China’s grip on rare earth markets “unlikely to be broken”

Australia’s resources minister Madeleine King has dismissed as a “pipe dream” the possibility that Western countries could soon end their reliance on China for rare earths and critical minerals, due to the Asian powerhouse’s existing grip on global markets.

“That’s a country that has seen this need coming and made the most of it,” she told Bloomberg News in an interview.

Rare earths and minerals are essential to the defence, aerospace and automotive industries. Lithium and other critical minerals including cobalt, platinum and rare earths are used in the manufacture of an extensive range of products central to both national security and the fight against climate change, such as jet engines, solar panels and electric vehicles.

Australia also enjoys some of the world’s largest reserves of these resources and along with China is among the biggest producers of critical minerals globally. King said that Australia would work with the US to boost investment in these critical minerals in a bid to break China’s monopoly on international supply chains. It was the government’s aim to “make the most of the natural endowment we have of these resources, so that we can provide an alternative source of them from China”.

Western Australia is the source for much of the country’s production capacity for lithium and rare earths. Siriana Nair, the US consulate-general in the state capital Perth, said Australia and the US shared a “strong strategic interest” in securing critical mineral supply chains.

While she avoided specifying China as the target of growing cooperation between the US and Australia, Nair said that having a single source of any critical resource was a “big drawback and a huge flaw”.

BoE follows Fed with rate hike of 0.75%

The Bank of England (BoE) has, as anticipated, confirmed its largest hike in the benchmark interest rate since the UK's "Black Wednesday" crisis in September 1992 as it struggles to bring double-digit inflation back to its 2% per cent target.

At its previous meeting on 21 September the Bank’s nine-strong monetary policy committee (MPC), which is responsible for setting rates, announced a 0.50% percentage points rate rise from 1.75% to 2.25%. Investors correcttly forecast that today’s decision would see the MPC follow the lead of the Federal Reserve and agree a 0.75 percentage points increase, taking the rate from 2.25% to 3%.

This marks the highest level since November 2008, when the BoE responded to the growing global financial crisis by cutting 1.5 percentage points from the rate, reducing it from 4.5% to 3%. Subsequent reductions took it to 0.5% by March 2009.

The current MPC has so far delivered seven back-to-back rate rises since December when UK rates were at a low of 0.1% to encourage the UK’s economic recovery from the Covid-19 pandemic.

Today’s decision comes after the US Federal Reserve confirmed its fourth consecutive 0.75% interest rate rise on Wednesday. The US central bank began raising interest rates by 75 basis points in June and the latest increase brings the federal funds rate – the benchmark for everything from business loans to credit card and mortgage rates – to between 3.75% and 4% after they sat at near zero for more than a year during the coronavirus pandemic.

Fed chairman Jerome Powell commented that there were “no grounds for complacency” but acknowledged that officials were considering the pace of rate rises as they assess their impact on the wider economy. “Even so, we still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said.

Singapore’s MAS hedges its bets on retail CBDC

The Monetary Authority of Singapore (MAS) has completed the first stage of its Project Orchid examination of a retail central bank digital currency (CBDC).

A white paper released this week concludes that there is no “urgent case” for a retail CBDC in Singapore, but the study envisioned the infrastructure required should the need arise. It also conceptualised a new model for digital currency — purpose-bound money — and involved Singaporean banks and government agencies into the research with a series of trials.

Singaporean consumers do not currently need a retail digital dollar due to the high quality of services already available, the authors wrote. They indicated, however, that the most foreseeable use case may be for the benefit of the MAS rather than users:

“Electronic payments in Singapore are pervasive, and households and firms in Singapore are already able to transact digitally in a fast, secure and seamless manner today. […] The case for a retail CBDC in Singapore could strengthen over time, especially if innovative uses emerge or there are signs that digital currencies not denominated in SGD are gaining traction as a medium of exchange locally.”

The MAS uses the concepts of programmable payment (“the automatic execution of payments once a pre-defined set of conditions are met”) and programmable money (“embedding rules within the medium of exchange itself that defines or constraints its usage”) to devise its purpose-bound money (PBM), which “specifies the conditions upon which an underlying digital currency can be used.”

This highly constrained, non-intermediated form of CBDC would serve well for vouchers, the white paper concludes. Four trials are being conducted at the three-day Singapore FinTech Festival, which ends tomorrow.

Europe call for tighter regulation of shadow banks

Europe needs to better regulate shadow banks as rising interest rates and market turbulence triggered by Russia’s invasion of Ukraine threaten financial stability, says the Bank of France’s governor Francois Villeroy de Galhau.

Although they play a growing role in the financial system, non-bank financial intermediaries (NBFI) such as investment funds or insurers face looser regulation than traditional lenders.

“It is high time that we moved forward to enhance the regulatory framework for NBFI that will ensure better liquidity management,” said Villeroy - who sits on the European Central Bank’s (ECB) Governing Council –  during a speech in Dublin. "We are facing rising threats to financial stability."

"Tackling systemic risks in NBFI may therefore require the development of additional rules both for leverage and for liquidity management in case of systemic risk developments.”

Villeroy added that the problem is caused by existing liquidity management tools being calibrated by market players and their incentives may not be aligned with broader stability goals. New regulation could require the development of additional rules both for leverage and for liquidity management in case of systemic risk developments.

Overseeing shadow banks is outside the ECB’s supervisory powers but the supervisor is increasingly concerned that the sector has grown too big to be ignored. “Financial stability risks in the non-bank financial sector should also be addressed from a systemic risk perspective,” a statement by the ECB noted. “This requires tackling identified vulnerabilities and increasing the resilience of non-bank financial institutions and market-based finance.”

Canada also delays ISO 20022 migration

Canada has confirmed that its high-value payment system’s move to the ISO 20022 single standardisation approach will be delayed until March 2023 in order to keep in step with the recently postponed migration to the message standard by SWIFT and the Eurosystem.

Canada’s Lynx was scheduled to go live with its second release this month, introducing ISO 20022. However, although the technology required to support the release will still be deployed as planned, it will not be activated until next March.

Payments Canada's decision to delay comes after consultation with Lynx users in order to align with SWIFT’s ISO 20022 migration for cross-border payments and reporting (CBPR+) - which was itself recently put back from November 2022 to March 2023.

SWIFT made its move in response to the European Central Bank’s (ECB) decision to delay the launch of the Eurosystem's new real-time gross settlement system and central liquidity management model, T2 - which is based around the use of the new messaging standard - from November to March to allow some member states more time for testing.

Last month, Payments Canada announced a delay to the launch of another of its flagship projects - the Real-Time Rail (RTR) payments system - from mid-2023 to an as-yet undetermined date.

Nordea AM lifts Brazil bond quarantine after Lula pledges

Nordea Asset Management has announced that the negative financial materiality of continued rainforest destruction governed its decision in 2019 to cease buying Brazilian government bonds for any of its internally managed emerging markets debt strategies.

“Despite taking this course of action, Nordea did not simply divest and disappear,” Nordea AM commented. “In 2020, the group became a founding and advisory member of the Investors Policy Dialogue on Deforestation (IPDD), a collaborative engagement aimed at initiating and coordinating a public policy dialogue on halting deforestation.

Following positive pledges from president-elect Luiz Inácio Lula da Silva after his election victory last weekend, Nordea’s Brazilian government bond quarantine has now been lifted, with immediate effect.

“Based on policy announcements from the president-elect – including the expected return of Marina Silva in a central policymaking role, and the effective concession of the election by the outgoing president – our emerging markets debt team at Nordea Asset Management has decided to lift the quarantine on Brazilian government bonds,” confirmed Thede Rüst, head of emerging markets debt at Nordea AM.

JP Morgan completes first DeFi trade on public blockchain

JP Morgan has successfully executed its first-ever cross-border transaction using decentralised finance (DeFi) on a public blockchain.

The 2 November trade was facilitated by the Monetary Authority of Singapore’s (MAS) Project Guardian, which was launched in May as part of a pilot program to “explore potential DeFi applications in wholesale funding markets.” A month earlier, JP Morgan announced a partnership with Singapore’s largest bank, DBS to build a new blockchain interbank platform to complement the work of central bank digital currencies (CBDCs).

This week’s pilot was another step into examining how traditional financial institutions can use tokenized assets and DeFi protocols to conduct financial transactions, among other use cases. DBS, Tokyo-based banking firm SBI Digital Asset Holdings and business leadership platform Oliver Wyman Forum also took part in the pilot programme.

The trade was executed on Ethereum layer-2 network Polygon, using a modified version of the Aave protocol’s smart contract code.

MAS said that a “live cross-currency transaction” was conducted, involving tokenised Singaporean dollar (SGD) and Japanese yen (JPY) deposits, along with a simulated exercise of buying and selling of tokenised government bonds.

Tyrone Lobban, head of blockchain launch and Onyx Digital assets at JP Morgan’s Onyx business unit, shared the news on Twitter, noting the tokenised SGD deposits were the first issuance of tokenised deposits by a bank.

Goldman Sachs upbeat on European gas price relief

Goldman Sachs is predicting that European natural gas prices will drop by about 30% in the coming months as the region’s nations gain a temporary upper hand on supply issues.

The Dutch Title Transfer Facility (TTF), Europe’s main benchmark for natural gas prices, traded at around €120 per megawatt hour (Pmh) on Tuesday. But Goldman Sachs expects this benchmark to fall to €85 Pmh in the first quarter of 2023, according to a research note published last week.

At this level, the price would mark a sharp reduction from the levels seen back in August, when Russia’s unprovoked invasion of Ukraine and the subsequent pressures on Europe’s energy mix pushed prices to a historic peak of above €340 Pmh.