Tag: News

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. 

As a decade of easy money and low interest rates came to an end, and with fears of a credit crisis seemingly receding, experts are advising that globally a wave of corporate bankruptcies may well come to pass. Top corporate debt experts are ringing the doom bells as they say apart from the early days of the pandemic, large corporate bankruptcies amounting to USD500 billion are accumulating at a pace second only to the global financial crisis in 2008.

Such experts suggest that the amount of corporate debt will continue to grow, straining credit markets that have been recovering from some of the biggest losses seen in twenty years and could threaten to slow economic growth. Many commentators just see the tip of the iceberg, as empty offices sprawl from Hong Kong to San Francisco, where many workers now work remotely from home. However, the underlying problem is debt built up throughout an era of cheap money, now costing much more to service as central bank’s monetary policy dictates increases in interest rates.

For example, in the United States from 2008 to 2021 the size of leveraged loans and high yield bonds, (owned by lesser creditworthy and riskier businesses) more than doubled to circa USD3 trillion. One interesting figure that has also been released for the time span 2008 – 2021 is that debts belonging to non-financial Chinese companies soared relative to the size of the Chinese economy. 

Elsewhere in Europe, in 2021 junk bond sales increased by circa 40%, a number of which are coming due for payment adding to the already outstanding debt of USD 785 billion that will have to be paid. In London, HSBC has its headquarters in Canary Wharf along with a number of other large financial institutions, where the once completely derelict site became a major financial centre. HSBC has already announced they are vacating the site in 2026 and prior to the Covid-19 pandemic banks were already scaling back on their working space. As a result, and not forgetting the impact Brexit had on office working spaces, two buildings in Canary Wharf owned by a Chinese property developer were seized by receivers due to non-payment of loans. 

In the world of private equity some of the companies they bought now have a debt level in excess of USD70 billion and are trading at distressed levels. For many years private equity enjoyed low interest rates and easy credit, and their business plan was to buy a company, then borrow money and then cut costs, thereby making a profit. Sadly, these companies were often left laden with debt, and more often than not with floating rate loans on the books. Like many companies throughout the world some private equity firms thought near zero interest rates would last forever, so they never bother to protect their companies with lost cost hedges. Today, with higher interest rates these companies are close to receivership.

As all these debts grow and more companies become distressed, other sectors such as advertising companies are affected, as this is the first area where companies reduce their budgets. Another sector feeling the pinch is real estate, where most of the distressed debt is related to the property problems in China, where companies such as Dalian Wanda Group have seen their debt price collapse and China Evergrande Group who have had to restructure their debt.

The collective global economy will have to hold their breath to see if central bank policies will allow for a reduction in interest rates as inflation is hopefully brought under control. However, with Russia having pulled out of the Black Sea Grain Initiative (implemented in July 2022), this may or may not negatively impact inflation, we will have to wait and see.

As inflation in the United States begins to cool, it is accelerating a decline in the US Dollar, which in turn is benefitting risk assets* across the globe. In September 2022, the US Dollar surged to a record high on the back of increasing interest rates, today against a basket of currencies the US Dollar is down circa 13%, its lowest levels for 15 months.

*Risk Assets as the words imply are those assets that carry a certain amount of risk and are quite susceptible to price volatility. Such assets are generally recognised as emerging markets, currencies, equities, commodities and high-yield bonds.

The global financial system is underpinned to a great extent by the US Dollar, so as the US Dollar declines, so US Treasury yields ease, making the US Dollar less attractive. However, on the other side of the coin, this gave a boost to foreign currency across the board such as the Mexican Peso and the Japanese Yen.

From a corporate standpoint, some US companies will benefit from a weaker dollar as this will allow multinationals to convert overseas profits back to dollars more cheaply, whilst at the same time making exports more competitive in overseas markets. For example, in the US technology sector, where some companies are enjoying high growth and have recently led the markets higher, they have, according to experts, generated circa 50% of their revenue from overseas markets.

In the currency world, throughout the foreign exchange markets, as the US Dollar declines technical levels are being broken, and across the globe those currencies that are risk-sensitive are ticking up. Certain foreign exchange strategies will benefit from a falling US Dollar such as a Dollar Funded Carry Trade*. Experts in the dollar funded carry trade market expect these trades to thrive against a bleak outlook for the US Dollar. 

*A Dollar Funded Carry Trade is where a higher yielding currency is bought against the sale of US Dollars, allowing the participant to pocket the difference.

The fall in the US Dollar will be a boon to some central banks and their monetary policies as they can withdraw support for their own currencies. In Japan for example, the US Dollar has fallen by 3% in the week ending 14th July and has dented expectations that as an import reliant economy, the government would have to intervene in the currency markets.

Figures from the S&P Goldman Sachs Commodity Index (S&P GSCI) have ticked up 4.6% this month reflecting the declining dollar reflecting raw materials being more attractive to foreign buyers. Emerging Markets are also benefitting from a fall in the US Dollar, making any debt corporate or sovereign easier and cheaper to service. This has been reflected in a 2.4% increase this year in the MSCI Emerging Market Currency Index.

The outlook for the US Dollar is essentially very bearish with many experts predicting the currency will fall to levels before the Federal Reserve started hiking interest rates and may go even weaker. But bears beware, a sudden unexpected increase in inflation could change strategies across the globe.

Whilst the United Kingdom still struggles to keep inflation in check, inflation surprisingly fell to 5.5% in the Eurozone, down from 6.1% in May, which is the lowest since January 2022. However, before policymakers could start popping champagne corks, the mood was tempered as figures showed a small uptick in core consumer price growth, with core inflation (excludes food and energy) having increased from 5.3% in May to 5.4% in June. This was clearly a disappointment for the ECB (European Central Bank), as until the underlying price pressures fall to the target of 2%, the ECB has confirmed they will keep raising interest rates.

Meanwhile, in the United Kingdom, contrasting figures with the Eurozone show inflation at the end of May at 8.7%, and with the Bank of England raising interest rates by 50 basis points on 21st June, there are fears that in order to keep battling inflation, a subsequent rise of the same amount is in the offing. Furthermore, recently released figures show that amongst the G7 countries, the United Kingdom’s growth rate for Q1 was the slowest (apart from Germany) and as of May, the annual inflation rate of 8.7% was the highest.

Experts point to emerging differences between the United Kingdom and the Eurozone, where the ongoing shortages of labour, plus the energy price crisis, make for a toxic combination resulting in inflation being more stubborn to shift than the Eurozone and other G7 countries. 

Regarding labour shortages, there are a record number of job vacancies, and the United Kingdom is facing additional inflationary pressure as companies across the land increase salaries/wages in attempts to fill these vacancies. Post-Brexit immigration laws are cited as one reason for a declining labour market, whilst post the Covid-19 pandemic, there are record levels of long-term sickness amongst adults of the working age.

Expert analysts also point to the United Kingdom’s governments Energy Price Guarantee (EPG), where for a typical household, electricity and gas bills have been capped at £2,500 pa (1st October 2022 – 1st July 2023). However, similar caps were not introduced in the Eurozone, therefore the recent decline in global wholesale electricity and gas prices are better reflected in their current inflation rate.

Furthermore, economists suggest another divergence between the Eurozone and the United Kingdom is that the UK’s economy is more service based than manufacturing based as opposed to those economies in the Eurozone. This leads to a more balanced economy which is reflected in the fact that inflation across the Eurozone is declining (apart from Germany and Croatia) whereas the United Kingdom is struggling on the inflation front. 

Figures for the end of July will show if this divergence is continuing, however, within the ECB’s rate setting council members have acknowledged that criticism by members of the UK press regarding the Bank of England’s handling of inflation, has served as a cautionary warning to the wise.

As recently as last week, core inflation (excludes energy and food prices) in both the Eurozone and the United States was easing slightly, whilst in the United Kingdom inflation remained 8.7%, but core inflation increased to 7.1%, the highest since 1992. So why is it when the United States and the Eurozone get a drop off in core inflation, Great Britain suffers an increase?

Without a doubt all Remainers blame Brexit for the inflation problems with the ex-governor of the Bank of England, Canadian Mark Carney, being their standard-bearer. The fall in the pound after Brexit is usually trumpeted as a reason for inflation, but that was seven years ago, and since then, sterling, apart from the odd blip (the Liz Truss regime stands out), has remained relatively steady and in 2023 has gained in strength.

Other reasons from the Remainers camp is trade with Europe is now more expensive and difficult with the end result being costlier imports. The lack of access to labour and skilled workers from Europe is yet another reason put forward by Remainers, but with immigration actually having increased this argument is redundant. However, it cannot be denied that leaving Europe has contributed to the weakness in business investment, but is that a contributing factor to an increase in inflation? Probably not.

The Bank of England has received many derogatory comments regarding the increase in core inflation, and it is argued that their attitude towards inflation was lethargic, and they are therefore responsible for the problems that beset the nation today. Blaming the Bank of England is the easy way out, and they have acted in concert with many other central banks throughout the world. In fact, they were the first to raise interest rates.

Experts suggest that there are a number of influential factors responsible for the increase in core inflation and these can be seen in;

1. Pay Inflation – The United States is running at 4.3% and the Eurozone is running at 5.2%, whilst in the United Kingdom it is running at 7.2%, helped along by increasing the National Living Wage in 2022 by 6.5% and by 9.7% a year later.

2. Supply Performance – The United Kingdom is suffering from a poor supply performance, and as opposed to other G7 countries their GDP is still well below pre-Covid-19 levels.

3. Workforce – There has been a massive fall-off in the workforce, with Covid being the major instigator of this scenario, but Covid was a global shock that has left its mark and can take some responsibility for where the United Kingdom (and many other countries) are today.

The United Kingdom is not alone in fighting inflation, and according to experts, the root cause of the massive increase in global inflation is found in a series of supply shocks, resulting in higher prices and the probability of a wage – price spiral. Central Banks would have to use monetary policy to fight this spiral, with the end result of bringing down inflation and hopefully wages. 

Sadly, the United Kingdom was hit particularly badly as the supply situation was much more severe than many other countries, and this is the real criticism of the Bank of England, as they did not act quick enough to keep the lid on the wage – price spiral.

There is only one monetary supply policy available to the Bank of England, and if increasing interest rates is the only way to fight inflation, the United Kingdom may well fall into recession. It will be painful, but we can only hope the current policy will bring down inflation at a faster rate than is currently predicted.