TheTreasurer

News roundup: March 2018

Deep US and UK scepticism over cryptocurrencies leads this month’s agenda. Plus: hints of interest rate rises on both sides of the Atlantic

New York Fed chief sounds alarm over cryptocurrencies’ “speculative mania”

New York Federal Reserve president William Dudley has urged investors to exercise extreme caution over cryptocurrencies. At a press briefing on the ongoing hurricane relief effort in Puerto Rico, Dudley picked up on a question from the floor that highlighted the presence of cryptocurrency evangelists on the beleaguered island, who – amid the slow recovery process – are touting a range of crypto products as alternative funding solutions. Dudley warned: “There is, I would say, a bit of a speculative mania around cryptocurrencies in terms of their valuations, which I view as pretty dangerous, because I don’t really see what the actual true, underlying value of some of these cryptocurrencies actually is in practice.” He added: “It’s essentially what people think it’s worth.”

Less than two weeks later, Dudley’s thoughts were echoed in a major speech on the future of money by Bank of England governor Mark Carney. Taking a critical tone, Carney said that cryptocurrencies’ extreme volatility “reflects in part that [they] have neither intrinsic value nor any external backing”. Like Dudley, he noted: “Their worth rests on beliefs regarding their future supply and demand – ultimately whether they will be successful as money.” Carney added: “The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system … Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better.”

Haldane hints at UK interest rate rise to combat inflation

Bank of England (BoE) chief economist Andy Haldane has hinted that the central bank could soon raise the UK’s interest rate as an anti-inflationary measure. Appearing with BoE governor Mark Carney before the Treasury Select Committee on 21 February, Haldane pointed out the dangers of the BoE failing to raise the rate on time. “Historically,” he said, “the thing which has killed jobs has been central banks stepping on the brakes too late. As [former Federal Reserve chair] Janet Yellen says, recoveries don’t die of old age – they die because central banks step on them, because they react too late. We’re absolutely clear: we don't want to go back there again because it is bad news for jobs.”

As such, he added: “That means going in this limited and gradual way to head things off in advance to prevent having to step on brakes, do a handbrake turn at a later stage.”

However, the very next day, the Office for National Statistics revised down the UK economy’s growth in the final quarter of 2017 from 0.5% to 0.4%. On that basis, a rate rise should not be considered a foregone conclusion.

Across the Atlantic, meanwhile, minutes from 2018’s first meeting of the Federal Reserve’s Federal Open Market Committee noted that US growth “remained above trend”, accompanied by a “strong” labour market. It added: “A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate,” providing hints similar to Haldane’s of an interest rate rise.

Fitch forecasts banner year for green bonds in Europe

European green bonds will become even more attractive to investors this year, Fitch has predicted. In a recent opinion, the rating agency points out that nine EU-based funds with combined assets under management of around €1bn will hit their three-year point in 2018, thereby reaching a key, determining threshold for investor confidence. “Green bond funds are rapidly emerging as a sub-asset class in fixed-income funds, as investor demand for ‘green’ investments grows,” Fitch says. “We estimate that Europe-domiciled green bond funds totalled about €2.8bn at end-2017: up nearly 40% on end-2016.” It adds: “Clearer regulatory classification of green bonds, likely later this year, could be another spur for investment.”

Almost three-quarters of organisations fail ‘cyber-readiness’ test

Some 73% of corporates have emerged as ‘cyber-novices’ in a wide-ranging cybersecurity survey from Hiscox. Only 11% of firms qualified as experts. In a poll of more than 4,100 companies, the insurer found that the vast majority “have some way to go before they are cyber-ready”. Large organisations are better prepared, with 21% of firms with 250 staff or more falling into the ‘expert’ category. Only 7% of smaller firms are able to join them. Hiscox notes that the organisations it polled have an average IT budget of £11.2m – of which just 10.5% is spent on cybersecurity.

Hiscox adviser Robert Hannigan – who set up the UK’s National Cyber Security Centre – said: “The survey highlights a widening gulf between those who ‘get’ cybersecurity, take it seriously and spend appropriately, and those who still regard the issue as someone else’s problem. Cybersecurity is not an IT issue, but rather a risk for the whole organisation.”

CPRI broker highlights risk hotspots and non-payment issues

Developing regions have emerged as key risk hotspots in a new report from leading credit and political risk insurance (CPRI) broker BPL Global. As the firm’s managing director, Sian Aspinall, explains, analysis of the BPL Global portfolio reveals “the sheer volumes of exposure the market is willing and able to absorb – predominantly in Africa, the Middle East and Latin America”. However, she points out: “Some of the most significant growth is emanating from OECD-located risks associated with non-trade-related loans.” That trend, she adds, “highlights that the global CPRI market is responding to the developing needs of clients by providing appetite for global risk”. Over the past three years, the report notes, overall CPRI market capacity has seen a substantial increase across all product lines – with maximum lines for non-payment private and public obligor risks rising by 30% to $2.4bn and $3bn respectively. That comes off the back of a steady increase in capacity from 2008 onwards.

Renminbi on way to becoming world’s third most traded currency

Prospects for the renminbi (RMB) are looking so positive that it is well on its way to becoming the world’s third most traded currency, according to a Bank of China presentation delivered at the Bank of England in February. In the Bank of China’s view, the currency has a whole series of factors weighing in its favour, such as: i) the offshore RMB FX daily trading volume is estimated at around $250m; ii) China Interbank Bond Market-traded RMB bonds held by international investors are worth CNY1.15 trillion – a year-on-year rise of 25%; and iii) more than 60 countries and regions maintain parts of their foreign reserves in RMB, with the result that iv) at least 1.12% of global foreign reserves – worth $108bn – are reported in RMB.

Turning to drivers that are likely to stimulate RMB activity in the near term, the presentation highlighted: i) China’s improved domestic-market governance; ii) the recent launch of the Hong Kong-to-China Bond Connect platform; and iii) multiple opportunities for investment across projects in the pan-Asian One Belt, One Road initiative.

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