Meet Britain’s (likely) new leader
After weeks of turmoil, British politics appears headed for some stability, as Rishi Sunak, the former chancellor of the Exchequer, is poised to succeed the ill-fated Liz Truss as prime minister. The British pound and government bonds rose a bit on the news — but the economic problems that trouble the country aren’t likely to be cured quickly.
Sunak has the numbers, with over 164 Conservative Party lawmakers backing him for prime minister as of Monday. (Conservative Party rules require candidates to have at least 100 pledged supporters to be considered.) The only remaining challenger, Penny Mordaunt, trails with roughly 90 pledged supporters, she says. But the clock is ticking. She has until 2 p.m. London time on Monday to reach the needed support threshold.
Sunak’s most potent challenger was Boris Johnson, the former prime minister who was ousted after his own cabinet ministers — including Sunak, then chancellor — quit in protest over a series of scandals. Johnson pulled out of the race on Sunday, despite claiming to have the support of 102 lawmakers (with the BBC estimating he had just 57 public backers).
Investors expect relative predictability from a Sunak government. During the race for prime minister this summer, Sunak defended his plans for higher taxes as fiscally responsible, compared with Truss’s promises of tax cuts to spur economic growth. The markets’ virulent reaction to Truss’s plans, which led to sweeping efforts by the Bank of England to prop up the government bonds known as gilts, suggest investors favor a less revolutionary approach, like what Sunak has promised.
Investors appear particularly relieved that Johnson — a notably divisive figure in Britain and abroad, who still faces a parliamentary inquiry into whether he lied to lawmakers about breaking Covid lockdown rules — is out of the running.
But Britain still faces enormous challenges. The Bank of England remains likely to raise interest rates to tamp down inflation that has reached 10 percent; Britain is still facing a huge cost-of-living crisis, owing largely to soaring energy costs; and homeowners face significantly higher mortgage payments. On Friday, Moody’s downgraded Britain’s credit rating outlook to “negative” from “stable,” citing weak growth and “unpredictability” in policymaking.
Sunak must also corral a Conservative Party that has splintered into several warring factions. Hard-right lawmakers favor cracking down on immigration and taking a hard line against the E.U. over the checking of goods crossing the trade border between Northern Ireland and Ireland. He may also face rebellion from Johnson loyalists who blame him for the downfall of the former prime minister.
HERE’S WHAT’S HAPPENING
Tesla cuts prices for key models in China. The electric carmaker has reduced the baseline prices for the Model 3 and the Model Y by as much as 9 percent, Reuters reports. The move appears to be tied to slowing demand in China, the world’s biggest E.V. market, and growing competition from domestic rivals.
The Trump family business goes on trial on Monday. The Manhattan district attorney’s office has accused the Trump Organization of tax fraud and other crimes, focusing on undeclared perks for executives. Among the star witnesses of the trial will be Allen Weisselberg, the company’s former C.F.O.
Japan struggles to prop up the yen. The currency continued to slide against the dollar on Monday, despite what investors suspect was another intervention by the Bank of England to curb volatility. Japan is in a difficult bind because it is trying to maintain ultralow interest rates, which could bolster the yen, to spur economic growth.
Chip makers struggle with tighter U.S. restrictions on China. YMTC of China has reportedly asked American employees in key roles to leave, to comply with new rules from Washington that require U.S. citizens to get permission to work at Chinese fabrication plants. And TSMC of Taiwan is said to have stopped work for a burgeoning Chinese semiconductor start-up.
Brace for a potential “tripledemic” this year. With pandemic lockdowns mostly in the past, experts predict a resurgence in Covid cases this winter — along with more traditional outbreaks of flu and, perhaps, of respiratory syncytial virus. “It’s going to be a rough winter,” one infectious disease specialist told The Times.
An “even more dominant” Xi
China released third-quarter economic data on Monday, laying bare the deep challenges facing the country days after Xi Jinping was appointed to an unprecedented third term as leader.
Gross domestic product in the world’s second-biggest economy grew 3.9 percent compared to the same period last year. That is higher than expected, but short of the full-year target of 5.5 percent — China’s lowest annual target in three decades. The authorities unexpectedly delayed publication of the data last week.
Financial markets tumbled. The Hang Seng Index in Hong Kong closed down more than 6 percent at a 14-year low on Monday, reflecting anxieties about the worsening economy, and after Xi stacked Communist Party leadership positions with loyalists. Chinese tech stocks listed in the U.S. are the worst performers there premarket, led by the e-commerce companies Pinduoduo and JD.com.
Xi’s move to tighten control was widely expected, but it underscores his ambition to accelerate China’s rise as a military and technological superpower, despite the potential economic damage, write The Times reports. That could have big implications for business.
“He was dominant already and is even more dominant now,” Dali Yang, a political science professor at the University of Chicago, said of Xi. A newly energized Beijing is likely to remain defiant in the face of international criticism of its hard-line behavior. It still wants to become the pre-eminent military force in the region and to assert its claim over Taiwan. At the congress, Xi said China would promote its own initiatives to solve global development and security problems.
Unchecked power could slow economic growth. Xi’s exceptionally stringent approach of imposing mass lockdowns and quarantines to eradicate Covid-19 outbreaks has throttled consumer spending and hit supply chains. The hugely important property market is also in a slump after he sought to curb speculation in the sector.
The geopolitical divide between the U.S. and China is widening. President Biden has waged a crackdown on China’s access to U.S. technology — in particular, chips and chip production — and the threat of Russia-like economic sanctions looms. Some of the Western world’s biggest corporations are now evaluating how to reduce the business they do in China. Goldman Sachs, though, hasn’t closed the door. On Monday, it announced a joint venture in China to boost investment in local infrastructure-related real estate assets.
Critics come after S.B.F. for his stance on crypto rules
Sam Bankman-Fried, the founder of the crypto exchange FTX, got skewered by his crypto colleagues after proposing voluntary digital asset standards to better protect consumers last week — and he’s still reeling from the experience. “Whelp, that was an interesting few days,” the billionaire wrote on Twitter on Sunday, responding to complainants denouncing him as “S.B.F. — The Regulator.”
Industry insiders are growing wary of S.B.F. The head of a sprawling global empire mostly built beyond the reach of U.S. regulators, the 30-year-old billionaire has donated about $40 million to various PACs and candidates in the 2022 election cycle and become a fixture on Capitol Hill. Some advocates for decentralized finance have grown increasingly concerned about Bankman-Fried’s high-profile support for a newish Senate Agriculture Committee bill on digital assets, which they feel could set back the DeFi movement.
Bankman-Fried also got into hot water for suggesting that DeFi adopt “know your customer” mandates to appease authorities. Opponents say this would undermine the decentralized crypto ethos, and would force DeFi firms to adopt rules associated with traditional finance. Some users and influential industry voices, meanwhile, have called for a boycott of FTX.
The crypto exec relented after the onslaught. S.B.F. thanked his critics for their input, which he used to revise some of his proposals. Among the most prominent was Erik Vorhees, the libertarian-leaning founder of the platform ShapeShift, who argued that DeFi should remain distanced from regulatory oversight, as it “transcends humans and their political machinations.”
“The devil is in the details,” Kristin Smith, the executive director of the Blockchain Association, an industry trade group representing about 100 companies, told DealBook. The industry agrees that centralized exchanges are ready for regulation, she said, but DeFi is new and nuanced and regulating this area would require more time. Translation: S.B.F. should stop speaking for DeFi.
Bankman-Fried thinks congressional action is coming. “It’s important to protect customers and to get federal oversight,” he wrote in an email to DealBook, adding that it’s equally important that code remain free. There’s still “some chance” that a narrow crypto bill that leaves DeFi untouched gets congressional approval after the November election, he predicted. “I think that, if it’s well-drafted (which I’m optimistic it will be!), it would make sense to pass it this year.”
“This is a moment of truth for education. How we respond to this will determine not only our recovery, but our nation’s standing in the world.”
— Miguel Cardona, the secretary of education, warning that a pandemic-fueled drop in the math and reading scores of U.S. students has deeper economic and societal implications.
The week ahead
What’s on the agenda this week? It will be a busy one for earnings — big banks in Europe, plus Big Tech in the U.S. We also have interest-rate-setting decisions and economic data releases.
Tuesday: The Saudi Arabia-sponsored “Davos in the Desert” begins. Despite tensions between Saudi Arabia and the U.S. over oil, many U.S. executives still plan to attend.
Wednesday: Meta reports earnings. An advertising slump and new privacy rules from Apple (which reports on Thursday) are expected to have eaten further into its revenue, which in the second quarter dropped for the first time since the company went public.
Thursday: Credit Suisse presents a plan to fix itself. A broad strategic review is set to conclude with a restructuring that will likely involve thousands of layoffs and an overhaul of its investment bank. Elsewhere: The U.S. reports third-quarter G.D.P., and it’s rates decision day for the European Central Bank.
Friday: deadline day for Elon Musk and his $44 billion Twitter deal. Last week, the Washington Post reported that he planned to cut Twitter’s staff by as much as 75 percent after taking the company private. In Asia, the Bank of Japan wraps up a two-day rate-setting meeting where no change in policy is expected.
THE SPEED READ
Best of the rest
We’d like your feedback! Please email thoughts and suggestions to [email protected]