PM — Nobel Prize for mapping Neanderthal genomes

Good afternoon, friends. There are some interesting moves on logistics and infrastructure investments happening here on the home front, while the UK is still capturing the imagination of the international business press as PM Liz Truss’ government flip-flops on some very controversial policies. Oh, and it’s Nobel Prize week.

THE BIG STORY TODAY

Kuwait’s Agility Logistics plans to set up and operate two customs and logistics services hubs worth a combined USD 60 mn, as per an agreement the Boursa Kuwait-listed company signed with the Suez Canal Economic Zone (SCZone) today, according to an SCZone statement. Work on the hubs is expected to begin by 2H 2023, the statement says. The agreement was signed on the sidelines of the Egyptian-Kuwaiti Economic Forum, where Trade and Industry Minister Ahmed Samir is meeting with a delegation of Kuwaiti investors, according to a cabinet statement. The Kuwaiti delegation includes 48 investors interested in investing in several sectors of the Egyptian economy including real estate and telecoms.

THE BIG STORIES ABROAD

There are a few big stories vying for attention in the international business press this afternoon, but the turmoil in UK financial markets continues to take the lead. The UK is u-turning on its decision to slash the top rate of income tax for individuals earning over GBP 150k per year, Chancellor Kwasi Kwarteng said earlier today. The rollback of the decision comes after the GBP has tanked over the past couple of days and caused deep volatility in the UK’s bond markets (which we break down in further detail in this afternoon’s Macro Picture, below). The story is getting plenty of coverage from the Associated Press, BBC, NBC, CBS, The Guardian, and Bloomberg, among others.

ALSO GETTING INK- Ukrainian forces have recaptured several villages in the country’s south, Reuters reports citing Russian state television. Russian sources acknowledged a Ukrainian tank offensive had advanced dozens of kilometers along the Dnipro River, securing one of the fastest advances and the most rapid breakthrough in the south.

HAPPENING NOW-

Pre-COP27 is underway: Foreign Minister Sameh Shoukry is in Congo attending COP27’s preparatory conference along with climate ministers from around the world for a last consultative meeting ahead of next month’s COP27 in Sharm El Sheikh, according to a ministry statement.

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** CATCH UP QUICK on the top stories from today’s EnterpriseAM:

• Saudi Arabia’s sovereign wealth fund has acquired a 34% stake in consumer electronics and household appliances retailer BTECH from Africa-focused investment firm DPI for an undisclosed sum.
• Tragedy strikes on the first day of the academic year: One schoolgirl died and 15 others were injured after a staircase collapsed at a secondary school in Kerdasa.
• Thanaweya amma students may soon get a second chance at improving their grades: The Education Ministry is looking into ways to allow students to repeat the entire academic year if they’re not happy with their grades.

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FOR TOMORROW-

PMI: We’ll know how Egypt’s private sector fared in September when S&P Global drops its latest PMI release tomorrow (Tuesday, 4 October). The downturn in activity looked to be easing in August when businesses told the survey that demand and output were rising on the back of slowing inflation.

???? CIRCLE YOUR CALENDAR-

The IMF will release its latest economic outlook on Wednesday, and the chances are it’s not going to be pretty as tightening financial conditions, an energy crisis in Europe and rising geopolitical tensions over Ukraine weigh on the global economy. The Fund and the World Bank will hold their annual meetings in Washington, DC, next week, from 10-16 October.

UPCOMING NEWS TRIGGERS- Here are some data points and news triggers to be on the lookout for in this month:

• Foreign reserves: The Central Bank of Egypt (CBE) should be out with September’s foreign reserves figures later this week. Reserves remained flat at around USD 33.1 bn in August, having fallen 20% since March due to headwinds caused by the war in Ukraine and tightening financial conditions.
• Inflation to notch new highs? Analysts are expecting inflation to have continued rising in September due to the weakening EGP after reaching highs not seen since November 2018 in August. We’ll find out when Capmas and the CBE release the figures next week.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

☀️ TOMORROW’S WEATHER- Expect the mercury to rise to a high of 32°C tomorrow in the capital city before cooling off to a low of 21°C in the evening, our favorite weather app tells us.

Swedish scientist Svante Pääbo was awarded the 2022 Nobel Prize in Physiology or Medicine, for his seemingly impossible “discoveries concerning the genomes of extinct hominins and human evolution,” according to a press release. Pääbo’s research managed to sequence Neanderthals’ genomes, despite them being extinct, and “made the sensational discovery of a previously unknown hominin, Denisova.” The discovery and genome sequencing breakthrough help us better understand genetic evolution and have implications for present-day humans’ physiology, the Nobel Assembly notes. The award is worth SEK 10 mn.

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Egypt dropped three spots in Ookla’s monthly Speedtest Global Index to rank 83 out of 182 countries in fixed broadband speed, while our ranking in mobile data speed remained flat m-o-m at 81 out of 140 countries. Egypt’s average fixed broadband download speed is now 45.46 Mbps. Topping the global ranking: Singapore has the fastest fixed broadband speed, edging out Chile and Thailand, while Norway takes the top spot for mobile data speed, followed by the UAE and Qatar.

Broadly speaking, internet speeds across Africa are lagging far behind the global average, Quartz notes. South Africa — which has the continent’s highest mobile data speed — ranks 47th, with an average mobile internet download speed of 38.11 Mbps. That’s “way below the global average mobile download speed of 77.7 mbps,” Quartz notes. Our lagging internet speeds is largely because 5G networks have yet to really land in Africa. Egypt is among 13 countries across the continent where testing is currently underway for 5G spectrums, but the broad majority (more than 40 countries) have yet to lay the groundwork for the network. “This could keep them locked out of the emerging global digital economy, which demands reliable and fast internet,” Quartz says.

???? ON THE TUBE TONIGHT-
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Pumpkin spice season favorite Hocus Pocus gets a sequel: It has a 38% score on Rotten Tomatoes, and was a box office flop when it was released in July 1993 — although that could be at least partially attributed to theHalloween movie being released in the middle of summer — but Hocus Pocus has since amassed somewhat of a cult following. Nearly 29 years later, the original film’s three stars — Bette Midler, Kathy Najimy, and Sarah Jessica Parker — reprise their roles as a trio of witches for Hocus Pocus 2, which is available to stream on Disney+. The sequel sees the three witches accidentally summoned to modern-day Salem by three girls, and the film also serves as a prequel as it dives into the Sanderson sisters’ origin story.

⚽ In the English Premier League: Leicester City plays against Nottingham Forest at 9pm.

In Serie A, Verona plays against Udinese at 8:45pm.

Finally, Rayo Vallecano face Elche at 9pm in La Liga.

AFCON 2025 won’t be taking place in Guinea: CAF has reopened the bid to host the 2025 Africa Cup of Nations (AFCON) after Guinea was stripped of its hosting rights due to inefficient infrastructure and facilities, the confederation said in a statement.

Could we come forward with a bid? We’ve been touting our sports infrastructure of late ahead of launching a bid to host the 2036 Olympics, and talk of a potential joint bid with Saudi Arabia and Greece for the 2030 World Cup. We’ve got AFCON form, having hosted the cup back in 2019.

???? OUT AND ABOUT-
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Amira Reda is singing popular songs from films and musical theater hits at Room Art Space tonight at 9pm.

Not a fan of colorful artwork? Lamasatt Art Gallery is hosting a Monochrome Exhibition, which features ink, lead and charcoal pieces. The exhibition ends tomorrow.

???? UNDER THE LAMPLIGHT-

DROPPING TOMORROW- Semiconductor chips are “the new oil”: Longtime Enterprise readers will know that semiconductors have been a hot topic for the past couple of years — and for good reason. The chips are critical components of most electronic devices, from smartphones to medical equipment and weapons. Economic historian Chris Miller’s Chip War offers an intriguing account of the events that led to the US perfecting chip design, how faster chips contributed to the US defeating the Soviet Union, and how the US’ role as the world’s leading superpower is tied to computer chips. The US is now ramping up domestic production of semiconductor computer chips, following a global shortage created by the pandemic, with much of the world’s chip manufacturing coming out of Taiwan, Korea, and Europe. Taiwan alone accounts for 37% of global chip supply. China, which is heavily reliant on foreign chips and now spends more on chips than oil, has made production of silicon chips a national priority but is struggling to catch up with Taiwan. Likening semiconductors to oil as a “critical resource,” Miller anticipates an upcoming battle over semiconductors.

The EGX30 was almost flat at today’s close on turnover of EGP 915.82 mn (3.9% below the 90-day average). Local investors were net buyers. The index is down 18.9% YTD.

In the green: Rameda (+1.9%), TMG Holding (+1.8%) and EFG Hermes (+1.8%).

In the red: Orascom Construction (-4.5%), Credit Agricole (-2.1%) and Elsewedy Electric (-1.9%).

The UK came close to having its “Lehman moment” last week — here’s what happened. “After 35 years in the industry, I’d never seen anything like it.” These were the words of one fund manager in the wake of last week’s historic UK government bond rout, a sell-off of such magnitude that it came close to causing a meltdown in the country’s pensions industry. According to industry insiders, without the Bank of England’s emergency intervention, swathes of the UK financial system was heading for collapse.

No ordinary budget: The turmoil was triggered by the unveiling of the Truss administration’s spending plans in a fiscal statement that may go down as one of the most ill-timed and destructive in the country’s history. Chancellor Kwasi Kwarteng’s so-called “mini budget” combined an historic intervention in the energy market to protect households and businesses from soaring gas prices with a larger-than-expected raft of tax cuts. Crucially, the government failed to cost any of its spending plans, and broke with convention by not providing any budget or economic forecasts. All of this was delivered at a time of market unease about the pace of rising interest rates and a looming recession in the UK.

The market response was fast and furious: The two days following the statement saw a fire sale of UK assets as investors panicked over the implications of hundreds of bns of GBP of unfunded borrowing on the country’s finances. The GBP flash-crashed more than 4% to hit a record low against the USD and bond yields jumped by the most on record as investors dumped bonds. In just two trading sessions, rates on five-year bonds leapt more than 100 bps as prices collapsed.

This wasn’t good news for the nation’s pensions industry: Pension funds invest a large part of their capital into government bonds because they are considered — in normal times at least — one of the safest asset classes. In particular, funds target long-dated bonds which provide a stable income that allow them to meet their liabilities years into the future.

Financialization was supposed to make the industry safer: Last week’s pensions crisis was triggered by a little-known area of the industry known as liability-driven investing (LDI), a strategy used by certain types of funds to hedge against liability risk. The goal of LDI is to align current and future liabilities, minimizing risks associated with rising interest rates, inflation, and people living longer than expected. They do this by going to LDI funds — operated by some of the biggest financial services firms in the UK including BlackRock, Legal & General, and Schroders — to purchase derivatives like interest rate swaps and repurchase agreements (repos).

The LDI market is huge: As of August around GBP 1.5 tn of liabilities were hedged using LDI strategies. To put this in perspective, this is almost four times greater than Egypt’s GDP in 2021. In UK terms, it’s equal to around 40% of the entire institutional asset management market.

The caveat: Not only are these derivatives sensitive to bond market volatility, but they allow pension funds to leverage their positions by up to four times, greatly magnifying losses when the market moves against their positions.

Cue margin calls: Pension funds were hit with emergency margin calls from LDI providers last week as soaring bond yields caused them to take heavy losses on their derivatives contracts. To find the cash for the collateral calls, pension funds were forced to sell bonds, causing yields to rise further, and producing a doom loop pushing them closer to insolvency.

The Bank of England intervenes: A few days into the crisis, the Bank of England was forced to intervene to prevent pension funds from collapsing. Just days before it was supposed to begin tightening its balance sheet, Governor Andrew Bailey announced a temporary emergency GBP 65 bn bond-buying program to calm the markets and lower what he called a “material risk to UK financial stability.” It was a close call: Inside sources said that the sector was just hours away from a systemic event.

A rock and a hard place: The government’s policy error has forced the Bank of England into reckoning with financial instability at a time when it has to tighten financial conditions to curb soaring inflation, Mohamed El Erian told Bloomberg last week (watch, runtime: 2:55).

Why do we care about this? Contagion. The importance of the UK financial sector to global markets means that a local crisis is unlikely to remain local. The collapse of UK bonds and the GBP ricocheted into global markets, triggering sell-offs in equities and bonds worldwide as investors grew fearful about financial stability.

This isn’t over: Unless the government makes a significant u-turn to calm the markets, the crisis in the bond market will likely resume when the Bank of England stops buying bonds on 14 October. Whether or not that happens, the consensus is that the bank will now need to raise interest rates by 75 bps in November, and the idea of a huge 100-bps hike no longer seems far fetched.