Connect with us

Published

on

The partisan standoff over the debt limit, which hardened over the weekend when 43 Senate Republicans said they would not support a clean debt-limit increase, sets the stage for severe turbulence in the financial markets, experts warn. 

The yield on Treasury bonds maturing next month spiked last week, signaling that investors are already preparing for the possibility that President Biden and Republican leaders in Congress won’t reach a deal before the Treasury Department runs out of money next month.  

Biden will meet with the top four congressional leaders at the White House Tuesday to discuss how to avoid a default, but lawmakers expect little progress from the meeting. It’s the first face-to-face meeting between Biden and Speaker Kevin McCarthy since Feb. 1. 

There’s growing pessimism in Washington and the financial markets that political leaders will negotiate a long-term deal by early June, the deadline set by Treasury Secretary Janet Yellen.  

If an agreement doesn’t come together in the next month, congressional leaders will have to agree to a short-term extension of the debt limit to give themselves more time to negotiate.  More debt ceiling coverage from The Hill: Pressure grows on Biden to bend in debt ceiling talks Debt limit battle: How we got here

Without a short-term agreement, the US would go past the so-called “X-date” and face major turmoil in the markets.  

“I genuinely believe there’s a better-than-50-percent chance that there will be default, it will occur over a weekend and when the chaos it creates becomes obvious to all the players, they’ll have to reach some sort of accommodation,” said former Sen. Judd Gregg (R-N.H.), who previously served as Senate Budget Committee chairman and an advisor to Senate Republican Leader Mitch McConnell’s (Ky.) leadership team. 

“The potential is pretty dire,” he warned. “Right now, you don’t have the leadership to solve the problem, that’s the bottom line.” 

Gregg said McCarthy faces a challenge to his speakership if he brings a debt-limit bill to the House floor without major fiscal reforms, but the cuts that he’s proposing don’t have a chance of passing the Senate. 

McConnell’s support for a letter signed by 43 Senate Republicans declaring they will not support “any bill that raises the debt ceiling without substantive spending and budget reforms” has failed to move Democrats away from insisting on a clean debt-ceiling increase.  

“I don’t know what Democrats have to negotiate,” said a senior Senate Democratic aide, who pointed out that Republicans agreed to raise the debt limit three times under former President Trump without drama. “We’re not the ones being inconsistent.” 

“At the end of the day, a lot of their behavior is playacting,” the aide said, predicting a spike in stock and bond market volatility will pressure Republicans into backing off their demands. “They have investments, too.” 

The aide, pointing to the downgrade of the nation’s credit rating in the 2011 debt-limit standoff, said that this year’s battle in Washington over the debt ceiling would also shake the financial markets.

“We have in the past. I don’t know why this would be different,” the aide said.  

Financial markets are already starting to show signs of stress related to the impasse over the debt ceiling. 

One-month Treasury bills maturing around a projected date in early June, when the government could run out of money, saw their yields spike to 5.76 percent last week. 

Yields have climbed far above recent averages closer to 4.5 percent and significantly higher than the recent low of 3.3 percent in April. 

“The Treasury bills curve appears to imply risk of disruption in June, July, and October,” Goldman Sachs chief economist Jan Hatzius wrote in a note last week to investors. 

Treasury bills maturing in early June were trading at more than a 50-basis point discount compared to May and July at the end of last week. 

“Investors are paying a healthy premium to own bills that mature in May while demanding hefty compensation to hold T-bills that are maturing in the first half of June,” analysts for Wells Fargo wrote in a note to investors last week. 

Wall Street insurance policies, which are known as credit default swaps, against one-year Treasuries hit a record-high spread of 1.77 percent late last week in a spike that was notable both for its timing and its size. 

“There is likely genuine fear that a divided government and increased political polarization could make finding a solution less likely. Meanwhile, the dual threats of rising deficits (with larger federal payments, some indexed to inflation) and higher Treasury debt service costs also increase the chance of an accident, contributing to the higher perceived riskiness of owning US debt,” Deutsche Bank analyst Steven Zeng wrote in a May 5 note. 

Uncertainty in the Treasury market, which is already dealing with one of the fastest quantitative tightening cycles in decades, could spell more trouble for the U.S. banking sector. 

Sen. John Cornyn (Texas), an advisor to the Senate Republican leadership team, said local and regional banks in his state worried about losing deposits. 
“This is a very dangerous situation. There’s been a big shift in deposits to places people perceive as safer,” he said. “All of them are nervous, our community bankers, our regional bankers. We need to try to calm this down.”  

Cornyn said the possibility of a national default isn’t helping to calm the jittery banking sector. 

“I think it’s creating unnecessary anxiety,” he said.  

One senior Senate Republican aide warned that a drop in demand for Treasury securities could trigger a broader market selloff.  

Treasury security auctions will likely become increasingly sensitive to the Treasury Department’s looming X-date, analysts say.  

“Yields are elevated beginning with the June 6 maturity, which the Treasury in January suggested was the soonest the Treasury could exhaust resources under the debt limit. The yield is highest around mid- to-late-July maturities, when we think the Treasury will have exhausted resources under the debt limit if it has not in June,” analysts for Goldman Sachs wrote. 

Auctions scheduled for this Thursday for four-week and eight-week bills due to mature within this time frame could see some additional stress, as could auctions on May 25, June 8 and June 15. 

The Bipartisan Policy Center argued in an analysis published Tuesday that “managing Treasury security auctions and meeting all obligations will become increasingly challenging as reserves dwindle.”  

“Concerns are also mounting that the country could find itself in a similar position to 2011, when Standard & Poor’s downgraded the U.S. from its AAA rating,” the think tank said. 

Yellen warned in an interview with ABC’s “This Week” that “it’s widely agreed that financial and economic chaos will ensue” if Congress fails to act by the deadline.   Debt limit battle: How we got here US could default on national debt as soon as early June: analysis

A report published by the Penn Wharton Budget Model Monday said the deadline to raise the nation’s debt ceiling will hit sooner than previously thought because tax receipts in April fell below projections.  

Alexander Arnon, the director of business tax and economic analysis for the Penn Wharton Budget Model, said “we found, as noted by the Treasury secretary and by the Congressional Budget Office, that tax receipts in April came in quite a bit lower.”  

“There was a drop off [in tax receipts] relative to what was expected and we are much closer [to default] than people had hoped earlier this year,” he said.  

Continue Reading

World

Israel announces military operation expanding in Gaza to seize ‘large areas’

Published

on

By

Israel announces military operation expanding in Gaza to seize 'large areas'

Israel is beginning a major expansion of its military operation in Gaza and will seize large areas of the territory, the country’s defence minister said.

Israel Katz said in a statement that there would be a large scale evacuation of the Palestinian population from fighting areas.

In a post on X, he wrote: “I call on the residents of Gaza to act now to remove Hamas and return all the hostages. This is the only way to end the war.”

He said the offensive was “expanding to crush and clean the area of terrorists and terrorist infrastructure and capture large areas that will be added to the security zones of the State of Israel”.

The expansion of Israel’s military operation in Gaza deepens its renewed offensive.

The ceasefire between Israel and Hamas that had begun in January ended in March as Israel launched various air strikes on targets across Gaza.

The deal had seen the release of dozens of hostages and hundreds of Palestinian prisoners, but collapsed before it could move to phase two, which would have involved the release of all hostages and the withdrawal of Israeli forces from Gaza.

Please use Chrome browser for a more accessible video player

26 March: Anti-Hamas chants heard at protest in Gaza

The Israel Defense Forces (IDF) had already issued evacuation warnings to Gazans living around the southern city of Rafah and towards the city of Khan Yunis, telling them to move to the al Mawasi area on the shore, which was previously designated a humanitarian zone.

Israeli forces have already set up a significant buffer zone within Gaza, having expanded an area around the edge of the territory that had existed before the war, as well as a large security area in the so-called Netzarim corridor through the middle of Gaza.

This latest conflict began when Hamas launched an attack on Israel on 7 October 2023, killing around 1,200 people and taking around 250 hostages.

The ensuing Israeli offensive has killed more than 50,000 Palestinians, according to Gaza’s Hamas-run health ministry.

Read more:
Father demands protection after Gaza aid workers’ deaths
Anti-Hamas chants heard at rare protest in Gaza

Please use Chrome browser for a more accessible video player

Bodies of aid workers found in Gaza

Aid group Doctors Without Borders warned on Wednesday that Israel’s month-long siege of Gaza means some critical medications are now short in supply and are running out, leaving Palestinians at risk of losing vital healthcare.

“The Israeli authorities’ have condemned the people of Gaza to unbearable suffering with their deadly siege,” said Myriam Laaroussi, the group’s emergency coordinator in Gaza.

“This deliberate infliction of harm on people is like a slow death; it must end immediately.”

Continue Reading

UK

Heathrow bosses ‘warned about substation’ days before major power outage, MP committee hears

Published

on

By

Heathrow bosses 'warned about substation' days before major power outage, MP committee hears

Heathrow Airport bosses had been warned of a potential substation failures less than a week before a major power outage closed the airport for a day, a committee of MPs has heard.

The chief executive of Heathrow Airline Operators’ Committee Nigel Wicking told MPs of the Transport Committee he raised issues about resilience on 15 March after cable and wiring took out lights on a runway.

A fire at an electricity substation in west London meant the power supply was disrupted to Europe’s largest airport for a day – causing travel chaos for around 200,000 passengers.

“I’d actually warned Heathrow of concerns that we had with regard to the substations and my concern was resilience”, Mr Wicking said.

“So the first occasion was to team Heathrow director on the 15th of the month of March. And then I also spoke to the chief operating officer and chief customer officer two days before regarding this concern.

“And it was following a number of, a couple of incidents of, unfortunately, theft, of wire and cable around some of the power supply that on one of those occasions, took out the lights on the runway for a period of time. That obviously made me concerned.”

Mr Wicking also said he believed Heathrow’s Terminal 5 could have been ready to receive repatriation flights by “late morning” on the day of the closure, and that “there was opportunity also to get flights out”.

However, Heathrow chief executive Thomas Woldbye said keeping the airport open during last month’s power outage would have been “disastrous”.

There was a risk of having “literally tens of thousands of people stranded in the airport, where we have nowhere to put them”, Mr Woldbye said.

This breaking news story is being updated and more details will be published shortly.

Please refresh the page for the fullest version.

You can receive breaking news alerts on a smartphone or tablet via the Sky News app. You can also follow us on WhatsApp and subscribe to our YouTube channel to keep up with the latest news.

Continue Reading

Business

What are Donald Trump’s tariffs, what is ‘liberation day’ and how does it all affect the UK?

Published

on

By

What are Donald Trump's tariffs, what is 'liberation day' and how does it all affect the UK?

If there is a word that has dominated Donald Trump’s second term, it’s tariffs. 

Aluminium, steel, cars and champagne have all been in his firing line, while China, Canada and Mexico are the countries targeted with the heaviest costs.

Along the way, there have been threats, pauses and postponements.

So what are tariffs, what is in the pipeline – and what could all this mean for the UK?

What are tariffs and why is Trump threatening to use them?

Tariffs are taxes on goods imported into the US.

It is the importers buying the goods who pay the tariffs – therefore, American companies.

Ultimately, the intent is to protect US manufacturing and bolster jobs by making foreign-made products less attractive.

However, there is a knock-on effect: to compensate for tariffs, companies put up their prices, so customers end up paying more for goods.

Tariffs can also damage foreign countries as they make their products pricier and harder to sell.

In his second term, Mr Trump has frequently used them – or the threat of them – as a trade weapon.

Please use Chrome browser for a more accessible video player

Trump’s tariffs: What can we expect?

They are a key part of Mr Trump’s efforts to reshape global trade relations, and he plans to impose a swathe of what he calls “reciprocal” taxes that would match tariffs levied by other nations.

Tariffs were also part of his playbook in his first term, when he imposed taxes on most goods coming from China and used them as a bargaining chip to force Canada and Mexico to renegotiate a North American trade pact.

On his first day back in office, the US president promised 25% tariffs on all products coming into the US from its nearest neighbours Mexico and Canada – ostensibly to force the countries to tackle illegal migration and fentanyl crossing the border.

What is liberation day?

Mr Trump has branded 2 April “liberation day”, when he could unveil the reciprocal tariffs on countries deemed to be giving the US a bad deal on trade.

The extent of potential tariffs and countries affected remains unclear, with Mr Trump at times sending mixed messages.

On 30 March, he said “all countries” could expect to be hit by tariffs.

Please use Chrome browser for a more accessible video player

What is Trump’s ‘Liberation Day’?

Speaking from Air Force One, the US president rubbished a question from a reporter who asked whether it was true he was planning on targeting between 10 and 15 countries.

“Who told you 10-15 countries? You didn’t hear it from me,” he said.

When pressed on how many he was planning to hit, he said: “You’d start with all countries, let’s see what happens.”

Two days prior, he said he was open to carving out deals with countries seeking to avoid US tariffs, but that those agreements would be negotiated after 2 April.

He had previously said he “may give a lot of countries breaks, but it’s reciprocal”, adding: “We might be even nicer than that.”

How could the UK be affected?

The UK hopes an economic deal with the US will spare the country from some of the tariffs.

Sir Keir Starmer and Mr Trump have had “productive negotiations” towards a UK-US “economic prosperity deal”, Downing Street has said.

Please use Chrome browser for a more accessible video player

‘Everything on table over US tariffs’

The two leaders discussed a possible deal in a phone call on Sunday and agreed negotiations will “continue at pace”, according to a statement released on Sunday 30 March.

The day before the so-called “liberation day”, Sir Keir told Sky News political editor Beth Rigby the UK was “working hard on an economic deal” with the US and said “rapid progress” has been made.

But, he admitted: “Look, the likelihood is there will be tariffs. Nobody welcomes that, nobody wants a trade war.

“But I have to act in the national interest and that means all options have to remain on the table.”

Sir Keir added: “We are discussing economic deals. We’re well advanced.

“These would normally take months or years, and in a matter of weeks, we’ve got well advanced in those discussions, so I think that a calm approach, a collected approach, not a knee-jerk approach, is what’s needed in the best interests of our country.”

Mr Trump has not explicitly said the UK is in his sights for further tariffs, though he has described VAT – a tax added on all goods and services in the UK – as unfair.

In deciding what is a reciprocal tariff for the UK, it’s possible Mr Trump could use the tax, typically 20%, to decide.

Data shows no great trade imbalances – the gap between what you import and export from a certain country – and UK figures show no trade deficit with the United States.

UK ministers have previously suggested this could be good news for avoiding new levies.

But the tariffs Mr Trump has already announced would have a big impact on the UK – particularly the car tariff.

Please use Chrome browser for a more accessible video player

Business secretary hopes Trump tariffs will be ‘reversed in weeks or months’

Jonathan Reynolds, the business and trade secretary, told Sky News he is “hopeful” the tariffs can be reversed soon.

He warned: “The longer we don’t have a potential resolution, the more we will have to consider our own position in relation to [tariffs], precluding retaliatory tariffs.”

He added the government was taking a “calm-headed” approach in the hope a deal can be agreed, but said it is only “reasonable” that retaliatory tariffs are an option, echoing Sir Keir’s sentiments over the weekend.

What tariffs have already been announced?

Some tariffs have already come into effect, while Mr Trump has confirmed some that will come in on 2 April.

He has said a 25% tariff on all cars imported to the US will come into effect, with a similar tariff on car parts expected to follow in May.

This could prove even more complicated for American car makers, who source components from around the world even if the vehicle is made in the US.

Trump tariffs teaser for SEO liberation day explainer

But Mr Trump has insisted the move will “continue to spur growth”, pointing to plans from Hyundai – the South Korean car maker – to build a $5.8bn (£4.5bn) steel plant in Louisiana.

The tariff could have a huge impact on the UK’s car industry, including on manufacturers such as Jaguar Land Rover, Aston Martin and Rolls-Royce.

Official data shows the US is the UK car sector’s largest single market by country, accounting for £6.4bn worth of car exports in 2023 – 18.4% of the total.

Trump has also said he will place a 25% tariff on all imports from any country that buys oil or gas from Venezuela, which includes the US itself – in addition to imposing new tariffs on the South American country.

On 12 March, a 25% tariff on all steel and aluminium imports to the US came into effect, affecting UK products worth hundreds of millions of pounds.

The move came after he placed a 10% tax on all imports from China, which he later doubled to 20%.

He placed 25% tariffs on Mexico and Canada, but paused them for a month two days after they came into effect, meaning they are set to resume on 2 April.

The pause did not fully cover a tariff of 10% on Canadian energy products.

What has been the global response to tariffs?

There has widely been condemnation of the tariffs, especially from countries worst affected like Mexico and Canada.

Please use Chrome browser for a more accessible video player

Canadian PM: ‘Tariffs are an attack’

Some have imposed, or threatened to impose, retaliatory tariffs.

China has already hit back with retaliatory tariffs covering a range of US goods, including a 15% tariff on coal and liquefied natural gas products, a 10% tariff on US crude oil and tariffs of up to 15% on key US farm exports.

Canada imposed tariffs of its own on US products, including a 25% reciprocal tariff on US steel and aluminium products and tariffs worth an estimated C$29.8bn (£16bn) on a wide range of US products including orange juice, peanut butter, alcohol, coffee and clothing.

Read more on tariffs:
It may be harder for the UK to trump metals tariffs
Stock markets tumble as Trump tariffs loom

The European Union has said it will impose retaliatory tariffs on the US, but when they will come into force is unknown.

The European Commission initially threatened to impose “countermeasures” affecting €26bn (£21.9bn) of US goods from 1 April, but later delayed this until the middle of April.

The bloc said the delay was because it wanted “additional time for discussions” with the US after Mr Trump threatened a 200% tariff on EU alcohol – including wine and champagne – if the bloc imposed duties on US whiskey.

Any tariffs imposed by the bloc would not only impact US steel and aluminium products, but also textiles, home appliances, agricultural goods and whiskey.

Why tariffs could cost you – even if Trump spares UK

Even if no tariffs are put on all UK exports to the US, consumers globally will still be impacted by the wider trade war, particularly in the US.

Economists believe that tariffs will raise costs in the US, sparking a wave of inflation that will keep interest rates higher for longer. The US central bank, the Federal Reserve, is mandated to act to bring inflation down.

More expensive borrowing and costlier goods and services could bring about an economic downturn in the US and have knock-on effects in the UK.

Forecasts from the National Institute of Economic and Social Research (NIESR) predict lower UK economic growth due to higher global interest rates.

It estimated that UK GDP (a measure of everything produced in the economy) could be between 2.5% and 3% lower over five years and 0.7% lower this year.

The Centre for Inclusive Trade Policy thinktank said a 20% across-the-board tariff, impacting the UK, could lead to a £22bn reduction in the UK’s US exports, with the hardest-hit sectors including fishing and mining.

Continue Reading

Trending