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Argentina’s economic outlook still murky – Industry roundup: 24 October

Argentina faces further volatility after first round of election

Argentina faces at least four more weeks of political and economic uncertainty after results from Sunday’s first round of the country’s presidential elections delivered no outright winner.

Far-right populist leader of the La Libertad Avanza (Freedom Advances) party, Javier Milei had been seen as leading the race before Sunday's voting. He has benefited from public anger against traditional political parties for failing to fix Argentina’s economy after decades of steady decline and record inflation.

Milei had hoped for a sensational outright victory similar to Jair Bolsonaro’s surprise triumph in Brazil in 2018. A self-described anarcho-capitalist who admires former US President Donald Trump, Milei was seen as the frontrunner after receiving the most votes in the August primaries.

Milei has mostly focused on the economy, which experts agree is perhaps the most severe challenge now facing Argentina, with inflation already standing at 138% in September and only expected to grow by the end of the year. On October 12, Argentina's central bank raised the country's benchmark interest rate to 133% from 118% as the September inflation data came in worse than forecast.

To fix the economic issues, Milei’s proposals include eliminating the central bank, replacing the local currency (the Argentine peso) with the US dollar as Ecuador and El Salvador have done, slashing public spending and shunning Argentina’s biggest trade partners China and Brazil.

Pre-election polls gave Milei the best chance of winning but have proven notoriously unreliable in past elections and it was his Peronist rival, centrist finance minister Sergio Massa who emerged as victor at the weekend. Massa won 36.6% of the 26.3 million votes cast, Milei came second with 30% while the third main candidate, the conservative former security minister and candidate for the centre-right Together for Change coalition, Patricia Bullrich, finished third, with about 23.8%.

The two other candidates in the election, Juan Schiaretti and Myriam Bregman, gained only 6.8% and 2.7% of the votes respectively.

Massa and Milei will now contest a second round on 19 November. For an outright victory, a candidate would have needed more than 45% of votes or, alternatively, more than 40% with a lead of at least 10-points over their closest rival. In the interim period, Argentina is posed for “another month of profound uncertainty, economic turbulence and fake news before the showdown,” reports suggest.

A Massa victory next month is far from certain as many of Bullrich’s right-wing voters may migrate to Milei, a libertarian economist who only entered the world of politics when he was elected to congress in 2021. Following Sunday’s result, Bullrich said of Massa “I will not congratulate someone who has been part of the worst government in Argentina’s history.”

As the results came in, Massa gave a sober speech vowing to lead a national unity government that would kickstart “a new phase in Argentina’s political history”. “Know that as president I will not fail you,” he said, promising “a country without uncertainty” and adding “Argentina is a big family and what it needs is someone to work 24/7 to protect it.”

Despite Milei’s setback, he urged deflated followers to celebrate the “historic achievement” of reaching the run-off only two years after La Libertad Avanza was founded. “Today is a historic day because two-thirds of Argentinians voted for change,” Milei declared, adding: “Either we change or we sink.”

Following the second round of voting, a new president and vice president are expected to take office on December 10.


US 10-year Treasury yield above 5% for first time since 2007

The US bond market’s worst-ever rout passed a new milestone on Monday, as 10-year Treasury yields rose above 5% for the first time in 16 years.

The yield, regarded by Wall Street as a key gauge of bond-market health, jumped nine basis points to 5.01% in early-morning trading, reaching its highest level since July 2007 when the first stirrings of the global financial crisis were being felt.

Longer-duration Treasury prices have cratered in recent weeks, dragged down by investors’ worries about the Federal Reserve’s efforts to dampen inflation and the US government’s steadily growing debt burden.

That has pushed up yields, which move in the opposite direction to prices, with 30-year yields also passing 5% earlier this month.

The run-up in yields has been driven by the Fed signalling that it plans to keep interest rates high well into 2024 in a bid to tame inflation, which has eased in recent months but remains way above the central bank’s 2% target. When borrowing costs are high, bond prices fall because their fixed returns become less attractive to investors.

Federal Reserve  chair Jerome Powell said last week that the Fed plans to proceed “carefully” with its tightening campaign, but most traders do not expect rate cuts before June 2024, according to data from the CME Group.

Lingering concerns about the deficit have also fuelled the sell-off. The US Treasury is expected to flood the market with bills, notes, and bonds in a bid to raise money to cover more than US$33 trillion worth of debt.

“Over the last quarter, bond yields have risen even as inflation has fallen and central banks have indicated that rates are close to their peaks,” Hargreaves Lansdown's head of strategic asset allocation Robert Farago commented in a research note Monday. “The recent rise in rates tells us investors are demanding a higher risk premium for owning longer-dated bonds.”


G7 summit "must focus on de-escalating trade tensions with China"

Ahead of their upcoming summit in Osaka, Japan on October 28-29, trade ministers of the G7 economies are urged to focus on de-escalating trade tensions between China and other major economies.

Writing for The Asset, Lili Yan Ing, secretary-general of the International Economic Association (IEA) and the lead adviser for the Southeast Asian region at the Economic Research Institute for Asean and East Asia (ERIA) says that Chinese “economic coercion” is expected to be high on their agenda at the weekend meeting, together with improving supply-chain resilience and strengthening export controls on critical minerals and technologies.

“But opposing China’s market-distorting industrial policies could inadvertently encourage other countries to erect their own trade barriers, exacerbating uncertainty and impeding global trade,” she suggests.

Yang-Ing notes that since joining the World Trade Organization (WTO) in 2001, China has repeatedly been accused of providing unfair industrial subsidies, resulting in multiple WTO dispute cases. In recent years bilateral trade between China and South Korea has declined significantly amid rising geopolitical tensions and following China’s decision to exclude from its subsidies program electric-vehicle manufacturers that used South Korean battery packs.

Trade relations between China and Australia also soured after China responded to Australia’s call for an independent international investigation into the origins of the Covid-19 pandemic by imposing tariffs on a range of Australian goods.

“Earlier this year, G7 leaders pledged to combat all forms of economic coercion. But this effort could have far-reaching consequences, given that China accounts for 19.4%, 7.5%, 6.8% and 6.5% of exports from Japan, the US, Germany and the UK, respectively,” says Yang-Ing. “Should the group implement anti-coercion measures targeting China, Chinese President Xi Jinping might retaliate.”

“But, beyond the potential implications for G7 economies, the group’s anti-coercion campaign could negatively affect global trade. By adopting anti-coercion measures, G7 members may inadvertently encourage other countries to erect their own trade barriers.”

She notes that In 2022 alone, governments worldwide introduced nearly 3,000 protectionist measures affecting investment and trade in goods and services.

“These actions, whether undertaken by individual countries or larger groupings, could exacerbate uncertainty and inhibit global trade. This increasing fragmentation is already having a negative effect. While the value of global trade reached US$49.5 trillion in 2022, the WTO recently lowered its trade growth forecast for 2023 from 1.7% to 0.8%, citing trade disruptions and a manufacturing slowdown.”

The full article can be accessed here.

“New S” in ESG is Security, says Citi CEO

Escalating conflict between Israel and Hamas are prompting global business chiefs to think more about security issues, according to Citigroup’s Chief Executive Officer Jane Fraser.

“There is a new S in ESG which is security, be it food security, energy security, it could be defence, or financial security,” Fraser said on the first day of Saudi Arabia’s flagship investment conference. “That’s certainly a theme for all CEOs around the world - how to build more resilient countries and companies.”

The Future Investment Initiative, dubbed “Davos in the Desert” has got underway in Riyadh but this year the annual event risks being overshadowed by the Israel-Hamas war despite attracting top names.

Another speaker on Day One of the three-day event, Bridgewater Associates founder Ray Dalio said he agreed with Fraser in being pessimistic on the outlook for the global economy next year.

“If you take the time horizon, the monetary policies that we are going to see will have greater effects on the world, it’s difficult to be optimistic about that,” Dalio said. The upcoming US elections will be about irreconcilable differences to do with wealth and power, he added.

Day one also features an energy summit, investigating the extent to which the Paris Agreement goals can align with economic growth, technology’s part in eliminating greenhouse gases, and the pace of global decarbonisation.


Eurozone PMI drops to three-year low

The economic downturn in the eurozone has deepened this month, with private sector output declining at its steepest rate in 35 months, according to 'flash' purchasing managers' indices (PMIs) out on Tuesday.

The flash Eurozone composite PMI dropped to 46.5 in October, down from 47.2 in September and surprising economists who had expected a slight tick-up to 47.4.

It was the fifth straight month of falling business activity and the lowest reading since November 2020. However, when pandemic-affected months are excluded, this would have been the steepest rate of decline in over a decade, according to S&P Global.

“New orders also fell at an accelerating rate, pointing to a worsening demand environment for both goods and services. Companies cut employment as a result, representing the first drop in headcounts since the lockdowns of early 2021, and remained focused on cost-cutting inventory management,”  S&P Global reported.

The manufacturing PMI fell to a three-month low of 43, from 43.4 in September, while the services PMI dropped to a 32-month low of 47.8 from 48.7. Both figures came in below the consensus forecasts.

Meanwhile, the rate of inflation for goods and services has moderated slightly this month, falling to its lowest since February 2021. “An ongoing sharp fall in manufacturing selling prices was accompanied by a moderation in service sector selling price inflation,” the survey noted.

US consumer watchdog proposes rule to implement open banking

US watchdog the Consumer Financial Protection Bureau (CFPB) has issued long-awaited draft proposals for the sharing of financial data, with the aim of boosting competition.

The open banking proposal just released by the agency calls for banks and credit unions to allow customers to easily share their financial information with third-party fintech apps, typically done through data aggregators that serve as a bridge between financial institutions and fintechs.

The CFPB says that its proposed rules would allow consumers to “break up” with banks that provide bad service and bar companies from misusing personal financial data, while boosting security.

The Bureau’s proposals are still in rough draft form and much may change between now and what gets finalised, possibly as soon as next year.

However the overarching themes — those of easier data sharing and greater competition between entities, and perhaps above all, consistency — herald a groundswell for open banking in the US.

In a statement that accompanied the announcement of the new rule, CFPB Director Rohit Chopra said: “With the right consumer protections in place, a shift toward open and decentralised banking can supercharge competition, improve financial products and services, and discourage junk fees.

He added that the proposed rule would “give consumers the power to walk away from bad service and choose the financial institutions that offer the best products and prices.”

In terms of process, the Notice of Proposed Rulemaking states that the rule would “implement section 1033 of the Consumer Financial Protection Act of 2010 (CFPA). It would require depository and non-depository entities to make available to consumers and authorised third parties certain data relating to consumers’ transactions and accounts; establish obligations for third parties accessing a consumer’s data, including important privacy protections for that data; provide basic standards for data access.”

The commentary period for the proposed rule runs to December 29, so all sides of the payments ecosystem are expected to voice their opinion over the next two months.


Nigeria expects US$10 billion of inflows to ease liquidity crunch

Nigeria expects to receive USS$10 billion of inflows in the coming weeks that will help ease a liquidity crunch that is weighing on its currency, the naira (NGN).

The government has a “line of sight” on the inflows into the country “in weeks rather than months,” Finance Minister Wale Edun said at the Nigerian Economic Summit in the capital, Abuja, although he did not provide details.

President Bola Tinubu’s ministers have been struggling to stem the decline in the currency. The inflows will add to other steps being taken by the government to boost foreign-exchange liquidity, including improving market transparency and allowing domestic entities to issue foreign-exchange instruments, Edun said.

“The market is illiquid, it’s not functioning properly because there is not enough supply of foreign exchange,” Edun said at the conference. “As part of a wider review, there’s a revamping of the foreign-exchange market such that the foreign-exchange market will be simplified, it will be digitalised and it will be reformed.”

The authorities also plan to broaden the official currency market to include other “legitimate” participants, including bureaux de change and financial-technology companies, Taiwo Oyedele, chairman of the presidential committee on fiscal policy and tax reforms, said at the conference. 

Nigeria is considering making it illegal to trade in the parallel market, Oyedele said.

“We currently have a market that is not working and it’s not going to work in its current format,” he said. “We don’t have sufficient liquidity even if you combine the parallel and the official markets.”

The naira has continued to slide against the US dollar on Monday amid insatiable demand for the greenback on the streets. The decline came days after the central bank ended curbs on using dollars to buy dozens of imported items, and at a time of the year that typically sees Nigerians making payments for tuition at foreign schools and universities.

Further details elaborating on the specifics of these “far-ranging initiatives to deepen foreign-exchange liquidity and improve confidence across” will be shared by the finance minister and the central bank governor, Tinubu said at the conference.


Rolls-Royce faces £350 million class action lawsuit from investors

UK engineering group Rolls-Royce faces a potential legal claim from investors upwards of £350 million (US$429 million) relating to a bribery and corruption scandal in 2017 that wiped millions of pounds from the company’s value.

Investors are working with lawyers to receive compensation, believing the jet engine maker made misrepresentations to the market about the scandal. Weekend press reports suggested that Rolls-Royce has turned to the law firm of Slaughter & May to stave off a litigation, the same firm that it employed six years ago.

In January 2017, Rolls-Royce announced that it would pay £671 million to settle allegations of bribery and corruption in several of its overseas markets.

It reached a deferred prosecution agreement with the UK Serious Fraud Office (SFO) after passing concerns regarding bribery and corruption involving intermediaries to the SFO from 2012 onwards.

The company also reached a deferred prosecution agreement with the US Department of Justice and a leniency agreement with Brazil’s Ministerio Publico Federal.


Australia’s SMEs vulnerable to currency fluctuations, reports WorldFirst

Australian small businesses are missing out on valuable foreign exchange (FX) opportunities and are more vulnerable to currency risk stemming from mounting interest rates and persistent inflation according to research by the research and advisory firm East & Partners and commissioned by the FX exchange platform WorldFirst.

Inside Small Business reports that despite nine out of 10 importing/exporting SMEs placing five transactions per month according to the research, most of these businesses have not considered FX solutions. Specifically, SMEs in the Australian forward market make up only 14.2% of the total business FX daily volumes, whereas upper commercial and corporate contribute 40.1% of average daily volume. Over 80% of microbusinesses and SMEs have never traded FX options and over 40% have never traded forward FX. 

The report noted that FX options can be more complex and riskier than forwards and as a result firms that do trade FX options are predominantly mid-market to large enterprises. 

Whilst SMEs prefer forwards, these risk mitigation solutions are still underutilised. The analysis confirms that this is significant given most small businesses deal with more than one currency and are more prone to FX risk than others. 

When entering new markets, three out of four SMEs firms cite issues with international payments as key challenges (75.9%). Lack of visibility in inbound payments being received, lack of tracking in outgoing payments, delays in receiving payments from overseas customers are among key pain points. 

“A main reason why SMEs lag when it comes to FX trading is because of apprehension and misunderstanding of the FX tools available” says WorldFirst Head of Commercial, Australia and New Zealand, Jim Vrondas.

“However, SMEs can use forward contracts to hedge against and undesirable exchange rate outcome and to lock in an exchange rate for up to 24 months. These solutions can help increase certainty for small businesses paying overseas suppliers and are an ideal way of protecting profits against a backdrop of volatility”.


Hong Kong sets up CBDC expertise group

The Hong Kong Monetary Authority (HKMA) has established an expert group of academics for central bank digital currency (CBDC) research.

The 12 members represent several local university faculties, including business, computer science, economics, finance, and law. They will play a key role in supporting the HKMA’s exploration of policy and technical issues surrounding its digital version of the Hong Kong dollar (eHKD) digital currency.

According to reports, the group has already commenced work on two research papers. The first paper examines privacy-enhancing technologies, and the second discusses the potential for interoperability (compatibility across blockchain networks).

Previous CBDC research already highlighted the potential for privacy-enhancing technologies (PETs) that enable the selective disclosure of information. This could facilitate transaction traceability and account verification without compromising the privacy of individuals. 

PETs could potentially be used for CBDC in multi-level supply chain finance and payments. In that case, manufacturing sub-contractors wish to maintain the anonymity of their suppliers to protect their market share from vertical integration by their client, the primary manufacturer. 

The HKMA may also pursue the option to make the CBDC interoperable with various blockchain networks. This could enhance user convenience for both merchants and consumers and promote widespread adoption. The Reserve Bank of Australia (RBA) recently completed trials for this feature.

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