Germany nationalises its biggest gas importer

Germany’s government announced it will nationalise the country’s biggest natural gas importer, Uniper, extending state intervention in the industry to prevent an energy shortage this winter as it weans itself off supplies from Russia.

The deal builds on a rescue package agreed with Uniper in July and features a capital increase of €8 billion (US$8 billion) that Germany will finance. As part of the agreement, the government will gain a 99% stake in the energy supplier, which until now was controlled by Finland-based energy group Fortum. The Finnish government has a 51 stake in Fortum.

Economy Minister Robert Habeck said the deal reflected Uniper’s significant position in the German gas market. It is subject to the approval of the European Commission (EC), the European Union's executive arm. Uniper supplies about 40% of all gas customers in Germany, and the invasion of Ukraine in February it bought about half of its gas from Russia.

The company’s losses have mounted as Russia has reduced natural gas supplies to European countries supporting Ukraine. The resulting price spiral has raised fears of business closures, rationing and a recession as winter approaches. Uniper has been forced to buy gas at far higher prices on the market to fulfil its supply contracts.

European countries have scrambled to counter the price hikes and prioritised securing their energy supplies for winter, filling their natural gas storage tanks as much as possible. Last week Germany also moved to take control of three oil refineries owned by Russian energy giant Rosneft before an embargo on Russian oil takes effect next year.

Habeck said that Germany has been able to fill its gas storage facilities to over 90% capacity in preparation for the winter heating season despite Russia halting gas deliveries through the Nord Stream 1 pipeline. Wholesale prices for gas have almost halved since the summer, he said.

“This means that, as a whole, we have coped quite well with the situation,” Habeck said. “But for Uniper, the situation has become significantly more dramatic and significantly worse.”

Gas prices remain at a historically high level. Citing the importance of Uniper for the German gas market, Habeck said the government had chosen to nationalise the company “to ensure security of supply for Germany.”

UK holds off following Fed with a 0.5% interest rate hike

The Bank of England’s monetary policy committee (MPC) has voted to increase the UK’s benchmark interest rate by 0.50% to 2.25%. It is the latest in a series of 0.50% hikes by the BoE and takes the UK rate back to a level last seen at the outset of the 2008-09 global financial crisis. Three of the MPC's nine members wanted a bigger hike of  0.75% basis points (bps) this month.

The BoE vote came a day after the US Federal Reserve announced the third successive 0.75% bps increase to its target interest rate, raising it to a range of 3.00% to 3.25% and signalled further increases to come. Projections now show the Fed’s policy rate rising to 4.40% by the end of this year before peaking at 4.60% in 2023 to battle continued strong inflation.

Commenting on the Fed’s latest increase, Alberto Matellán, chief economist at MAPFRRE Asset Management said: “The 75 bps hike is as expected, and they say the ongoing pace is appropriate. Economic activity is already cooling down but, paradoxically, that could make aggressive hikes even more necessary.”

“That’s because they have to fight inflation first, before trying to kickstart the economy, so they must reach their terminal rate as quickly as possible. This way they will have the chance to lower rates later, and the impact can be felt earlier.”

“Actually, contrary to Europe, US inflation now seems widespread and sticky; not only based on supply chain problems, but also on the huge amount of dollars printed in recent years. Given this context, cutting liquidity might not be enough, but a significant slowdown in the pace of GDP should be achieved to bring inflation down. That’s the “pain” Powell talked about.”

At the BoE’s previous meeting concluded on 3 August, the MPC voted 8 to 1 for a 0.50% increase in the UK rate to 1.75%. Since last December, when the MPC announced a 0.15% bps rise from 0.10% to 0.25%, the Bank has steadily raised rates from their post-financial crisis low in response to accelerating inflation but has not yet followed the more hawkish policy being followed by the Fed.

Some analysts had urged the MPC to opt for a rise of as much as 1.00 bps. Earlier this week Sweden’s Riksbank announced a 100-bps hike, taking its main policy rate to 1.75%, as it warned that “inflation is too high.” However, the bigger-than-expected increase only briefly lifted the Swedish crown, which has been sinking against the dollar and the euro.

Deutsche Bank predicts deeper eurozone recession in 2023

Higher energy costs, potential shortages and power blackouts will hit the eurozone economy hard over the coming months warns Deutsche Bank, which now predicts that gross domestic product in the eurozone will contract by -2.2% in 2023, against its previous forecast in July of only a -0.3% decline.

“The energy crisis in Europe means that 2023 will likely be behind only 2009 and 2020 as the worst year for the European economy since World War Two,” writes Deutsche Bank’s chief analyst Jim Reid.

Economists in the bank’s research team see Germany’s economy contracting by -3.5%, next year, with France’s economy shrinking -1.2%, Italy -1.8% and Spain -1.0%.

“Upside to our view may emerge if fiscal shielding proves very effective or gas prices fall markedly in 2023. But there are also factors that could result in more downside: a colder winter or greater amplification of the competitiveness shock,” write DB economists led by Peter Sidorov.

Even with the lower revisions, they see eurozone inflation running at 6.2% next year in what's looking like a classic stagflationary environment. Within that, core is expected to be up 4.0%.

Beyond next year, a modest recovery is expected with 2024 GDP now seen at +1.2% against +1.0% previously and 2025 at +1.0%.

Australia’s central bank takes US$30 billion hit on bond purchases

Australia's central bank revealed that it has lost A$44.9bn (US$30 billion; £26.3 billion) on bonds that it purchased as part of its efforts to support the country's economy during the Covid-19 pandemic.

The Reserve Bank of Australia's (RBA) deputy governor, Michele Bullock admitted that this resulted in a “substantial” loss of A$36.7 billion for the Bank’s 2021-22 fiscal year and has temporarily left it in negative equity.

“If any commercial entity had negative equity, assets would be insufficient to meet liabilities and therefore the company would not be a going concern,” said Bullock, but added. “Since it has the ability to create money, the Bank can continue to meet its obligations as they become due.”

The RBA said it plans to keep the bonds, which were accumulated under a A$300 billion emergency stimulus programme, until they mature, and it ultimately expects to make a profit.

Bullock commented that other central banks around the world face similar losses on their emergency stimulus programmes. For example, in July the Swiss National Bank reported a first-half loss of 95.2 billion Swiss francs (CHF), (US$97.3 billion, £86.0 billion); the biggest loss since its formation in 1906.

Minutes of the RBA’s last meeting on 6 September show that it believes interest rates are now returning to “normal settings” after a series of cuts during the pandemic. The bank raised its main interest rate by half a percentage point for the fourth month in a row at the meeting and they now stand at 2.35%.

HSBC CEO sees no early end to China property market slump

HSBC’s CEO Noel Quinn believes that the “massive” correction to China’s commercial real estate market may have at least another two years to run before it lifts.

“It’s a faster correction and a more decisive one than I was expecting, or I think anyone was expecting, and I think it’s got quite a while to go before it really stabilizes,” Quinn said at a Bank of America conference this week. “You could be looking at another two plus years of correction.”

Last month HSBC said that it would take further charges against its more than US$12 billion of exposure to commercial real estate in China, where it is the biggest overseas bank, as a third of those assets are “substandard” or “impaired,” according to Chief Financial Officer Ewen Stevenson. The sector is nonetheless “modest” in the context of HSBC’s overall lending book, Stevenson added.

Earlier this month it was reported that China’s property developers had posted their worst first-half earnings in more than a decade, an outcome expected to pressure stocks further even as the government boosts efforts to stabilise the broader sector.

Quinn said that he was encouraged by some of the policy changes that had been introduced, although they were aimed primarily at re-establishing the flow of domestic capital into the sector. “I think it will take quite some time for the international capital markets to rebalance towards that in a positive way,” he said

A clampdown on leverage, China’s strict Covid Zero policy and a weakening economy have contributed to much of the fallout in the property sector this year. Government plans to lower mortgage rates and offer guarantees on some upcoming onshore bond offerings have had little impact in improving sentiment.

China’s biggest property developer by sales, Country Garden Holdings, last month reported a 96% drop in profits for H1 2022, blaming a “severe depression” in the country’s crisis-hit property market in which “only the fittest can survive”.

Ripple CEO meets with CFTC commissioner

Social media speculation has been rife following a recent visit by Caroline Pham, an American attorney who serves as a commissioner of the US Commodity Futures Trading Commission (CFTC), to the offices of Ripple Labs where she met with its CEO Brad Garlinghouse.

Pham said that visiting Ripple Labs was part of her “learning tour” and Garlinghouse responded that it was "an absolute pleasure" to welcome her to his company's offices although fans of XRP, the native cryptocurrency on the Ripple network, believed there could be more significance to the meeting.

Many in the XRP community have praised the CFTC commissioner while taking the opportunity to criticise the US Securities and Exchange Commission (SEC), which has adopted a more aggressive approach to regulating crypto compared to its sister agency. The SEC took Ripple to court in December 2020, accusing the company of violating securities laws with its XRP sales.

Some commentators suggested that the timing of the meeting between Pham and Garlinghouse might not be a coincidence; a number even speculating that the CFTC could become the token's primary regulator, which means that it would be classified as a commodity.

SEC Chair Gary Gensler has repeatedly stressed that most existing cryptocurrencies are securities. However, he has recognised Bitcoin as a commodity, meaning that the CFTC is responsible for regulating it.

Iran to begin testing digital rial

The Central Bank of Iran (CBI) is about to launch a central bank digital currency (CBDC), according to the news service of the country's Chamber of Commerce, Industries, Mines and Agriculture.

In the report, the CBI was quoted as saying that the goal of the “crypto-rial” is to turn banknotes into programmable entities. The announcement comes after the bank’s publication last month of a draft document outlining the “goals, dimensions, threats and opportunities for the development” of an Iranian CBDC.

In May 2021, former CBI Governor Abdolnaser Hemmati said that the bank had already developed a “primary version” of a digital rial (IRR). Earlier this month the CBI’s current head, Ali Salehabadi, said that it had the necessary infrastructure and rules in place for a CBDC.

Although the country’s government views crypto as a means of circumventing strict US sanctions – even placing a US$10 million import order to be paid in crypto earlier this year – the CBI has revealed little about its work on a digital rial, or its function.

The digital currency is not designed to compete with global cryptocurrencies such as Bitcoin, according to the report.

DBS and FinLync partner on plug-and-play bank API solutions

Singapore-based bank DBS has partnered with the privately held fintech FinLync in “transforming corporate finance and treasury offices by aggregating global banking application programming interfaces (APIs) to deliver embedded real-time payments and cash management.

“This will provide a simpler and more efficient way for corporates to digitalise their corporate treasury functions by leveraging DBS’ extensive API suite RAPID.”

DBS said that the FinLync partnership with FinLync “will enable corporates to experience greater ease of integration, eliminating the need for complex implementation projects, which are often tedious and costly.

“With plug-and-play capabilities to integrate banking services through the bank’s APIs into their workflows, corporates can now directly connect to and leverage DBS’ extensive suite of cash management, workflow, trade, information and foreign exchange (FX) services in real-time. This helps corporates to accelerate the pace of automating their treasury operations and speed up their decision-making processes – all of which are key in ensuring corporates stay ahead of the curve and optimise working capital.

“At the same time, with greater integration between DBS and its clients’ corporate treasury and enterprise resource planning systems, corporates can also fully execute a range of treasury and finance functions seamlessly on their platforms, eliminating dependence on external treasury solutions. This enables treasury and finance teams to operate more efficiently and allows for significant transformation of their treasury services to meet the changing business environment.”