Tailspin markets get a big dose of chill from the Bank of England

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All the UK government drama is keeping me from catching up on the one UK drama I really want to consume, which is Love Island Season 8, which I still haven’t finished (no spoilers please!)

But seeing as this newsletter is apparently about the economy or whatever, I’m going to do my best in God’s name with that…thing.

Here’s the deal: After a dramatic drop in the value of the pound, the Bank of England made an emergency intervention on Wednesday to try to calm panic in the financial markets.

Investors have been dumping UK assets these days, threatening to rip apart the massive bond market and creating volatility in pockets of the normally staid and, dare I say, incredibly boring financial world.

KEY CONTEXT:

  • All this chaos comes from the newly implemented UK government’s radical tax cut plan. And when I say “radical”, I promise I’m not editorialising: you’d be hard-pressed to find a leading economist or analyst backing Prime Minister Liz Truss’s cuts, which will require huge amounts of government borrowing to pay for them. .
  • Not to put too fine a point on it: the International Monetary Fund gave the UK’s tax plan a highly unusual rebuke, saying it would increase inflation and inequality. That’s the kind of thing the IMF might say to a booming economy, not a G7 nation with a history of stable finances.
  • And Charlie Bean, the former deputy governor of the Bank of England, told my colleague Julia Horowitz that the government was making “really stupid” decisions.

Anyway, where were we? Well, the bond markets are melting…

So on Wednesday evening in the UK, the Bank of England, which is independent of the government, intervened to administer the financial equivalent of a Valium in the form of bond purchases “on any scale necessary” to restore order.

That seemed to be working, at least for now: bond markets on both sides of the Atlantic responded positively, with yields soaring and investors taking it easy. The US 10-year Treasury yield, which briefly reached 4% for the first time in a decade, reversed course and settled around 3.70%. US stocks, which opened in the red, rallied on Wednesday afternoon, snapping a six-day losing streak.

THE BIG PICTURE

The BOE may have quelled market anxiety for now, but the Truss administration has only doubled down on its intention to stimulate growth through tax cuts. The three-week-old government seems eager to push its policy on the sidelines at a time when the global economy is counting on stability.

We can’t spare the United States here either, as the Fed’s most aggressive rate hikes in four decades are tearing through the global financial system. Raising rates strengthens the US dollar and helps fight inflation at home. But it forces central banks around the world to follow suit, raising their interest rates faster and higher as the dollar’s strength weakens currencies, writes Julia.

The global financial system is now “like a pressure cooker”, said Chris Turner, head of global markets at ING. “You have to have strong and credible policies, and any wrong policy is punished.”

Volkswagen has priced Porsche’s initial public offering at $80.22 per share, which will raise approximately $9.1 billion. That puts the deal at the upper end of Volkswagen’s original estimate and values ​​the company at roughly $73 billion.

The IPO could be one of Europe’s biggest ever when Porsche goes public in Frankfurt on Thursday.

Buying a car, which was no picnic before the pandemic, has become an even tougher endeavor in a time of supply chain disruptions and high inflation.

Once upon a time, the idea of ​​paying sticker price at a dealership was laughable—a trap only suckers would fall for. But now, the average new car is selling above the manufacturer’s suggested retail price as demand remains strong and automakers are still trying to return to pre-pandemic production levels.

But, writes my colleague Peter Valdes-Dapena, the brand with the highest markup as a percentage of total cost can surprise you.

It’s not like the Jeep Wrangler with its cult following or those sexy Porsche sports cars, although people pay a premium for those.

No, the wildest brand ever is the sensible, budget-friendly Kia.

The South Korean company’s sedans and SUVs are selling for about 6 percent above sticker price, according to data from Edmunds.com. Roughly tied for second place, averaging 4% above sticker price, are Honda, Hyundai and Land Rover. (And in dollar terms Land Rovers, which usually sell for $94,000, have the biggest markup, with customers paying nearly $3,700 over sticker).

However, Kia customers pay an average of $2,183 over the sticker, second only to the luxury Land Rover in direct dollars. This is especially notable given that a Land Rover costs about 2.5 times what a Kia costs.

There are a few reasons for this.

  • Kia has won a loyal following for being a good value car. It’s not shiny. And in this economy, most of all people want reliability and good value.
  • The brand has also (quite successfully) shifted its marketing away from that budget car image. It wants to be associated with good design and ~ freshness, and that also happens to be affordable.
  • Kia sells a relatively large number of hybrid and electric models, giving it an advantage at a time when consumers are concerned about the environment and high gas prices. People are often willing to pay a little more for electric and hybrid models in the hope that they will save money on gas.
  • The sticker-above trend may not go away for a while, as new car production is hampered by a supply shortage that is still slowly being addressed.

But there’s a little good news for buyers who aren’t in a rush and aren’t dead set on a new car. Used car prices – which soared to dizzying heights at the start of the pandemic – are finally starting to come down.

“Talk to any (very) large car dealer and you’ll hear the same thing: an absolute whirlwind of deflation is coming in used car prices,” he tweeted Ophir Gottlieb, CEO of Capital Market Laboratories, earlier this month.

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