Show Report: FPL Opening Speaker Neil Warns About Health of UK Economy

The FPL EMEA Trading Conference, held on 28 February, addressed the growth in multi-asset trading, spread in connectivity and technology, need to serve the buy-side better, and the challenge of complying with regulations such as Dodd-Frank and the European Market Infrastructure Regulation (EMIR). But perhaps the starkest warning from the day was not about the avalanche of impending regulations facing financiers, but rather the dire state of the UK economy. 

There was a warning from the opening speaker, Andrew Neil, ex-editor of ‘The Sunday Times’ and a man who was tutored by his near contemporary, the UK Business Secretary Vince Cable at the University of Glasgow in the late 1960s, that the loose monetary policy in the UK has the potential to incubate a low wage, high inflation economy. In recent years, wage rises have not kept pace with the cost of living in the UK, depressing demand and creating a downward economic cycle in the country. 

Neil also warned that it could be dangerous to officially loosen UK inflation targets still further, as the incoming new governor of the Bank of England (BoE), Mark Carney, has stated he’d like to do, or to allow negative interest rates to become entrenched, as the deputy governor, Paul Tucker, is advocating. The BoE has already said its 2% inflation target won’t be hit until 2016, but many are sceptical if even this is achievable, warned Neil, with the rate currently running at 3% and as high as 5% on occasion. The alleged “triumph” of keeping interest rates low was also attacked as pretty hollow because the BoE is buying most of the government’s bonds via its Quantitative Easing (QE) programme, so the real market appetite for UK bonds is unknown. With 40% of UK government debt now owned by the BoE there is a reckoning to be had eventually, Neil suggested, and there were also a lot of “zombie companies” in the UK being kept afloat by cheap money. 

The situation for the British economy has, of course, already darkened following the loss of the UK’s triple-A rating from Moody’s in February. The European situation is not much better, warned Neil, with the EC warning the Eurozone recession will continue and the instability engendered by the Italian election threatening to reopen the Eurozone crisis

The EU’s Financial Transaction Tax (FTT) was also much discussed at the FPL EMEA Trading Conference on 28 February. The audience of traders, investors, technologists and financial market participants obviously took a keen interest in the proposals, which the UK Chancellor, George Osborne, has been unable to stop and which the US also opposes, alongside the EU plan to cap bankers’ bonuses

The sluggish performance of the UK economy was down to four factors, theorised Neil at the FPL EMEA Trading Conference, with the fall in consumer demand – as median wages in the UK have fallen back to 2003 levels – one of the primary causes. Other contributors to the “stalled engines of demand” that simultaneously failed after the 2008 crash and continue to ensure the UK economy bumps along the bottom, worrying treasurers and investors across the land, include: 

  • Public spending cuts, due to the necessary austerity measures to get government debt under control (the situation is the same in Europe added Neil). 
  • No export-led engine of growth in the UK, due to its ossified manufacturing sector.
  • A lack of a business investment engine, even though businesses have got “massive amounts of cash [reserves]”. 

According to Neil all these four potential engines of growth are stalled – “what the Americans would call a slam dunk” – and that is why the UK economy is underperforming. The same reasoning applies to much of the rest of the European economy of course. The downgrading of the UK by Moody’s was also referenced in regard to how this would further devalue the pound (GBP versus the dollar (USD) even though the markets had largely already priced in the move. 

US Perspective: Shale Gas Will Change Global Economic and Political Situation

Wrapping up his opening address at the FPL Conference, Neil said that the US and Canada will eventually be energy independent thanks to the discovery of shale gas and development of new sources of oil and energy that aren’t dependent on the Middle-East. He pointed out that when President Obama came to power only 10% of imported US oil came from the troubled region and by the time he leaves in January 2017 not a single drop will come from there. “They [the US] have found a shale gas reserve in North Dakota that has the greatest known energy reserve in the world,” said Neil, before going on to outline how this – allied to his Hawaiian birth and Indonesian upbringing – would allow Obama to be “the first truly Pacific President”, abandoning Europe to some extent, which will still be reliant on expensive Middle-Eastern oil but won’t have the US protecting the shipping lanes. 

These geopolitical changes are bigger than all of us and will impact corporations and nations alike, warned Neil, adding that the discovery of shale gas also means that the US can conceivably manufacture steel and make cars again competitively due to the cheap power. This is the real game-changer, and while the recent opening of talks on a EU-US free trade agreement is welcome news it’s not of crucial importance because global geopolitics is moving against Europe. 

Regulatory Burden

The delegates at the FPL EMEA Trading Conference from banks; asset managers; investors, including treasurers; trading venues; technology vendors and representatives of the FIX Protocol industry standard organisation that put on the show, turned to specific concerns affecting the financial markets after the opening address. Foremost in most minds appeared to be the imminent Italian Financial Transaction Tax (FTT), the existing French measures and the impending wider European FTT after much of the eurozone adopted the proposal on 14 February. As one of the panellists at the 11-11.45am session entitled ‘Are Regulators Demands Realistic’ put it, some financial market participants may avoid Italy now because the planned introduction of the FTT there has not been smooth, which ultimately damages liquidity. Treasurers need to be aware of these liquidity impacts and act accordingly. 

The regulatory panel, which included two FPL EMA representatives in Stephen McGoldrick, co-chair of the regulatory subcommittee and a director for market structure at Deutsche Bank and Chris Sims, co-chair of the business practices subcommittee and a consultant at Ignis Asset Management, went on to detail some of the huge regulatory – and consequent technological – challenges facing financial market participants, from treasurers to asset managers. The impending German law constraining cross-border high frequency trading (HFT) was discussed, alongside the EU’s second Markets in Financial Instruments Directive (MiFID II), which will lead to Organised Trading Facilities (OTFs) – essentially anything they missed the first time around when designing multilateral trading facilities (MTFs) under MiFID I. Each of these legislative items will have profound impacts on the future shape of financial markets: and this is only a small fragment of the avalanche of regulatory and market changes on the way following the 2008 financial crash.

Other sessions at the FPL EMEA Trading Conference in London concentrated on the post-trade move towards centralised counterparty clearing (CCP) usage for over-the-counter (OTC) derivatives, commonly used by treasurers to hedge. The need for more transparency post-crash was also discussed, alongside the promised EU-wide consolidated tape, which according to one panellist was “nowhere” as it wasn’t in the interests of market data providers. “It only happened in the US because of the Regulation National Market System (RegNMS) stipulations,” he added – an example, if any where needed, that sometimes regulation can help the market. 

The afternoon sessions at the 2013 FPL EMEA Trading Conference split into business and technical streams on ‘Managing Risk: A Standardised Approach’ and ones on ‘Transaction Cost Analysis (TCA)’ and execution quality measurement, not to mention the ‘Tectonic Shifts in FX Trading’ and the push for a common global ‘Legal Entity Identifier (LEI)’. The day ended with a presentation about ‘Understanding the Needs of the European Buy-Side Community’, which many a corporate treasurer no doubt has wished for in the past when dealing with the predominantly banking-based crowd. A fun address from the Australian rugby world cup winner and sporting celebrity, David Campese, wrapped up the Conference before delegates departed. 




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Mark Carney Bank of England