On Ukraine, Both Russia and Nato Have Backed Themselves into a Corner

Russia-Ukraine Conflict

Summary:

Almost a year into Moscow's full-scale invasion, what was a proxy war appears to be evolving into direct conflict.

The Nato-Russia confrontation is increasing in intensity, and fast approaching a turning point that could make it even more dangerous. The escalation is following a military trajectory, underscored by meetings convened this week by top generals from Nato and Ukraine, amid terrifying remarks being made by Russian leaders about possible "nuclear options".

Today, close to the one-year anniversary of the start of Moscow's full-scale invasion, there are few signs of hope for a political solution. Rather, what's been a proxy war so far could transform into direct conflict. In seeking to back the other into a corner, both sides may have backed themselves into a corner, making it impossible for either of them to back down.

Dmitry Medvedev, Deputy Chairman of the Russian Security Council, put it bluntly, when he said: “The defeat of a nuclear power in a conventional war may trigger a nuclear war." Commenting on Nato support for the Ukrainian armed forces, he added: “Nuclear powers have never lost major conflicts on which their fate depends." The Kremlin confirmed that Mr Medvedev’s remarks were consistent with Moscow’s nuclear doctrine.

Western leaders have previously discounted such remarks from the former Russian president. They might even ignore the remarks made by Ramzan Kadyrov, head of the Chechen Republic, who said: “Russia will never allow itself to lose in any confrontation, and it can press the button, and peace be upon you.” Mr Kadyrov, whose forces are fighting alongside the Russian army, was obviously referring to nuclear weapons.

Indeed, western leaders seem confident – in varying degrees – that Moscow wouldn't dare use nuclear weapons in the war, believing this would lead to the defeat of its army and even bring down its regime. They are confident it will eventually back down. But Russian President Vladimir Putin isn't known to back down, in which case might they be mistaken?

Why is the current round of escalations more dangerous than previous ones? First, there is a concerted effort in the West to seek unprecedented aid for Ukraine, including tanks, missiles and other military hardware that could enable Kyiv to launch attacks on Russian territory. Moscow views these weapons, especially long-range weapons, as provocative.

Further, Washington has now added Crimea into the military equation, knowing that this would rile up the Kremlin. Ukraine President Volodymyr Zelenskyy reaffirmed his country's aim to restore Crimea, which Moscow annexed in 2014. Addressing western audiences, Mr Zelenskyy said: “Our objective is to liberate all of our territories … Give us your weapons and we will bring our land back." Washington agrees and believes Crimea would change the dynamics of the war and has urged new weapons shipments to Ukraine to this end.

The UK, through its defence secretary and military intelligence, has not only pledged to send armoured vehicles and thousands of missiles and ammunition to Ukraine, but also revealed efforts by Nato states to train Ukrainian soldiers. London has revealed that Moscow is deploying its new T-14 Armata battle tanks but, perhaps as part of psychological warfare, said that this decision was associated with risks for Russia in terms of production delays and the size and weight of these tanks.

Nato’s strategic push for more logistical support for Ukraine will pose a significant challenge for Russia. By mid-March, Ukrainian soldiers who have completed their training in the West, will return with new equipment and strategies that impose a new situation for the Russian army. This month, Ukrainian Parliament passed legislation allowing foreign citizens to fight alongside the army.

Last week's summit involving Nato chiefs of defence has brought a combination of alarm and renewed belligerence in the Russian political and military ranks. And as the war enters a new phase, there is talk within Russian circles about possible preventive measures.

"Preventive strikes" – meaning the nuclear option – are now being seriously considered. The conversation is no longer limited to tactical nuclear strikes exclusively in Ukraine. Rather, both the geography and scale of the nuclear options have expanded. I am given to understand that recent Russian remarks about the Poseidon Super Torpedoes are not a coincidence.

Some experts say these nuclear-capable torpedoes can generate tsunamis once they hit Nato countries such as the US and UK. Mr Putin first revealed them in 2018, claiming they were a new type of strategic nuclear weapons that no defence system in the world could intercept. They have also been described as doomsday weapons. Last week, Moscow announced production of the first batch, to be deployed onboard the Belgorod submarine. But is all this a bluff, or is it really a step towards executing a nuclear preventive strategy?

Nato members don't appear to be intimidated by the prospect of direct conflict with Russia, betting perhaps on a fear of consequences in Moscow. All this escalation could also be just a new peak in the war, to be followed by ceasefire negotiations and political settlements. But for now, it appears unlikely as the space for negotiations narrow and the space for warfare expands.

Of course, the West doesn't underestimate Russia's capabilities. It is also factoring in the regional actions of Moscow and its allies. For this reason, US diplomatic movements in the Middle East this week included efforts to hedge against Iranian adventures and Israeli initiatives, seeking to ensure that the situation remains calm in countries such as Iraq.

According to a White House statement, US National Security Adviser Jake Sullivan discussed with the leaders of Israel “Ukraine, as well as the burgeoning defence partnership between Russia and Iran and its implications for security in the Middle East region". Mr Sullivan stressed that the US would never allow Iran to acquire nuclear weapons.

For his part, Brett McGurk, the US co-ordinator for the Middle East and North Africa, led a large delegation to Iraq, holding the first meeting of its kind with Prime Minister Mohammed Shia Al Sudani, who despite being backed by Iran, recently stated that his country needed continued US troops presence in Iraq. Bear in mind that the Co-ordination Framework, the governing coalition backing Mr Al Sudani, has a different position that echoes Tehran’s call for US troops to leave, underscoring the importance of his diverging position. The US delegation did not hesitate to call for stopping Iraqi funds from being diverted to Iran.

All surprises are possible in the Ukrainian Pandora’s box. This war portends further non-traditional, "pre-emptive" and "preventive" strategies, which until recently were considered unlikely.

Source: The National News

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Alex

For many young Black Americans, affording a home or college can feel like an impossible dream. But in the U.S. capital, local officials think they may have an answer: "baby bonds".

The program - which will deposit up to $1,000 per year into eligible children's bank accounts - is among a number of baby bond and savings schemes aiming to ensure poorer children start out their adult lives with a nest egg.

Backers say they can help tackle growing racial divides in wealth - defined as the total net value of a household's assets including savings and property - which in turn fuel wider economic inequality.

"Wealth really translates into opportunity," said Signe-Mary McKernan, a vice president at the Urban Institute think-tank that focuses on inclusive economic growth and has carried out research on baby bonds.

"Wealth is insurance against tough times – tuition to get a better education or a better job, capital for a small business or to buy a home."

Although baby bonds and similar schemes are typically open to anyone who falls below an income threshold, they help to combat racial economic inequalities as Black and other racial minority families are disproportionately likely to be poor.

In Washington, the typical white family has 81 times more wealth than a Black family, according the D.C. council, which created the baby bond scheme.

The city's bonds could be worth more than $25,000 by the time a child turns 18, said Urban Institute policy associate Madeline Brown, at which point they can access the money to study, buy a home, start a business or save for retirement.

The program's trust has been funded but is awaiting final legal and technical tweaks before it launches, according to a city spokesman.

Lawmakers in Connecticut have approved their own baby bond program, and California has passed a more limited scheme, focused on foster youths and children who lost parents in the pandemic.

Seven other states have introduced legislation to create baby bonds, and more are studying the issue, Brown said.

Maryland's new governor, Wes Moore, was elected in November on a platform that included a baby bonds proposal that analysts say would the largest in the country.

Shawn T. Wooden, who spearheaded Connecticut's baby bond law as state treasurer, told the Thomson Reuters Foundation that the police killings of George Floyd and other Black Americans prompted him to look for "more transformative policies."

"As the father of two Black boys and the only Black statewide elected official in New England at the time, I was compelled to ... address the long-standing racial inequities that permeate our society, particularly with respect to economic disparities," he said.

Widening Gap

Racial wealth inequities in the United States have been increasing since the 1980s.

White families had a median household wealth of $184,000 in 2019, compared with $23,000 for Black families and $38,000 for Hispanic families, according to data from the Federal Reserve Survey of Consumer Finances.

The U.S. Treasury has warned that "under current conditions" the gap will continue to widen.

Failure to address the racial wealth gap could cost the U.S. economy up to $1.5 trillion by 2028, according to McKinsey, a consultancy.

In light of that stagnating progress, baby bonds "can go a long way in achieving what we want to see," said Miriam Calderon, chief policy officer with Zero to Three, an advocacy group that focuses on infants and toddlers.

"When families are thriving, babies are thriving. Baby bonds are a really promising policy that ... are an important part of this puzzle," she said.

While the effectiveness of baby bonds is as yet unproven, a 2019 analysis by researcher Naomi Zewde, then with City University of New York, found that a program benefiting all U.S. newborns would narrow wealth inequality by nearly 90%.

Federal legislation first introduced in 2018 has sought to create a national program that would deposit up to $2,000 a month for children born to low-income families.

Though the bill has failed to progress, a Senate report in December backed baby bonds as a way to create economic opportunity for all at "a time of rising inequality and declining social mobility".

Critics have lambasted such proposals. Ryan Bourne, with the libertarian Cato Institute think-tank, has warned the federal proposal amounts to "redistribution" and a backdoor expansion of federal subsidies for home purchases or college tuition.

Indeed, Connecticut's baby bonds law remains the subject of political wrangling, with funding still up in the air.

Connecticut Governor Ned Lamont's office declined to say whether he would support its eventual funding.

"It is premature for the governor to put baby bonds on the (broader) bond agenda until programmatic and budgetary concerns expressed by the implementing agencies are addressed," communications director Adam Joseph said in an email.

'It plants that idea'

Several cities are already undertaking narrower versions of baby bonds, creating savings accounts for newborns to eventually use for college.

For many families, relatively small amounts in the fund can have an outsized impact, said Joci Kelleher, director of the Brilliant Baby program at California nonprofit Oakland Promise.

"The idea is not that this can pay for college (but) it plants that idea in a family's mind," said Kelleher.

Since 2017, Brilliant Baby has created savings accounts for babies born to low-income families in the city of Oakland that sign up. Each account, seeded with $500, will grow to about $2,000, Kelleher said.

One widely cited study from 2013 found children from poor families with even small amounts of money put away for college were three-times more likely to attend and four-times more likely to graduate.

Yabnely Lara, who enrolled her youngest child in Brilliant Baby in 2018, said at first, she was confused about why the program was already focusing on college for a toddler.

But after she signed up, Lara noticed a change in her own thinking.

"It made me think that somebody else is putting money (away) for my child, so I need to start doing things for him too," said Lara, 39, who has since started working for the program.

"We started taking classes and trainings, and we started saving money."

Those impacts on families' outlooks are what drove the mayor of St. Paul, Minnesota, to create a similar program that started operating in 2020.

"For some children, high school feels like a finish line," Mayor Melvin Carter said by phone.

While the money is not enough to pay for college, "it can become a vehicle, starting in early childhood, beyond high school graduation. That ends up being the first step."

Source: Reuters

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Kevin Du

China and Canada, which worked together to broker a landmark global deal to protect nature in December, now need to use their joint leadership to build momentum and help countries meet biodiversity goals at the national level, green groups say.

At the COP15 U.N. biodiversity summit, about 195 countries agreed ambitious targets, including conserving at least 30% of land and oceans by 2030, while respecting the rights of indigenous peoples.

Last month's talks were led by China but held in Montreal, due to Beijing's challenges in curbing the spread of COVID-19.

The new "Kunming-Montreal Global Biodiversity Framework" - delayed by the pandemic and slow-paced negotiations - was welcomed by conservationists. But many remain wary of unmet nature pledges previously made by governments.

"Now we've managed the 'easier' part at COP15, the hard work of implementation should immediately begin," said Li Shuo, a policy advisor at Greenpeace China.

"China and Canada, as the parents of the deal, should keep injecting momentum into the global nature protection agenda in 2023," he added in an interview.

People around the world depend on nature - from oceans to rainforests - to supply them with clean air and water, and to regulate rainfall that is vital for growing food crops.

And because plants absorb planet-heating carbon dioxide to grow, strengthening conservation efforts is widely seen as one of the cheapest and most effective ways to slow climate change.

But forests and other ecosystems are still being destroyed, often to expand agriculture and production of commodities such as palm oil, soy and beef, to feed a growing global population.

Years of diplomatic tensions between Canada and China ahead of the two-week COP15 summit led to doubts over whether the two governments could land a global nature deal, similar to the 2015 Paris Agreement on climate change.

But Greenpeace's Li said their coordination at the final negotiations in the Canadian city of Montreal - the seat of the U.N. biodiversity secretariat - defied expectations.

"Both countries set a good example of nations putting their political differences aside for the global environmental agenda," he said.

"Collaborating further in the implementation ... will not only enhance their joint legacy but help improve their bilateral relationship," he added.

Power of 'fear'

The previous global biodiversity accord adopted in 2010 in Aichi, Japan, set 20 targets to stem biodiversity loss by 2020, but none of those were fully met.

While Aichi helped galvanise action by many countries, governments ultimately did far too little to stop the destruction of ecosystems and species, said Susan Lieberman, vice president of international policy at the Wildlife Conservation Society.

Marco Lambertini, special envoy for WWF International, said past nature deals had been struck when awareness of the threats to biodiversity was limited - but that has changed.

Evidence of the damage caused by human activities is now overwhelming, and there is growing understanding of how the degradation of nature affects plants, animals and our own lives, be it health or the economy, he added.

"I grew up in a society where people were looking at the destruction of nature as something to be sad about," Lambertini said.

"Now people are looking at (it) as something to be worried about. Fear is probably the most powerful evolutionary pressure," he added.

The Montreal nature deal includes more ways to measure progress and hold governments accountable for their promises than previous agreements, he said.

The only Aichi target that was close to being achieved, he noted, had measurable figures - protect or conserve 17% of all land and inland waters and 10% of the ocean by 2020.

The Montreal pact, in addition to the 30% conservation goal, also contains a pledge to restore at least 30% of degraded land, inland waters, and coastal and marine ecosystems by 2030.

But with less than eight years to meet this decade's COP15 targets, countries must immediately start preparing their national biodiversity plans, which are due to be submitted in 2024, said Toerris Jaeger, executive director of the Oslo-based Rainforest Foundation Norway.

"If they collectively fall short of the COP15 targets, the plans need to be further updated and ambitions increased accordingly," he added.

Blending Finance

The need for more financing from rich countries to help poorer nations meet the new targets agreed at COP15 was a sticking point in efforts to hammer out the biodiversity pact.

The Montreal talks ended with some drama as the final deal was passed following objections from the Democratic Republic of Congo, which later appeared to downgrade its stance to "reservations" on financing and resource mobilisation.

The success of the COP15 deal will depend on sustaining political pressure and ensuring donors - both governments and philanthropists - deliver on their financial pledges, said Charles Barber, a senior biodiversity advisor at the World Resources Institute, a U.S.-based think-tank.

Combining efforts to boost action and funding for climate, forest and biodiversity protection will be important, he added, pointing to a rainforest summit planned for March to be led by French President Emmanuel Macron and Gabon President Ali Bongo.

WWF's Lambertini said the COP15 goal of raising $200 billion per year in biodiversity funding is achievable because - unlike government pledges made under U.N. climate deals - COP15 finance will come from a wide range of sources, both private and public.

But, he cautioned, the aim of reducing harmful subsidies by $500 billion per year, such as support for intensive agriculture, may not be achieved by 2030 as changing economic models will require efforts beyond environment ministries.

Businesses, meanwhile, must start factoring nature into their decision-making at all levels, as they are already doing with climate change, said Linda Krueger, director of biodiversity policy at The Nature Conservancy.

"We can't waste time or momentum - implementation has to start immediately," she emphasised.

Source: Bdnews24

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Owen Li

Environmental, social and governance-related loans in Japan are poised for further growth after rising to a record in 2022, with sustainability-linked loans and transition finance expected to drive the activity.

Such loans are growing in size and fast becoming mainstream, underscoring the government's efforts in incentivising sustainability and the market's acceptance of these types of financings.

Kirin Holdings is seeking a ¥50bn (US$377m) debut transition financing, which will be the first such loan for a beverage and food company in Japan. It follows a ¥200bn green loan In November for carmaker Nissan Motor – Japan's largest such financing – and a ¥100bn sustainability-linked loan for seasonings maker Ajinomoto in December.

"Over the past year, investors' commitment to ESG has become clearer," said Koji Tanaka, head of the syndication department in the solution product division at MUFG. "I believe that debt-originated ESG governance is finally working in Japan as well. It has become important to incorporate ESG flavours into lending, which is the core business of financial institutions. Some investors have made it clear that they won't invest in products without ESG labels."

Volumes for ESG loans (including green financings) more than doubled to US$20.93bn in 2022 from US$9.87bn in 2021, while deal flow skyrocketed to 133 from 54 transactions, according to Refinitiv LPC data.

The deals included a ¥60bn transition-linked commitment line in December for Mitsui OSK Lines, the third such borrowing for the shipping firm following a debut deal in September 2021, a ¥50bn 10-year transition-linked loan for Kyushu Electric Power in October and a ¥100bn transition-linked subordinated loan for Chugoku Electric Power in September. Government support SLLs are expected to receive a fillip from the government, which is introducing subsidies for third-party evaluation costs related to such financings from April this year, adding to the existing support for green bonds and green loans.

In December 2021, the Bank of Japan launched a climate change scheme offering lenders in Japan long-term loans at zero interest for on-lending through green and sustainability-linked bonds and loans. The scheme lasts until fiscal 2030.

Earlier that year in April, the Ministry of Economy, Trade and Industry introduced a performance-linked interest subsidy for transition projects of up to 20bp over the next three years. Kyushu Electric Power's transition-linked loan completed last October was the first such borrowing to receive the subsidy from METI under an industrial competitiveness enhancement act.

METI has also announced roadmaps for seven high greenhouse gas emitting sectors (steel, chemicals, electricity, gas, oil, paper and pulp, and cement) with more to come later.

As a result of these measures, the investor base for ESG loans is growing with about 80% of Japan's 99 regional banks now compliant with the Task Force on Climate-related Financial Disclosures. They are also eligible for the BoJ's climate change scheme.

"Some financial institutions have set medium to long-term sustainable finance balance targets, but they have not reached a stage where they would provide preferred loan pricing or create a special framework for sustainable finance. On the other hand, there is a gradual increase in the number of financial institutions that find it easier to obtain credit approval if deals have a sustainability flavour," said Takayuki Ishiwatari, joint general manager of the debt finance department at Sumitomo Mitsui Banking Corp.

In October, construction company Toda raised a ¥30bn debut SLL, drawing a whopping 35 lenders, of which most were regional banks. Hurdles to growth While the record volumes in ESG loans provide encouraging signs, the market faces a few hurdles. To begin with, ESG loans have yet to catch up with their bond counterparts, although the gap between the two narrowed in 2022 because of the slowdown in bond issuance arising from rising interest rates and volatility in global financial markets.

Green and ESG-related bond volume in 2022 reached US$28.73bn, up 20.8% from US$23.79bn in 2021, according to Refinitiv data. In 2022, Japanese borrowers raised US$3.19bn from 27 transition bonds, compared with US$2.10bn via six transition loans.

Many top-tier investment grade companies have established sustainable finance frameworks in recent years and already have track records in sustainable financings. But many others remain on the sidelines and are yet to warm up to the concept.

"Although the level of interest in sustainable finance is increasing day by day, the effects of such financings are hard to evaluate and we believe that is the reason some companies are reluctant to step up," said SMBC's Ishiwatari. "Having sustainable components does not significantly reduce the funding cost so we must raise awareness in the market by promoting such financings as one of the IR [investor relations] products that could lead to increases in stock prices, corporate evaluations and expansion of the investor base."

While Japan has been an early mover globally in transition finance, that form of lending is not without its challenges. In December, METI established a sub-working group to tackle growing concerns over financed emissions, which are indirect greenhouse gas emissions attributable to financial institutions because of their involvement in providing capital or financing to the original emitter.

Financial institutions participating in the Glasgow Financial Alliance for Net Zero are required to achieve net-zero financed emissions by 2050, which somewhat counters the objectives of lenders in transition finance.

" Efforts toward decarbonisation by borrowers are accelerating again this year as many companies are recognising the importance of transition strategies toward decarbonisation, but we don't think this led to as many transition-labelled loans as expected," said Tomoko Hirabayashi, joint general manager of the syndicated finance department in the sustainable business promotion office at Mizuho Bank.

"[However] there is a strong demand for transition finance from the investor side such as Japanese regional banks. We are hearing that they would be interested in joining in syndication as they are not capable of assessing the technology by themselves at this point."

Source: Reuters

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Samantha Luan

Forex

We recently revised our EUR/USD forecast higher on the back of a radically changed global macroeconomic picture. Slowing inflation and a deteriorating data-flow in the US have forced a dovish repricing in Fed rate expectations, while the European Central Bank looks determined to keep hiking at a sustained pace. Meanwhile, a positive re-rating of growth expectations occurred in both China (thanks to the easing of Covid rules) and Europe (thanks to lower energy prices). All this points – in our view – to dollar weakness and a more benign environment for high-beta currencies in 2023.

In this article, we outline four potential patterns for EUR/SEK based on four key factors set to drive the pair over the short and medium term: global risk sentiment, Europe's economic performance/energy crisis, Riksbank-ECB policy and Sweden's economy. The range of outcomes is derived from the expected volatility priced in by the options market.

External environment

The first two factors in our scenario analysis are purely external to Sweden. Global risk sentiment remains – statistically – the single most important driver of EUR/SEK in the medium term. The Fed's policy is a key driver in this sense. Our economics team has recently highlighted how the deterioration in forward-looking data (like the ISM Services), combined with the easing in inflationary pressures, are shedding doubts on whether the Fed will be able to deliver another 50bp of total tightening and take rates to 5.00%. We now expect a larger easing package (100bp) in the second half of 2023 compared to what markets are pricing in (60bp).

While lower rates should be a straightforward positive factor for global equities and high-beta currencies such as SEK, there is a key caveat. Should the easing cycle be triggered primarily by a pronounced US economic underperformance rather than primarily by falling inflation, the net positives for high-beta currencies would be offset.

SEK presents one of the strongest sensitivity in G10 to eurozone's growth sentiment, which at this historical juncture is very strictly a function of energy prices and geopolitical developments in Ukraine. ING's views on the eurozone's economy can be found in our economics team's "Eurozone Quarterly": one key point is that the abatement in gas prices (largely thanks to mild weather) has allowed a recovery in the euro area's economic outlook, and a recession can now be averted.

The improvement in the eurozone's outlook should have – in theory – weighed on EUR/SEK, since SEK tends to have a higher beta than the euro to the eurozone's growth. However, this has not been the case lately. There are two reasons for this: first, the hawkish surprise by the ECB triggered EUR-specific strength; second, risk sentiment was rather weak into year-end and only margianlly recovered at the start of 2023.

We discuss in the next paragraph the relevance of ECB and Riksbank policy for EUR/SEK, but an important takeaway is that SEK has some room to catch up with the improved eurozone growth picture, although that can only occur in a stable or recovering risk environment.

Sensitivity to rate differential rising

The sensitivity of EUR/SEK to the EUR-SEK two-year swap rate differential (which tracks the ECB-Riksbank policy divergence) has started to pick up again recently. This happened largely thanks to: a) gas prices abating and no longer being the key driver of short-term moves in European currencies; and b) the ECB turning increasingly aggressive on tightening.

For most of last year, the correlation between EUR/SEK and its short-term swap differential was rather muted – as shown below. The large hikes by the Riksbank were not translating into a stronger krona: the 100bp hike in September was a case in point. This was observed across many developed central banks.

We think that a generalised improvement in the global risk picture can keep rebuilding the FX-rate differentials relationship in 2023, including for EUR/SEK. Accordingly, the ECB-Riksbank policy divergence should regain relevance for the pair.

ECB and Riksbank policy

We expect the ECB to hike by 125bp by mid-2023, in line with the Governing Council's recent rhetoric and the improved economic outlook in the eurozone. That would take the deposit rate to 3.25%, which is currently what markets are pricing in. Unlike the Fed, we expect rate cuts will only be a 2024-2025 story in the eurozone.

The Riksbank's policy rate is currently at 2.50% and our baseline scenario sees 75bp of additional hikes in Sweden and a peak rate of 3.25% like the ECB deposit rate. This is in line with market expectations. We see, however, an elevated risk of 100bp being delivered. The reasoning behind this is that: a) inflation is still very elevated in Sweden (CPIF 10.2% year-on-year, core CPIF 8.4% YoY) and proved rather sticky in latest reads; b) there is a rather explicit interest by the Riksbank to support the krona (which would help fight inflation).

On this second point, the most straightforward approach to support SEK is not to underdeliver compared to market expectations on monetary tightening, especially at a time when the ECB is hiking aggressively. In our baseline scenario, we see the EUR-SEK short-term rate differential being capped as ECB tightening is fully priced in and the Riksbank can still moderately surprise markets on the hawkish side.

The timing of rate cuts is another important point, especially for the EUR/SEK outlook in 2H23. In our view, for the same reasons mentioned above – and especially the Riksbank's preference for a stronger SEK – the discussions about monetary easing will be delayed as much as possible. We currently pencil in the first rate cut by the Riksbank in 2024, and we expect it to come a few months before a similar move by the ECB.

Another approach to support the krona could go through FX reserves. The Riksbank accelerated the build-up of its FX reserves in early 2022, which essentially implied selling SEK to purchase foreign currencies (mainly USD and EUR). This seemed counterintuitive given the desire for a strong currency, but the Riksbank highlighted how reserve management was not part of the monetary policy framework.

FX reserve data shows that the pace of purchases has abated recently, and that reserves are now above the 2019 recent peak. This is already good news for SEK, but it does not look hihgly likely – for the moment – that the Riksbank will start actively selling FX to support the krona. It could become a more viable option later this year should SEK feel more depreciating pressure despite a hawkish monetary policy or should the bank be forced to halt hiking earlier than expected.

Some uncertainty around the Riksbank's policy is also tied to the recent change of governor. Erik Thedéen took the role at the start of the year, but we do not have enough information about his stance on monetary policy to conclude he will bring any substantial changes in the bank.

Riksbank facing a housing dilemma

There is one key downside risk to our 'hawkish' scenario for the Riksbank. Unlike the ECB, the Riksbank has to deal with a very vulnerable property market.

Indeed, tight monetary policy is already weighing on the Swedish housing market. Rising costs for debt servicing and construction had drastically reduced consumer and investors' appetite, resulting in prices falling substantially. The headline Valueguard HOX index shows a peak-to-trough fall of 15.2%, and the Riksbank forecasts a further decline until the third quarter of 2023.

Looking at the Swedish mortgage market, only 10% of new loans have a fixation period of longer than five years, and over half of the total loans are on variable. Together with the Swedish household debt proportion to net disposable income rising steadily over the past two decades to 200 percent, there are some limits to how far the Riksbank can go with tightening before triggering a fully-fledged property crash.

A black-swan scenario for SEK could materialise if ultra-sticky inflation forces the Fed, the ECB and the Riksbank to push rates considerably higher than what markets are currently expecting, triggering a crash in the housing market. That could also lead to big rate cuts in late 2023 to support the economy.

In our baseline scenario, the 75-100bp of tightening by the Riksbank should keep fuelling the property market correction, but in a controlled manner and not excessively exceeding the Riksbank's estimates.

Our forecast for EUR/SEK

After discussing the range of possible patterns for EUR/SEK in 2023, it's time to sum up our view, which corresponds to the "Cautious optimism" scenario above. We are moderately bearish on EUR/SEK in 2023 given the projected improvement in the eurozone's economic outlook and in risk sentiment.

More in details, we expect EUR/SEK to trend lower and move sustainably below 11.00 by the end of the first quarter as the Riksbank hikes by 50bp and signals more tightening, while European sentiment improves. Then, we expect EUR/SEK to test the 10.00/10.50 trading range in the third quarter, when Fed rate cuts could give high-beta currencies like SEK an advantage over the EUR, and the beneficial effects for the krona of an improved European economic outlook emerge. However, SEK could experience some weakness towards the end of the year – i.e. EUR/SEK moving back above 10.50 – as colder weather could bring higher energy prices and a deterioration in risk sentiment.

It's important to note that this profile embeds our view for a rather strong EUR in 2023. We expect to see larger SEK gains against the dollar.

Source: ING

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Thomas

Political

U.S. Attorney General Merrick Garland has appointed two different special counsels to independently investigate the handling of classified records by Republican former President Donald Trump and his Democratic successor, President Joe Biden.

Jack Smith, a war crimes prosecutor, is investigating whether Trump or his associates improperly retained classified records at his Florida estate after he left office in 2021 and then tried to obstruct a federal investigation. Garland tapped Trump-era former U.S. Attorney Robert Hur for Maryland to investigate the removal and retention of classified records from Biden's time as vice president, and the discovery of them at his home and one-time office at a think tank.

What are the similarities between the two cases?

Neither Trump nor Biden should have had any classified material in their possession. During a presidential transition period, the records from each administration are supposed to be turned over to the legal custody of the U.S. National Archives.

It is unlawful to knowingly or willfully remove or retain classified material. Failure to properly store and secure classified material poses risks to national security if it should fall into the wrong hands.

Biden has said he was surprised to learn he had classified information in his possession. Trump has said on social media, without providing evidence, that he declassified the records, though his attorneys have declined to repeat that assertion in court filings.

The materials in question date back to when Biden was President Barack Obama's vice president from 2009 to 2017, and when Trump was president from 2017 to 2021.

How do the two cases differ?

Legal experts say there are stark contrasts between the two cases.

In Trump's case, the National Archives tried for more than a year after Trump left office to retrieve all of the records he retained, without success. When Trump finally returned 15 boxes of documents in January 2022, Archives officials discovered they contained classified materials.

The matter was referred to the Justice Department, which issued a grand jury subpoena last May seeking the return of all classified records. Investigators then visited Trump's home, where his attorneys handed over more material and asserted there were no more documents on the premises.

That turned out to be false. Additional evidence collected by the FBI, including surveillance footage from the Mar-a-Lago estate, prompted agents to seek court approval to execute a search warrant on Aug. 8 amid concerns over possible obstruction.

The FBI recovered an additional 13,000 documents, about 100 of which were marked as classified.

In Biden's case, Garland said the president's attorneys informed the Archives and the Justice Department in November that they had discovered fewer than a dozen classified files inside a closet at the Penn Biden Center think tank in Washington D.C. earlier that month.

After the discovery, the attorneys continued to conduct additional searches at Biden's homes in Wilmington and Rehoboth Beach, Delaware, where more documents were found in both December and this month. All were turned over to the authorities.

What legal peril do Biden and Trump face?

It is a crime only if the retention and removal of classified records is intentional.

Prosecutors typically won't pursue charges for the accidental retention of classified records, but if there is evidence of possible obstruction of justice, that could change things.

For that reason, legal experts say, Trump faces considerably more legal peril than Biden.

To date, there has been no suggestion by the Justice Department that Biden knowingly retained the records or refused to return them to the government.

Also, as president, Biden is unlikely to face prosecution. The Justice Department has not changed its long-standing policy that a sitting president cannot be indicted.

The same policy helped insulate Trump when he was president and under investigation by then-Special Counsel Robert Mueller. In that case, Mueller declined to determine whether Trump had obstructed his investigation into possible ties between Russia and Trump's 2016 election campaign because of the department's policy.

Source: The Straits Times

Risk Warnings and Disclaimers

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Samantha Luan

Forex

If there was only one word to sum up 2022, "unpredictable" might be the most accurate.

Yet we all enjoy trying to predict the future, especially when it comes to our finances – to protect ourselves from the downside, or to take advantage of the upside.

What does 2023 hold for investors? We talked to some leading lights in the financial world about the road ahead.

Prediction: Debt bomb

Sarah Newcomb, director of financial psychology at Morningstar

"I'm concerned about the lack of saving in America as a whole. Inflation may be slowing, but data from the Federal Reserve shows consumer borrowing has been steadily rising. It seems we're funding our more expensive lifestyles with debt.

"That can only last so long, and with rising interest rates, it concerns me. We had a moment of higher savings rates when the pandemic first hit, and people realized they needed to be prepared for anything. Once the shock wore off, spending and borrowing picked back up, and I fear we didn't learn our lesson. I am concerned about increased bankruptcy rates, loan defaults and overall financial stress in 2023."

Prediction: Boring wins

Carrie Schwab-Pomerantz, president of Charles Schwab Foundation and managing director of Charles Schwab & Co.

"I predict that in 2023, timeless money principles will win out and more people will decide that 'boring is best' when it comes to managing their finances. Tried-and-true principles that have helped people build wealth for generations will be the hottest trend in finance: investing for the long term; building a portfolio grounded in asset allocation and diversification; establishing an emergency fund; limiting debt; and maxing out your 401(k).

"Of course, trendy investment ideas will pop up as they always do, but it's important to remember there is no get-rich-quick solution. Getting back to the basics will foster strong financial foundations as we face economic headwinds in the new year."

Prediction: Bonds are back

Kristy Akullian, iShares senior investment strategist at BlackRock

"Bonds will be back in 2023 in a way we haven't seen in decades. In an otherwise challenging investment landscape for the year ahead, we see tremendous value in high-quality fixed-income and believe others will as well.

"No longer just the remit of retirees, attractive yields will attract a new cohort of buyers to the asset class: Newer investors looking for less volatility, Millennials with near and medium-term investment objectives and multi-asset managers who see opportunity to outperform. Already, ETF flows are starting to show a shift in investor preferences – watch for much more of this in the year ahead."

Prediction: "Unstoppable trends" will ride out recession

Jim O'Donnell, CEO of Citi Global Wealth

"We're focused on what we call 'unstoppable trends' like healthcare – especially in areas like biologics, life science tools and age tech – that are likely to give investors access to companies with long-term growth prospects. Aging and growing populations are likely to boost spending on healthcare innovations.

"This growth, paired with the fact that the healthcare industry is least tied to current economic conditions, makes this a potentially attractive sector for suitable investor portfolios."

Prediction: Headwinds for small business

Asahi Pompey, Global Head of Corporate Engagement, Goldman Sachs; President of the Goldman Sachs Foundation

"For small business owners, the financial success of their businesses will become even more deeply intertwined with their personal financial situations as the economic climate remains uncertain. The optimism of these entrepreneurs for continued growth in the new year points to resilience amid some tough financial decisions they'll likely make in 2023.

"For instance, we expect to see a rise in debt consolidation as business owners look to combat the rate environment. And while entrepreneurs will continue to invest in their businesses, growing their personal savings will be increasingly important to buffer against continued inflationary pressures."

Prediction: Consumers hunkering down

Chris Britt, Co-founder and CEO at Chime

"My prediction would be that American consumers in 2023 are going to hunker down and focus on building more solid foundations for their financial future. The data is clear that people's confidence is at extremely low levels right now, not seen since the early days of pandemic.

"Since millions of consumers use us as their primary account, we can actually see where money is going. We are seeing far less movement into more volatile investments, like crypto transactions, and more movement into safer investments like high-yield savings. That signals to us that people are preparing for what could be a very challenging 2023."