U.S. stocks look ready to sing the bear market blues again this morning after the Bank of England shuffled sentiment with a dominant turnaround. Fearing a breakdown in market stability, the central bank on Wednesday promised to buy long-dated bonds “on whatever scale is necessary,” sending the yield on the 30-year gilt down by a full percentage point in the span of just a few hours. The chorus quickly spread across the Atlantic, with U.S. debt echoing similar moves, as the 10-year Treasury yield fell 26 bps to 3.71% for its largest one-day decline since March 2009.
Knee-jerk reaction? Stocks soared higher as bonds surged – just a day after the S&P 500 notched a new bear market low – but many cautioned that the rally was far from sustainable. Futures are reflecting the outlook this morning, with contracts linked to the Dow (DJI), benchmark S&P 500 (SP500) and tech-heavy Nasdaq (COMP.IND) off by about 1% at the time of writing. Many also doubt that the Fed will blink like the Bank of England, which is worried about shoring up investor confidence after a series of planned tax cuts sparked days of turmoil in financial markets.
In contrast, the U.S. central bank is steadfast in its mission to stamp out inflation. It has shown a disregard to the stock crash of 2022, soaring yields and a skyrocketing dollar, especially since it wants prices and consumer spending power to come down. The Fed is also not afraid of the “unwarranted tightening of financing conditions” and “flow of credit to the real economy” that was flagged by the Bank of England, and it would likely take a more serious breakdown in U.S. trading conditions to ignite a reversal of QT policies.
Will the strategy even work? “The BoE’s bond purchases may temper the UK government’s borrowing costs but have not resolved the tensions between fiscal loosening and monetary tightening,” noted Carol Kong, strategist at Commonwealth Bank of Australia. “Sterling is not out of the woods [with] the BoE seen addressing the symptom and not the cause,” added DBS currency strategist Philip Wee. “The government has yet to address the credibility of the tax cut plans, which critics see adding to the inflation woes.” (11 comments)
Hurricane Ian was downgraded to a tropical storm this morning, but Florida officials are still warning of serious consequences as it barrels through the state on its way to the Atlantic. Central and northeast Florida are projected to see 12 to 20 inches of rain, with some areas receiving as much as 30 inches, and Ian could pick up speed as it heads back into the ocean. Forecasts show the storm turning further north on Friday, moving into Georgia and the Carolinas.
No power: Around 2.5M customers in Florida are without electricity after the eye of Ian landed around 3 p.m. ET in Cayo Costa as a Category 4 hurricane. Storm surges reached as high as 18 feet in some coastal areas, while maximum sustained winds hit 150 mph, leaving people that didn’t evacuate stranded in their homes. Extensive infrastructure and property damage has also been recorded in areas like Fort Myers and Cape Coral, though the full scope of the impacts will likely be known later today.
“This storm is doing a number on the state of Florida,” Governor Ron DeSantis declared. “After Hurricane Ian passes, be careful going outside. Make sure to avoid downed power lines, avoid standing water, stay clear of trees, do not drive in standing water and keep generators 20 feet outside of your home.”
Go deeper: Widespread transportation disruptions were recorded on Wednesday, including airport closures and over 2,000 flight cancellations. Florida’s biggest seaport in Jacksonville, known as Jaxport, as well as Port Canaveral, also joined Port Tampa Bay in shutting down completely.
The IPO market may be drying up in the current investing environment, but one company still appears to be driving at its finest. Porsche AG advanced 3% to €85/share during its first trading session in Frankfurt, after parent Volkswagen AG (OTCPK:VWAGY) set the final price for the sports-car maker at the top end of its €76.50-€82.50 marketed range. The listing values Porsche at some €75B, making it Europe’s largest initial public offering in a decade despite many challenging market conditions.
Bigger picture: As part of the listing (and a nod to its well-known vehicle line), 911M Porsche shares were divided into 455.5M preferred shares and 455.5M ordinary shares. Only a quarter of the preferred, non-voting shares were sold, while a holding company controlled by the Porsche and Piech families bought 25% of the company – with voting rights – giving them a majority that could halt major strategic decisions implemented by the carmaker’s board. Investors in the IPO also included the sovereign wealth funds of Qatar, Abu Dhabi and Norway, as well as mutual fund company T. Rowe Price.
Volkswagen, which will retain a 75% stake in Porsche, is set to raise €19.5B from the IPO. The parent firm plans to distribute nearly half of the proceeds to VW shareholders in the form of a special dividend, while the remaining amount will pave the way for its EV transition and investments in software. In terms of earnings, Porsche recorded a €4B profit last year, on revenue of €33.1B.
Engineered for magic: Porsche hired Italian investment bank Mediobanca – which took Ferrari (NYSE:RACE) public in 2015 – as a financial advisor for the IPO. While the two companies are in the luxury auto business, Ferrari has exclusively focused on expensive sports cars as Porsche expands into the more affordable market and SUVs. Ferrari is also run independently of its former parent Fiat and the Agnelli family, trading freely on the open market, while only 10% of Porsche’s shares were offered to retail investors, and do not carry any voting rights. (5 comments)
Russia is set to annex nearly 15% of Ukraine in the coming days as Vladimir Putin hardens his response to the recent advances made by the Ukrainian military. He has already ordered a military mobilization of 300K additional troops, threatened to defend Russia with nukes if necessary, and turned off the taps (and possibly sabotaged) the Nord Stream pipeline system that carries natural gas to Europe. Tallies from recent referendums held in the Luhansk, Donetsk, Kherson and Zaporizhzhia regions supported joining Russia, according to the Kremlin, though Kyiv and the West have dismissed the results as coercive, rigged and illegal.
The fears: “As for the risk of Russia using these votes and subsequent annexation of those territories as a pretext for nuclear strikes – we are conscious of this risk, we understand that it is real,” said Yuriy Sak, an advisor to Ukraine’s Defense Minister Oleksii Reznikov.
As a result, the EU is working on a fresh sanctions package that would set price caps on Russian oil – and ban the import of other products – costing Moscow a total of €7B per year. The bill would additionally bar the sale of key technologies that could benefit Russia’s military, prohibit EU nationals from serving on the boards of Russian state-owned enterprises, and restrict the transfer of Russian wealth via crypto assets and services. Senior Russian ministry officials and individuals (involved with the latest referendums) would also be in the crosshairs of the package.
Outlook: For the new EU sanctions to go into effect, the bloc’s 27 members will need to overcome recent tensions to unanimously approve them, while the United States may also jump aboard. “We will continue to work with allies and partners to bring even more pressure on Russia and the individuals and entities that are helping support its attempted land grab,” State Department spokesman Ned Price told reporters. (6 comments)
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