Author: Barclay Butler

On July 20^th, 2023, it was announced by the Indian Government that, effective immediately, all exports of non-basmati white rice would be halted. The government advised that the ban was put in place to lower rice prices in India and to ensure domestic demand is met. Though exports of basmati rice and parboiled rice are not affected by the ban, there are a number of countries that are highly reliant on Indian rice. Some of these include Senegal, Nigeria and the Ivory Coast in West Africa and in South-East Asia, Vietnam, Malaysia and the Philippines. 

A few days earlier on Monday 17^th July, Russia withdrew from the Black Sea Grain initiative, which allowed fertiliser and food to be exported from three ports in Ukraine Odessa, Chornomorsk and Pivdennyi. The initiative was brokered by the United Nations and Turkey, with promises that would allow Russian agricultural goods to reach global markets. Russia accused the west of breaking these promises and, as such, Russia withdrew from the pact. 

Food prices rise

Prices of rice began to rise in 2022 mainly due to huge flooding in Pakistan which had a knock-on effect of tightening global supply, add to that the El Nino weather pattern plus the ban by India, the market could tighten even further. India is responsible for 40% of the global rice supply and 15% of the banned items, and according to the IFPRI, (International Food Policy research Institute), the reduction in Indian rice exports risks both heightened food insecurity and increases in global prices.

The result of Russia abandoning the Black Sea Grain Initiative (allows safe passage of ships carrying grain from Ukrainian ports), was an increase in global food prices for the month of July. In a year where global food prices had steadily reduced, the FAO (United Nations Food and Agricultural Organisation) confirmed on Friday 4^th August that the Global Food Price Index rose by 1.3% in July compared with that of June. The index was still down circa 12% from July 2022, however with Russia’s decision to abandon the pact, the prices of sunflower oil and grains have once again increased. 

The global impact

Figures released by the United Nations shows Ukraine accounting for 46% of the world’s sunflower oil exports, while the FAO also showed wheat rising on the broader Food price Index by 1.6% in July.  According to the OECD, prior to the war, Ukraine was responsible for 10% of global wheat exports, (fifth largest), and can also account for being in the world’s top three of exporters of rapeseed oil, maize and barley.

The cost to human lives in Ukraine because of this illegal war started by Russia is absolutely appalling, but sadly the cost goes well beyond the shores of Ukraine. Across the whole of east Africa circa 80% of grain consumption comes from the combined exports of Ukraine and Russia. This year, around 50 Million East African people are facing hunger with many more in the abovementioned West African states. We can only hope that diplomatic efforts currently in progress to halt this war are successful.

Once again, the global economy and global geopolitics are in crisis. The Russian invasion of Ukraine marches on, supported by China, and to some extent India, who are now the largest importer of Russian oil. Many western countries are experiencing an energy crisis, an interest rate crisis, a credit crisis, an inflation crisis and in many instances a food crisis. Added to these crises, we are now experiencing a “Collateral Crisis”. It is inconceivable that in 2023 the world is suffering so badly but the facts show that there is a crisis everywhere you look, and governments should bear the brunt of their population’s anger.

Causes and concerns

As an example, the Eurozone core inflation recently hit an all-time record high of 5.6%, (8.7% in Germany), whilst remembering the words of Christine Lagarde the president of the European Central Bank who said in 2022 inflation would come down, and in 2020 said it would hardly go up at all. As a result, bond yields have gone up along with cost of borrowing and for those in the Collateral Transfer market, the current economic climate is altering their outlook on where to place their funds.

For those companies who provide Bank Guarantees (collateral), for other companies to utilise for loans and lines of credit, 2023 has been a watershed for asset diversification. To start with, quantitative tightening by central banks has ensured that domestic merchant and international banks and other finance houses have reduced the size of their loan books, thus making new credit facilities hard to come-by. For those who can access credit facilities, the central bank’s “increase in interest rate policy” to combat inflation has pushed up the cost of borrowing.

As a direct result, the demand for collateral has shot through the roof with the provider companies unable to match the increased demand. In fact, many providers of collateral are looking to diversify away from collateral transfer and utilise their assets in more profitable arenas. This in turn is making the demand for collateral more acute, pushing up the cost of leasing Bank Guarantees to levels not seen since the financial crisis of 2007 – 2009.

What does this mean for IntaCapital Swiss?

However, IntaCapital Swiss, Europe’s market leader in the collateral transfer market is still providing access to loans and lines of credit at highly competitive prices despite the increased demand and costs for bank guarantees. IntaCapital Swiss have been providing this service for well over a decade and have a data-base of collateral providers who have kept their prices stable, whilst still continuing to provide collateral to those companies wishing to access loans and lines of credit.

Furthermore, some companies that have presented credit facility applications to their bankers offering Demand Bank Guarantees as collateral, have found their application rejected, because as previously advised above, banks are reducing the size of their loan books. However, due to their years of experience in the collateral transfer market, IntaCapital Swiss have foreseen this potential problem and have a data-base of third-party lenders who will replace any bank declining to lend against a Demand Bank Guarantee.

The future of lending

It is apparent, especially in Europe, that the central bank policy of increasing interest rates together with quantitative easing is not having the desired effect to bring inflation under control and it returns it to the stated policy of 2%. Central banks may well continue to increase interest rates thus putting even further pressure on the availability of collateral and in turn making it harder for companies to access loans and lines of credit in the collateral transfer market. 

However, amongst all the geopolitical and global economic uncertainty IntaCapital Swiss are still able to provide access to loans and lines of credit at a cost not detrimental to their clients.

On Tuesday 1^st August 2023, Fitch, one of the acknowledged top three rating agencies, downgraded the United States top tier credit rating from AAA to AA+. This downgrade comes despite the debt resolution last June and came as a surprise to investors, exacting an angry response from the government.

Fitch pointed out that this downgrade was due not only to the increasing size of the country’s current fiscal deficits but pointed to fiscal deterioration over the next three years. Furthermore, this downgrade also includes last minute solutions to debt limit clashes seen over the past 20 years. 

Fitch went on to say that the government’s fiscal and debt governance had deteriorated over the last two decades and they had already been considering cutting the credit rating last May, when, once again, lawmakers were clashing over increasing the country’s borrowing limit, leaving the US Treasury a few weeks away from running out of cash.

The retort from US Treasury Secretary Janet Yellen was that the “downgrade was arbitrary and based on outdated data”. She went on to say, “Fitch’s quantitative ratings model declined markedly between 2018 and 2023 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decisions”. 

The White House responded by saying it strongly disagrees with this decision and their press secretary added that “It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world”. 

The move by Fitch has had a mixed reaction in the markets, with some commentators advising that problems could now arise for those funds and index trackers who only have a AAA mandate, thereby forcing sales on purely compliance issues. Other experts suggested that taken at face value, this will be seen as a black mark or a dent in the reputation and standing of the United States. However, if, as result due to market nervousness, a risk-off move is fuelled, then paradoxically a move to a safe haven of buying US Treasuries may well occur. 

Many commentators and analysts feel that this announcement will be dismissed by the markets rather than have a long-lasting effect on the US economy. One commentator pointed out that when S&P rating agency downgraded the United States rating in 2011 the risks for those holding investment portfolios that held top rated securities were reworked to say, “government guaranteed or triple-A”. Basically, a government guarantee is more important than a Fitch rating.

In the largest shift in sentiment since 1999, equities have become the flavour of the year, crushing what many analysts had predicted as the “Year of the Bond”. These predictions made back in December 2022, seemed to be coming to fruition in early 2023 as the economic outlook of despondency that supported such predictions seemed the right call.

However, from Hong Kong to London to New York, the demand for bonds has taken a backseat to equities. This has produced a massive rally across the world, and analysts suggest that investors are even more optimistic about equites as signs suggest that gains are far from over.

Although the Federal Reserve raised interest rates last week, the sentiment is that aggressive rate hikes are coming to an end and, indeed, last week’s hike may well be the last. This, together with a more dovish leaning toward monetary policy, should have made bonds a safety net against a downturn in growth.

Instead, analysts and the Federal Reserve itself are no longer predicting a recession in the US Economy: growth keeps accelerating with new jobs being created and inflation cooling. Many experts are signalling a buy for equities whilst at the same time bonds are failing to live up to their sobriquet of a safety net, and as predictions of a recession recede the buzz word in the markets is “A Soft Landing”.

A lot of expert investors have been taken by surprise by the shift from bonds to equities with figures released showing that whether there is a soft landing or not investors are increasing their exposure to equities sacrificing their interest in bonds. Indeed, in a reversal at the start of 2023, data released for Exchange Traded Funds ETFs, indicate equities being preferred to bonds.

It should not be forgotten that bonds have returned positive returns for investors, with market data showing big yields being collected for little risk. However, not many foresaw massive gains in equities with the Nasdaq 100 (tech heavy) posting gains of 44%. 

But as a number of experts have said, there are other considerations to be taken into account. For example, the cooling of inflation may be attributed to the fall in energy prices, whilst the 5 ¼% hike in interest rates may take up to two years to feed through to the market. So, with equities on the rise, the smart money may not be writing off bonds just yet.

Rushall Olympic 0   2 Farsley Celtic

As sponsors of Farsley Celtic, our congratulations must go to the team and management for their impressive win over Rushall Olympic on the opening day of the season. Make no mistake, the National League North is not for the faint-hearted, and Farsley Celtic have an abundance of big and strong players, who took their chances against a very good opposition. Our continued backing of the club is very important to us and we look forward to congratulating the team on more wins as the new season progresses.

August 3^rd is the day economists, dealers, analysts et al, expect the Bank of England to raise the interest rate by 25 basis points to 5.00%, though some commentators are suggesting a repeat of the full half-point hike as was seen in June of this year. This potential hike is a reflection on how difficult the Bank of England is finding the fight on inflation, and whilst both the European Central Bank and the Federal Reserve raised interest rates by 25 basis points this week, the common consensus is that they are both nearing end of their rate-tightening policy.

Experts and investors are currently split 50/50 between peak rates of 5.75% and 6.00%, as earlier this month, on July 11th, data released showed record growth in wages prompting the markets to suggest a peak rate of 6.5%. However, this figure retreated to the above-mentioned split when further data released reflected a decline in consumer price inflation which dropped from 8.7% to 7.9%.

However, inflation in the United Kingdom is double the rate in the United States and sits at four times the Bank of England’s stated target of 2%. Some experts suggest the recent decline in consumer price inflation was more to do with energy prices and the short-term moves within that sector with long-term pressures still weighing heavily on the economy. 

Elsewhere, thanks to the increase in rate expectations mortgage costs are now at their highest point which was last seen in 2008 and other sectors such as house building are feeling the effects of higher interest rates and a survey last Monday 24^th July showed that growth in the private sector had fallen to a six-month low. As for the job market, figures for wages released for the three months to May 2023, are the joint-highest since 2001, (when records first began), reflecting a growth in wages (not including bonuses) of 7.3%. Unemployment rose to 4%, a 16^th month high as employers advertised fewer jobs and more people entered the job market.

It is also expected that the Bank of England will along with the rate decision update their forecasts on both inflation and on growth. These are expected to be lower than the forecasts made back in May of this year as a consequence of the higher market rate expectations. The Bank of England will continue to wage war on inflation which will mean further tightening, and we can only hope this cycle will end sooner rather than later.

The word is out that the world’s largest exporter of crude oil, Saudi Arabia might for a third month in a row, raise the price of its Arab Light to Asian Refiners. Furthermore, Saudi Arabia’s voluntary output cuts may indeed be extended resulting in the tightening of supply of high sulphur/sour crude.

Experts suggest that for its Arab Light Crude Saudi Aramco may raise the OSP (Official Selling Price) by roughly 45 cents in September to USD3.65 above that of Dubai/Oman quotes which would reflect Arab Light Crude’s highest premium this year.

Various analysts and experts have forecasted that Saudi Arabia will extend their voluntary cut to include September, when on August 4^th OPEC + has their monthly meeting, referred to as the Joint Ministerial Monitoring Committee meeting. The current supply reductions have been a boon for oil prices especially for sour crude*.

An important indicator as to whether the OSP will move up or down is backwardation** which is a pricing structure where prices for future supply are lower than that of prompt supply, which suggests a higher demand for oil and less supply. If there is supply tightness, this is reflected in the widening of the spread which in July widened by 43 cents a barrel, typically indicating a similar rise can be expected in the OSP.

Meanwhile back on Wall St, analysts estimated that globally the demand for oil reached an all-time high in July of 102.8 million bpd. This translates to a bigger than expected 1.8 million bpd deficit in Q3 and Q4 of this year and, potentially in 2024, a circa 0.6 million bpd deficit.

 However, the same analysts also said that OPEC spare capacity has risen significantly over the past year, plus declining US oil production costs, and international projects showing a return to growth, will limit the upside to prices.

*Sour Crude – is known for its fairly high sulphur content making it more difficult and costly to refine and can be viewed as a less desirable form of crude oil.

**Please note the backwardation is calculated on the widening or contracting of price spreads on the Middle East Benchmark Crude Dubai, which along with Brent are the most widely used benchmarks in the world for pricing physical crude.

Net Zero by 2050 is the battle cry the world continually hears from governments and green organisations whose mantra is for the world to be free of greenhouse gases within the next three decades. Indeed, the latest COP*, a conference of governments held in Egypt this year, once again espoused the need for carbon neutrality by 2050 and to keep global warming below 1.5 degrees centigrade.

*COP – The Conference of the Parties attended by governments that had signed the United Nations Framework Convention on Climate Change (UNFCCC), a treaty which was created in 1994.

Sadly, the world is somewhat behind in this ambitious plan, especially as the recent war between Russia and Ukraine has ensured that a number of countries have had to increase reliance on fossil fuels to meet energy demands. Furthermore, expert analysts have announced that as of December 2022 investments of USD7 trillion per annum, or almost USD200 trillion by 2050, are required to meet the Net Zero goal.

Thus, with an investment goal of USD7 trillion per annum, how is it that investment funds earmarked for ESG (Environmental, Social and Corporate/Social Governance), or sustainable investments, have surprisingly ended up in the coffers of Aramco, the world’s largest oil company? The answer lies back in 2021 when Aramco started the process of raising USD28 billion, and where unintentionally (so it appears), they were the recipient of funds intended for ESG and sustainable projects.

The tie up between ESG and Aramco came about with the creation of two Aramco subsidiaries, the Aramco Gas Pipelines Co and the Aramco Oil Pipelines Co. In which scenario, Aramco sold 49% of each company to consortiums led by BlackRock Inc and Global Energy Partners LLC, who employed bridging loans from banks to fund both transactions. However, the consortium needed funding to repay the bank loans so two SPVs were created with the same Luxembourg address and named GreenSaif Pipelines Bidco and EIG Pearl Holdings. The two SPVs went on to sell bonds, and as there was no direct link to the fossil fuel industry, the bonds enjoyed an above-average score on the JPMorgan Chase sustainability screening process. The natural progression of these bonds was to then appear in the JPMorgan ESG Index, which are tracked by circa USD40 billion under management.

As a result, a number of actively managed ESG funds have bought bonds issued by the two SPVs, and with analysts predicting that another USD15 billion in debt is needed to continue the financing of the pipeline, ESG funds will need to increase their due diligence. A number of senior financial institutions who have signed up to ESG corporate governance have also bought bonds issued by the two SPVs.

Last week, crude oil in London finally surged above the USD80 mark as demands for fuel in China and other parts of the world reached new highs. We say finally, as for most of the year those betting on a tightening oil market have seen those bets come to nothing. Furthermore, the tightening has come at a time when OPEC (for OPEC please read Saudi Arabia and their allies) are engaging in production cutbacks, which will inevitably drain storage tanks across the world.

Experts from the IEA (International Energy Agency) suggest there will be a sharp tightening in the oil market, as they expect seasonal demand to increase which they feel may well convert into an increase in prices as we head into Q3 of 2023. If such a scenario comes to pass, this could also endanger the global economy, which has of course benefitted from declining inflation and a fall in energy costs.

However, certain analysts are still unclear as to whether a return to USD80 a barrel for Brent Crude is the start of a major price rally, as inflation still needs to be kept in check which could mean a further rise in interest rates. Furthermore, there are some unflattering economic indicators coming out of China, and Russia and Iran continue to flood the market with cut-price crude, though Russia has subsequently cut production as outlined below. 

Brent futures (the main international benchmark) are now the highest since May this year, with experts predicting a stronger market in Q3 and Q4, with some even pronouncing that it was the “tipping point” the market was expecting. The crude market “is heating up” seems to be the common theme among analysts, as they suggest this is due to output cuts amongst the OPEC members (Saudi Arabia et al) finally having an impact. 

Even Russia, who for the most part of this year has boosted exports of crude to fund the war with Ukraine, has jumped on the OPEC bandwagon and reduced output. This was confirmed by the release of tanking tracking data that showed Russia had reduced exports by circa 25% for the four weeks from June 10th to July 9th. Indeed, figures recently released show the balance of supply and demand in June swinging from a surplus to a deficit. 

Some traders still remain bearish as they feel demand is somewhat at the mercy of an economic environment that still produces figures that bring a justifiable uncertainty to the market. This includes sluggish growth in Europe, contracting manufacturing in China, and a possible recession in the United States. Even the IEA has reduced their forecast for global fuel consumption.

However, many analysts and experts still feel the price will increase, especially as Saudi Arabia needs oil revenue for their much vaunted social and economic transformation. Many believe the de facto ruler Crown Prince Mohammed Bin Salman may well prolong the current cuts in output, along with the other members of OPEC. Some experts even predict a rally to USD90 per barrel. Evidently, the next few months will be an interesting time in the oil markets.

This Thursday 27th July, the European Central Bank, ECB, is expected to hit the rate hike button once again, but beyond the end of July, markets appear unsure of what is going to happen next. Currently EuroZone interest rates stand at 3.5% the highest in the last 22 years, having risen by 400 basis points in the last year. However, many experts suggest that interest rates have come close to topping out as headline inflation begins to cool along with a weakening economy.

What many analysts and traders are saying is that the ECB has always offered fairly exact guidance as to what will happen at their next rate meeting. However, this time around guidance for the September meeting is somewhat opaque so the markets are ruminating as to what is going to happen. As far as this Thursday goes, economists suggest that there will be a 25-basis point rate increase to 3.75% as non-core or headline inflation remains just high enough to justify a move of a ¼%, and anything higher will be a surprise. 

 A consensus amongst various experts and analysts suggests that a rate hike in September is no longer a certainty and expects the ECB president Christine Lagarde to stress uncertainty in regard to further tightening of monetary policy. However, there is a feeling that after July there may be one more hike to 4% where EuroZone rates will have reached their zenith, though as to when rates begin to fall, we may have to wait and see. Some experts are predicting rates to be circa 2.4% by the end of 2024 with rates beginning to decline in Q2. Indeed, recent bank lending data would appear to suggest that the upward surge in the cost of borrowing (the steepest in the ECB’s history), shows that loan volumes have come down sharply which may facilitate a decline in economic output, which is further fuelling speculation that rates are finally peaking.

Finally, the villains of the piece, headline inflation and core inflation (core inflation represents the change in the cost of services and goods but does not include those figures from the energy and food sectors). Whilst headline inflation fell across the Eurozone for the third straight month in June, core inflation (which is considered a better guide on the underlying trend) only fell slightly from 6.9% to 6.8%, which is not what the policy makers within the ECB wish to see. There will probably be little comment from the ECB until new economic projections come out in September.