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RBNZ CUTS OCR TO 2.75%, S&P DOWNGRADES BRAZIL, BOE MEETING

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RBNZ CUTS OCR TO 2.75%, S&P DOWNGRADES BRAZIL, BOE MEETING

By Arnaud Masset, Market Analyst at Swissquote

As expected, the Reserve Bank of New Zealand has cut the OCR by 25bps to 2.75% and left the door wide open for further easing as it claimed it will remain data dependent. The Central Bank revised downward its growth projection to around 2% from 3% in its June statement, arguing that “the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate”. On a more positive note, Graeme Wheeler noted that growth was supported by “robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions”. As a result, the New Zealand dollar dropped 2.30% against the US dollar and is now trading around $0.6270. We were already bearish on the NZD and this dovish statement has only reinforced our view that the RBNZ wants to see a weaker Kiwi. On the data front, house sales jump 41.7%y/y in August, according to REINZ, after increasing 37.8% in July.

In a surprise move, Standard & Poor’s lowered Brazil’s long-term credit rating to junk, from BBB- to BB+, while maintaining a negative outlook. The New York based credit-rating agency argued that “The political challenges Brazil faces have continued to mount, weighing on the government’s ability and willingness to submit a 2016 budget to Congress consistent with the significant policy correction signaled during the first part of President Dilma Rousseff’s second term”. Traders will therefore price in the new information in USD/BRL today and it won’t be pretty as the move wasn’t anticipated so soon (S&P cut the outlook to negative on July 28th).

In the Asian session, stocks partially erase yesterday’s strong gains as mounting uncertainties about Fed’s next interest rate decision push traders to take their recent profits. The Shanghai Composite edges lower by 0.87%, while its tech-heavy counterpart, the Shenzhen Composite lost 0.28%. In Japan, the Nikkei 225 lost 2.51% of yesterday’s 7.71% gain while the Topix index falls 1.85%. Only the Kospi index from South Korea manages to stay in positive territory and rises 1.44%. In Australia, the S&P/ASX falls 2.42%, despite an encouraging job report. Unemployment rates fell to 6.2% in August from 6.3% in July as the economy created 17.4k jobs, beating expectations of 5k but below. The Australian dollar rebounded above the 0.70 threshold against the US dollar, erasing early session losses.

In Europe, equity futures follow the Asian lead with the Euro Stoxx 50 down -1.16%, DAX down -0.96%, CAC 40 down -1.10% and the SMI down -0.82%. In UK, the Footsie is down -0.93% while the sterling proves rather resilient given the disappointing data released yesterday. July’s industrial production contracted -0.4%m/m versus 0.1% median forecast while manufacturing production printed at -0.8%m/m versus 0.2% consensus. GBP/USD is grinding slower and lost 0.40% from yesterday’s high. The closest support stands at 1.5165 (low from September 4th) while on the upside, a resistance can be found at 1.5413 (high from September 8th).

***YannQuelenn, Market Analyst: “It is likely that the Bank of England will leave its rate unchanged today. We believe that policy makers are not only considering domestic conditions but also global conditions. Markets are currently driven by the next U.S. Fed rate hike, China’s current turmoil and lingering low oil prices.

At the last BoE meeting one member voted “yes” for a rate hike, however, we think there is no reason for others members, at least for the time being, to vote favourably. Nonetheless, UK domestic conditions seem supportive of a rate hike. Only inflation remains of concern, which printed at 0.1% y/y in August. On the other side, retail sales currently stand at 4.2% y/y despite a minor setback in August. GDP is also on its way up with a read of 0.7% for Q2.

What’s really weighing on the minds of BoE members is that global growth and productivity remain low. The WTI is holding below $50 a barrel on fears of China’s slowdown and on the current OPEC oversupply. It is likely that this negative outlook will weigh on the decision to increase rates as the UK may be affected by a slower global economy. Therefore we think the BoE will sit tight and wait for more supportive domestic data before making any move. We expect the GBP to strengthen against the EUR in the medium term. However, it is likely that BoE minutes will provide some dovish comments which could provide some positive traction to the single currency.”***

Today traders will be watching: Inflation reports from Sweden and Norway; the interest rate decision from the BoE in UK; manufacturing production from South Africa; COPOM minutes, IPCA inflation from Brazil; new housing prices from Canada; import price index and initial jobless claims from the US.

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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 1

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? 2

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

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 3

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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