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Afreximbank’s African Commodity Index declines moderately in Q3-2020

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 1

African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.

The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.

An overview of the AACI for Q3-2020 indicates that on a quarterly basis

  • The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
  • The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
    • Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
    • Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
    • Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
    • Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
  • Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
  • Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.

Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.

Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:

“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’

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Barclays announces new trade finance platform for corporate clients

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Barclays announces new trade finance platform for corporate clients 2

Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.

With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.

This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.

James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”

Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”

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What’s the current deal with commodities trading?

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What’s the current deal with commodities trading? 3

By Sylvain Thieullent, CEO of Horizon Software

The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.

Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).

Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.

The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.

Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.

The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.

However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.

What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.

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Beyond cost containment: Outsourced trading as the new norm

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Beyond cost containment: Outsourced trading as the new norm 4

By Gary Paulin is Global Head of Integrated Trading Solutions at Northern Trust.

Outsourcing, initially of the back office, and subsequently of the middle office, has been a feature of the asset management industry for some years. More recently, in the third wave of outsourcing, managers began to outsource non-core front office functions, and the pace of change has grown rapidly to the extent that the industry has passed the tipping point of this transition.

For example, in our survey taken during Q1 2020 of 300 heads of investment operations from global asset management firms with assets ranging from $10 billion to $500 billion, 85% of respondents said they were already outsourcing their trading capability or were interested in doing so within the next two years.

What started as simply a cost-efficiency endeavour has evolved. The outsourced trading model has moved from being a largely defensive strategy – a response to cost pressures – to a proactive move that can de-risk and streamline operations and enhance governance and operational resiliency while also responding to very real and relentless margin progression.

In short, outsourced trading is increasingly viewed as a more optimal state for asset managers, and as the timing of the Northern Trust survey shows, this turn in thinking predates the onset of the Covid-19 pandemic. The pandemic in our view is an accelerant of change, but not the catalyst. We can see its origins more than a year ago, well before the economic cataclysm and office shutdowns of 2020.

Recent years have seen increased deal flow in the asset management industry, along with significant restructurings and increased investment in technology, as firms sought to gain scale, cut fixed costs and automate functions. These are classic responses to margin pressure, which has persisted even during the recent bull market in equities.

In fact, the drivers of change are global and go far beyond simple margin pressure. They include aspects of competition, the ability to leverage economies of scale, business resilience, changing economic models, variable costs, demographics, technology and regulation – drivers no longer hidden under the veil of strong markets. Critically, this past year has marked a significant change in the economics of the industry, as margins for many asset managers fell despite assets under management going up.

Margins are not expected to fall in a bull market like that of 2019 – when the S&P 500 gained over 28% – yet according to investment market analysts this, for many, is what happened. The long-held assumption that strong market returns correlate with asset manager financial performance broke down. Strong markets failed to mask the structural drivers underneath and, we believe, this was the tipping point for the industry.

As economics change so must operations. The pandemic brought new urgency – and opportunity – for managers to undertake an internal review of their whole office. The question at the bottom of such a review is whether a range of front office functions, historically perceived to be core to a successful asset management operation, actually deliver value. If not, these functions must be considered a cost and susceptible to outsourcing to a more cost-efficient platform. Meanwhile, the extended work from home protocols of 2020 have undermined some of the core objections to outsourcing, such as the assumption that portfolio managers need to work in close physical proximity to their trading desk.

Beyond the value/cost equation, however, there is increasing recognition that front office outsourcing – whether whole or in part – is directly beneficial. For example, outsourcing to a global service provider has enabled a range of firms to expand their investment horizons internationally without concern about governance issues as apply to passing overnight trading to third-party brokers who will almost certainly be under the same pandemic pressure as all the rest of us. Other firms have seized the opportunity of moving to a variable pay-as-you-go cost dealing structure to offer a broader slate of investment strategies or to develop their inhouse research capabilities.

These and other opportunities are new, and underline our view that front office outsourcing leads to an optimal state for investment managers; one where the playing field is levelled enabling medium and smaller firms to compete on the basis of pure alpha with large scale players.

But today, it is not just the smaller or medium managers who are outsourcing front office functions; many of the ‘big players’ are also in active transition. Why? Because the benefits of outsourcing apply to the whole asset management industry, but a hyper-scale manager requires a hyper-scale global service provider to work with. These used not to exist, now they do and both sides are riding the wave.

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