Tag: News

Eurozone Makes Winter Gas Storage Target 2 1/2 Months ahead of Schedule

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 16th, 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 1st, 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 18th 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 12th, 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 secures 5th place after drawing with Chorley

Farsley Celtic 1  1 Chorley

A well-earned draw by Farsley Celtic leaves them 5th 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.

Reports of the US Dollars Demise may be Wishful Thinking

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.

Global Food Prices Under Further Threat from Russia and India

On July 20th, 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 17th 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 4th 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.

The Collateral Crisis in 2023

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.

Fitch Cut United States Credit Rating to AA+

On Tuesday 1st 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.

Equities Outstrip Bonds in 2023

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.

Congratulations to Farsley Celtic!

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 3rd 2023 Looms Large for UK Inflation

August 3rd 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 24th 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 16th 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.

Will Saudi Arabia Raise September Crude Oil Prices?

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 4th 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.