Moody’s cuts US credit rating outlook to negative
Credit ratings agency (CRA) Moody’s has cut its outlook on US credit ratings to negative from stable, warning that rising interest costs and the large US fiscal deficit were starting to undermine the country’s credibility.
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues,” the agency commented. “Moody’s expects that the US’s fiscal deficits will remain very large, significantly weakening debt affordability.”
Recent brinkmanship in Washington has also been a contributing factor, it added. “Continued political polarisation within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”
Analysts report that Investors have growing doubts that the US economy can handle its rising interest expenses without a major change in federal spending and have taken out their concerns on the market for US government debt.
The ratings agency has, however, affirmed the long-term issuer and senior unsecured ratings of the US at Aaa. and Moody’s said that it expects the US to “retain its exceptional economic strength.” “Further positive growth surprises over the medium term could at least slow the deterioration in debt affordability,” the agency commented.
Moody’s move to cut its outlook arrives as Congress once more faces the looming threat of a government shutdown. For now, the government is funded through to this Friday, November 17, but lawmakers in Washington remain at loggerheads over a bill ahead of the deadline.
Newly elected House Speaker Mike Johnson released a Republican government funding plan at the weekend, giving members time to read it before an expected vote later today on the measure.
But his plan to fund certain parts of the government through December 7, and other parts through January 19, 2024, known as a laddered continuing resolution, or CR, has not attracted support in the White House and in the Democratic-controlled Senate.
“Moody’s decision to change the US outlook is yet another consequence of Congressional Republican extremism and dysfunction,” commented White House press secretary Karine Jean-Pierre.
Eurozone economic growth will remain weak, says ECB
Eurozone economic growth will remain weak in the near term as services and the labour market weaken but nations in the bloc should not free discretionary bank buffers to ease the pain, said the European Central Bank’s (ECB) Vice President, Luis de Guindos.
Severa; of the eurozone’s biggest countries have implemented a so-called counter-cyclical buffer, which requires lenders to set aside more capital during better times, so that it may then be released when the economic cycle turns.
“Macroprudential authorities should preserve releasable capital buffers to ensure that they are available in the event that conditions in the banking sector deteriorate,” de Guindos said in a speech.
Germany and France both implemented such buffers earlier this year and France plans to increase it from the beginning of 2024 while the Netherlands has announced plans to double the buffer next May.
A potential concern is that the eurozone economy has shown minimal growth this year and any recovery next year will be shallow, keeping the rate below 1%. “Weaker industrial activity is spilling over to services,” said de Guindos. “It is likely that the euro area economy will remain subdued in the near term.”
Even the region’s resilient labour market, the main positive feature of the economy, has started to show signs of weakening, de Guindos added.
The ECB has raised interest rates to a record high via 10 straight increases, the most recent in September from 3.75% to 4%, in a bid to slow consumer demand and push inflation back to its 2% target. While inflation is now below 3%, de Guindos said it is likely to bounce higher again in the coming months, even if the general disinflationary trend would still continue over the medium term.
On the prospects for interest rates, de Guindos said the ECB would have more information in December “to reassess the inflation outlook and required policy action”. He also repeated the bank’s standard guidance that interest rates will be held at their current level “for a sufficiently long duration” that will play a “substantial” role in reducing inflation.
Turkish lira bonds will be top investment in 2024, says Deutsche Bank
Turkish lira bonds will move from being the worst-performing local debt market in developing nations this year to the best in 2024, according to analysts at Deutsche Bank, which has joined JP Morgan in predicting a lira bond turnaround.
“It is still a few months too early to turn structurally bullish,” cautioned analysts led by Christian Wietoska in a note issued by the bank. “We believe local bonds need to reprice another 200-400 basis points, but then offer value from a structural perspective.”
This optimistic outlook from both banks extends to other prominent investors who are wagering on a recovery for this asset class, which has suffered considerable outflows due to political instability and government interference in monetary policy. Turkey’s central bank has sharply increased interest rates in recent months, most recently from 30% to 35% in October and eased regulations.
Despite these positive steps, Deutsche Bank anticipates further weakness in Turkish bonds for the remainder of 2023. This forecast is driven by persistent inflationary pressures, high volumes of bond issuance, and expectations of continued monetary tightening. The analysts recommend purchasing the Turkish lira against the US dollar until yields on two-year notes reach 40% and those on 10-year notes hit 35%.
The central bank has also adjusted its year-end interest rate projection upward to 65%, a notable increase from its prior estimate of 58%. Inflation is expected to peak above 70%, which will likely lead to a gradual depreciation path for the Turkish lira exchange rate.
HSBC completes first tokenised physical gold trades
HSBC announced the first trades tokenising the ownership of physical gold held in the bank’s London vault, using distributed ledger technology (DLT).
HSBC has developed the capability by creating a ‘digital twin’ of an existing physical asset – specifically loco London gold that is custodied in its vault. Tokenised physical gold can be traded between HSBC and institutional investors through the HSBC Evolve single dealer platform, or through an application programming interface (API).
Richard Bibbey, HSBC’s Global Head of FX, EM rates and Commodities, said: “As one of the earliest adopters of DLT, we are pleased to reinforce our leadership position in the gold market by tokenising physical gold. We continue to pave the way for improving the post-trade market infrastructure of capital markets.”
HSBC’s approach to gold tokenisation generates a permissioned digital representation of clients’ physical gold holdings, which is integrated into the group’s operational infrastructure, including HSBC Evolve. This provides a digital overlay for clients to see their tokenised gold trades and positions that correspond with their physical holdings.
This in turn allows for an automated, more efficient and cost-effective way for investors to keep track of their allocated as well as unallocated gold. This approach enables an automatic allocation of gold bars, which meet investors’ criteria, and then tokenises them.
HSBC’s gold tokenisation approach complements HSBC Orion, the bank’s existing platform for issuing and storing native digital assets such as digital bonds.
Japan’s US corporate bond sell-off “could bring volatility”
Credit managers are awaiting the release of data this week that will show whether Japanese investors’ aversion to US corporate bonds in August was a blip or marked the beginning of a trend.
Government bond yields in Japan have risen in recent months as speculation grows that the nation’s central bank will step back from its ultra-relaxed monetary policy, which could persuade investors there to move money home to take advantage of higher returns.
Japanese investors have traditionally been among the biggest buyers of US corporates, so any such move could reduce global market liquidity and increase the risk of volatility. Demand for US company debt from Asian investors, including in Japan, has already noticeably softened in recent months, according to reports based on feedback from bankers.
Japanese investors sold a record net US$17.2 billion of US corporate debt in August, the latest Treasury Department data show, as the highest hedging costs in more than 20 years make the securities less attractive.
“In many ways, the risk for investment grade credit is that the Bank of Japan (BOJ) normalises policy before the next US downturn,” commented Steve Caprio, head of European and US credit strategy at Deutsche Bank. “Japanese inflows have limited investment grade credit spread widening in past sell offs. But if the BOJ normalises policy, this flow may be quite muted when it is most needed.”
While Japanese investors have sold out of corporate bonds, they bought the most US sovereign bonds in six months in September, in part because many insurers are now looking at buying the securities on an unhedged basis. Sumitomo Life Insurance, for example, may boost holdings in overseas bonds that it doesn’t hedge against currency fluctuations.
Australia faces “bumpy road ahead” in taming inflation
Australia’s poor levels of productivity and sticky services inflation will prove the biggest stumbling blocks to the Reserve Bank of Australia’s (RBA) efforts to retool the national economy, with a leading executive of the central bank warning Australians of a “bumpy” road ahead.
Acting assistant governor economics Marion Kohler said that the RBA’s successive interest rate hikes had slowed GDP growth, eased labour market conditions and brought headline inflation down from its peak of close to 8% in late 2022 to 5.4% in the September quarter. However, the bank has said that it does not expect the rate to reach its 3% target range until late 2025.
The RBA last week lifted its cash rate by 25 basis points to 4.35%, the first increase for five months and the highest in 12 years.
Kohler said that higher taxes and interest rates would continue to hit Australian households and national GDP growth will be below average across 2024, driven by low consumer demand.
New organisation to focus on CBDC standards
A newly formed organisation will aim to start a dialogue among the world’s central banks to support adapting technical standards of different central bank digital currency (CBDC) solutions.
The Nobel Sustainability Trust (NST), a charity established by the members of the Nobel family, is set to push the adoption of CBDCswith a new initiative called Central Bank Digital Currency Collaboration Organisation (CBDCCO).
According to a press release, the programme aims to facilitate “efficient and reliable carbon asset life cycle management” for CBDCs. Through CBDCCO, the trust will encourage central banks to liaise in supporting the integration of “innovative digital financial infrastructure” developed by central banks and organisations such as the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and World Bank.”
“Digital currencies present a unique opportunity to rebuild and reshape our financial systems with sustainability at their core,” said Peter Nobel, the Chairman of NST.
CBDCCO is also said to support the adaptation of technical standards of different CBDC solutions to make state-issued digital currencies mutually convertible on an international level. The newly formed organisation is expected to start operation next January.
Founded in 2007, the Nobel Sustainability Trust was established to encourage the research, development, action, and implementation of sustainable solutions, as per the charity’s official website. The trust is financially supported by sovereign entities, family offices, and corporations “who support its agenda.”
RTGS.global adds three more cross-border payment pilots
RTGS.global, the cross-border settlement company, has signed pilot agreements with three more banks: Alif Bank and Bank Arvand in Tajikistan, and Universal Capital Bank in Montenegro.
They are the latest institutions to embark on pilot programmes with the company. Through its network, the banks “will realise significant liquidity benefits and streamline traditionally cumbersome cross-border settlement processes.”
It follows RTGS.global’s earlier pilot agreements with MDO Humo in Tajikistan and Credo Bank in Georgia, reflecting the company’s focus on cross-border payment and settlement procedures in the Central Asia and Central and Eastern Europe regions.
RTGS.global’s solution has so far appealed to early adopters in rapidly developing markets such as Central Asia. Furthermore, the Commonwealth of Independent States (CIS) plays a pivotal role in the global cross-border payment landscape, with 39% of the world’s cross-border payment traffic routed through the region.
Jarrad Hubble, CEO at RTGS.global, commented: “It’s a pleasure to be working closely with another group of progressive banks committed to overcoming the historic and emerging challenges associated with payments and liquidity management.
“Currently, it’s quicker to fly money around the world than it is to move it cross-border, which highlights the growing demand for frictionless cross-border payments and settlements as banks in rapidly developing markets seek to keep pace with the evolving digital economy.”
Afreximbank signs US$1 billion in deals at IATF in Cairo
The third Intra-African Trade Fair (IATF2023) being held in Cairo, Egypt, which opened on November 9 and concludes tomorrow, has seen the African Export-Import Bank (Afreximbank) sign financing and other agreements totalling more than US$1 billion with leading businesses across the continent over the event’s first three days.
The Bank also signed a US$150-million trade finance facility agreement with United Bank for Africa (UBA), under the Ukraine Crisis Adjustment Trade Financing Programme for Africa, to be utilised to finance trade and trade-related transactions in support of UBA clients to facilitate increased financing of trade businesses in various sectors of the Nigerian economy to mitigate the adverse effects of the Russia-Ukraine crisis.
Signed by Denys Denya, Executive Vice President, Finance, Administration and Banking Services, Afreximbank, and Oliver Alawuba, Managing Director of UBA, the facility is expected to enhance confidence in the settlement of international trade transactions for strategic imports.
IATF2023 is being attended by 1,600 exhibitors from 75 countries. Egyptian President Abdel-Fattah El-Sisi, who attended the opening, stressed the importance of African coordination as he welcomed delegates.
Standard Chartered and SBI in digital asset joint venture
Standard Chartered’s innovations arm, SC Ventures, and Japanese conglomerate SBI Holdings are collaborating to establish a digital asset joint venture in the United Arab Emirates (UAE).
“The joint venture will focus on investing in companies across the digital assets spectrum including market infrastructure, risk and compliance tools, defi, tokenization, consumer payments, and the metaverse,” stated SC Ventures.
SC Ventures CEO Alex Manson added that the UAE “is fast becoming a hub for fintechs in the digital asset space due to its strengthening infrastructure and talent.” He noted that the joint venture will leverage SC Ventures’ experience in digital assets through its ventures, such as Zodia Custody and Zodia Markets, and through its investments in companies like Ripple and Metaco.
The announcement of the new joint venture added that it plans “to make investments ranging from seed to Series C funding with a focus on investing globally.”
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