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Fed not yet ready to cut US interest rates – Industry roundup: 1 February

Fed signals US interest rate cuts to take longer

The Federal Reserve has raised expectations that US interest rate cuts are in prospect during 2024, but also signalled it wants more evidence that easing inflation is sustainable before reducing them.

As anticipated, the US central bank kept its core interest rate range steady between 5.25-5.5% following the first meeting of its Federal Open Market Committee (FOMC) of the year.

Its statement to accompany the decision showed that the Fed had dropped a longstanding reference to possible further hikes in borrowing costs. It read “The committee judges that the risks to achieving its employment and inflation goals are moving into better balance”, signalling an improvement in conditions towards a rate cut.

But the statement cautioned: “The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2% - its target rate.”

The statement saw a shift in financial market expectations for the first rate cut, with many analysts forecasting that it will follow in May and not March as previously anticipated.

At a news conference, Fed chair Jay Powell confirmed: “We do have confidence, but we want to get greater confidence” that improved inflation data is sending “a true signal”.

The Fed’s policy tightening cycle began in March 2022, shortly after Russia’s invasion of Ukraine when price pressures were accumulating, and the US consumer price index had reached a 40-year high of 9.1% by June. The rate has since eased at a faster pace than in Europe, although it edged up to 3.4% in December from 3.1% a month earlier.

US stocks fell following the release of the Fed's statement while the dollar rose against many currencies although not against the pound. Many expect the Bank of England will adopt a harder line on the prospect of rate cuts later today when it announces the monetary policy committee’s (MPC) latest decision.


Hapag-Lloyd CEO warns of lengthy Red Sea crisis

Attacks on cargo vessels in the Red Sea by Yemen-based Houthi rebels are unlikely to end soon, which will force shipping companies to continue avoiding the route through the Suez Canal, the head of Germany’s international shipping and container transportation group Hapag-Lloyd.

“We don't think it will be over the day after tomorrow,” chief executive Rolf Habben Jansen said at a news briefing in Hamburg. “Whether it'll be one, three or five months - I don't know.”

A political deal and a mission to protect freight vessels might bring a resolution within six months, he added.

Hapag-Lloyd, the world's fifth biggest container liner, has joined other shippers in taking longer, costlier journeys around Africa, after one of its ships was attacked on 15 December.

It was important that the European Union actively supported a multinational naval coalition to protect commercial traffic in the region, Habben Jansen said. Rerouting around Africa takes vessels two to three weeks longer, resulting in a drop of 150,000 standard containers (TEU) being transported in December compared with original expectation, he added. Hapag-Lloyd transports roughly one million TEU per month on its 264-strong fleet.

Mitigations have included buying more containers, adding 125,000 in TEU capacity at a cost of US$350 million, the group revealed. But using more ships to meet demand on time, and running those faster on more fuel, involved higher costs for customers.

This week, Hapag-Lloyd reported earnings before interest and tax for 2023 of €2.5 billion (US$2.7 billion), a sharp drop from the 2022 figure of €17.5 billion. The fall largely reflected lower freight rates as global supply chains normalised following the pandemic.

In other news, cruise operator Carnival Corporation plans to reroute itineraries for 12 ships across seven of its brands in May, including one P&O Cruises vessel, to avoid transits through the Red Sea.

In a statement the group said it was “committed to the safety and well-being of its guests and crew and has been actively monitoring the situation in the Red Sea and surrounding region.

“Given recent developments and in close consultation with global security experts and government authorities, the company has made the decision to reroute itineraries for 12 ships across seven brands, which were scheduled to transit the Red Sea through May 2024”.


Japan allocates US$20 billion to clean hydrogen production

Japan plans to spend yen (JPY) 3 trillion (US$20.3 billion) over the next 15 years to subsidise the production of cleaner hydrogen and will promote cooperation with the private sector to develop a domestic supply chain for the energy source.

Hydrogen fuel, which emits only water as a byproduct, is regarded as a next-generation energy source as nations pursue decarbonisation. However the cost of hydrogen, covering production through supply, is reportedly 10 times higher than that of natural gas.

Tokyo aims to subsidise the cost difference for companies that produce cleaner forms of hydrogen, often categorized as “green” or “blue” hydrogen, while most hydrogen currently is produced from natural gas or coal, resulting in carbon dioxide emissions during production. This emissions-heavy form is referred to as “grey” hydrogen.

Blue hydrogen involves capturing and storing most of the carbon emissions produced during that process. Green hydrogen produces hydrogen through the electrolysis of water using renewable power sources such as solar and wind.

Japan intends to set 3.4 kilograms of CO2 emissions during production per 1 kg of hydrogen as the upper limit to be eligible for the subsidy. Anticipated recipients are businesses that produce hydrogen domestically as well as those that import and sell hydrogen from overseas.

A bill that includes the establishment of the framework will be submitted during the current regular parliament session. Once a law is enacted, business plans will be solicited from companies and subsidy recipients will be decided by the end of this year.

The JPY3 trillion will be financed by Tokyo’s green transformation (GX) transition sovereign bonds, which will be issued from this month. Subsidy amounts will be reassessed based on the extent of hydrogen adoption.

Potential targets include chemical maker Asahi Kasei, which is using funding from Japan’s New Energy and Industrial Technology Development Organization, aka NEDO, to develop electrolysis equipment, as well as oil company Eneos and trading house Sumitomo Corp., which have plans to import hydrogen produced overseas.

Japan plans to increase the domestic hydrogen supply by 50% over the current level to 3 million tonnes in 2030, and to 20 million tonnes in 2050. The subsidy will require that hydrogen supply begins by fiscal 2030 and that the supply continues for 10 years after government financial support ends.


UAE completes first cross-border CDBC payment using mBridge

The United Arab Emirates (UAE) has successfully completed the first cross-border payment using the Digital Dirham (AED).

The “historic transaction” of AED50 million ($US13.6 million) was sent by Sheikh Mansour bin Zayed Al Nahyan, chairman of the board of the Central Bank of the UAE, to China.

The cross-border payment was facilitated through the "mBridge" platform, a collaborative effort of the Bank for International Settlements (BIS) Innovation Hub, four founding central banks including the Hong Kong Monetary Authority (HKMA), Central Bank of the United Arab Emirates, Digital Currency Institute of the People's Bank of China and Bank of Thailand, and more than 25 observing members.

The programme aims to transform wholesale cross-border payments using a multiple-central bank digital currency (multi-CBDC) common platform underpinned by distributed ledger technology (DLT).

The project seeks to address inefficiencies such as high costs, low speed and transparency, and operational complexities, while safeguarding currency sovereignty and monetary and financial stability for each participating jurisdiction.

The latest development comes after the First Abu Dhabi Bank successfully completed a pilot with JPMorgan’s Onyx blockchain for cross-border payments in October 2023. China has also made large strides in the development of its digital yuan (e-CNY) CDBC, such as completing the first cross-border oil transaction, and first cross-border settlement for precious metals.


YouLend-J.P. Morgan deal extends £4 billion additional financing to SMEs

YouLend, the London, UK-based embedded finance provider announced the completion of a private securitisation transaction with global financial services firm J.P. Morgan as a senior lender and Castlelake, L.P. providing subordinate debt.

The deal will enable YouLend to extend £4 billion (US$5.05 billion) in additional revenue-based financing to small- to medoium-sized enterprises (SMEs). This will be accessible via partnered global e-commerce sites, tech companies, and payment service providers, such as Amazon, Dojo, eBay, and Just Eat

“The partnership with J.P. Morgan demonstrates a commitment to powering the backbone of the economy, by closing the funding gap for SMEs,” a release stated. “YouLend’s sophisticated AI-driven decision-making model boosts financial inclusion by building an accurate picture of a business’s health and opening finance to the most under-served SMEs.”

Anders Torpe Christoffersen, CFO of YouLend, commented: “This partnership with J.P. Morgan is a critical milestone for YouLend. The deal enables us to provide nearly £4 billion in additional SME financing and underscores our dedication to fuelling the growth and financial stability of SMEs.”

The financing from J.P. Morgan “will extend YouLend’s origination volumes as it works to empower a rapidly increasing number of businesses across the EU and the UK with access to seamless embedded finance experiences. By reducing YouLend’s cost of capital, the facility supports YouLend’s ambition to offer the most competitive rates and market-leading terms for its global partners and their merchants.”

Texas bans Barclays from bond market over ESG policies

Texas Attorney General Ken Paxton said that the US state has banned Barclays Bank from participating as an underwriter in Texas’ municipal bond market, following the company’s failure to respond to requests for information over its environmental, social and governance (ESG) policies.

It marks the latest move in an ongoing anti-ESG movement by Republican politicians in the US, with Texas among the most active states in anti-ESG initiatives. Actions include placingseveral asset managers on a list for potential divestment for allegedly “boycotting” energy companies, and joining a multi-state alliance to “protect individuals from the ESG movement,” through actions such as blocking the use of ESG in all investment decisions at the state and local level, and prohibiting state fund managers from considering ESG factors in their investments on behalf of the state.

Texas is the US’s largest net energy supplier, providing nearly a quarter of the country’s domestically produced energy, and accounting for over 40% of the nation’s crude oil proved reserves and production, according to the US Energy Information Administration (EIA).

According to a statement released by the Office of the Attorney General (OAG), Barclays was identified as a potential “fossil fuel boycotter” due to its participation in a net zero alliance, and was sent a letter in November, alongside other banks including Bank of America, J.P. Morgan Chase, Morgan Stanley and Wells Fargo, among others, asking for more information concerning its ESG commitments.

The OAG said that Barclays informed the AG that it would not be able to respond to the inquiry, leading to the ruling that “until further notice, we will not approve any public security issued on or after today’s date in which Barclays purchases or underwrites the public security or is otherwise a party to a covered contract relating to the public security.”

Sidra Capital launches VCC for commodity supply chain investment

Sidra Capital, a Shari’ah-compliant asset management firm regulated by the Saudi Arabian Capital Market Authority, (CMA) has launched its maiden Singapore-domiciled variable capital company Sidra Asian Opportunities Investment I VCC (VCC).

In November 2023, the VCC was launched with an investment strategy focused on facilitating cross-border commodity supply chains via fully funded irrevocable Letters of Credit (LC). The VCC “specifically targets the high demand for solid fuel produced by select Indonesian producers, valued for the intrinsic qualities of the commodity and reliability of the producers in delivering the expected quantity and quality to purchasers.”

To enhance security “the underlying trades are secured end-to-end by USD-denominated LCs issued or confirmed by banks with strong credit ratings, which eliminates foreign exchange and payment risks. Furthermore, as the trades are structured as back-to-back purchases and sales of commodities rather than speculative trading, investors are not exposed to inventory and price risks.”

The VCC is managed by Sidra Capital Pte Ltd, a wholly-owned subsidiary of Sidra Capital, which operates as a registered fund management company licensed by the Monetary Authority of Singapore (MAS).

Sidra Capital has pioneered Islamic private finance in Saudi Arabia, its portfolio including a range of Shari’ah-compliant private finance investment solutions, such as the Sidra Income Fund series and Sidra-Ancile Global Structured Trade Investment Fund.


FOMO Pay and Klasha partner on Africa-Asia cross-border payments

Singapore’s FOMO Pay, a digital payment and digital banking solutions provider in Asia, announced a strategic partnership with Klasha, a Lagos, Nigeria-based global cross-border payment company.

A news release stated: “Recent studies reveal that Asia accounts for over 40% of Africa’s exports and imports; therefore, facilitating cross-border transactions between the two regions has become increasingly vital. Recognising this need, the new partnership between Klasha and FOMO Pay aims to provide a platform that enhances cross-border payment capabilities for merchants and businesses across Africa and Asia.”

Highlights of the partnership include:

  • Easy online collections and payments: FOMO Pay will enhance collections for its corporate clients through Klasha’s platform, empowering businesses to receive payments in local African currencies and money methods while they get payouts in their preferred currencies.
  •  Market expansion: Asian businesses can unlock opportunities to expand into new markets in Africa and broaden their customer base with Klasha and FOMO Pay’s joint efforts in facilitating cross-border payments.

Jess Anuna, CEO of Klasha, said, “With combined efforts, we will continue to enable merchants in Asia to collect payments from the continent more seamlessly through our payment rails and our unique ability to terminate payments in greater Asia. We look forward to widening our services to more merchants with this partnership.”


Allianz Trade issues Country Risk Atlas

German multinational insurance group Allianz has launched its inaugural Country Risk Atlas, which it describes as “a good compass” that offers detailed insights into country risk.

“The newly published Country Risk Atlas 2024 from Allianz Trade serves as the ultimate guide on this expedition, offering insights into the intricate constellation of economic, political, and environmental. social and governance [ESG] factors that shape the non-payment risks in 83 countries,” the group states in a release.

“The Atlas reveals hidden risks and opportunities guiding businesses and investors aiming to navigate the unpredictable waves of global markets.”

Allianz Trade describes the past year as one of resilience and change. “The Atlas reports upgrades for 21 economies, encompassing 19% of the global GDP. Markets in China, South Africa, Qatar, Algeria, Morocco, Oman, Bulgaria, Tanzania and Uruguay showcased resilience to global shocks, while those of Croatia, Cyprus, Greece, Iceland, and Slovenia saw improvements,” the group reports. “However, not all changes were positive; downgrades in countries like Egypt and Israel remind us of the persistent volatility in global markets.

“In regional terms, Africa witnessed the most upgrades, with ten countries showing improvement, yet it continues to face significant challenges in terms of liquidity and access to international markets. Europe followed with six upgrades. In contrast, Asia and the Americas saw improvements only in China and Uruguay. This regional analysis indicates that while some areas are showing signs of progress, others like Africa and the Middle East may lag, especially given the increasing global liquidity risks and ongoing fiscal and monetary policy efforts.”


Jordan's Arab Bank partners with Mastercard 

Arab Bank and Mastercard has announced the launch of cross-border payment services RemitEx.

The new collaboration leverages Mastercard’s Cross-Border Services platform to provide a remittance product that will enable customers of Amman, Jordan-based Arab Bank to make faster, safer and full-value transfers without fees for the recipient.

A release stated: “The launch of this new service comes as part of Arab Bank’s strategy to reinforce its digital payment offering and provide its customers with flexible and advanced banking solutions that meet their evolving needs and expectations. This service will enable remittance to 28 countries, opening new corridors and expanding the bank’s global reach, with plans for further expansion in the future.

Yacoub Matouk, Head of Consumer Banking at Arab Bank – Jordan, added: “Our strategic collaboration with MasterCard is a manifestation to the bank’s agility in responding to consumers’ growing demands for secure and innovative payment solutions across borders. The new cross-border payment services are a remarkable addition to the bank’s portfolio of payment solutions offered to customers, providing them with semi-instant, seamless and secure money transfer experience processed through MasterCard’s cross-border services platform, and supported by a paradigm of digital payment solutions.”

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