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City warned EU will do London no favours on financial services

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The former minister leading the UK government’s review into the City has warned that Brussels is targeting London’s position as a global financial services centre and has predicted the EU will not grant British-based firms the highly prized access they are seeking to the European market.

Jonathan Hill, also a former EU financial services commissioner, said it was not in Brussels’ interests to allow London to continue to dominate the European financial market in the way it did before Brexit.

“Given that their strategy is to build up the EU, why on earth would they?” said Lord Hill, who is drawing up a series of reforms to the City’s stock market listings regime aimed at attracting more fast-growth and founder-led tech businesses. “The EU will not do us any favours.”

The EU and UK have agreed that following Britain’s departure from the single market on January 1, decisions on access to each others’ markets in financial services will be based on each side declaring unilaterally that the other side’s regulatory systems are “equivalent” to its own. 

So far Brussels has granted the UK time-limited equivalence on two of the roughly 40 different financial areas where London is seeking market access. The EU has given no further indication on when it will take more equivalence decisions.

Despite this, Lord Hill said Britain had an advantage outside the EU in being able to move more quickly when regulating to attract the next wave of companies in growing industries such as digital, fintech and green finance.

“We should be able to do this quicker, more proportionately, more flexibly, than you can at EU27,” he insisted.

He added that it was “striking” that London was still dominant in the region even after “four and a half years of political paralysis”, pointing out that no single European city had been able to capitalise on Brexit.

“The hopes my old European mates had that this would lead to the re-emergence of a European capital markets centre to compete with London has not happened,” he said. Lord Hill stood down from the European Commission in 2016 following the Brexit referendum.

“The bits of business that have left London have fragmented across Europe: to Amsterdam, Brussels, Frankfurt, Paris, Dublin. That says our competition is American and Asia so let’s see what they are doing.” 

Brexit should be used as a chance for the UK to position itself for the future, he said. “There is a necessity to think about London’s position as a global financial centre after Brexit. We need to signal that things are changing.”

He said that the review into the stock market listings regime — which will be published next month — would be part of a broader look at whether the City of London was competitive with global financial centres in the US and Asia.

“We should use this review as an opportunity to look at some of the broader questions: how could we improve the whole ecosystem, build strong and deeper capital markets? . . . how can we make the whole system work better?”

Lord Hill has consulted widely with industry. People involved in the consultation said the review was likely to back the reduction in the requirement for free float and allow founders to have greater control of their businesses through a dual class of shares. Both measures are seen to be attractive to the sorts of fast-growing tech companies that London wants, and are already offered by exchanges elsewhere.

Lord Hill declined to say what the review would conclude, but added that the “key point is that we need to attract the growth businesses of the future and they are operating in a global market where there is a lot of competition for them”.

By ensuring that the UK does not “miss out on this moment of tech companies setting up, looking to grow”, this would lead to an “ecosystem” of better research and access to capital.

He warned against any knee-jerk “bonfire of red tape” but said it was crucial that the UK moved fast to deliver reforms, pointing at data showing that London was losing out to the US and Asia for the biggest and most exciting IPOs. 

Asked about areas such as dual share classes and free floats, he said: “You can see that other global high-standard jurisdictions think about them slightly differently than we think about them in the UK. If one does recommend changes then it’s how one can put safeguards in, phase them in and balance interests.”



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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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