect and prevent illegal activity, once Mr. Epstein was a client, “very few problematic transactions were ever questioned, and even when they were, they were usually cleared without satisfactory explanation,” the New York regulator concluded.

Deutsche Bank itself is a corporation, and, as has often been said, it’s people, not corporations, who do bad things. Responsibility for working with Mr. Epstein permeated the ranks of the private-banking division that caters to wealthy clients.

Yet Deutsche Bank declined to publicly identify any individuals involved — and the authorities didn’t demand it. The so-called consent order with the New York agency included no names of the bankers or executives who were implicated; instead, the document is littered with references like RELATIONSHIP MANAGER-1 and EXECUTIVE-2. A bank spokesman, Daniel Hunter, said the bank meted out appropriate punishments to employees who were still at the bank, but declined to name anyone.

Based on descriptions of the employees in the consent order and interviews with current and former Deutsche Bank officials, The New York Times was able to identify nearly every person anonymously described in the order. At least one high-ranking executive remains in her position: Jan Ford, the bank’s head of compliance in the Americas.

It is rare for companies and regulators that are settling allegations of crimes or other misconduct to name the individuals responsible for those misdeeds — a practice that perpetuates the myth that such acts were inadvertently committed by a faceless institution and were not the consequence of decisions made by human beings.

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Continue reading the main story
Large companies “will happily pay a big fine as long as senior managers are protected,” said John Coffee Jr., a Columbia Law School professor and author of the forthcoming book “Corporate Crime and Punishment: The Crisis of Underenforcement.”

Fines paid by public companies, even of the $150 million magnitude Deutsche Bank is paying, fall almost entirely on shareholders rather than the individuals responsible. When those individuals bear no discernible consequences, the result is an astonishing rate of recidivism, Mr. Coffee noted, despite repeated apologies and promises that bad behavior won’t happen again.

New York’s Department of Financial Services, not Deutsche Bank, wrote the consent order that omitted the executives’ and bankers’ names. “The New York State Department of Financial Services is the first and only financial regulator to take action against a financial institution in connection with Jeffrey Epstein,” said a spokeswoman for the agency, Sophia Kim. “The department’s consent order provides a wealth of detail about the course of conduct of the bank, consistent with D.F.S.’s role as the New York licensing agency for the institution itself.”

While the bank may not be legally obligated to name those responsible for the Epstein relationship, it should do so to rebuild public trust, said Brandon Garrett, a professor at Duke Law School and author of “Too Big to Jail.” “When a company does something seriously wrong, then accountability is all the more important,” Mr. Garrett said. “You want assurances they’re cleaning house. That’s especially true for Deutsche Bank, which has been around this block many times.”

Indeed, Deutsche Bank is a symbol of corporate recidivism: It has paid more than $9 billion in fines since 2008 related to a litany of alleged and admitted financial crimes and other transgressions, including manipulating interest rates, failing to prevent money laundering, evading sanctions on Iran and other countries and engaging in fraud in the run-up to the financial crisis.

Deutsche Bank claimed to have put all this behind it when it named Christian Sewing as chief executive in 2018. “We all have to help ensure that this kind of thing does not happen again. It is our duty and our social responsibility to ensure that our banking services are used only for legitimate purposes,” Mr. Sewing said last week in a message to employees.

Since neither the regulator nor the bank would reveal the people responsible for the misconduct, my colleagues and I decided to fill in some of the blanks left by the consent order. (Some of the bankers and executives confirmed their roles; none would comment on the record.)

“RELATIONSHIP MANAGER-1,” who brought Mr. Epstein into Deutsche Bank, is Paul Morris, who had previously helped manage the Epstein account at JPMorgan. Despite Mr. Epstein’s conviction in 2008 of soliciting prostitution from a minor and widespread press coverage of his involvement with underage girls, Mr. Morris in 2013 introduced Mr. Epstein to his Deutsche Bank bosses as “a potential client who could generate millions of dollars of revenue as well as leads for other lucrative clients to the bank,” according to the consent order.

In a subsequent email to higher-ups at the bank, Mr. Morris noted that the Epstein relationship could generate annual revenues of up to $4 million.

Mr. Morris needed approval for a client who carried such reputational risk. He sent Charles Packard, the head of the bank’s American wealth-management division and described in the consent order as “EXECUTIVE-1,” a memo detailing Mr. Epstein’s controversial past. In a subsequent email, Mr. Packard said that he had taken the issue to the division’s general counsel and the head of its anti-money-laundering operation and that neither felt Mr. Epstein required additional review. “We can move ahead so long as nothing further is identified,” Mr. Packard wrote in a May 2013 email to Mr. Morris.

(Deutsche Bank told regulators that it found no written record of any approval from the executives Mr. Packard said he consulted.)

At the time, Deutsche Bank was aggressively expanding its U.S. wealth management business under its new co-chief executive, Anshu Jain. The bank developed a reputation for courting wealthy clients who other banks shunned — including a default-prone real estate developer named Donald J. Trump.

Once the Epstein relationship was underway, Deutsche Bank executives ignored repeated red flags, including suspiciously large cash withdrawals and 120 wire transfers totaling $2.65 million to women with Eastern European surnames and people who had been publicly identified as Mr. Epstein’s co-conspirators, according to the consent order.

That and other activity — including media accounts of Mr. Epstein’s sexual misconduct — led employees in the bank’s anti-financial-crime department to urge executives to further scrutinize the Epstein relationship.

Mr. Morris and Mr. Packard met with Mr. Epstein at his East 71st Street mansion in January 2015 and asked him “about the veracity of the recent allegations,” according to the consent order. No one took notes; the bank told regulators it had no record of the substance of the meeting.

Whatever Mr. Epstein said, Mr. Packard “appeared to be satisfied,” according to the consent order. No one subsequently asked Mr. Morris for his opinion. Deutsche Bank apparently didn’t further investigate the allegations against Mr. Epstein.

Eight days after the visit to Mr. Epstein’s mansion, a bank committee charged with vetting transactions that pose risks to the bank’s reputation held a meeting. According to a bank official familiar with the meeting, it was chaired by Stuart Clarke, chief operating officer for the Americas; other attendees included Michael Chepiga, acting general counsel for the Americas; and Ms. Ford, the compliance executive who had joined the bank just one week earlier.

The committee concluded that it was “comfortable with things continuing” with Mr. Epstein, according to an email that a committee member sent Mr. Packard. One committee member “noted a number of sizable deals recently,” according to the consent order. In other words, the relationship was making money for Deutsche Bank.

The following week Ms. Ford, the head of compliance, memorialized the decision in an email to Mr. Packard and other executives that put the onus squarely on Mr. Packard: Deutsche Bank would “continue business as usual with Jeff Epstein based upon” Mr. Packard’s “due diligence visit with him.” Ms. Ford also imposed some conditions on the relationship, but Mr. Packard and others “inexplicably” failed to convey those conditions to all of those who regularly dealt with Mr. Epstein. The bankers “continued conducting business with Epstein in the same manner as they had,” the consent order said.

Only after The Miami Herald revealed in November 2018 the extent of Mr. Epstein’s sexual misconduct and lenient plea deal did Deutsche Bank begin to wind down its relationship with Mr. Epstein. Even then, a bank executive wrote letters to two other financial institutions essentially vouching for Mr. Epstein.

By then Mr. Morris and Mr. Packard had both left the bank. Mr. Morris went to Merrill Lynch, where he’s a private wealth adviser. Mr. Packard joined Bridgewater Associates, the hedge fund founded by Ray Dalio.

Of the members of the risk-assessment committee who approved continuing the Epstein relationship, Mr. Clarke and Mr. Chepiga have both left the bank. Only Ms. Ford remains.

The bank’s Mr. Hunter declined to comment on her behalf. “Deutsche Bank undertook appropriate disciplinary actions based upon its findings regarding the underlying conduct, including termination for some employees,” Mr. Hunter said. “We do not comment on individual instances of employee discipline.”

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • VNRX +80%, BPMC +20%, VNDA +8.4%, CYAD +7.9%, SPAQ +4.9%, BA +2.7%, IMMU +2.6%, EW +0.9%, ABT +0.7
  • Gapping down:
    • MSB -13.8%, OSMT -12.6%, MHK -6%, VXX -2.8%, ALT -2.4%, IVZ -1%

FT : The coming oil supply rise

The coming oil supply rise
The latest energy news: rolling back output cuts, price of carbon heats up, Americans hit the road

Earnings season is imminent — and it’s not going to be pretty. Every sector will suffer, but none more than energy.

Second-quarter numbers will paint the most extensive picture yet of the carnage wreaked by the coronavirus pandemic. Revenues will tumble, profits will tank and writedowns will be commonplace. Bosses will urge investors to look forward not back.

Energy Source will be surveying the damage as it is reported, but today we heed those pleas and look at the road ahead for the sector at large.

Our first item looks at Opec’s plans to roll back output cuts and what lies ahead for US shale. Our second is about how hopes for a green recovery are driving up the price of carbon. Elsewhere in ES today: Americans are back on the roads. And what next in the Dakota Access Pipeline drama?

Thanks for reading. Let us know your thoughts and ideas at energy.source@ft.com. If this has been forwarded to you, please sign up for the newsletter here. — Myles

Has Opec+ already won the market share battle?
Global oil supply is about to rise. Provided it can keep a lid on crude prices, Opec+ should get the lion’s share of the increase.

The cartel’s oil output reduction of 9.7m barrels a day from May to July has, in tandem with rising demand, tightened the market. But the International Energy Agency and others now predict a deficit in the second half of the year, meaning output can begin to return to pre-crash levels.

Tomorrow, Opec+’s Joint Ministerial Monitoring Committee is likely to endorse a long-planned supply increase from August of 2m b/d. Saudi Arabia is keen to stick with the schedule, according to three people familiar with its position.

Meanwhile US suppliers appear ready as ever (see graphic) to compete for a share of any supply increase. The price crash sent American output tumbling from 13m b/d to a low of 10m early last month, according to Genscape, a division of Wood Mackenzie. But a rally to $40 a barrel has allowed production to bounce back to around 11m b/d as some wells have restarted.


More supply is coming. Florian Thaler, chief executive of OilX, which monitors daily global oil flows, told Energy Source that US output would surge by at least 600,000 b/d this month. The IEA predicts it will keep rising gently through the end of the year.

Will it? The numbers of operating rigs and fracking crews in the shale patch continue to fall, so the US output rise isn’t led by drilling. It’s because at $40 a barrel — WTI’s price over recent weeks — operators think they can profitably restart the wells they shut earlier.

But to keep shale production steady, you need to keep drilling and completing wells — that’s the sector’s distinctive cast-iron rule. Without a swift pick-up in activity, supply could drop by 300,000 to 400,000 b/d per month, according to analysts.

The big operators will drill just enough to maintain new output and keep the decline rates at bay. But more profit, not more production, is the priority over the next 18 months. That was the message from Matt Gallagher, Parsley Energy’s chief executive, in an interview with the FT this week. “We don’t need to be growing, even if there’s a price signal.”

US production would not recover this year’s highs in his lifetime, the Parsley chief said. And while some “offshoot companies” might “adopt the growth stance” again if prices rose, “it’s not going to affect the world supply-demand dynamic”.

Have the Saudis, who helped push the oil price off the cliff in March, won? “Yes,” said Mr Gallagher in an email exchange after our interview.



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The curious case of the soaring carbon credit
If anyone tells you they know of a one-way bet it’s generally a good idea to nod sagely then check your wallet is still in place.

But it’s not clear this is widely understood in the European carbon market.

The EU Emissions Trading Scheme, or EU ETS, has soared in the last few months, with traders looking beyond the market’s frankly dreadful short-term fundamentals to focus on the bigger picture: that the EU wants a green recovery and therefore will need carbon prices to rise.

On Monday morning, prices jumped 5 per cent to get above 30 euros a tonne — the highest in 14 years — and came within just a few cents of hitting the all-time record of 31 euros a tonne from 2006.

Prices have more than doubled since March, despite actual emissions being widely expected to fall sharply this year — reducing demand for allowances — as economies slow in the face of the coronavirus pandemic.

So what is going on? Well, some fingers have been pointed at speculators and hedge funds, but not everyone is convinced.


Trevor Sikorski at Energy Aspects highlights that the latest Mifid positioning report suggests that more than 10 times as many new long positions came from commercial and compliance buyers in the second quarter — broadly industrial end users and utilities — as opposed to investment funds.

“The causes of strong trend rallies are often identified as being speculative, particularly if moves are not well supported by fundamentals,” Mr Sikorski said. “[But] while proprietary sources are potentially playing a role, exchange data are far from convincing.”

Instead, utilities have been happy to buy as they believe they can see what is coming: that the EU will at some stage reduce the number of allowances further to help support the price as part of a broader push to lower emissions.

“Most participants have not had to sell, with sector hardships being lessened by government stimulus loans and/or recourse to repo trades,” Mr Sikorski said. “Instead, the data suggest that they have seen the current period as an opportunity to buy, given the expected future shorts.”

But does that mean the market has become a one-way bet? With the EU effectively controlling how many allowances to release in the future, it’s starting to sound a little like it. That’s almost certainly reason for caution.

Data Drill
Americans are going to work again: overwhelmingly by car — and not by public transport. An aversion to crowds, and the ensuing risk of coronavirus transmission, is keeping them off metros and buses, Apple mobility data suggest. Instead, the inhabitants of New York, Chicago, Los Angeles and Houston are back behind the wheel in numbers exceeding pre-crisis levels.

Even in California and Texas, where fresh coronavirus surges have prompted a reimposition of restrictions, car travel has recovered completely.

FT : UK’s largest accounting firms lambasted by watchdog for ‘unacceptable’ work

UK’s largest accounting firms lambasted by watchdog for ‘unacceptable’ work
PwC, Deloitte, EY and KPMG had higher number of audits needing big improvements, FRC finds

The UK’s biggest accounting firms have been criticised by the industry’s watchdog for an “unacceptable” decline in the quality of their work after a third of their audits fell below its expected standard.

The Financial Reporting Council said a higher number of audits needed significant improvements at each of the Big Four firms — PwC, Deloitte, EY and KPMG — as well as the smaller firms BDO and Grant Thornton.

Its sharpest criticism was reserved for PwC, the UK’s largest audit firm by revenue, as well as KPMG and Grant Thornton. The firms are being investigated by the regulator for their involvement in high-profile corporate failures at Thomas Cook, Carillion and Patisserie Valerie.

“We are concerned that firms are still not consistently achieving the necessary level of audit quality,” said David Rule, the FRC’s executive director of supervision. “The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions.”

The watchdog’s latest annual review is based on a sample of audits carried out by the UK firms.

The findings come as the Big Four firms prepare to separate their audit practices from their wider consulting, restructuring and tax divisions over the next four years under plans to improve audit quality by the FRC. The profession has been subjected to intense scrutiny for poor working practices and conflicts of interest after a series of accounting scandals.

The FRC said it was particularly dissatisfied with the firms’ record of standing up to the management of their clients, which it said meant auditors were failing to challenge companies, particularly on the impairment of goodwill, revenue and contracts and loan loss provisions. It said the firms were also conducting poor work when judging going concern — a company’s ability to continue trading for the next 12 months — as well as monitoring inventories, group oversight and investment property valuations.

“Firms’ senior management need to be clear that taking difficult decisions is an appropriate response to improving audit quality, even if it might sometimes mean delaying or modifying opinions, and ultimately losing some audit engagements,” the FRC warned.

The regulator said Grant Thornton’s audit quality inspection results were “unacceptable”, adding to pressure on the sixth-largest accounting firm, which it accused of “very poor audit quality” last year. The FRC found that 45 per cent of its audits required improvements and that it was particularly bad at auditing revenue and ensuring the appropriate levels of challenge and scepticism.

Grant Thornton said: “Audit quality remains a priority for us, and we are encouraged by the indicative progress we have made over the past year in enhancing our audit quality.”

The FRC said PwC’s and KPMG’s inspection results were “unsatisfactory” and the firms would be subjected to greater scrutiny. It found that 35 per cent of PwC’s audits and 39 per cent of KPMG’s audits required improvements. That was a steep decline from 23 per cent and 24 per cent respectively last year.

KPMG audit head Jon Holt said: “We believe audit quality is improving year on year and we will not be happy until we consistently achieve AQR scores which reflect that progress.”

Meanwhile, the FRC found that 24 per cent of Deloitte’s audits required improvements and 29 per cent of EY’s.

“We are disappointed our overall results are not higher and we have plans in place to address the FRC’s feedback,” said Andrew Walton, head of audit at EY. The FRC ordered EY — which is facing international pressure over its audits of NMC Health and Wirecard — to improve “firm-wide procedures” such as strengthening the culture of challenge within its audit processes.

About 38 per cent of BDO’s audits required improvements, the FRC said, and 20 per cent of Mazars’ audits. Both firms have been rapidly growing their audit practices and winning larger, more complex audits over the past two years.

FT : Investors yank $500m from super-leveraged US tech fund

Investors yank $500m from super-leveraged US tech fund
Record weekly outflow from ETF known as ‘TQQQ’ suggests wariness after momentous rally

An exchange traded fund designed to amplify the moves of red-hot US tech stocks has just suffered its worst ever week of outflows, suggesting that investors are growing wary of highly stretched valuations.

Investors pulled $491m from the ProShares UltraPro QQQ ETF last week in the biggest weekly withdrawal since the ETF launched a decade ago, according to data from Bloomberg.

The ETF is a risky investment, aiming to use leverage to deliver three times the daily performance of the Nasdaq 100 stock index — a benchmark of the biggest companies listed on the tech-heavy market.

The outflows failed to make much of an impression on the fund’s assets, which closed the week at a record $7.1bn, propelled by a strong performance for stocks including Apple, Amazon, Alphabet and Tesla. The fund’s holdings are up about two-thirds in value from the start of the year, roughly three times the return of the benchmark.



But the redemptions from the UltraPro QQQ fund — the largest leveraged ETF — could be a sign that investors are easing out of tech stocks after a momentous rally, said Ben Johnson, head of ETF research for Morningstar.

The tech-focused benchmark includes mega-cap stocks that have acted as haven assets during the Covid-19 crisis and represent more than a fifth of the US stock market — the highest proportion on record.

“We’ve seen quite a run in the Nasdaq 100 in recent months and it’s likely time for many to consider locking in the gains,” he said.

On Monday tech stocks were the hardest hit in a rapid afternoon sell-off after California rolled back most of its economic reopening measures to contain the pandemic. Such an announcement would typically trigger a shift toward tech stocks, “but in this case they felt the biggest pain — I found that telling,” said Jim Tierney, chief investment officer of US concentrated growth at AllianceBernstein. “Maybe people are saying they’ve run pretty far and maybe investors are taking some profits.” 

The Nasdaq 100 is up 21.4 per cent for the year, compared with a 2.3 per cent loss for the S&P 500. The price-to-earnings ratio, a popular yardstick of valuation, has also widened between the two indices. Investors are paying 33 times the trailing year’s profits for companies in the Nasdaq 100 compared with 21 times for stocks in the S&P 500 — a gap that has nearly doubled since the start of the year, and is at its widest since December 2007.


“It’s very much about price-to-earnings multiple expansion rather than earnings growth,” said Mr Tierney.

The year’s best performer in the Nasdaq 100 is Zoom, the video conferencing group that has become a market favourite after a surge in use of its product during lockdowns. The stock has nearly tripled in value. Tesla, the second-best performer, is up more than 250 per cent for the year.

ETFs that use borrowed money to magnify returns have drawn criticism in the past. Carl Icahn, the billionaire investor, has repeatedly taken aim at such instruments over the years, saying they have helped turn the stock market into a “casino on steroids”.

A “short” version of the ProShares Ultra QQQ ETF — designed to deliver three times the inverse daily performance of the Nasdaq 100 — had $261m of inflows over the week, the most in more than three months.

“This category of funds is not intended to serve investors with a long-term orientation,” said Mr Johnson of Morningstar. “It’s about capitalising on short-term moves in the market.”