On Tuesday 15^th August Farsley achieved a notable draw with a penalty goal in the dying moments of their home game against newly promoted South Shields. They had a number of near misses during the game but Farsley’s fighting spirit saw them through to a draw.

Moving forward to Saturday 19^th after a four-hour plus coach trip to Bishops Stortford, Farsley produced an excellent goal on the half hour, which allowed the visitors to walk away with all three points.Farsley remain unbeaten this season and their impressive start leaves them in 6^th place on 8 points, 2 points off leaders Scunthorpe United. Our congratulations once again go to the team and their management for an impressive start to the season.

The outlook for construction companies in the United Kingdom is certainly gloomy, as developers with concerns regarding inflation, high borrowing costs and the economy in general have slowed up on house building projects. In fact, in London itself, new home sales have fallen to an 11-year low not seen since 2012 thanks mainly to the cost-of-living crisis and once again the high cost of borrowing. 

Interestingly, Country Garden Holdings, China’s largest privately owned home builder, and considered one of the safer bets, missed payments on international debt obligations. Their cash flow problems have also impacted on land in an impoverished part of east London, where 5 years ago a site was purchased to build hundreds of apartments, sadly to date not one brick has been laid. The plans for the land are therefore being impacted not only by the cash crisis in Country Garden Holdings but also the problems facing the UK economy.

Construction however only forms part of the problem as after a strong Q1 and Q2, sadly in August private-sector companies suffered their first contraction in seven months. Experts and economists advise that the impact of higher interest rates is finally beginning to be felt throughout the economy. This had led to more companies and households adjusting their spending downwards thereby reducing demand throughout the economy. 

In other parts of the economy, consumers are cutting back on their spending on non-essentials which is impacting on the services sector, which not only represents the largest part of the economy but is now showing signs of weakness. In August data released by the CBI (Confederation of British Industry), showed that retail figures suffered their largest year on year drop for nearly 2 ½ years. Analysts at the Marks and Spencer Group have recently advised that there is a risk that as the year progresses the consumer market may tighten even further.

A number of experts and analysts suggest that as the year progresses more negative data will be released into the market, which may show signs of a further slowdown in the UK economy. According to recent data released, circa 445,000 firms are today in Significant Distress, a year-on-year increase of 8.5%. The Bank of England recently warned the increase in the cost of borrowing has also accelerated the risks of corporate defaults, with some companies cutting back on employment and reducing investment. 

Indeed, the Bank of England is expected to raise interest rates again to 5.5% with some commentators suggesting a high of 6% in 2024, the highest for 23 years, further squeezing the pocket of Britain’s consumers. The British economy may or may not be heading for a recession. Many commentators feel this has been avoided, no doubt we will all know by the end of the year. 

Another hard-fought draw leaves Farsley unbeaten this season and they remain 6^th in the league on 9 points, 3 points off the leaders Spennymoor Town. There are six other teams on 9 points, so this season is already showing signs of being highly competitive. Farsley went in at half time one nil down but came out firing on all cylinders in the second half and levelled the score early on with an excellent goal. Farsley went two one up and only a bizarre penalty, where no Tamworth player appealed, denied the Celts a well-deserved three points.

Is Europe’s largest economy heading for another downturn? Data released from the highly respected Munich based ifo Institute* said that following their monthly survey they found confidence has been falling in all four main sectors of the economy: retail, services, manufacturing and construction. The survey found that many German companies have a negative outlook on the current future of the economy.

*ifo Institute – This is a highly regarded Business Climate Index and is representative of early indicators of economic development in Germany with data being published on a monthly basis.

As companies become increasingly pessimistic about the current state of the economy and indeed in Q4, the confidence index has fallen to a 10-month low of 85.7, a fall of 1.7 points. These findings reflect another survey of purchasing managers, where falling new orders, inventories and output, showed German companies had suffered a steep decline in activity not seen for three years.

The across-the-board decline in leading economic indicators suggested another contraction in the German economy for Q3 and Q4 of this year. Indeed, the German economy has been slower to recover from the Covid-19 pandemic than the rest of the Eurozone and the United States. Germany has not seen positive growth for Q1, Q2 and Q3 indicating that Germany’s huge industrial base has been hit hard by a sudden downturn in manufacturing. 

Recent data released showed a further sign of weakness where new orders in the construction sector fell by 2.7% compared to that of June 2022. Such figures show how high interest rates have filtered through to the housing market thereby negatively impacting on activity. Furthermore, recently revised data on German GDP showed the German economy stagnating three months to June compared to the same period in 2022. 

Experts suggest that a lack of momentum in the foreign trade arena combined with high interest rates will keep weighing on the economy in Q3 and Q4, with some senior figures in the finance industry suggesting that the economy could slip into a recession by the end of the year before mounting a recovery in 2024.

Analysts are suggesting that due to the grim outlook for the German economy, the European Central Bank ECB, may not raise interest rates (10^th consecutive time) at their next meeting in September. Since reaching a record high of 10.5% in October 2022, headline inflation in the eurozone is expected to be in the region of 5% in August 2023, however core inflation (excludes food and energy data) remains a problem. So, will the ECB attack core inflation in September with another rate hike or will Germany catch a break with the ECB keeping interest rates where they are?

According to data released by Gas Infrastructure Europe, the European Union has hit their gas storage target 2 ½ months ahead of schedule by posting a 90.1% capacity as of August 16^th, 2023. However, be warned, according to expert’s prices will probably remain volatile over concerns regarding the depth of the winter. 

The EU set the benchmark or threshold for gas storage for November 1^st, 2023, as they try to loosen reliance on Russian gas to see them through the coldest parts of the winter. However, this is the first time since records began (2016), that storage targets have attained this level at this time of year.

The European gas benchmark TTF Futures, (Title Transfer Facility) fell by 2.5% on 18^th August, but still remains high because as experts advised, full inventories during the summer may not compensate for very cold weather in the winter. 

Sadly, the European Union’s demand for gas cannot be met by storage alone, and in the event of colder temperatures, as well as global supply disruptions, Europe could once again be left looking everywhere for gas as they did in 2022.

Experts suggest that the EU will have to compete for liquefied natural gas (LNG), despite current storage levels. Indeed, since the Russian/Ukraine war, and with Russia cutting supplies, the EU have had to purchase supplies from the market to make up the shortfall and this can make them vulnerable to shocks in the global energy market. 

A recent example is potential strikes at LNG export sites in Australia, which together account for circa 10% of global supplies. The market reacted accordingly with the TTF exploding upwards by 40% in the week ending August 12^th, 2023. 

Whilst exports of LNG are basically confined to Asian markets, if there was a decline, Asian buyers would have to search elsewhere to make up the shortfall, pitching them directly into competition with the European Union.

If, as some sources suggest, the winter 2023/2024 will be colder than the previous winter, LNG prices may well increase along with that of demand. As the Russian/Ukraine war shows no sign of abating, we can only hope for a milder winter than that which some forecasters have predicted.

Farsley Celtic 1  1 Chorley

A well-earned draw by Farsley Celtic leaves them 5^th and just 2 points off top spot. With no losses in the first two games as sponsors we once again congratulate the team and the management for their efforts so early into the season. It is a privilege to sponsor a team whose players show so much grit and determination, especially securing the draw against a good side such as Chorley. We look forward to seeing the progression of the team in the coming games.

For several years, we have heard how the US Dollar is losing its dominance in the world, and the Renminbi will be the next big thing in the world of reserve currencies. Yet claims of the US Dollar’s demise is often negated by regular economic data that shows the currency reigning supreme in international finance and trade.

The abiding power of the US Dollar has repeatedly proved itself against other major currencies, and is no doubt highly perplexing and somewhat contentious for the governments of countries such as China, Russia and Iran who would love to see the demise of the dollar, or at least take a back seat in the global reserve currency stakes. The bottom line is that if you take any economy in the world, they cannot compete with the United States capacity to produce liquid and safe assets.

Investing in Renminbi

China has been pushing for some time for other countries to adopt the Renminbi in greater amounts whilst reducing their exposure to the US Dollar. Interestingly last year, 30% of reserve banks expected to increase their holdings of Renminbi whereas this year the figure has fallen to 13%. Experts suggest this is due to geopolitical tensions between China and the US plus US sanctions in Russia.

Data released by a UK based central bank think-tank, the Official Monetary and Financial Institutions Forum (OMFIF), reflects the sentiment whereby a combined total of USD 5 Trillion of assets being managed by reserve banks/central banks expect a gradual decline of the USD Dollar as a proportion of global reserves. 

Today the percentage total of that proportion is 58% but the combined wisdom of the reserve banks suggest that total will be 54% in 2033. Data released from the OMFIF shows that 6% of reserve banks will over the next couple of years reduce their USD Dollar exposure while 10% will increase their exposure over the same period, but by 2033 a net 6% of reserve banks advised they expect to have reduced their exposure to the US Dollar.

So, what does this mean right now?

All in all, the US Dollar seems pretty much secure as the world’s main currency reserve with the only impediment to its ongoing dominance being the US Government themselves. This may appear as a fatuous comment, however, let us remember 2007 – 2009 global financial meltdown, and the recent spate of US Banks having to be bailed out, the default on US Treasury Bonds was averted but a domino effect could have destroyed confidence in US obligations.

Also, with the power the dollar brings, the US government should be mindful of being overbearing and complacent. Whilst many sanctions are indeed deserving (e.g., Russia), the unilateral use of the US Dollar as a diplomatic baseball bat could turn allies into adversaries, making it far more difficult for the United States push their values of freedom and financial policing to countries who could easily be turned towards BRICS who are advocating a move away from the US Dollar.

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.