By Lior Alkalay, eToro Senior Analyst
It was little more than a year ago, a Friday, March 11th, a black day that can never be forgotten; a day when the entire world sat, transfixed by scenes so devastating that even Hollywood’s most creative couldn’t have imagined them. To a one, we can almost instantly, and with perfect, agonizing recollection, envision the scenes of terrified Japanese trying to flee the ominous huge black wave, created in the aftermath of a major earthquake, as it flooded their shores. The destruction was horrific; more than 9,000 deaths, 2,000 missing and 4.4 million people left homeless. As if the tsunami wasn’t enough, the flooding which followed ignited a nuclear disaster in the Fukushima compound. The radiation contaminated the entire Fukushima area, transforming entire cities and villages into “ghost towns,” while simultaneously destroying wide swaths of agriculture in the north east of Japan. And despite the death, destruction and shock to not just their homeland but their collective psyche, the Japanese people never lost their spirit, or their hope. No, throughout the ordeal they prevailed, and they did so with incredible, awe-inspiring dignity, calm, resolve and perseverance.
However, death and destruction were not the only damage; the earthquake and tsunami had a massive economic cost, as well. Estimated damage from the tsunami and radiation from the damaged nuclear plants are estimated to be more than $180 billion. And that estimate is only the direct effect, not taking into consideration secondary effects of loss of jobs, and the potential economic costs of lost agrarian lands and other long term damage as a result of the flooding and radiation. And while the world bore witness to the noble spirit of the Japanese people who valiantly withstood the after-effects of the disaster, the economic community, which had witnessed the Japanese economy sinking and drifting lower for much of the last 20 years, believed that this would be the last straw, that this – the latest and greatest damage – would finally eclipse Japan, the land of the rising sun. In that belief, they would be proved wrong.
The curse of the Yen
Most investors and not a few analysts had estimated that 2011 would be a difficult one for Japan, with a serious economic downturn as a large proportion of Japanese industry had been paralyzed for a prolonged period of time; Barclays Bank estimated the damage to be as much as 3% of GDP. But the Japanese economy, very much like the Japanese character, endured and was on the path to recovery. Eventually, despite the devastation, there was a remarkable rebound in Japanese business activity with GDP for 2011 contracting by only -0.47%, a great and welcome surprise to most economists. And this is even as Japan was forced to shift away from nuclear energy, and suffered with increased energy costs.
Of course, economists continue to downgrade their expectations of Japanese growth, pointing to the fact that Japan was already at the end of two “lost” decades of dismal growth and tends to suffer from chronic deflation that has been worsened by the strengthening Yen which heavily weighs on exports.
If there were one key characteristic which could be considered the real drag on the Japanese economy over the past two decades, it would certainly be the strength of the Japanese currency. Although the economic devastation of the natural disasters are enormous, it is in the strong Yen that has continued to weigh so heavily on the Japanese economy, to the point that it has become practically numb, drifting and slowly sinking.
Japan is an export-oriented country with the total of all exports valued at $800 billion (2011 figures) and so, like all exporting countries including China and Brazil, a higher valued currency is significantly hurting exporters’ profits. Since the 1990s, the Yen has appreciated considerably, rising more than 50% in relation to the U.S. Dollar’s value. An aggressive appreciation by all means, but even more so when you consider that Japan is not an emergent economy like China, where workers earn a few hundred dollars a month, but a fully developed, modern economy with average wages that are among the highest in the world. A 50% rise in the Yen’s value, therefore, means that Japanese manufacturing costs had spiked quickly. It is only recently that we have begun to bear witness to the severe effects on Japanese exporters; Sony, the electronics giant, announced that it was letting go some 10,000 workers, equivalent to 6% of its workforce, and Toyota, the automotive behemoth, estimated the impact of a strong Yen on its operational profit to be ¥250 billion.
The vicious cycle
The Japanese unit labor cost (effectively, a calculation of workers) is so high that Japan is suffering a wave of falling wages and, as consequence, falling prices. When prices fall, citizens prefer to save rather than spend and if the inflation rate is negative, even a bond yielding zero is actually positive, right? This then is the start of a vicious cycle – Japanese citizens saving, and pushing prices even lower and Japanese bonds even higher. In response, the Japanese government “tries” to tackle it by spending more, only to find that its huge bond market has been pushing the private sector’s bond market to the sidelines, because no business can compete with the safety inherent in a government bond. So prices keep falling, and investment inflows keep flowing to the government instead of business and the entire country becomes wrapped up in red tape. The cycle repeats; prices fall, bonds rise, and the Yen rises still more, and on and on and on again…
Investors challenge economist
Economists view Japan as an economic powerhouse in decline, and they stress rising energy costs alongside the government’s hesitancy to pass a bill which could restore the economic damage spawned from the tsunami. Economist also note that the Japanese government tends to have a somewhat laissez faire attitude as regards the global outlook for rising energy costs, which could have stemmed from their near total and long-term reliance on nuclear energy, and in the absence of that nuclear power, they have no clear policy direction. Add to that the sticky Yen factor and it all comes as a huge drag, pulling down the land of the rising sun. In fact, economists’ stridently argue that the government’s lack of a long-term strategic plan and the frozen political climate suggests that the chance for a positive change is slim and that Japan’s ultimate decline will undoubtedly occur.
Investors, however, are starting to view things differently and increasingly diverging from the consensus economic view. They are becoming increasingly optimistic that the land of the rising sun will not just rise, but shine. When looking at the Nikkei 225, Japan’s premier index and ultimately the embodiment of investors’ sentiment, the picture is contrastingly bright. Since the global rally in equities started back in November, and through March 2012, the Nikkei outperformed most major indices including the S&P500, FTSE100, and even the Hang Seng, gaining a staggering 17.9% this year alone. It seems that while economists were busy debating how Japan could pull itself out of the muck and mud, the investment community has brushed off political worries and saw instead the enormous potential in the Japanese economy for growth and prosperity. Investors, in fact, are already witnessing a change.
Investors have pointed out some strong opportunities; first and foremost among them is the change to the Bank of Japan’s stance. While economists talk of the need for political change, investors point to the shift of the BoJ which set an inflation target of 1%.In point of fact, that means that the BoJ has become closer to the U.S. Federal Reserve in terms of monetary policy, by preparing to spur the economy with more asset purchases, partial money printing and easing credit until inflation returns. However, the setting of an inflation target could be considered a mere ploy which hides the BoJ’s real intent, i.e. to copy the Fed’s philosophy of printing money to spur growth. The “Bernanke cure” has, in fact, showed remarkable success considering that the U.S. has been able to stabilize growth after the apocalyptic credit crunch it experienced.
Investors see that as a major fundamental change; if inflation starts to emerge in Japan, encouraged by the BoJ, then the close to zero yields of JGBs will stop being attractive and Yen demand will eventually evaporate, and a weaker Yen can take Japanese growth a long long way. This process has already started and the Yen has now firmly stabilized above the 80 level; some earlier critics, including Goldman Sachs’ Jim O’Neil, who coined the term “BRICs,” is now predicting that the Yen Dollar rate is destined to reach 100, which will be exceedingly positive for Japan. Investors also point to Japanese corporations as attractive, valuation-wise, and which on the whole provide good long-term value; another way of saying, “we believe in Japan’s ability to recover.”
So, who is right, the pragmatic economists or the increasingly optimistic investors? That is yet to be seen, but what I can say with all confidence is this; when it comes to identifying opportunities, history has shown, time and again, that investors overwhelmingly have the upper hand.
Barclays announces new trade finance platform for corporate clients
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.”
What’s the current deal with commodities trading?
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.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
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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