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Markets in a tailspin get a big dose of chill from the Bank of England | CNN Business


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All the drama out of the UK government is keeping me from catching up on the only 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 ostensibly about, like, the economy or whatever, I’ll do my best to unpack what in God’s name is going on with that whole…thing.

Here’s the deal: Following the drastic decline in the value of the pound, the Bank of England staged an emergency intervention Wednesday to try to calm panic in financial markets.

Investors have been dumping UK assets for days, threatening to crash the massive bond market and creating volatility in pockets of the financial world that are normally steady and, dare I say, incredibly boring.

KEY CONTEXT:

  • All this chaos stems from the newly installed UK government’s radical tax cut plan. And when I say “radical,” I promise I’m not editorializing: You’ll be hard-pressed to find any mainstream economist or analyst who’s backing Prime Minister Liz Truss’ cuts, which will require huge amounts of government borrowing to pay for.
  • Not to put too fine a point on it: The International Monetary Fund issued a highly unusual rebuke of the UK tax plan, saying it would likely increase inflation and inequality. That’s the kind of thing the IMF might say to an emerging economy — not a G7 nation with a track record of stable finances.
  • And Charlie Bean, a former deputy governor of the Bank of England, told my colleague Julia Horowitz the government was making “really stupid” decisions.

Anyway, where were we? Oh right, bond markets melting down…

So, on Wednesday afternoon in the UK, the Bank of England, which is independent from the government, stepped in to administer the financial equivalent of a Valium in the form of buying up bonds “on whatever scale is necessary” to restore order.

That seemed to work, at least for now: Bond markets on both sides of the Atlantic responded positively, as yields came off their highs and investors breathed a sigh of relief. The US 10-year Treasury yield, which had briefly topped 4% for the first time in over a decade, reversed course and settled around 3.70%. US stocks, which had opened in the red, rallied Wednesday afternoon, snapping a six-day losing streak.

BIG PICTURE

The BOE may have soothed market anxieties for now, but the Truss administration has so far only doubled down on its intentions to stimulate growth through tax cuts. The three-week-old government appears hell-bent on pushing through its fringe policy at a time when the global economy is counting on stability.

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

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

Volkswagen is pricing the Porsche initial public offering at $80.22 a share, which will raise approximately $9.1 billion. That puts the deal at the top end of Volkswagen’s original estimate and values the company at roughly $73 billion.

The IPO could become one of the largest ever in Europe when Porsche goes public in Frankfurt on Thursday.

Buying a car, which was no picnic before the pandemic, has become an even more fraught endeavor in an era of supply chain clogs and high inflation.

Once, the idea of paying sticker price at a dealership was laughable — a trap that only suckers would fall into. But now, the average new car is selling well over the manufacturer’s suggested retail price, as demand remains high and and carmakers are still trying to get back to pre-pandemic production levels.

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

It isn’t Jeep Wranglers with their cult-like following or those sexy Porsche sports cars, though folks are certainly paying a premium for those.

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

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

Still, Kia customers pay, on average, $2,183 over sticker, second only to luxury Land Rovers in straight dollar terms. That’s especially remarkable given that a Land Rover costs about 2.5 times what a Kia costs.

There are a few reasons this.

  • Kia has won loyal fans by being a good value car. It’s not flashy. And in this economy, especially folks crave reliability and good value.
  • The brand has also been (rather successfully) shifting its marketing away from that budget-car image. It wants to be associated with good design and ~ coolness ~ that just happens to also be affordable.
  • Kia sells a relatively large number of hybrid and electric models, giving it an edge at a time when consumers are anxious about the environment and high gas prices. People tend to be willing to pay a bit more for the electric and hybrid models, expecting to save money on gas.
  • The above-sticker trend may not go away for a while, as new-car production is still hobbled by supply shortages that are slowly working themselves out.

But there’s a tiny sliver of good news for shoppers who aren’t in a rush and aren’t dead-set on a new car. Used car prices — which shot up to dizzying heights early in the pandemic — have finally begun falling.

“Speak to any (very) large used car dealer and you will hear the same – an absolute vortex of deflation is coming to used car prices,” tweeted Ophir Gottlieb, the CEO of Capital Market Laboratories, earlier this month.

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