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The upheaval in gilt (UK government bond) markets that led to last week’s spectacular intervention from the Bank of England continues to reverberate.

The Bank was obliged to buy long-dated gilts – those with a maturity of 20 or 30 years – on Wednesday last week following a wave of forced selling by pension funds.

Those pension funds had been engaging in strategies known as liability-driven investment (LDI) which, despite becoming a £1.5 trillion market, was until last week little known outside the world of pensions investing.

Under the strategies, pension funds seek ways to better match their assets (the retirement savings of scheme members) with their liabilities (the future pension payments that have been promised to those members on their retirement).

They did so using derivatives contracts – a way of using leverage – but, when gilt yields spiked higher as markets took fright at Kwasi Kwarteng‘s borrowing plans in his mini-budget, the investment banks that write those derivatives contracts sought more money from the pension funds to reflect the fact that gilt prices were falling (the yield and the price move in opposite directions).

The episode has led to a lot of misunderstanding. One is that the Bank has spent £65 billion propping up the gilt market. It hasn’t: it has simply indicated that the maximum it could end up spending under its intervention will be £65 billion.

Another is that this is some kind of taxpayer bail-out of pension funds. Again, it isn’t.

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It is more akin to the Bank’s asset purchase scheme, or Quantitative Easing in the jargon, under which the Bank bought assets like gilts and held them on its balance sheet, although the Bank would prefer this latest move not to be regarded as QE, more a special operation to ensure more orderly market conditions.

Pension funds have not been given something for nothing by taxpayers and nor does the Bank emerge with nothing for the money it spends – it emerges with a holding of gilts on which interest will be payable by the government.

Other misconceptions concerned those who participate in LDI.

Shares of Legal & General, one of the biggest insurance companies in the FTSE-100, have come under pressure since questions began being asked about its participation in the LDI market.

Between the close on 22 September – the night before Mr Kwarteng unveiled his mini-budget – and the close of business last Friday night, shares of Legal & General fell by just under 15%.

That may be because the episode shone a spotlight on L&G’s role in the LDI market in an unflattering way. It was widely reported that the sell-off gathered momentum early last week because L&G had been requesting that pension fund clients put up more cash in response to falling gilt prices.

The investment bank Jefferies had said on Monday that the insurer could be exposed to fund outflows as a result: “The biggest risk for L&G is that this crisis has discredited the firm’s risk management abilities.

“In the process, it’s possible that this sparks outflows from LDI funds, as clients reallocate to alternative strategies, with lower liquidity risks.”

So today’s stock exchange announcement from L&G, in which it clarified its role in LDI and set to soothe the anxieties of investors, is a big deal.

The company made clear that Legal & General Investment (LGIM), its asset management arm, has merely been acting as an agent between LDI clients – pension funds – and market counterparties sitting on the other side of those trades, chiefly investment banks.

It added that, as a consequence, it “therefore has no balance sheet exposure”.

L&G also praised the Bank’s intervention and said that, as a result, interest rates had come down.

It added: “These steps have helped to alleviate the pressure on our clients.”

The insurer added for good measure that, although it holds gilts as part of its investment activities, the sell-off had not affected its capital or liquidity position.

It went on: “Despite volatile markets, the group’s annuity portfolio has not experienced any difficulty in meeting collateral calls and we have not been forced sellers of gilts or bonds.”

Shares of L&G have rallied by more than 5% on the statement while shares of Aviva and Phoenix Group, two other big FTSE-100 life companies, have also bounced.

While L&G’s statement may have calmed nerves about its own role in the LDI market, it may not do so for the market as a whole. People are rightly confused and concerned about how defined benefit pension funds, which, in theory, should be an exceptionally safe and dull corner of the investment universe, have suddenly – thanks to the involvement of derivatives products – been made inherently more risky and prone to the vagaries of market movements.

Lord Wolfson, the chief executive of Next and one of the most influential figures in British business, said last week that he had written to the Bank in 2017, when Mark Carney was governor, outlining his concerns about LDI strategies.

He said the strategy – buying gilts and then using them as collateral to obtain further exposure to the gilt market – “always looked like a time bomb waiting to go off”.

So L&G’s statement today is far from being an end of the matter.

The Commons Treasury Select Committee is now looking into the issue and is set to question the Pensions Regulator. The Financial Conduct Authority and the Bank are also likely to be asked what they knew.

One of the bankers who helped invent LDI strategies told the Financial Times this week that the technique had “helped stabilise pension funding over the past two decades” and that it had helped “provide a future for millions of members of defined-benefit funds”.

But it seems likely that the Bank, which is mandated to maintain the stability of the UK’s financial system, will now be looking to make this particular corner of the markets less risky.

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Trump trade war could still see America come off worse

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Trump trade war could still see America come off worse

It is a trade deal that will “rebalance, but enable trade on both sides,” said Ursula von der Leyen after the EU and US struck a trade deal in Scotland.

It was not the most emphatic declaration by the president of the European Commission.

The trading partnership between two of the biggest markets in the world is in significantly worse shape than it was before Donald Trump was elected, but this deal is better than nothing.

As part of the agreement, European exports to the US will be hit with a 15% tariff. That’s better than the 30% the bloc was threatened with but it is a world away from the type of open and free trade European leaders would like. The EU had offered tariff free trade to the US just weeks before the deal was announced.

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Instead, it has accepted a 15% tariff and agreed to ramp up its energy purchases from the US.

The EU tariff on US imports will remain close to zero but Europe did get some important exemptions – on aviation, critical raw materials, some chemicals and some medical equipment. That being said, the bloc did not achieve a breakthrough on steel, aluminium or copper, which are still facing a 50% tariff. It means the average tariff on EU exports to the US will now rise from 1.2 % last year to 17%.

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There is also confusion over the status of pharmaceuticals – an important industry to Europe. Products like Ozempic, which is made in Denmark, have flooded into the US market in recent years and Donald Trump was threatening tariffs as high as 50% on the sector.

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US and EU agree trade deal

It appears that pharmaceuticals will fall under the 15% bracket, even though President Trump contradicted official announcements by suggesting a deal had not yet been made on the industry. The risk is that the implementation of the deal could be beset with differences of interpretation, as has been the case with the Japan deal that Trump struck last week.

It also risks fracturing solidarity between EU states, all of which have different strategic industries that rely on the US to differing degrees. Germany’s BDI federation of industrial groups said: “Even a 15% tariff rate will have immense negative effects on export-oriented German industry.”

The VCI chemical trade association said rates were still “too high”. For German carmakers, including Mercedes and BMW, there was some reprieve from the crippling 27.5% tariff imposed by Trump. The industry is Europe’s top exporter to the US but the German trade body, the VDA, warned that a 15% rate would “cost the German automotive industry billions annually”.

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Who’s the winner in the US-EU trade deal?

Meanwhile, François Bayrou, the French Prime Minister, described the agreement as a “dark day” for the union, “when an alliance of free peoples, gathered to affirm their values and defend their interests, resolves to submission.”

While the deal has divided the bloc, the greater certainty it delivers is not to be snubbed at.

Markets bounced on the news, even though the deal will ultimately harm economic growth.

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‘Millions’ of EU jobs were in firing line

Analysts at Oxford Economics said: “We don’t plan material changes to our eurozone baseline forecast of 1.1% GDP growth this year and 0.8% in 2026 in response to the EU-US trade deal.

“While the effective tariff rate will end up at around 15%, a few percentage points higher than in our baseline, lower uncertainty and no EU retaliation are partial offsets.”

However, economists at Capital Economics said the economic outlook had now deteriorated, with growth in the bloc likely to drop by 0.2%. Germany and Ireland could be the hardest hit.

While the US appears to be the obvious winner in this negotiation, uncertainty still hangs over the US economy.

Trump has not achieved his goal of “90 deals in 90 days” and, in the end, American consumers could still bear the cost through higher prices.

That of course depends on how businesses share the burden of those higher costs, with the latest data suggesting that inflation is yet to rip through the US economy. While Europe determined on Sunday that a bad deal is better than no deal, some fear that the worst is yet to come for the Americans.

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US and EU agree trade deal, says Donald Trump

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US and EU agree trade deal, says Donald Trump

The United States and European Union have agreed a trade deal, says Donald Trump.

The announcement was made as the US president met European Commission chief Ursula von der Leyen at one of his golf resorts in Scotland.

Speaking after talks in Turnberry, Mr Trump said the EU deal was the “biggest deal ever made” and it will be “great for cars”.

The US will impose 15% tariffs on EU goods into America, after Mr Trump had threatened a 30% levy.

He said there will be an EU investment of $600bn in the US, the bloc will buy $750bn in US energy and will also purchase US military equipment.

Mr Trump had earlier said the main sticking point was “fairness”, citing barriers to US exports of cars and agriculture.

He went into the talks demanding fairer trade with the 27-member EU and threatening steep tariffs to achieve that, while insisting the US will not go below 15% import taxes.

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For months, Mr Trump has threatened most of the world with large tariffs in the hope of shrinking major US trade deficits with many key trading partners, including the EU.

Ms von der Leyen said the agreement would include 15% tariffs across the board, saying it would help rebalance trade between the two large trading partners.

In case there was no deal and the US had imposed 30% tariffs from 1 August, the EU has prepared counter-tariffs on €93bn (£81bn) of US goods.

Ahead of their meeting on Sunday, Ms von der Leyen described Mr Trump as a “tough negotiator and dealmaker”.

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Bread producers Hovis and Kingsmill close in on historic merger

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Bread producers Hovis and Kingsmill close in on historic merger

The owners of Hovis and Kingsmill are closing in on a definitive agreement to merge two of Britain’s most famous grocery brands following months of talks.

Sky News has learnt Associated British Foods (ABF), the London-listed company which owns Kingsmill’s immediate parent, Allied Bakeries, has proposed paying roughly £75m to acquire Hovis from its long-term private equity backers.

Banking sources said a deal could be formally agreed to combine the businesses as early as the end of next week, although they cautioned the complexity of the transaction meant the timing could yet slip.

Confirmation of a tie-up would come nearly three months after Sky News revealed ABF and Endless – Hovis’s owner since 2020 – were in discussions.

Industry sources have estimated that a combined group could benefit from up to £50m of annual cost savings from a merger.

ABF has also been exploring options for the future of Allied Bakeries separate from its talks with Hovis in the event a deal could not be agreed or is prevented from completing by competition regulators.

If it does go ahead, the merger will unite two historic bread producers under common ownership, with Allied Bakeries having been founded in 1935 by Willard Garfield Weston, part of the family which continues to control ABF.

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Hovis traces its history back even further, having been created in 1890 when Herbert Grime scooped a £25 prize for coming up with the name Hovis, which was derived from the Latin ‘Hominis Vis’ – meaning “strength of man”.

Persistent inflation, competition from speciality bread producers and shifting consumer habits towards lower-carb diets have combined to impair breadmakers’ financial health in recent decades, however.

In accounts filed at Companies House earlier this month, Hovis said it had “achieved positive financial progress despite continued tough trading conditions”.

The company reported sales of £439.6m in the 52 weeks to 28 September last year, down from £477.6m in the 53 weeks to 30 September 2023.

Earnings before interest, tax, depreciation and amortisation fell from £20.9m to £18.7m, which Hovis said was the result of the revenue decline and higher distribution costs.

“Overall bread share remained stable, despite significant price inflation and the ongoing cost-of-living crisis, demonstrating the resilience of the Hovis brand and its iconic status as one of Britain’s most loved food brands,” the accounts said.

This week, the trade publication The Grocer reported that Britain’s big four supermarkets, including Asda and Sainsbury’s, had delisted a number of Hovis-branded products.

The publication quoted a Hovis spokeswoman as saying the company was “aware of some adjustments to Hovis product lines in certain stores”.

“We remain fully committed to working collaboratively with our retail partners to grow our mutual businesses.”

The overall UK bakery market is estimated to be worth about £5bn in annual sales, with the equivalent of 11m loaves being sold each day.

Critical to the prospects of a merger of Allied Bakeries, which also owns the Sunblest and Allinson’s bread brands, and Hovis taking place will be the view of the Competition and Markets Authority (CMA) at a time when economic regulators are under intense pressure from the government to support growth.

Warburtons, the family-owned business which is the largest bakery group in Britain, is estimated to have a 34% share of the branded wrapped sliced bread sector, with Hovis on 24% and Allied on 17%, according to industry insiders.

A merger of Hovis and Kingsmill would give the combined group the largest share of that segment of the market, although one source said Warburtons’ overall turnover would remain higher because of the breadth of its product range.

Responding to Sky News’ report in May of the talks, ABF said: “Allied Bakeries continues to face a very challenging market.

“We are evaluating strategic options for Allied Bakeries against this backdrop and we remain committed to increasing long-term shareholder value.”

In a separate presentation to analysts, ABF – which is also in the process of closing its Vivergo bioethanol plant in Hull after pleading for government support – described the losses at Allied, which also owns own-label bread manufacturer Speedibake, as unsustainable.

The company does not disclose details of Allied Bakeries’ financial performance.

Prior to its ownership by Endless, Hovis was owned by Mr Kipling-maker Premier Foods and the Gores family.

At the time of the most recent takeover, High Wycombe-based Hovis employed about 2,700 people and operated eight bakery sites, as well as its own flour mill.

Hovis’s current chief executive, Jon Jenkins, is a former boss of Allied Milling and Baking.

This weekend, ABF declined to comment, while Endless could not be reached for comment.

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