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China may target the European Union’s pork producers in retaliation for EU tariffs on its electric cars.

The world’s second largest economy revealed on Monday that it had launched an investigation into imports of pork for human consumption from the bloc.

The Commerce ministry inquiry was in response to a complaint by Chinese pork producers earlier this month.

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The announcement was made less than a week after the European Commission said it would impose additional tariffs of up to 38% on battery electric cars imported from China by 4 July, unless a remedy could be agreed.

The planned penalties, which Europe’s car industry opposes, are a response to what the commission sees as unfair Chinese state support for manufacturers that is pricing out European competitors.

By targeting pork, instead of tit-for-tat measures on EU-made electric vehicles, China would avoid harming its own car brands’ European operations.

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‘It doesn’t have to be war with China’

Spain, the Netherlands, Denmark and France are among the top seven exporters of pig-related goods to China.

Russia and South America could be the main beneficiaries of any resulting tariffs on EU pork.

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Spain is the top supplier of pork to China, accounting for a quarter of all imports at a value of $1.25bn annually, according to Chinese customs data.

Spanish pork producers group Interporc said it would fully cooperate with the investigation by Chinese authorities, adding: “The EU and China have plenty of time to reach agreements.”

Its Danish counterpart warned producers would be “hit incredibly hard” by any restrictions on sales to China.

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Thames Water rescue plan promises £20.5bn investment

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Thames Water rescue plan promises £20.5bn investment

The group of Thames Water lenders aiming to rescue the company have set out plans for £20.5bn of investment to bolster performance.

The proposals, submitted to the regulator for consideration, include commitments to spending £9.4bn on sewage and water assets over the next five years, up 45% on current levels, to prevent spills and leaks respectively.

Of this, £3.9bn would go towards the worst performing sewage treatment sites following a series of fines against Thames Water, and other major operators, over substandard storm overflow systems.

It said this would be achieved at the 2025-30 bill levels already in place, so no further increases would be needed, but it continued to argue that leniency over poor performance will be needed to effect the turnaround.

The creditors have named their consortium London & Valley Water.

It effectively already owns Thames Water under the terms of a financial restructuring agreed early in the summer but Ofwat is yet to give its verdict on whether the consortium can run the company, averting the prospect of it being placed in a special administration regime.

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Thames is on the brink of nationalisation because of the scale of its financial troubles, with debts above £17bn.

Without a deal the consortium, which includes investment heavyweights Elliott Management and BlackRock, would be wiped out.

Ofwat, which is to be scrapped under a shake-up of oversight, is looking at the operational plan separately to its proposed capital structure.

The latter is expected to be revealed later this month.

Sky News revealed on Monday that the consortium was to offer an additional £1bn-plus sweetener in a bid to persuade Ofwat and the government to back the rescue.

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Thames Water handed record fine

Mike McTighe, the chairman designate of London & Valley Water, said: “Over the next 10 years the investment we will channel into Thames Water’s network will make it one of the biggest infrastructure projects in the country.

“Our core focus will be on improving performance for customers, maintaining the highest standards of drinking water, reducing pollution and overcoming the many other challenges Thames Water faces.

“This turnaround has the opportunity to transform essential services for 16 million customers, clean up our waterways and rebuild public trust.”

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The government has clearly signalled its preference that a market-based solution is secured for Thames Water, though it has lined up a restructuring firm to advise on planning in the event the proposed rescue deal fails.

A major challenge for the consortium is convincing officials that it has the experience and people behind it to meet the demands of running a water company of Thames Water’s size, serving about a quarter of the country’s population.

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No room for Treasury complacency as UK hit by toxic cocktail of market shifts

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No room for Treasury complacency as UK hit by toxic cocktail of market shifts

No chancellor much likes it when the pound takes a tumble. No chancellor much likes it when the yield on their government debt – the interest rate paid by the state – climbs to historic highs.

When these two things happen on the same day, and in the run-up to a hotly-awaited Budget… well, that’s the last thing any chancellor ever wants to see coming up on their screen. Yet that was the toxic cocktail that awaited Rachel Reeves on the terminal screens in the Treasury on Tuesday morning.

The pound dropped by more than a percent against the US dollar, while the yield on 30-year government debt (known as gilts) rose to the highest level since 1998.

The real question now is: how much does she have to worry about it and, more to the point, what can she do about it?

Let’s start with the first question first. Bond yields are a measure of the interest rate paid on debt and, in the case of government debt, they are influenced by all sorts of things. This makes interpreting their movements quite tricky, at the best of times.

For in one respect, they are a proxy for how creditworthy (or not) investors think a government is. If they think a country is about to default on its debt (Greek bonds and the euro crisis are perhaps the best example) then they might sell a country’s bonds and, lo and behold, the interest rate on those bonds goes up.

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Inflation up by more than expected

But in another respect they also reflect what people think will happen to inflation and interest rates in the coming years (or, in the case of long-dated bonds like the 30-year gilt, the coming decades). So, if you think inflation is going to be higher for longer, then all else equal, you would expect gilt yields to be higher, since that implies the Bank of England will have to keep its interest rates higher. It all feeds into the government bond yield.

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Nor is that the end of it, because these yields are also affected by all sorts of other things: how much demand is there from pension funds? What’s the impact of the ageing population? How fast is the country going to grow? All of these things (and more) can have a bearing on the bond yield.

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All of which is to say, there’s rarely a single explanation for phenomena like the one we’ve got today. Consider the higher 30-year bond yields faced by the UK. On the one hand, there’s a compelling explanation served up by the Whitehall and parliamentary drama of recent months.

The government has failed to pass some key legislation cutting welfare spending. It has also had to do a U-turn on cutting winter fuel payments. Those two decisions mean it is left with a sizeable hole in the public finances in the coming years. That in turn makes it considerably more likely that it might have to borrow more, which in turn means investors might be getting more worried about Britain’s indebtedness. That’s totally consistent with higher gilt yields. And so perhaps it’s no surprise that the UK’s 30-year bond yield is considerably higher than other G7 nations.

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Tax rises playing ’50:50′ role in rising inflation

But it’s not quite that simple. For one thing, Britain is far from the only country in the G7 with a public finances problem. France and the US have deficit trajectories that look considerably less controlled than Britain’s. Nor is it evident from other measures of fiscal concern – for instance, the credit default swaps insuring against a country going bust – that Britain is an outlier.

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Now consider another datapoint: inflation. Britain has the highest inflation rate in the G7, by some margin. In other words, part of the explanation for the UK’s high yields is that markets are fretting not just about fiscal policy (the stuff done in Whitehall) but monetary policy (the stuff done by the Bank of England in the city).

Now, in practice these two worlds bleed into each other. Part (though certainly not all) of the reason inflation is high is those National Insurance hikes introduced by the Labour government.

In short, this is a bit more complicated than some of the more breathless commentary in recent weeks might have you believe. Even so, regardless of how you balance those explanations, there is no doubting that Britain finds itself in a tricky position.

This combination – of high inflation, weak economic growth and a large and swelling budget deficit – is precisely the economic cocktail that landed the Labour government of the mid-1970s with an IMF bailout. We are a long, long way from anything like that happening this time around. But the ingredients are familiar enough that no one should be altogether complacent.

After all, the last time a government got overly complacent about these factors, back in 2022, we all know what happened next. The mini-Budget, a vertiginous spike in bond yields and a period where Britain’s financial markets stared into the precipice. Best not to repeat that again.

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Pound drops as 30-year gilt yields at highest level this century

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Pound drops as 30-year gilt yields at highest level this century

The value of the pound has sunk – as the cost of 30-year government borrowing reached a high last seen in 1998.

The so-called spot rate saw one pound buy $1.336 on Tuesday, a low last seen in early August, and down from $1.353 earlier in the day.

Despite the dip, it’s still higher than the vast majority of the past year: in early September 2024, a pound bought $1.31.

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The decline, however, means sterling is on course for the biggest one-day drop since April, when Donald Trump’s announcement of country-specific tariffs spooked markets.

The drop was similarly steep against the euro, with a pound momentarily buying €1.1486, a low not seen since November 2023, nearly two years ago. It’s also a fall from €1.1586 earlier in the trading session.

Before the so-called liberation day announcement, £1 equalled nearly €1.19.

It comes as the yield – the interest rate demanded by investors – on 30-year government bonds – loans taken by the state – hit 5.72%, the highest rate this century.

Why?

Yields are rising across the globe in the face of weak economic growth and the US trade war.

Investors are also concerned about UK government finances as Chancellor Rachel Reeves battles to stick to her fiscal rules to bring down debt and balance the budget.

High inflation and increased public debt from the pandemic have left a deficit between state spending and income.

There have been high-profile government U-turns on winter fuel payments and welfare spending cuts that have meant the chancellor has to look elsewhere to meet her self-imposed fiscal rules.

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More expensive interest payments from rising bond yields have meant the country is stuck in a cycle of rising debt.

Today’s rises to the cost of government borrowing could not have come at a worse time for the public finances.

While a £14bn sale of new 10-year government debt – a record sum – was completed, it was achieved at the highest yield since 2008.

Lale Akoner, global market analyst at investment platform eToro, said of the auction: “For the government, this creates a paradox – market confidence in UK debt is robust, but financing that debt is increasingly expensive, constraining budget flexibility and raising the stakes for fiscal discipline ahead of the autumn budget.”

The yield on 10-year gilts, as they are known in the UK, later rose to its highest since January at 4.825%, up on the day but in line with their transatlantic equivalent, US Treasuries.

The global bond sell-off was also being reflected on stock markets.

The Dow Jones Industrial Average and tech-focused Nasdaq were both down by more than 1% at the open on Wall St.

In Europe, Germany’s DAX was 2% lower while the FTSE 100 was just 0.6% down as it is less exposed to declines in technology stocks which have accounted for much of the value growth seen over the summer.

The flight from risk also saw the spot price of gold, traditionally a safe haven for investors in times of uncertainty, briefly climb to a new record high of $3,578.40 per ounce.

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