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Briefs: It may take a shock rate hike for traders to leave the UK pound alone

The Edge Singapore
The Edge Singapore • 8 min read
Briefs: It may take a shock rate hike for traders to leave the UK pound alone
The UK pound plunged almost 5% to a record low after Chancellor of the Exchequer Kwasi Kwarteng vowed to press on with more tax cuts. Photo: Bloomberg
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It may take a shock rate hike for traders to leave the UK pound alone

“Be more forceful”: That is the message to the Bank of England (BoE) from the financial community, convinced that only massive policy-tightening to lift rates above those of the Federal Reserve (Fed) will stabilise the UK pound.

This comes after the UK pound plunged some 4.7% to a record low after the new Chancellor of the Exchequer, Kwasi Kwarteng, vowed to press on with more tax cuts, even as markets delivered a damning verdict on his fiscal policies. The bulk of the currency’s slide on Sept 26 took place in a frantic 20-minute sell-off, evoking traders’ cries of a flash crash. The UK pound fell to as low as US$1.0350 ($1.49) before bouncing back slightly to trade at US$1.0805 on Sept 29.

The BoE acted on Sept 28 to staunch the bond sell-off, announcing a plan to buy long-dated bonds that fueled a record rally in 30-year gilts. But the impact on the UK pound was shortlived, with the currency soon resuming losses and extending the more than 5% sell-off since the Sept 23 tax-cut announcements.

The bond-buying scheme may not let the bank off the rate-hike hook, and some financial experts are still calling for an emergency intra-meeting rate hike to support the currency. They also say the central bank needs to take bolder steps after the government’s unfunded tax cuts and the subsequent gilt market blow-up harmed officials’ credibility in fighting inflation.

See also: UK inflation slows to 2% goal for first time in three years

“There’s a broader issue, which is the loss of credibility in policy making,” said Mohamed El-Erian, chief economic adviser at Allianz SE. “Policymakers will have to go beyond what they would normally have to go as the Fed is doing in the US.” El-Erian added the BoE needed to raise rates by at least 100 basis points (bps) before the meeting, saying an even more significant hike of 150 bps before then “is not off the table.”

But the BoE has played down chances of such a move which would have evoked memories of the 1992 Black Wednesday crisis, leaving UK pound-watchers at banks and asset management firms in anticipation of the Nov 3 meeting.

Analysts reckon that policymakers would need to outdo the Fed in hawkishness at that meeting and subsequent ones. That means taking the critical rate to about 6%, above estimates of the 4.4% terminal Fed rate that’s currently priced. Money markets are pricing some 160 bps of BoE tightening next month.

See also: How the US mopped up a third of global capital flows since Covid

The UK pound briefly jumped after the BoE announcement and then resumed losses. It strengthened again, heading into US afternoon trading as the dollar slid against most major currencies. — Bloomberg

Porsche’s upcoming IPO to be the largest in Europe

German vehicle manufacturer Volkswagen (VW) set the final listing price for Porsche at EUR82.50 per share, valuing the company at EUR75 billion ($104 billion) as it seeks to prove that the iconic sports-car brand can sidestep the slump in capital markets and pull off Europe’s largest initial public offering (IPO) in a decade.

A meeting of VW’s supervisory board and its executive committee on Sept 28 approved the final list price, which sits at the upper limit of the EUR76.50 to EUR82.50 range first offered to investors. Porsche will mark its first day of trading when markets open on Sept 29 in Frankfurt.

The sale will help Volkswagen raise funds to plough into its electrification push. At the same time, investors get a slice of an emotional brand akin to Ferrari, which also managed a successful separation from parent Fiat in 2015.

“If you can pull off an IPO in such a difficult market, it shows the attractiveness of the business,” Jefferies analyst Philippe Houchois said. “Porsche is a mature, well-known business that doesn’t need to raise capital. Putting it on the market as a fully formed business — being able to pull that off is quite impressive.”

According to data compiled by Bloomberg, companies raised less than US$10 billion ($14 billion) in IPOs this year through August, an 83% drop in proceeds from last year. The data showed that Porsche’s listing is the largest in Europe since miner Glencore raised almost US$10 billion in a London IPO in 2011.

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The share price puts Porsche at a valuation that is not far from VW’s total market capitalisation —a business that comprises Audi, Skoda, Seat and the VW brand, among others. Yet, for all its aggressive marketing, the listing has also garnered negative attention for its complex structure.

Volkswagen divided Porsche’s share capital into equal voting and non-voting shares, with the German carmaker retaining 75% ownership. Some 12.5% of total share capital — only non-voting shares — is publicly listed, with a large portion going to four cornerstone investors. Qatar Investment Authority, Norway’s sovereign wealth fund, T. Rowe Price and ADQ have committed to taking up as much as EUR3.7 billion of the IPO.

The other 12.5% of total shares go directly to VW’s largest shareholders — the billionaire Porsche and Piech family — via their investment company Porsche Automobil Holding. The family already owns a 53% majority of VW’s voting shares. Under the IPO terms, they will also get 25% plus one share of Porsche AG’s voting stock, paying a small premium to preferred shares for a total of EUR10.1 billion.

Porsche SE will mainly finance the acquisition with a debt capital of EUR7.9 billion, buying shares in two tranches starting next month. The second purchase is expected in January, following a special dividend payout by VW.

Until 2009, the family-owned half of Porsche and all voting rights, but they were forced to sell the sports-car business to VW after their attempt to take over the German carmaker went awry. The IPO restores family control over an asset long out of reach: They get a blocking minority on the sports-car maker’s supervisory board, and their status as VW anchor shareholder bolsters that control.

Porsche is targeting revenue of as much as EUR39 billion this year and a return on sales of 18%, up two percentage points from last year, the company said in July. Returns are to climb above 20% in the long term.

Besides the ownership structure, governance is another issue for some investors. Porsche CEO Oliver Blume was recently elevated to CEO of Volkswagen while retaining his post at the unit. An analysis from Bernstein shows that Porsche’s market capitalisation should sit at EUR80 billion, just below luxury companies but at the higher end of carmakers. — Bloomberg

Manufacturing output increased in August

Singapore’s manufacturing output increased by 0.5% y-o-y in August, moderating from the 2.2% growth seen in June and the 0.6% growth in July. Despite the figure marking the slowest y-o-y growth since September last year, August’s figure marks an improvement in m-o-m terms after two straight months of contraction. The y-o-y growth also surprised Bloomberg’s forecast for a 0.7% contraction print.

The main drags during the month were due to the electronics and chemical clusters, which registered y-o-y declines of 7.8% and 11.2%, respectively. These were mitigated by the y-o-y growths seen in the rest of the clusters.

Excluding biomedical manufacturing, August’s output fell by 1.2% y-o-y. On a seasonally adjusted m-o-m basis, manufacturing output grew by 2%. Output, however, declined 2.9% m-o-m, excluding biomedical manufacturing.

In August, transport engineering saw the highest growth, with output increasing by 32.8% y-o-y. This was thanks to the growth in the marine and offshore engineering and aerospace segments, which were supported by a higher level of work done in ship repair and offshore projects and higher demand for aircraft parts from the US and more maintenance, repair and overhaul jobs from commercial airlines.

Output for the general manufacturing cluster grew by 18.8% y-o-y in August, with all segments registering output growth. The food, beverage and tobacco segment expanded because of the higher beverage and dairy products output. In contrast, the various industries and printing segments grew due to the former recording higher production of structural metal products, wearing apparel and paperboard containers.

On the other hand, output for the biomedical manufacturing cluster increased by 11.1% y-o-y, with both segments seeing growth in their output. The medical technology segment expanded due to higher demand for medical devices from the US and China. In contrast, the pharmaceuticals segment grew due to a different mix of active pharmaceutical ingredients.

The precision engineering cluster saw output grow by 2.9% y-o-y due to the higher output in the machinery and systems segment, which grew on account of the higher output of semiconductor-related equipment. However, the output of the precision modules and components segment fell due to the lower production of optical products, electronic connectors and bonding wires. Output for the electronics cluster fell by 7.8% y-o-y, with all segments logging a y-o-y decline on softening demand.

Meanwhile, output for the chemicals cluster fell by 11.2% y-o-y due to the declines in output of the specialities and other chemicals segments and the petrochemicals segment. The specialities segment recorded lower production of mineral oil additives and industrial gases while the other chemicals segment reported lower output of fragrances. The decline in the petrochemicals segment contracted due to plant maintenance shutdowns. On the other hand, output for the petroleum segment increased by 8.1% y-o-y on account of higher demand for jet fuel driven by the relaxation of international air travel restrictions.

On a three-month moving average basis, manufacturing output rose 1.3% y-o-y in August. — Felicia Tan

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