June 7th Financial News

Daily News

Summary:

The RBA unexpectedly raises its benchmark interest rate by 25bps; the World Bank projects the world's economy will grow 2.1% in 2023; the Kakhovka dam in Kherson, Ukraine is damaged...

[Quick Facts]

1. The RBA unexpectedly raises its benchmark interest rate by 25bps.

2. The World Bank projects the world's economy will grow 2.1% in 2023.

3. Goldman Sachs lowers the probability of a U.S. recession and expects the terminal interest rates at 5.25%-5.5%.

4. The U.S. SEC asks to freeze the assets of Binance's U.S. subsidiary.

5. Kakhovka dam in Kherson, Ukraine has been damaged.

[News Details]

The RBA unexpectedly raises its benchmark interest rate by 25bps

The Reserve Bank of Australia unexpectedly raised its benchmark interest rate by 25 basis points to 4.10%, a new high since 2012. The market expected it would keep rates unchanged. In addition, the RBA reiterated the possible need to further tighten monetary policy, depending on the development of inflation and the economy. It showed determination to restore CPI to the target level and will take the necessary measures to do that.

The World Bank projects the world's economy will grow 2.1% in 2023

The World Bank raised its forecast for global growth in 2023 as the U.S. and other major economies are more resilient than expected. But the Bank said the drag on the economy from higher interest rates next year will be worse than expected. The real global GDP is set to grow 2.1% this year, the World Bank said in its latest Global Economic Prospects report. That's higher than the 1.7% forecast released in January, but well below the 3.1% growth rate in 2022.

Goldman Sachs lowers the probability of a U.S. recession and expects the terminal interest rates at 5.25%-5.5%

Goldman Sachs cut the probability of a U.S. recession in the next 12 months from 35% to 25% and said the Federal Reserve is "very likely" to raise interest rates by 25 basis points in July. Earlier, the pressure on the U.S. banking sector was reduced, and U.S. President Joe Biden signed a bill to suspend the U.S. government's debt ceiling, avoiding a possible default. Goldman Sachs said the new debt ceiling will only lead to "small spending" cuts, which should make the overall fiscal momentum "roughly neutral" over the next two years. The pressure on the banking sector will only reduce this year's real GDP growth by 0.4%. The bank now expects that the Fed's terminal rate will be around 5.25%-5.5%, similar to the expectations of Deutsche Bank, UBS, and other peers.

The U.S. SEC asks to freeze the assets of Binance's U.S. subsidiary

The U.S. Securities and Exchange Commission (SEC) filed an emergency motion in federal court in Washington, D.C., on the evening of June 6 ET, asking a judge to freeze the assets of Binance's U.S. subsidiary and require the company to return funds on its U.S. trading platform to customers. The SEC wanted the freeze order to apply only to Binance's two holding companies in the U.S., while other international exchanges that are not regulated by the U.S. are not affected by the order.

Kakhovka dam in Kherson, Ukraine has been damaged

Kakhovka dam in Kherson, eastern Ukraine, was damaged on Tuesday, and parts of the area are being flooded. A state of emergency has been declared in the city of Nova Kakhovka due to the dam explosion. Both Russia and Ukraine accused each other of committing the dam destruction, increasing tensions in the region.

[Focus of the Day]

UTC+8 09:30 Australia GDP YoY (SA) (Q1)

UTC+8 10:00 China Trade Balance (May)

UTC+8 13:45 Switzerland Unemployment Rate (SA) (May)

UTC+8 14:00 Germany Industrial Output MoM (SA) (Apr)

UTC+8 14:00 U.K. Halifax House Price Index MoM (SA) (May)

UTC+8 14:45 France Trade Balance (SA) (Apr)

UTC+8 15:00 The OECD released its economic outlook report

UTC+8 20:30 U.S. Trade Balance (Apr)

UTC+8 22:00 The Bank of Canada announces its interest rate decision

UTC+8 22:30 U.S. EIA Crude Stocks for the Week Ended June 2

Risk Warnings and Disclaimers

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Warren Takunda

Traders' Opinions

Economic

Russia's federal government has announced a staggering budget deficit of RUB 3.4 trillion in the first five months of 2023, marking a record high for this period. This deficit represents a sharp contrast to the surplus of RUB 1.6 trillion recorded during the corresponding period last year, as reported by the Ministry of Finance. The widening deficit can be attributed to a decline in revenues and a surge in government spending.

Revenue collections witnessed a significant decline, plummeting by 18.5% to RUB 9.8 trillion compared to the same period in the previous year. The primary factors contributing to this decline are the global economic slowdown and the imposition of sanctions on Russia's energy sector, resulting in reduced income from vital oil and gas industries. These challenges have posed severe hurdles to Russia's financial stability.

Simultaneously, government expenditures witnessed a substantial increase, soaring by 26.5% to RUB 13.2 trillion. The surge in spending can be attributed to Moscow's ongoing military intervention in Ukraine, which has necessitated significant financial resources. This heightened level of government spending has put immense strain on Russia's fiscal health and highlighted the underlying issues that continue to plague the state's budget.

The persistent budget deficits and mounting expenditures have forced the Kremlin to adopt certain measures in order to finance its operations. To meet its financial requirements, the Russian government has turned to issuing bonds to raise capital. Additionally, the government has been compelled to dip into its National Welfare Fund, a reserve designed to safeguard against economic uncertainties and emergencies.

The current economic scenario in Russia underscores the urgent need for the government to address these unsustainable developments. As the budget deficit continues to reach record highs, it is crucial for the Kremlin to reassess its economic policies and explore avenues for revenue diversification beyond the oil and gas sectors. This would help mitigate the adverse effects of global economic fluctuations and reduce the nation's vulnerability to external pressures, such as sanctions.

Furthermore, the government must also carefully evaluate its expenditure priorities and seek more efficient ways to allocate resources. By ensuring transparency and accountability in financial management, the Russian authorities can work towards regaining fiscal stability and fostering long-term economic growth.

The impact of Russia's budget deficit extends beyond its borders. As one of the world's major economies, Russia's fiscal health has implications for global markets and investors. The growing deficit and increased borrowing may lead to higher interest rates and inflationary pressures, affecting not only domestic consumers but also international stakeholders.

In conclusion, the Russian government's announcement of a record-high budget deficit of RUB 3.4 trillion in the first five months of 2023 highlights the challenges facing the country's economy. The decline in revenues due to a global economic slowdown and energy sector sanctions, coupled with soaring government expenditures driven by the military intervention in Ukraine, has strained Russia's fiscal position. Urgent measures are required to address these issues and restore fiscal stability, including diversifying revenue sources and enhancing financial management practices.

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Economic

The world economy is set to grow at a slower pace as continued monetary policy tightening to rein in inflation is expected to crimp development, the World Bank has said.

Growth has been forecast at 2.1 per cent this year, down from 3.1 per cent last year, before recovering to 2.4 per cent in 2024, the Washington-based lender said in its latest Global Economic Prospects report on Tuesday.

Tight global financial conditions and subdued external demand are expected to weigh on growth across emerging markets and developing economies.

This year's growth projections for these economies are "less than half [of] those from a year ago, making them highly vulnerable to additional shocks", the World Bank said.

In emerging markets and developing economies other than China, growth is set to slow to 2.9 per cent in 2023, from 4.1 per cent last year.

"The surest way to reduce poverty and spread prosperity is through employment – and slower growth makes job creation a lot harder," said World Bank President Ajay Banga, who assumed charge on Friday.

"It's important to keep in mind that growth forecasts are not destiny. We have an opportunity to turn the tide but it will take us all working together."

Last month, the US Federal Reserve bumped up the policy rate for a third consecutive time this year by 25 basis points to curb inflation and restore price stability.

Higher Interest Rates to Slow Global Growth in 2023, World Bank Says_1

The Fed has been aggressively increasing interest rates since March last year to tame consumer prices that hit a 40-year high in 2022.

However, it has indicated a potential pause in rate increases amid fears of a recession in the world's largest economy.

The central banks of the UAE, Saudi Arabia, Bahrain, Qatar and Oman all followed suit by raising their benchmark borrowing rates in May.

Global financial conditions have tightened as a result of policy rate increases and recent bouts of financial instability, according to the World Bank.

Many banks experienced substantial unrealised losses due to the sharp rise in policy interest rates, it said.

"Financial markets remain highly sensitive to evolving expectations about the future path of interest rates of major central banks," the report said.

The latest forecasts indicate that the overlapping shocks of Covid-19, the Ukraine war and the sharp economic slowdown have dealt an enduring setback to development to emerging markets and developing economies, "one that will persist for the foreseeable future", the World Bank said.

By the end of 2024, economic activity in these economies is expected to be "about 5 per cent below levels projected on the eve of the pandemic".

"The world economy is in a precarious position," said Indermit Gill, chief economist and senior vice president at the World Bank.

With fiscal weaknesses having already tipped many poor countries into debt distress, pressure is growing in emerging markets and developing economies due to higher interest rates, he said.

Growth in the Mena region is expected to slow to 2.2 per cent in 2023, before rebounding to 3.3 per cent in 2024, as inflation and global headwinds subside and oil production rises.

The 23-member Opec+ alliance of oil producers on Sunday said it had set a new production target of 40.46 million barrels per day for 2024.

The alliance has extended its output cuts until the end of 2024 as concerns about economic growth weigh on the outlook for fuel demand.

Saudi Arabia will make an output cut of a million bpd in July, which could be extended if required.

The group has total production curbs of 3.66 million bpd, or about 3.7 per cent of global demand, in place, including a 2 million bpd reduction agreed on last year and voluntary cuts of 1.66 million bpd announced in April.

"The growth outlook for oil exporters in 2024 has improved since January, reflecting an assumed rebound in oil production, the expected effects of reform initiatives, and investment drives in Saudi Arabia and the UAE," the World Bank said.

The Mena region entered 2023 with "solid growth momentum in oil-exporting economies owing to high oil prices – which had helped these economies grow at a decade-high rate in 2022 – and ongoing recoveries in services sectors".

Higher Interest Rates to Slow Global Growth in 2023, World Bank Says_2

Many developing economies are also struggling to cope with weak growth, persistently high inflation and record debt levels, said World Bank deputy chief economist Ayhan Kose.

"Yet new hazards – such as the possibility of more widespread spillovers from renewed financial stress in advanced economies – could make matters even worse for them," he said.

"Policymakers in these economies should act promptly to prevent financial contagion and reduce near-term domestic vulnerabilities."

In advanced economies, growth is set to decelerate from 2.6 per cent in 2022 to 0.7 per cent this year and remain weak in 2024, according to World Bank estimates.

After growing by 1.1 per cent in 2023, the US economy is set to slow down to 0.8 per cent in 2024, "mainly because of the lingering impact of the sharp rise in interest rates over the past year and a half", the report said.

In the euro area, growth has been projected at 0.4 per cent in 2023, down from 3.5 per cent in 2022, due to the lagged effect of monetary policy tightening and energy price increases.

Despite a continued recovery in tourism, global trade growth is also expected to slow this year in view of the continuing rotation of consumption towards services, which tend to be "less trade-intensive", the World Bank said.

"In 2023, trade will grow at less than a third of its pace in the years before the pandemic," Mr Gill said.

The World Bank had said in March that global economic growth was expected to slump to a three-decade low by 2030, with the world economy set to reach its "speed limit" – the maximum long-term rate at which it can grow without risking excess inflation.

Source: The National News

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Kevin Du

Cryptocurrency

The top U.S. securities regulator sued cryptocurrency platform Coinbase on Tuesday, the second lawsuit in two days against a major crypto exchange, in a dramatic escalation of a crackdown on the industry and one that could dramatically transform a market that has largely operated outside regulation.

The U.S. Securities and Exchange Commission (SEC) on Monday took aim at Binance, the world's largest cryptocurrency exchange. The SEC accuses Binance and its CEO Changpeng Zhao of operating a "web of deception".

If successful, the lawsuits could transform the crypto market by successfully asserting the SEC's jurisdiction over the industry which for years has argued that tokens do not constitute securities and should not be regulated by the SEC.

"The two cases are different, but overlap and point in the same direction: the SEC's increasingly aggressive campaign to bring cryptocurrencies under the jurisdiction of the federal securities laws," said Kevin O'Brien, a partner at Ford O'Brien Landy and a former federal prosecutor, adding, however, that the SEC has not previously taken on such major crypto players.

"If the SEC prevails in either case, the cryptocurrency industry will be transformed."

In its complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.

The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.

Coinbase suffered about $1.28 billion of net customer outflows following the lawsuit, according to initial estimates from data firm Nansen. Shares of Coinbase's parent Coinbase Global Inc closed down $7.10, or 12.1%, at $51.61 after earlier falling as much as 20.9%. They are up 46% this year.

Paul Grewal, Coinbase's general counsel, in a statement said the company will continue operating as usual and has "demonstrated commitment to compliance."

Oanda senior market analyst Ed Moya said the SEC "looks like it's playing Whac-A-Mole with crypto exchanges," and because most exchanges offer a range of tokens that operate on blockchain protocols targeted by regulators, "it seems like this is just the beginning."

Leading cryptocurrency bitcoin has been a paradoxical beneficiary of the crackdown.

After an initial plunge to a nearly three-month low of $25,350 following the Binance suit, bitcoin rebounded by more than $2,000, exceeding the previous day's high.

"The SEC is making life nearly impossible for several altcoins and that is actually driving some crypto traders back into bitcoin," explained Oanda's Moya.

Broker, Exchange Crackdown

Securities, as opposed to other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 outlined a definition of the term "security," yet many experts rely on two U.S. Supreme Court cases to determine if an investment product constitutes a security.

SEC Chair Gary Gensler has long said tokens constitute securities and has steadily asserted its authority over the crypto market, focusing initially on the sale of tokens and interest-bearing crypto products. More recently, it has taken aim at unregistered crypto broker dealer, exchange trading and clearing activity.

While a few crypto companies are licensed as alternative system trading systems, a type of trading platform used by brokers to trade listed securities, no crypto platform operates as a full-blown stock exchange. The SEC also this year sued Beaxy Digital and Bittrex Global for failing to register as an exchange, clearing house and broker.

"The whole business model is built on a noncompliance with the U.S. securities laws and we're asking them to come into compliance," Gensler told CNBC.

Crypto companies refute that tokens meet the definition of a security, say the SEC's rules are ambiguous, and that the SEC is overstepping its authority in trying to regulate them. Still, many companies have boosted compliance, shelved products and expanded outside the country in response to the crackdown.

Kristin Smith, CEO of the Blockchain Association trade group, rejected Gensler's efforts to oversee the industry.

"We're confident the courts will prove Chair Gensler wrong in due time," she said.

U.S. Tightens Crackdown on Crypto with Lawsuits Against Coinbase, Binance_1

Founded in 2012, Coinbase recently served more than 108 million customers and ended March with $130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75% of its $3.15 billion of net revenue last year.

Tuesday's SEC lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief.

On Monday, the SEC accused Binance of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to restrict U.S. customers from its platform, and misleading customers about its controls.

Binance pledged to vigorously defend itself against the lawsuit, which it said reflected the SEC's "misguided and conscious refusal" to provide clarity to the crypto industry.

Customers pulled around $790 million from Binance and its U.S. affiliate following the lawsuit, Nansen said.

On Tuesday, the SEC filed a motion to freeze assets belonging to Binance.US, Binance's U.S. affiliate. The holding company of Binance is based in the Cayman Islands.

Source: Reuters

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Warren Takunda

Traders' Opinions

Economic

BYD Auto, the renowned Chinese electric vehicle (EV) manufacturer, continues to solidify its position as a global leader in the EV industry. Boasting a substantial market share of 8.8% and a market capitalization of $99.38 billion, BYD has witnessed remarkable growth and success in recent years¹². This report will delve into BYD's expansion strategies, its challenges in the US market, and its notable achievements in the battery sector.

BYD has been actively expanding its sales footprint across various countries, with a particularly strong presence in Asia, Europe, and Latin America¹². Its commitment to producing high-quality electric vehicles has resonated with consumers globally, contributing to the company's impressive market share. Additionally, BYD has earned a well-deserved reputation for its cutting-edge technology and commitment to sustainability, bolstering its appeal to environmentally-conscious consumers.

However, despite its remarkable growth, BYD faces significant hurdles in entering the US market, largely due to political tensions and regulatory barriers². While the company has successfully penetrated many international markets, the United States remains a challenging landscape for BYD's expansion plans. Nonetheless, BYD continues to explore opportunities and evaluate its approach to ensure a measured and cautious entry into the US EV market, demonstrating a strategic mindset and adaptability².

In addition to its achievements in the EV sector, BYD has also emerged as a major player in the global battery market. In July 2022, the company ranked second in global electric-car battery shipments, further highlighting its influence and expertise in this crucial area³. BYD's dedication to research and development, coupled with its focus on battery innovation, has positioned the company favorably in the battery market, creating opportunities for future growth and collaboration.

With a market capitalization of $99.38 billion, BYD's financial strength reflects investor confidence in the company's long-term prospects⁶. The substantial investments made in research and development, as well as strategic partnerships, have contributed to BYD's consistent growth and market dominance. As the global demand for electric vehicles continues to surge, BYD is well-positioned to capitalize on this trend and further strengthen its market position.

In conclusion, BYD Auto stands as a true global leader in the electric vehicle industry, with an impressive market share and a soaring market capitalization. The company's expansion efforts, particularly in Asia, Europe, and Latin America, have yielded remarkable results. While challenges persist in entering the US market due to political tensions and regulatory barriers, BYD's cautious approach showcases its strategic thinking. Additionally, BYD's significant presence in the battery market further cements its influence in the broader clean energy sector. As the world embraces the shift towards sustainable transportation, BYD remains a key player driving the future of electric mobility.

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Damon

Economic

Chinese trade figures for May top the Asia-Pacific economic data and events calendar on Wednesday with investors keen to see whether April's shock slump in imports is repeated, which will offer clues on the health - or otherwise - of domestic demand.

Markets may get a tailwind from Tuesday's global session - Wall Street ended higher and volatility fell to a pre-pandemic low, although the crypto world was rocked after the U.S. Securities and Exchange Commission filed a second major lawsuit in as many days against industry giants.

First quarter GDP growth figures from Australia are also due on Wednesday, potentially giving the Aussie dollar and other local assets a nudge after the surprise interest rate hike from the country's central bank on Tuesday.

Analysts polled by Reuters reckon the economy grew by 0.3% from the previous quarter, and by 2.4% compared with the same period a year ago. Both would mark a slower pace of growth from the fourth quarter of last year.

The Australian dollar could be in for a bout of profit taking on Wednesday after rallying strongly on Tuesday, a fourth straight rise, following the RBA's rate hike and signaling of more to come.

That's the Aussie's longest winning streak in a month, and the currency is up almost 1% this week. It has not appreciated two weeks in a row since January.

Chinese trade data for May will be the main focus, especially imports, which have been sluggish for over a year. The scrapping of pandemic-era restrictions and lockdowns earlier this year was supposed to spur a surge in domestic demand, but that hasn't happened.

The surprise 7.9% slump in imports in April was a major red flag that the economic re-opening was not going according to plan. It was one of the main catalysts for investors turning bearish on Chinese assets and the economy in recent weeks.

Economists polled by Reuters predict an 8.0% fall in imports for May, and a 0.4% decline in exports.

The Chinese yuan slid to new low for the year through 7.10 per dollar on Tuesday. Further signs of a struggling economy will likely keep the yuan on the defensive, even if the overall trade surplus is relatively large.

Overall, markets go into Wednesday in pretty fine fettle. The CBOE volatility index - the so-called Wall Street fear index - closed below 14.0 for the first time since February 2020.

Here are three key developments that could provide more direction to markets on Wednesday:

- China trade balance (May)

- Australia GDP (Q1)

- FX reserves - China, Japan, Indonesia

Source: Yahoo

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Justin

Central Bank

Economic

Forex

Data keeps the hike door open

At its latest gathering, the Bank of Canada decided to stand pat for the second meeting in a row as it was largely anticipated. However, it did not satisfy those expecting a rate cut later this year, with the statement revealing that policymakers are still prepared to raise rates further if deemed necessary.

Data after the meeting have been adding credence to the Bank’s choice to leave the door to more hikes open. The April jobs report revealed that the unemployment rate held steady at 5.0%, just a tick above its lowest level in more than five decades, while the inflation data for the month showed that headline inflation accelerated in April, and although all the underlying metrics slowed, both the Trimmed mean and Common CPI rates slid by less than expected.

Will the BoC Resume Interest Rate Hhikes?_1

Most importantly, the economy grew by double the estimated pace during the first three months of the year after stagnating at the end of 2022, resulting in a skyrocketing quarter-on-quarter annualized rate to 3.1% from -0.1%.

But a hike more likely in July

Having said all that though, although market participants are convinced that another hike may be firmly on the table, they don’t see a high probability of this happening at this week’s gathering. They are assigning a 40% probability to the hike scenario, with the remaining 60% pointing to no action. They believe that a hike is more likely to be delivered in July and nearly another one by December.

Will the BoC Resume Interest Rate Hhikes?_2

Therefore, should policymakers stay sidelined and stick to their guns that they remain prepared to hike more if needed, the loonie is likely to slide but not much. For a noteworthy and sustained tumble in the Canadian currency, officials may need to stand pat and officially announce the end of this tightening crusade, which according to the aforementioned data appears to be the least likely scenario.

The former looks the wisest choice as it is too early to describe the latest rebound in the headline CPI rate as inflation getting out of control, and thus, officials may prefer to wait for more data before they hike again. They could do so at the July meeting, where updated macroeconomic projections will be available. Now, in the case of the Bank pressing the hike button this week and appearing willing to deliver more, the loonie could rally.

Dollar/loonie stays trapped within a wide range

Dollar/loonie has been trading in a trendless mode since November, with most of the price action being contained between the 1.3230 and 1.3650 barriers. Thus, the medium-term picture, at least from a technical perspective, looks neutral.

Will the BoC Resume Interest Rate Hhikes?_3

Currently, the pair is sitting slightly above the 1.3400 zone. If the BoC appears less hawkish than expected on Wednesday, dollar/loonie is likely to rebound and perhaps aim for another test at the upper bound of the range, at around 1.3650.

On the other hand, a potential hike could extend last week’s retreat, with a potential break below 1.3400 perhaps paving the way towards the lower bound of the aforementioned range, at around 1.3230.

Employment report also on tap

Having said all that though, apart from the BoC decision and the related market reaction, loonie traders will also have to evaluate the Canadian employment report for May, due out on Friday. Even if policymakers stay on hold, conditional upon leaving the door open to another hike, a strong employment report could prompt investors to add to their hike bets, adding more basis points worth of increments by the end of the year.