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ECB set to follow Bank of Canada with rate cut – Industry roundup: 6 June

European Central Bank set for its first rate cut since 2019

Expectations are high that the European Central Bank (ECB) will today cut borrowing costs for the euro area for the first time since September 2019.

A 25 basis points (bps) reduction to 4.25% in the ECB's main rate and 3.75% in the deposit rate will mark the official end to the fast-hiking cycle that began in 2022 after the Covid-19 pandemic as inflation soared. But investors’ attention appears to have already moved on to what will happen after this first cut by the Bank.

The ECB will be following the Bank of Canada (BoC), which yesterday cut interest rates as it sees a soft landing on the horizon for the Canadian, making it the first Group of Seven central bank to kick off an easing cycle.

BoC policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate by 25 basis points (bps) to 4.75%, as widely expected by markets and economists. Officials ae increasingly confident that Canada’s inflation is headed to the Bank’s 2% target, and said it’s “reasonable to expect further cuts,” if progress continues.

Analysts believe the ECB is similarly poised to begin reducing rates. “Judging by the commentary from officials, there is no questioning of the wisdom of cutting rates on 6 June,” said Mark Wall, ECB watcher with Deutsche Bank.

“Even with the upside surprise on May HICP [harmonized index of consumer prices], the ECB can argue a cut is consistent with its reaction function. The question is, what comes after June?”

 Eurozone inflation for May came in slightly higher than expected with headline inflation at 2.6% and the print for core at 2.9%. On top of that, negotiated wage growth — a figure closely watched by the ECB — did reaccelerate in the first quarter to 4.7% after hitting 4.5% in in the fourth quarter of 2023.

“Many of these data are distorted by one-off effects,” said the chief economist of Berenberg, Holger Schmieding. “For example. a mild winter had boosted Q1 [first quarter] outdoor construction and thus real GDP while one-off payments raised wages more than usual in some countries such as Germany early this year.”

But while another rate cut in July cannot be ruled out, given the recent commentary from ECB policymakers it does not seem very likely. “We see that some elements of inflation are proving persistent — especially domestic inflation, and services in particular,” ECB board member Isabel Schnabel said in an interview with the German public broadcaster ARD on 16 May.

“I would caution against moving too quickly because there is a risk of cutting interest rates too fast. And we should definitively avoid that,” she added.

As policymakers in the eurozone move ahead, they leave behind their counterparts at the US Federal Reserve, who are grappling with a seemingly more persistent inflation problem and warning that it will take longer to cut rates there.

Some analysts have questioned how far the ECB can split from the Federal Reserve, while others say a divergence is not unusual and reflects two different economic situations.


Australia’s economic growth stalls in Q1

Australia’s economic growth slowed to a crawl in the first three months of 2024 as high borrowing costs and still-elevated inflation limited consumer spending, even as the prospect of relief on interest rates remains a distant one.

Data from the Australian Bureau of Statistics showed real gross domestic product (GDP) rose 0.1% in the Q1, even less than the market forecast of 0.2%,

Annual growth dropped to 1.1%, from 1.5% the previous quarter and the slowest pace in three decades outside of the pandemic.

Growth in household spending, which accounts for half of GDP, was only a fraction firmer at 1.3%. Most of that was on essential items such as electricity and healthcare, with discretionary spending almost flat for the year.

The outlook for future spending power was also poor, with the savings rate sinking to a historically low 0.9%, after large downward revisions to past numbers .

"Given that the savings rate was around 5% before the pandemic, that underlines the severe pressure households have been facing due soaring living costs, interest payments and taxes," said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics. “And with real incomes stagnating last quarter, that pressure hasn’t fully faded yet.”

Financial markets have already priced out any risk of a further hike in the Reserve Bank of Australia's (RBA) 4.35% cash rate, but neither do they see much chance of a cut in the near tem.

Futures imply around a 50-50 probability of a move in December and are not fully priced for a cut to 4.10% until May 2025

Speaking to lawmakers before the data, RBA Governor Michele Bullock acknowledged the economy was "very, very weak", but insisted policy needed to be restrictive to bring demand back into line with supply and curb inflation.


China plans new carbon measurement standards to boost climate efforts

China has announced plans to better measure the carbon content of its products, as a key step in reaching its own climate goals and meeting tougher carbon standards overseas.

The new “carbon footprint management system” detailed by the Ministry of Ecology and Environment will go into effect in 2027, setting standards for measuring carbon emissions for about 100 key products throughout the Chinese economy, according to a policy document.

At first, the Chinese calculation standards will apply to high-emitting products such as coal and natural gas as well as export products like steel, aluminium, lithium batteries and electric vehicles.

The ministry said it hoped to expand the guidance to 200 products by 2030.

It said the new standards would help drive low-carbon consumption, with local governments urged to develop pilot programmes and policies to encourage the use of lower-emissions products.

Analysts said the calculations could also play a key part of China’s efforts to reduce emissions associated with product manufacturing – and avoid trade tensions and high import tariffs under the European Union’s (EU) new carbon border tax.

The move shows China is working to catch up with EU legislation that already “has set clear rules on the measuring and disclosure of product carbon footprints”, said director Ma Jun at the Institute of Public and Environmental Affairs in Beijing.

“China is a latecomer on that, so there are still some gaps to fill,” he said, adding that the calculations could also help China create incentives for companies and individuals to reduce emissions.

With Europe’s carbon border adjustment mechanism (CBAM) set to impose tariffs in 2026, countries outside the region have grown anxious about the possible hit to their manufacturing.

Some, like South Africa, have considered filing complaints with the World Trade Organization. Critics say the EU rules unfairly penalise exporters, and do not consider an exporting country’s overall emissions-reductions efforts.

But moves such as China’s to prepare companies to calculate their emissions could also be a precursor to launching their own low-carbon rules – effectively keeping those taxes on high emissions within the country, analysts said.

In India, where officials have criticised the CBAM as a trade barrier, there has been discussion among policymakers about whether existing taxes on the steel industry should be redesignated as carbon taxes, said Ritabrata Ghosh, vice-president of ICRA, an Indian investment information and credit rating agency.“Whether this sees the light of day remains to be seen,” he said.

It is unclear if China is considering its own carbon tax regime, but it has said it wants to expand the trading of carbon credits to sectors such as steel and cement.


Bloomberg launches T+1 fixing rates

Following the changeover in North American securities markets on 28 May to T+1 settlement, Bloomberg Index Services has launched what it says are the only T+1 FX fixings available to the market via its BFix service.

Bloomberg says that the T+1 switch has increased the pressure on client systems by narrowing the window in which transactions can be processed and settled. Using the BFix value T+1 rates, users can send FX orders into their executing counterparts without being physically present in the designated time zone.

While sell-side banks can currently offer this service through forwards desks on a T+1 basis taking opposite risk from the spot desk on a T+2 basis, the forwards desk inherits a tom/next FX swap which may ultimately impact banks’ credit facilities when done in sizable volumes. Bloomberg says that using the new T+1 benchmarks, banks can seek to match or net orders to reduce credit impact at scale.

The initial launch includes 20 deliverable currencies against the dollar – the euro; the Australian, Hong Kong, New Zealand and Singapore dollars: Sterling; Japanese yen; Swiss franc; the offshore deliverable Chinese renminbi; Czech koruna, Danish and Norwegian Krone; Hungarian forint, Israeli shekel, Mexican peso, Polish zloty, Romanian leu, South African rand, Swedish krona, and Thai baht.

“Providing a solution to what will be a very challenging process for the FX market is where the Bloomberg Index team steps up to meet client needs,” says Colin Gallagher, BFix benchmark & currency indices product manager at Bloomberg Index Services. “With extensive use of BFI X in currency derivative products, accurate date alignment and a stable window environment for bank execution, BFix is now a well-established FX benchmark clients rely on globally and BFix T+1 is a natural evolution to our offering.”


IFC and HSBC in Mexico supply chain finance deal

The International Finance Corporation (IFC) and HSBC have struck a risk participation deal on a US$200 million supply chain finance portfolio in Mexico.

The IFC, the financing arm of the World Bank, will assume 50% of the risk of the facility as part of its global supply chain finance (SCF) progamme, which launched in December 2022. The financing will “promote sustainable supply chains” and benefit local suppliers in Mexico, including small to medium-sized enterprises (SMEs), the IFC says in a disclosure document.

Nealy one in three of Mexico’s SMEs cite lack of access to finance as an impediment to their growth, the IFC says. The deal will benefit what the Corporation calls the “last mile” of the supply chain, including second-tier and deep-tier suppliers.

Buyers participating in the programme will be HSBC’s existing corporate clients. The deal has a tenor of one year with two one-year rollover options, an IFC spokesperson said. The risk participation still requires approval from the IFC Board, which is due to consider the proposal on 1 July.

The transaction marks the first time HSBC has participated in the IFC’s global SCF initiative and is the third commercial lender to do so, following three deals in 2023: two with Citi and one with South Africa’s Absa Bank. HSBC and IFC already co-operate on other trade finance schemes, including a US$600 million facility launched in October 2022 under the global trade and liquidity programme.


BIS’s Project Rialto to explore instant cross-border payments

The Bank for International Settlements (BIS) is launching Project Rialto to explore how instant cross-border payments could be improved using a modular foreign exchange (FX) component combined with settlement in wholesale central bank digital currencies (wCBDC).

The Basel, Switzerland-based BIS says that improving cross-border payments is an explicit international policy goal and a priority of the G20 group of major economies. FX is a key component of cross-border payments but currently, the FX services facilitated by correspondent banks can be costly, slow and complex, and they expose participants in the payments chain to liquidity, credit, and settlement risks.

Decentralised solutions, central bank digital currencies (CBDCs) and interlinked payment infrastructures are considered promising avenues to improve cross-border payments. How they interact has not yet been explored and could yield answers that advance cross-border payments globally.

Project Rialto is a collaboration of the BIS Innovation Hub Eurosystem and Singapore Centres in partnership with several central banks. It explores a new automatic FX settlement layer solution using wCBDC as a safe settlement asset that could be deployed for interlinked instant payment systems or digital asset systems.

It takes its name from the Rialto in Venice, which is both a bridge connecting the two sides of the Grand Canal (symbolising the cross-border payment infrastructure), and a marketplace (symbolising the automatic FX settlement using wCBDC).


Maersk reports surging freight rates and congested ports

Denmark-based container shipping carrier A.P. Møller-Mærsk has reported improved earnings but warned of ship diversions around the Red Sea tying up capacity and signs that port congestion is worsening, particularly in Asia and the Middle East.

The combination of disruption and strong demand continue to buoy global freight rates, enabling Maersk to raise its full-year guidance for the second time in barely over a month this week.

Maersk’s chief executive, Vincent Clerc, said that a sudden rush to order shipments ahead of this year’s festive period risks deepening delays and congestion across the global supply chain. He told the Financial Times that, after “an almost vertical” increase in shipping costs in the past month amid worsening congestion at ports in Asia and the Middle East, more customers could try to ship goods much earlier than normal.

“At this stage the thing that can really make things worse for the global supply chain is this rush for the door where everybody starts to order more than they need. You get this bullwhip effect,” he added.

Spot freight rates have jumped by two-thirds over the past month as the shipping crisis caused by Houthi rebels in Yemen attacking container vessels has led to delays for customers and congestion in Asian and Middle Eastern ports.

Maersk expects freight rates to keep moving higher through the rest of the year due to strong container market demand and ongoing disruption in the Red Sea, where attacks by Yemen’s Houthis have forced ship operators to divert vessels thousands of miles.


ADB approves US$250 million to boost public-private partnerships in Pakistan

The Asian Development Bank (ADB) has approved a US$250 million policy-based loan to help Pakistan drive sustainable investment in infrastructure and services through public-private partnerships (PPPs).

As per a press statement, the loan is part of ADB’s Promoting Sustainable Public–Private Partnerships Programme that supports the implementation of government policies to create an enabling environment for fiscally affordable PPPs and promote inclusive economic growth

“This programme is part of our comprehensive and integrated package of public sector management support that balances the country’s fiscal consolidation and growth objectives,” said ADB Director General for Central and West Asia Yevgeniy Zhukov.

“The programme will help the Government of Pakistan create an environment that is conducive to strategic, fiscally affordable PPPs that will bring the country closer to its development goals,” he said

As per the Manila-based lender’s statement, ADB’s programme supports reforms that will increase the absorptive capacity of PPP infrastructure investments by creating a more robust and integrated legal and institutional framework for public investment management and public financial management for PPPs.


Aira secures €200 million funding for European heat pump rollout

A financing facility from BNP Paribas will boost Swedish clean tech firm Aira’s plans to expand home heat pump financing offer to consumers across Europe

The green home heating specialist Aira has secured €200 million boost from the French banking group in the form of a new debt financing facility, which the Swedish firm said would help finance the installation of heat pumps across Europe.

Aira, which last month opened its second UK clean tech hub in Manchester, said the support from BNP Paribas marked its first debt financing facility, and would be largely used to support the rollout of heat pumps in thousands of homes across Germany.

The firm is aiming to accelerate the adoption of clean home heating across Europe through a financing model that offers customers a new heat pump at zero upfront cost, with the technology then paid for through monthly payments.

It has committed to investing £300 million (US$383 million) in the UK alone, in a move it expected to create 8,000 jobs over the next decade as it bids to become a UK market leader in heat pumps.

Martin Lewerth, Aira Group's chief executive, said the latest financing support from BNP Paribas marked "a significant milestone for Aira as we endeavour to make heat pump technology accessible to every home through affordable monthly payment solutions".

"With substantial debt financing facilities from partners like BNP Paribas, we are set to remove one huge barrier to heat pump adoption and turbocharge our rollout across Europe," he added. "This securitisation with BNP Paribas marks the first step in Aira's consumer financing journey and represents a major leap towards moving Europe off fossil fuel-based boilers."


Bunq to leverage AI in open banking with Mastercard

Netherlands-based bunq, the second largest neobank in Europe, has partnered with Mastercard to offer its 12.5 million users across Europe ʺa complete overview of their finances. This is achieved by leveraging Mastercard’s Open Banking platform, which allows users to add accounts from any bank to their bunq app.ʺ

The integration enables bunq users to get spending insights from their bank accounts directly within the bunq app, allowing them to budget more effectively and plan ahead. Further enhancing the user experience, bunq’s artificial intelligence (AI) money assistant, Finn, will enrich these insights with transaction data from multiple banks. For instance, users can ask Finn for a complete overview of their travel expenses in the last year, and it will retrieve travel-related transactions from both bunq and any external banks. ”In that way, bunq becomes the first bank in Europe to leverage AI in open banking,” a release noted.

“Thanks to open banking, bunq has seen a surge in user engagement, with nearly 40% of their surveyed users reporting a significant increase in their use of the app within two weeks of launch,” the release added. “With more people in Europe preferring to have more than one bank account, the new features take the hassle out of managing multiple bank accounts and advance open banking among bunq’s user base across Europe.   

“Our users live life without borders, effortlessly blending home, work, and travel, said Bianca Zwart, Chief of Staff at bunq. “We’ve built the bunq app around their lifestyle, and this partnership takes it even further. By combining Mastercard Open Banking with bunq’s world-leading AI platform, the possibilities to enhance their experience are endless.”

“We’re pleased to support a leading neobank like bunq, as they show a great example of how multiple benefits of open banking and AI can deliver an excellent user experience. This collaboration showcases our strong platform and reach across Europe and the opportunities for scaling on our global open banking network”, said Bart Willaert, EVP, International Open Banking, Mastercard.   

Open banking features for bunq users are now available in the Netherlands, France, and Germany and will scale further across Europe. bunq and Mastercard announced the partnership at the thought-leading European edition of Money 20/20 in Amsterdam. 


Malaysia’s AHAM Capital launches biotech fund

Malaysia’s AHAM Asset Management, aka AHAM Capital, has launched the AHAM World Series – Biotechnology Fund, described as a wholesale feeder growth fund that provides investors access to the burgeoning opportunities within the biotechnology investment universe.

AHAM Capital said the fund will primarily invest in the Janus Henderson Horizon Biotechnology Fund (target fund), managed by Janus Henderson. To achieve its investment objective, the fund will allocate a minimum of 85% of its net asset value (NAV) to the target fund and a maximum of 15% to money market instruments, deposits, and/or cash.

ʺBiotechnology companies are at the forefront of scientific innovation, rapidly enhancing our genetic understanding to develop new treatment for major diseases,” said AHAM Capital product solutions and customer experience chief executive Anton Tan. “Over the past decade, we have seen significant improvements in scientific productivity, with the number of drugs receiving Food and Drug Administration (FDA) approval doubling from 121 to 243 in the past 20 years.

“Healthcare spending is poised to increase driven by a demographic shift in the US, coupled with aging populations and globalisation. These long-term secular forces create an attractive fundamental backdrop for biotechnology investments. Despite experiencing its worst drawdown on record, the biotech sector is currently trading at a substantial discount to the broader market, presenting a unique ‘innovation on sale’ opportunity,” he added.

Commenting on the outlook for the sector Janus Handerson portfolio manager Andy Acker said: “Biotechnology is currently undergoing unprecedented levels of innovation, thanks to dramatic improvements in life science tools, genetic engineering, and new modalities for treating human diseases such as cancer, autoimmune disease, and rare genetic conditions. These advancements are unearthing opportunities for investors to identify the next blockbuster (billion dollar) therapies and generate alpha for clients.”

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