Transcript: UK leaders court US investors

This is an audio transcript of the FT News Briefing podcast episode: ‘UK leaders court US investors’

Jessica Smith
Good morning from the Financial Times. Today is Monday, August 5th, and this is your FT News Briefing.

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Britain’s chancellor is visiting the US and Canada today on a mission to market her country. Asset managers are vexed by all the cash idling in money market funds.

Madison Darbyshire
Asset managers really want people to be bullish.

Jessica Smith
And we’ll tell you why commodity prices are falling sharply. I’m Jess Smith and here’s the news you need to start your day.

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UK chancellor Rachel Reeves starts a three-day visit to New York and Toronto today. She’s on this side of the Atlantic to sell Britain as a stable place to do business. The new Labour party government wants to reset its relationship with trading partners after years of political and economic turmoil. But Reeves’s timing isn’t ideal. Her visit comes after days of violent attacks by far right and anti-immigrant extremists in many UK cities.

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US stock markets opened today after sharp sell-offs last week across the globe. Maybe one more reason for stock investors to play it safe. But investors have been playing it safe. So safe there’s now a record $6.1tn of cash parked in US money market funds. That has asset managers pulling their hair in frustration. Our US investment correspondent Madison Darbyshire has been reporting on this, and she joins me now. Hi, Madison.

Madison Darbyshire
Hi, Jess. How are you doing?

Jessica Smith
I’m doing well, thanks. So, Madison, why are asset managers so annoyed?

Madison Darbyshire
Asset managers are frustrated, and they have been frustrated for over a year, that investors just seem really unwilling to put cash to work in the markets. And part of this frustration is asset managers make money on other people’s money. They make a percentage of the capital that’s invested with them because they charge fees to manage that money. And so when cash is sitting on the sidelines, they’re only earning like a very small fee on their money market funds compared to what they would be getting in their actively managed funds or their bond funds. They’re also frustrated just because cash sitting on the sidelines kind of bodes poorly for the way people feel about the markets, and asset managers really want people to be bullish.

Jessica Smith
OK. So then I want to ask you, why are investors keeping so much money in cash right now?

Madison Darbyshire
So one of the reasons there’s so much money sitting in cash right now is because for the first time in over a decade, investors are able to earn returns on their cash that is outpacing inflation. So investors are saying, OK, well my cash is doing all right, so why would I put money in the market when I have this really weird feeling and everyone’s kind of all doom and gloom, like, why would I put money in the market and risk a loss on that money when I could earn a really comfortable return and take basically no risk?

Jessica Smith
But aren’t there always times when investors get nervous and put their money in cash? Is there anything different about this time?

Madison Darbyshire
It is really common for investors in times of stress or down markets to move money into cash. But what’s been unusual about this moment in markets is that the markets are actually doing really well. And so asset managers are kind of perplexed as to where the negative sentiment is coming from. What they feel is different about this moment is there is a lot of geopolitical uncertainty and conflict. You’re having a tremendous number of elections happening all around the world, including a very uncertain election in the US. For whatever reason, investor sentiment is really lagging behind a lot of the major economic indicators that show that the economy is still really strong. So investors are just kind of waiting to see what happens.

Jessica Smith
So what happens if the Federal Reserve lowers interest rates, as Fed chair Jay Powell recently signalled he would do. I mean, what impact will that have on investor thinking?

Madison Darbyshire
Yeah, so the fed has signalled that it intends to lower rates, but it has not lowered rates yet. But asset managers are hoping and praying that Jay Powell starts to loosen rates. Because the number one effect that that has is it makes cash less attractive. So all of a sudden investors can’t sit in cash doing nothing and earn 5 per cent. They have to put their money into markets to earn returns that are gonna outpace annual inflation. We’re seeing investors kind of move capital into fixed income products because they’re trying to lock in this high rate, because if you lock in the rate, then you don’t have to worry about interest rates going down. But if you’re sitting in cash, you’re very vulnerable to what the Fed decides to do with interest rates.

Jessica Smith
Madison Darbyshire is the FT’s US investment correspondent. Thanks so much, Madison.

Madison Darbyshire
Thanks for having me, Jess.

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Jessica Smith
It’s not just asset managers wringing their hands. Commodities traders are going through a rough patch as well. The price of commodities, everything from corn to copper, has been falling. Now, this is good for consumers, but not for the people who trade in these natural resources. The FT’s commodities reporter Susannah Savage, calls it a pretty big downturn.

Susannah Savage
Especially because we saw prices at really high levels a few months ago. So it’s the turnaround that’s been very sharp. So we’ve seen fund managers cut around $41bn in bullish bets on commodities. And that’s meant that the price of copper, for example, is down close to 20 per cent from its record high in May, and corn is at its lowest since October 2020. A lot of this is because China is the biggest consumer, the biggest importer of commodities, and demand has fallen off, or traders are perceiving that demand is falling off from China as the country’s economy ceases to grow at the same pace that we’d seen before.

Jessica Smith
Susannah, is this downturn all about China, or are there any other reasons why commodities prices are falling?

Susannah Savage
Well, so it’s not just China. For example, if you look at agricultural commodities, China is a massive importer of a lot of the big agricultural commodities like corn, wheat, soy. But also we have seen a real surge in supplies because of increased production in big producing countries like the US and Brazil. So that’s helped to push down prices. And that will also be good for consumers and good for bringing down inflation further. There’s also other factors. For example, the US dollar, which is very strong at the moment. When the US dollar depreciates, commodity prices tend to go up. And another analyst also mentioned that a recent fall in the stock market has led some fund managers to reduce their positions in other assets as they kind of reassess their appetite for risk.

Jessica Smith
So looking ahead a bit, what do analysts say about commodities prices over the next few months?

Susannah Savage
So I think a lot is riding on the US election. This will decide some of the dynamics of trade with China, which is really important in terms of commodities, as China is the biggest consumer of them, the biggest importer. Also, the Republican party, especially under Donald Trump, some analysts said to me, they feel that with Trump in power, he may be less inclined to pursue the green transition. And for that, you need a lot of metals, such as copper. So, you know, it’s a stretch perhaps for some people, but there might be a perceived downturn in demand for that if we see Trump looking like he’s gonna win.

Jessica Smith
Susannah Savage is the FT’s commodities reporter. Thanks, Susannah.

Susannah Savage
Thanks very much.

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Jessica Smith
An Australian start-up is raising funds to develop a technology to extract lithium. It would ideally open up new reserves of the commodity that’s become critical to battery making, and it could reduce reliance on China for supplies. The company is called ElectraLith, it’s backed by one of the world’s biggest mining companies, Rio Tinto. And it’s one of a handful of companies developing direct lithium extraction. A Goldman Sachs research note last year said the technology could double lithium production and have a similar impact that shale has had on the oil sector.

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You can read more on all these stories for free when you click on the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.