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Donald Trump creates confusion over US stimulus package

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Democrats have been pushing for $2.2tn in new spending

Donald Trump has thrown talks between Democrats and Republicans on fresh stimulus for the US economy into confusion as the White House continues to face questions on whether it has done enough to tackle the virus both inside the administration and in the country at large.

Just a day after leaving hospital with Covid-19 the president broke off negotiations with congressional Democrats on a new US aid package, triggering a sell-off in the US stock market.

A few hours later he appeared to backtrack and made appeals for lawmakers to approve help for the airline industry, small business and direct government payments to individuals worth up to $1,200.

The uncertainty followed an intervention by Jay Powell, chair of the Federal Reserve, who argued for additional fiscal support for the US economy.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” said Mr Powell in a speech to the National Association for Business Economics on Tuesday. “By contrast, the risks of overdoing it seem, for now, to be smaller.”

Larry Kudlow, the top White House economic adviser, on Wednesday said there was a “low probability” that Congress would agree with Donald Trump’s call for a series of piecemeal stimulus measures before November’s election.

The talks are being led by Steven Mnuchin, the US Treasury secretary, and Nancy Pelosi, House speaker. Democrats have been pushing for $2.2tn in new spending, whereas the Trump administration had been willing to go up to $1.6tn.

Mr Trump’s handling of the virus, which has killed more than 210,000 people in the US, has been one of the main reasons for his poor performance in national polls against Democratic rival Joe Biden. In surveys conducted since last week’s presidential debate and Mr Trump’s admission to hospital, Mr Biden’s lead has been growing, especially with independents, as the president doubles down on his attempt to minimise the pandemic.

Tonight Mike Pence, vice-president, and Kamala Harris, Democratic vice-presidential nominee, will go toe-to-toe in their one and only debate of the election campaign. Here are five things to watch. Follow the debate live with Swamp Notes on the FT.com homepage from 7pm ET.

Markets

Wall Street stock markets opened higher on Wednesday, recovering the late losses in the previous session caused by Donald Trump’s surprise intervention in talks between Democrats and Republicans over more help for the US economy. The S&P 500 and the tech-focused Nasdaq both gained about 1.2 per cent.

Heatmap style chart showing monthly changes in central bank policy rate (whether it has gone up or down) for 29 Emerging Market countries. Since the middle of 2019 there has been almost rates have generally stayed the same or lowered each month. Turkey became the first EM this year to increase rates

Foreign investors have become net sellers of emerging market stocks and bonds in recent weeks, following a period of capital inflows after the panic selling that gripped markets in March. The changing conditions mean that EM central banks that raised interest rates in response to the start of the pandemic will find it harder to do so again. The number of banks lowering rates shrank to a trickle in September, after a wave of loosening in the second quarter of the year, according to a Financial Times analysis of monetary policy in 25 developing countries.

Central banks became net sellers of gold in August for the first time in a year and a half, in the latest indication that demand for the metal is slowing following a record-setting rally. Global central banks sold a net 12.3 tonnes of gold over the month, according to estimates published on Wednesday by the World Gold Council. The latest data reflect the pullback of some major buyers as countries free up resources to deal with the coronavirus crisis.

Business

The first trials of a digital health pass that certifies airline passengers are Covid-free will begin this week in a push to reopen international travel fully after nearly nine months of disruption. United Airlines and Cathay Pacific Airways will test the CommonPass on routes linking travel hubs including London, New York, Hong Kong and Singapore from Thursday. CommonPass aims to create the first globally recognised proof that a passenger has tested negative for the virus before a flight, using a digital certificate downloaded to a mobile phone.

Bruno Pavlovsky, president of Chanel’s fashion division, insisted “the show is the best way to present the collection”, after this week’s catwalk display at Paris Fashion Week. Chanel, along with rivals LVMH-owned Louis Vuitton and Dior, went ahead with live shows despite the reintroduction of restrictions on bars and cafés in the French capital.

Mass entertainment has been hit hard by coronavirus. Shut entirely in the first months of the pandemic, some cinemas, theme parks and attractions have been able to reopen. But they are operating with reduced capacity, and guests that do come are spending less. Are we ever going to go out to have fun again? asks Brooke Masters.

Global economy

The coronavirus pandemic has put millions more across the developed world out of work than official unemployment statistics suggest. More than 25m people in the euro area and the US are officially unemployed, according to figures published last week. But economists say the true number of people who have lost work because of the pandemic is far higher.

Diverging fortunes - Billionaire wealth growth by sector, 2009-20 (industry standardised annual growth)

Fortunes of the world’s billionaires have soared to record levels during the pandemic. Their collective wealth hit $10.2tn this summer, exceeding the previous high set in 2017, according to an annual study from Swiss bank UBS. The total number of billionaires reached 2,189, up from 2,158 in 2017. “Fortunes are polarising as business innovators and disrupters deploy technology to be among the leaders of today’s economic revolution,” said the report.

The world economy will perform better than feared at the height of the coronavirus pandemic, but warned the head of the IMF, the “calamity is far from over”. Speaking ahead of next week’s virtual IMF and World Bank annual meetings, Kristalina Georgieva urged nations not to withdraw economic support early and to plan for a protracted recovery period because “there is the risk of severe economic scarring from job losses, bankruptcies, and the disruption of education”.

Get in touch

How is your workplace dealing with the pandemic? And what do you think business and markets — and our daily lives — will look like after lockdown? Please tell us by emailing covid@ft.com. We may publish your contribution in an upcoming newsletter. Thanks

The essentials

Women have tended to bear the brunt of childcare in this pandemic and are facing huge anxieties over job security and their finances. We asked three experts to give their tips on how to handle the pressures of working from home during this health crisis. “It is the whole sense that if there is domestic work to be done, it is not falling evenly. That was always true, but you could leave home and go and shut the door on it, and now you cannot,” said Sue Unerman, chief transformation officer at MediaCom.

Read more in our Women in Business special report.

Final thought

Bespoken’s drinks are made from a base alcohol or by modifying existing aged spirits

A Silicon Valley-based start-up plans to take on the $500bn global spirits industry with the launch of what it calls a “Nespresso machine” for whisky. Bespoken Spirits claims its proprietary technology can reduce the traditional barrel-aged process of producing whisky “from decades to days”. The launch received a frosty reception from the Scotch Whisky Association, which said it would take legal action against any product “that claims to compete with Scotch whisky as ‘whisky’ but fails to meet the legal requirements of the country of sale”.



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Rio Tinto set to start negotiations over Mongolian mine

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Rio Tinto is set to start face-to-face negotiations with the government of Mongolia as its seeks to complete the $6.75bn expansion of a huge copper project in the Gobi desert. 

The Anglo-Australian group is sending a team of senior executives to the capital Ulaanbaatar to try and hammer out a new financing agreement so that the development timeline can be maintained and underground caving operations can start later this year.

The discussions will focus on a number of issues including tax, a new power agreement and benefit sharing, according to people with knowledge of the situation.

Some government officials want Rio to pay more than $300m of withholding taxes on income it has received from Oyu Tolgoi LLC, the Mongolian holding company that owns the mine. 

Rio receives a management service fee for running Oyu Tolgoi’s existing open pit and the underground project as well as interest on money it has lent the government to fund its share of the development costs.

However, the officials say it is “very difficult, if not impossible” to engage constructively on the issue because the payments are the subject of arbitration in London.

For its part, Rio believes the issue of withholding taxes is dealt with in the separate investment and shareholder agreements that cover its operations in the country.

The underground expansion of Oyu Tolgoi ranks as Rio’s most important growth project. At peak production it will be one of the world’s biggest copper mines, producing almost 500,000 tonnes a year.

Although Rio runs the existing operations and is in charge of the underground expansion project it does not have a direct stake in the mine.

It’s exposure comes through a 51 per cent stake in Turquoise Hill Resources, a Toronto-listed company. TRQ in turns owns 66 per cent of Oyu Tolgoi LLC, with the rest controlled by the government of Mongolia. 

The project has been beset by difficulties and is already two years late and $1.5bn over budget. The government said earlier this year that if the expansion is not economically beneficial to the country it would be necessary to “review and evaluate” whether it can proceed.

To that end the ruling Mongolian People’s party and its new prime minister Luvsannamsrain Oyun-Erdene are trying to replace the Underground Development Plan with an improved agreement.

Signed in 2015, this sets out the fees that Rio receives for managing the project as well as the interest rates on the cash Mongolia has borrowed to finance its share of construction costs.

However, it was never approved by Mongolia’s parliament and has become a focal point for critics who say the country should receive a greater share of the financial benefits.

Rio, which recently appointed a new chief executive, has told the government it is prepared to “explore” a reduction of its project management fees and loan interest rates as well as discuss tax.

However, analysts are sceptical that the two sides will be able to put a new agreement in place by June when a decision on whether to start caving operations must be taken if Oyu Tolgoi is to meet a new target for first production in October 2022.

Rio is also at loggerheads with TRQ on how to fund the cost overruns at Oyu Tolgoi. Last week, TRQ’s chief executive resigned after Rio said it planned to vote against his re-election at its annual shareholders’ meeting.

In a statement, Rio said it was committed to working with TRQ and the government of Mongolia to enable the successful delivery of the Oyu Tolgoi Project

“Aligning and co-ordinating our joint efforts to resolve the concerns of the Government . . . going forward is of the highest priority,” it said.



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Value investor John Rogers sees an end to Big Tech’s stock market dominance

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The veteran value investor John Rogers predicted the US is headed for a repeat of the “roaring twenties” a century ago that will finally encourage investors to dump tech stocks in favour of companies more sensitive to the economy.

The founder of Ariel Investments told the Financial Times in an interview that value investing “dinosaurs” like him stood to win as higher economic growth and rising interest rates took the air out of some of the hottest stocks of recent years.

Rogers, who has spent a near four-decade career focused on buying under-appreciated stocks, said the frenzied buying of special purpose acquisition companies, or Spacs, signalled frothiness in parts of the market, even while a coming economic boom underpinned other share prices.

“This will be a sustainable recovery. I think there’s going to be kind of a roaring twenties again,” Rogers said, adding that the strength of the economic recovery would surprise people and challenge the Federal Reserve’s ultra-dovish monetary policy.

The US central bank is “overly optimistic that they can keep inflation under control”, he said, and higher bond market interest rates would reduce the value of future earnings for highly popular growth stocks such as tech companies and for the kinds of speculative companies coming to market in initial public offerings or via deals with Spacs.

“Spacs are a sign that growth stocks are topping. A signal that the market is frothy,” said Rogers, a self-styled contrarian and famed for his Patient Investor newsletter for clients that debuted in 1983.

Value investing is based on identifying cheap companies that are trading below their true worth, an approach long espoused by Warren Buffett. Value stocks and those sensitive to the economic cycle boomed after the internet bubble burst in 2000, but the investment strategy has been well beaten over the past decade by fast-growing stocks, led by US tech giants. 

“We’ve been looking like the dinosaurs for so long,” said Rogers. “We’ve been waiting for that booming economic recovery since 2009.”

Proponents of value investing believe that the combination of expensive growth stock valuations and a robust recovery from the pandemic will cause a significant switch between the two investing approaches.

Higher bond market interest rates reduce the relative appeal of owning growth stocks based on their future earnings power.

When 10-year bond yields rise, “growth stocks look way, way too expensive versus value,” said Rogers. “Value stocks are going to come out of the recovery very strong, they’re going to have a tailwind from an earnings perspective. Their earnings are going to be here and now, not 20, 30 years down the road.”

The Russell 1000 Value index outperformed the equivalent growth index by 6 percentage points in February, rising 5.8 per cent versus a drop of 0.1 per cent for the growth index. That was the biggest outperformance for value since March 2001, according to analysts at Bank of America.

“Although rising rates triggered the rotation, we see a host of other reasons to prefer value over growth,” the analysts wrote last week, “including the profit cycle, valuation, and positioning that can drive further outperformance.”

Rogers said he expected higher overall stock market volatility from rising interest rates this year but value should reward investors as it did “20 years ago once the internet bubble burst”. Ariel is bullish on “fee generating financials” and Rogers said preferred names included KKR, Lazard and Janus Henderson, while it was also bullish on traditional media, including CBS Viacom and Nielsen.

Chicago-based Ariel is one of the few large black-owned investment companies in the US, with $15bn of assets under management. It manages the oldest US mid-cap value fund, dating from 1986. 



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High-priced tech stocks sink further into bear market territory

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Some of the hottest technology stocks and funds of recent months have fallen into bear market territory and investors are betting on more turmoil to come, as rising bond yields undermine the case for holding high-priced shares.

A Friday afternoon stock market rally notably failed to include shares in Tesla and exchange traded funds run by Cathie Wood, the fund manager who has become one of the electric carmaker’s most vocal backers.

Shares in Tesla fell 3.6 per cent on Friday to close below $600 for the first time in more than three months, although it had been down as much as 13 per cent at one point. The stock is down 32 per cent from its January peak, erasing $263bn in market value.

Wood’s $21.5bn flagship Ark Innovation ETF — 10 per cent of which is invested in Tesla shares — also closed lower on Friday. It is now down 25 per cent and in a bear market, defined as a decline of more than one-fifth from peak.

Clean energy funds run by Invesco, which were last year’s best-performing funds, are also in bear market territory, along with some of the highest-flying stocks in the technology and biotech sectors.

“Bubble stocks and many aggressively priced US biotechnology stocks have been the hardest hit segments of the equity market,” said Peter Garnry, head of equity strategy at Saxo Bank.

The tech-heavy Nasdaq Composite index fell into correction territory — defined as a decline of more than 10 per cent from peak — earlier this week but rebounded 1.6 per cent on Friday as bond yields stabilised.

The yield on 10-year US Treasuries yield briefly rose above 1.6 per cent early in the day after a robust employment report for February buoyed confidence in a US economic recovery. Yields were less than 1 per cent at the start of the year.

Rising long-term bond yields reduce the relative value of companies’ future cash flows, hitting fast-growing companies particularly hard.

These type of companies figure prominently in thematic investing funds run by Wood at Ark Investments. The performance of Ark’s exchange traded funds has abruptly reversed after they recorded huge inflows and strong gains for much of the past 12 months.

“The speculative tech trade is in various stages of rolling over right now,” said Nicholas Colas, co-founder of DataTrek, a research group.

Bar chart of  showing Hot stocks and funds enter bear market territory

RBC derivatives strategist Amy Wu Silverman said investors were still putting on hedges in case of further declines in high-flying securities, including options that would pay off if Tesla and the Ark Innovation fund drop in value.

The number of put options on the Ark fund hit an all-time high on Thursday, according to Bloomberg data. By contrast, demand for put options on ETFs such as State Street’s SPDR S&P 500 fund — which reflects the broader stock market — have fallen as stocks have dropped.

Demand for options normally slides as a stock or ETF slumps in value, given there was “less to hedge, since you got your down move”, Silverman said. The elevated put option activity on speculative tech stocks and funds was “suggesting investors believe there is more to go”, she said.

Even after the declines, stocks in the Ark Innovation ETF remain highly valued, with a median price-to-sales ratio of 22 versus 2.5 for the broader stock market according to Morningstar, the data provider.

Two of the fund’s other big holdings, the streaming company Roku and the payments group Square, were also lower on Friday, extending recent declines.

Ark’s other leading ETFs have also retreated sharply as air has come out of Tesla and other hot stocks. Tesla is the largest holding in Ark’s $3.3bn Autonomous Tech and Robotics fund and its $7.2bn Next Generation Internet ETF.

Wood has also taken concentrated holdings in small, innovative companies. Ark holds stakes of more than 10 per cent in 26 small companies across its five actively managed ETFs, according to Morningstar.

“These large stakes raise concerns around capacity and liquidity management,” said Ben Johnson, director of passive funds research at Morningstar. “The more of a company the firm owns, the more difficult it will be to add to or reduce its position without pushing prices against fund shareholders.”

Ark did not respond to a request for comment. The Ark Innovation ETF is still sitting on a performance gain of 120 per cent for the past year. It bought more shares in Tesla when the carmaker’s shares began falling last month.



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