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Bump in the night - FX flash crashes put regulators on alert @Reuters Africa |
The increasing frequency of flash crashes in the $5.1 trillion-a-day
(£4 trillion) foreign exchange market has regulators scrambling for
answers.
Sudden, violent and often quickly reversed price moves are now a
regular occurrence in world currency markets — often during the
so-called ‘witching hour’, a period of thin trading between 5-6 pm in
New York when currency dealers there have powered off and colleagues
in Tokyo have yet to sign on.
Two big crashes this year separately pummelled the yen and the Swiss
franc and, given the importance of currency pricing for trade,
investment flows and the global economy, policymakers are concerned a
major fracturing could threaten financial stability.
“The question is, is this a new normal, or is it a canary in the
coalmine sort of thing?” said Fabio Natalucci, deputy director of the
Monetary and Capital Markets Department at the International Monetary
Fund (IMF).
“We have seen the frequency of these events increase so this may be
pointing to a major liquidity stress event coming at some point in the
future.”
Natalucci said liquidity strains — market lingo for an insufficient
number of buy and sell orders — were evident days ahead of a big crash
and the IMF was creating a monitoring tool that might be able to
predict when the next one was coming.
Reflecting official disquiet, flash crashes have been a regular topic
of discussion this year at the Federal Reserve Bank of New York’s FX
market liaison committee, a forum for central bankers and market
players.
Bankers and policymakers agree that an industry-wide switch to
machine-trading in FX markets is behind the frequency and severity of
the price moves, meaning that further crashes are likely.
“Our pessimistic view is that this technology is going to become an
increasing part of the FX market and we need to step up our
monitoring,” a G10 central bank official said, declining to be named
because he is not authorised to speak publicly.
Regulators aren’t pressing the panic button yet. Natalucci said there
was no evidence that flash crashes so far had raised funding costs for
firms or households and it made sense to study the problem before
“rushing into enacting any regulatory responses”.
Mini-crashes already occur roughly every two weeks in the FX market
according to a study by Pragma, a company which creates computer
trading models.
In these incidences, a currency’s price will shift dramatically
followed by a swift reversal, along with a sudden and significant
widening of the spread between prices quoted to buy and sell it. The
spread usually narrows after a few minutes.
Computer models known as algorithms, or algos, have largely replaced
humans in currency trading, helping banks to cut costs and boost the
speed at which deals are done.
The models are designed to execute trades smoothly by breaking down
orders into small pieces and searching for platforms where liquidity
is plentiful.
But problems arise when market conditions change, for instance, when
trading volumes suddenly collapse or volatility spikes as has been the
during Britain’s protracted attempt to extricate itself from the
European Union. At such times, algos are often programmed to shut
down.
Two senior central banking officials, speaking on condition of
anonymity, said such “kill switches” drained liquidity.
And, because fragmented forex markets depend on algos for a constant
stream of price quotes — by one estimate there are 70-odd trading
platforms — a widespread shutdown causes volumes to nosedive, making
the price moves more dramatic.
The first of this year’s notable crashes came on January 3 when the
yen spiked suddenly against the dollar after Tokyo markets closed. It
jumped 8% within the space of seven minutes against the Australian
dollar and 10% to the Turkish lira.
The second was on February 11 when the Swiss franc gyrated
frantically, with an unexplained and brief jump against the euro and
dollar.
A Reserve Bank of Australia (RBA) report noted that several flash
episodes have been recorded during the witching hour.
It was also during this illiquid period on October 7, 2016 that
sterling collapsed 9% in early Asian trading, falling to around $1.14
from $1.26 within minutes.
The RBA’s analysis of all these flash crashes concluded algorithmic
trading strategies likely acted as “amplifiers”.
Human traders would be able to spot an opportunity from the market
turmoil — buying a currency in free fall - which would help to defuse
it. But these days there are far less of them around.
Upto 70% of all FX orders on platform EBS, one of two top venues for
currency trading, now originate from algorithms. In 2004, all trading
was undertaken by humans.
With banks under constant pressure to cut costs and
post-financial-crisis rules making it ever more expensive to trade,
there is no sign of firms hiring extra staff or deploying existing
employees onto a graveyard shift.
Instead, some try to avoid trading when they know volumes will be
light such as major holidays.
Machines, meanwhile, are expected to become even more dominant.
Pragma has just launched an algorithm to trade non-deliverable
forwards, derivatives used to hedge exposure to illiquid currencies,
especially in emerging markets, according to Curtis Pfeiffer, chief
business officer at the firm.
Trading in illiquid, emerging market currencies was previously the
mainstay of voice traders.
“FX trading in banks is a tough business because spot trading is so
commoditized and revenues are squeezed,” said John Marley, a senior
currency consultant at Smart Currency Business.
“Moreover, banks have rolled back their proprietary trading desks due
to the extra capital required and lower risk appetite.”
Policymakers’ ability to understand and affect currency moves are
hampered by the freewheeling nature of the FX market, which is
unregulated, private and decentralised.
The ‘FX Global Code’ was developed by central banks and private sector
participants to promote a fair and open FX market but it is not
legally binding.
In comparison to equity markets, where regulators have been able to
introduce measures to try and tame wild price swings, policymakers in
the FX space are still at the discussion stage.
Flash crashes were on the agenda of two recent meetings of the Foreign
Exchange Committee, an industry group sponsored by the Federal Reserve
Bank of New York, and a gathering of the Global Foreign Exchange
Committee (GFXC) this month.
“It’s important for us to use this forum to understand flash events,
their causes, and how the principles of the Global Code can be applied
to promote a fair and efficient FX market,” Simon Potter, executive
vice president of the Federal Reserve Bank of New York and the chair
of the GFXC, told Reuters.
Central banks could potentially intervene to smooth out significant
and prolonged gyrations in currency markets but that would be
controversial.
“The primary mandate for most central banks is price stability and the
secondary mandate is financial stability,” said Nikolay Markov, senior
economist at Pictet Asset Management.
“As long as these intraday big moves do not impinge on financial
stability or drain interbank liquidity, central banks will monitor
these developments and are not supposed to react to intraday moves.”
It could also be costly — Britain’s failed defense of sterling in 1992
cost it around 3.3 billion pounds according to Treasury calculations —
and potentially futile.
“I doubt that central banks can do much to prevent the occurrences of
these flash crashes as previous incidents have been a result of a
complete drying up of market liquidity, resulting in some big moves,”
said Neil Mellor, senior FX strategist at BNY Mellon in New York.
“Unless those problems are addressed, we will continue to see such
price swings.”
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12-SEP-2016 :: Mirrors on the ceiling, The pink champagne on ice Africa |
If volatility spikes, positions are going to be reduced en masse. Or
to put it another way and to borrow the lyrics from the Eagles Hotel
California:
Mirrors on the ceiling,
The pink champagne on ice
And she said “We are all just prisoners here, of our own device” Last
thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
“Relax,” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “
What is clear is that we are at the fag-end of this party.
Home Thoughts
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@Ferrari's Hybrid Supercar Comes With a Combined 1,000 Horsepower @business Africa |
Ferrari NV unveiled its first production-volume plug-in hybrid, the
1,000-horsepower SF90 Stradale, as the supercar maker aims to keep
pace with tightening emissions regulations while still satisfying its
power-hungry customers.
The model will begin shipping in the first half of next year,
according to people familiar with the matter. It will be equipped with
three electric motors, adding 220 horsepower to a 780-horsepower V8
turbo combustion engine -- the highest output of any 8-cylinder in
Ferrari history, according to a statement Wednesday.
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.@DeLaRuePlc announces 2018/19 full year results De La Rue plc (@LSEplc DLAR) International Trade |
Performance excluding paper † Revenue increased 12% to £516.6m
Adjusted operating profit* increased 6% to £60.1m
HEADLINES
• Performance excluding paper †
o Revenue increased 12% to £516.6m
o Adjusted operating profit* increased 6% to £60.1m
• Further strategic progress
o Growth in Security Features and PA&T
o PA&T growth accelerated with multiple contract wins; on track to
double revenue
within 3 years
o Good progress on strategic review of ID business
• Next phase of the Group’s transformation underway
o Proposal on operating model reorganisation and transformation programme
announced today
o Divisional structure will optimise operations and provide future
strategic options
o Expected to deliver annual savings of in excess of £20m by FY22
partially mitigating
increasing competitive pressures in Banknote Print
• Balance sheet reflects increased net debt and reduced pension deficit
o Exceptional charge of £18.1m relating to a credit loss associated
with the outstanding accounts receivable of a customer in Venezuela
currently unable to transfer funds due to non-UK related sanctions
o Net debt of £107.5m (31 March 2018: £49.9m) primarily due to an
increase in gross accounts receivable of c£40m driven by the timing of
revenue and the balance due from Venezuela.
o IAS 19 UK defined benefit pension deficit reduced to £76.8m (2018: £87.6m)
• Proposed final dividend of 16.7p; full year dividend unchanged at 25.0p
• IFRS operating profit on reported basis was substantially lower as
FY18 included the benefit of the £80.5m gain recorded on the change in
indexation methodology on the UK defined pension scheme and FY19
included additional exceptional charges
“De La Rue has delivered revenue and profit growth in a year of
transition and progress for the company. Security Features revenue has
increased by 38% year on year, while PA&T revenue is on track to
double within three years. We are pleased to have won a number of
contracts with strategically important customers including HMRC in the
UK and the Kingdom of Saudi Arabia.
“The strategic review of our International Identity Business is
ongoing, and we are making good progress.
“As we look ahead, the conclusion of the UK passport contract in 2020
and the growing competitive pressure in the banknote print market
present some significant challenges for our business. To partially
mitigate against this, today we have set out a three year cost
reduction programme intended to deliver in excess of £20m in annual
savings by FY22. In addition, we will be proposing a reorganisation of
our business over the next twelve months designed to enhance our
strategic focus and generate greater efficiencies.
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The spread on the copper producer's $750 million of debt maturing in September 2022 rose above 2,000 basis points this week @markets. Africa |
The spread on the copper producer’s $750 million of debt maturing in
September 2022 rose above 2,000 basis points this week.
At 22%, the yield was 20 percentage points more than U.S. Treasuries
of an equivalent maturity.
These are levels almost unheard of in the bond world. Only nations
already in default, such as Venezuela, have dollar spreads and yields
as high as Zambia’s.
Argentina is in the second-worst position among emerging markets still
current on their Eurobonds, according to JPMorgan Chase & Co.’s
indexes, and its average spreads are roughly half Zambia’s.
It would be a bold move for any investor to buy Zambian assets.
Moody’s Investors Service last week downgraded the country to Caa2 --
eight steps into junk.
The economy is forecast by the International Monetary Fund to grow
2.3% in 2019, the slowest pace in more than two decades, and reserves
have fallen 50% in the past three years to just $1.4 billion.
The government’s attempt to seize copper mines from Vedanta Resources
Ltd. has only added to investors’ unease.
“Investing in Zambia’s high-beta Eurobonds is fraught with default
risk,” Gregory Smith, a fixed-income strategist at Renaissance
Capital, wrote in a note on May 24.
“We do not think the government will default on the Eurobond coupons
in 2019, especially as half the $237 million of coupons due in 2019
has been paid. However, recent events do increase the probability of
default in 2020 and in subsequent years.”
Some investors think prices are cheap enough to justify the risks. The
2022 bond rose 3 cents to 65 cents on the dollar as of 12:33 p.m. in
London, reducing the spread to 1,837 basis points and the yield to
20.4%. Zambia’s $1 billion of 2024 securities climbed 2 cents to 66.
Zambia probably needs a combination of an IMF bailout, a credit line
from China’s central bank, and a restructuring of loans from Chinese
lenders for the government to avert a debt crisis, according to Smith.
He estimates a recovery rate of between 60 and 74 cents on the dollar
if President Edgar Lungu’s administration does default, which it has
repeatedly said it can avoid.
Finance Minister Margaret Mwanakatwe told state TV Wednesday that
Zambia had made progress in talks with China to convert dollar debt
into yuan. She also said the Zambian and Chinese central banks were
working on a memorandum of understanding, without giving further
details.
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.@DDMabuza's strategic manoeuvres challenge both his boss's authority and the plans to reform the economy @Africa_Conf Africa |
'It is more like a chess championship than a wrestling match,' said a
close observer. 'There will be many calls of "check" but "checkmate"
seems a long way off.' The test of strength between Ramaphosa and
Mabuza could determine the future trajectory of the ruling African
National Congress and whether it can find a balance between attracting
foreign investment on the one hand, and alleviating poverty and
creating jobs on the other
The economy lingers at below 1% growth and needs to achieve 3-5% to
make an impact on rampant unemployment of 27% nationwide and over 50%
for youth
Ramaphosa's close association with Mabuza is seen as toxic by
investors and analysts alike. Mabuza, sometimes called 'the cat' for
his political survival skills, now hovers between the Jacob Zuma and
Ramaphosa ANC factions, having formerly been seen as a Zuma loyalist.
He delivered a key bloc of votes for Ramaphosa at the December 2017
ANC elective conference and was once one of the three influential
'Premier League' provincial premiers (AC Vol 58 No 21, Mabuza changes
the race). Aged 58, he has presidential ambitions of his own.
Mabuza's name has been linked to a series of scandals during his term
as Premier of Mpumalanga province including the rigging of state
tenders, bribery and having political opponents assassinated
The balance of power in the ANC's 'top six' has been painfully divided
between the warring factions. Mabuza, Mantashe and ANC
Treasurer-General Paul Mashatile are considered supportive of
Ramaphosa in varying degrees while Magashule and Deputy
Secretary-General Jessie Duarte, a Zuma loyalist, are seen as hostile.
The key battle now is over Mabuza. If he becomes Deputy President
again, it will mark a poor start for the president and cast a long
shadow over his new term of office.
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"Most of the companies you see here they done close," he sighs @TheEconomist Africa |
Long lines of lorries stretch like tentacles from Apapa port, the
largest in Nigeria. Drivers doze in their cabs, feet flung over
dashboards; some sling hammocks beneath the chassis. Musa Ibrahim, an
ebullient trader, says he has been queuing for two days. He gestures
at empty buildings. “Most of the companies you see here they done
close,” he sighs.
The Nigerian economy is stuck like a stranded truck. Average incomes
have been falling for four years; the imf thinks they will not rise
for at least another six. The latest figures put unemployment at 23%,
after growing for 15 consecutive quarters. Inflation is 11%. Some 94m
people live on less than $1.90 a day, more than in any other country,
and the number is swelling. By 2030 a quarter of very poor people will
be Nigerian, predicts the World Data Lab, which counts such things.
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"Baba Go Slow" #Nigeriadecides Africa |
It’s a Nollywood Level drama but permit me to give you some context.
GDP growth has lagged Population growth, GDP grew by 1.93 percent last
year, up from 0.82 percent in 2017 and grew 2.4 percent in the fourth
quarter. Nigeria was the second biggest economy in Africa in 2018,
using the market exchange rate of NGN362/$ or the biggest economy
using the fixed rate [@RencapMan]. Unemployment has risen from 8.2% to
23.1% under President Buhari's watch which would be a plain untenable
position for any incumbent Politician seeking re-election in most
parts of the World. The President is a victim of low oil prices which
provide 70% of government revenue. ''Baba Go Slow'' has to be
contrasted with President Al-Sisi's Egypt. Al-Sisi [and I for one
disagree with him on many things particularly with his
''incarceration'' strategy] made bold moves when it came to the
Economy. Egypt devalued its currency early, took a brutal punch in the
solar plexus but is now reaping the dividend from its bolder economic
policy, Nigeria is still muddling along with its ''Voodoo'' level FX
economics. Since President Buhari came to power in May 2015, Nigeria's
stock market has fallen more than any other in the world, dropping 50%
in dollar terms. There is a Message in that performance. The Stock
Market has perked up over the last few sessions, however.
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Kenya Fresh-Produce Platform @TwigaFoods Aims to Disrupt African Retail @technology Kenyan Economy |
Dar es Salaam, Lagos and Addis Ababa could be the next stop for a
Kenyan fresh-produce distribution platform in its quest to disrupt
food-supply chains in Africa.
Twiga Foods Ltd. aggregates farm produce and distributes it to vendors
at street corners or market stalls in the Kenyan capital, Nairobi,
through a mobile phone-based supply platform.
In the country’s fragmented retail market, where 90 percent of food is
sold through informal outlets, the tech startup is trying to create
efficiency to lower food prices.
“A banana in a Nairobi supermarket costs more than a banana in London,
while the average income of a consumer in the U.K. is 30 times
compared to Kenya,” Peter Njonjo, Twiga’s co-founder, said in an
interview in Nairobi.
“This is true for many African cities and our vision is to leverage
technology and organize a more efficient value chain that lowers food
prices.’’
Many Kenyans in the Nairobi metropolitan area, which has about 6.5
million people, spend an average of 45 percent of their disposable
income on food, Njonjo said.
Many cities on the continent face similar challenges - urbanization
outpacing infrastructure development, inefficient agriculture and a
fragmented retail industry, he said.
“If it works here, the key thing is we would want to find a way to
scale and get into those cities and offer the same products and
services,’’ he said.
Nairobi is growing into a tech hub creating solutions for problems
common in the developing world. In the past six years, Kenya received
58 percent of reported investment deals in East Africa, according to
the Africa Private Equity Venture Capital Association.
Twiga is first eyeing other East African cities, such as Dar es Salaam
in Tanzania and the Ethiopian capital, Addis Ababa. It plans to then
move on to Africa’s most populous city, Lagos, where Njonjo worked for
three years as Coca-Cola Co.’s regional head for West and Central
Africa before becoming Twiga’s chief executive officer.
“For us the icing would be Lagos,’’ he said. “We will remain very
centric to big urban cities, because that’s where the problem is
biggest.”
Twiga sources the fruits and vegetables from 17,000 farmers and
delivers directly to 180,000 informal retailers daily in Nairobi and
its environs, creating a predictable market for growers and reducing
transport costs for the vendors.
To beat Nairobi’s notorious traffic, the firm dispatches its trucks
early in the morning so they are at its neighborhood depots where it
distributes to kiosks.
Twiga will face a “formidable challenge” integrating logistics systems
in the other African countries they target, and uptake may be slow in
markets that don’t embrace change quickly, said Gerald Muriuki, a
technology analyst at Nairobi-based investment bank Genghis Capital.
In Nigeria, they’ll have to contend with perennial power shortages,
according to Eric Musau, head of research at Standard Investment Bank
in Nairobi. “It boils down to cost and how soon they can turn
profitable,” he said.
Other than distribution, Twiga is also working with selected farmers
to modernize food production and expects dispatches to increase to
200-300 metric tons per day by the end of the year from about 120 tons
currently, he said.
The company has raised $35 million from venture capital and
convertible notes since inception in 2013.
This year, Twiga will conduct a second round of financing to fund
expansion in Nairobi and another round in 2020 for growth outside of
Kenya, Njonjo said.
Existing investors include Wamda Capital, which had invested in the
Middle Eastern ride-hailing company Careem Networks FZ that Uber
Technologies Inc. bought for $3.1 billion in a cash and stock deal
last month.
“We have a good captive audience of investors we can walk this journey
with,” Njonjo said.
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