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London’s sway in Europe put to test as rival hubs make trading inroads

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London’s once-unquestioned dominance of European financial markets is being tested as trading spills beyond the UK’s borders following the end of the Brexit transition.

Data released this week revealed the speed at which the UK can lose its grip on key parts of Europe’s financial services industry.

Trading in stocks and derivatives — markets where London has long taken a leading role — has flowed out of London in the six weeks since the Brexit transition period expired. Amsterdam, Paris and New York have all gobbled up market share, according to data released in recent days.

With financial services omitted from the UK’s trade deal with the EU just before Christmas, banks, brokers and fund managers have swiftly grown accustomed to far more basic and inefficient terms for cross-border trade.

Some executives and bankers worry that the patterns established in recent weeks are beginning to set the parameters for the relationship between London and Brussels over the longer term.

Steven Maijoor, outgoing chair of the European Securities and Markets Authority, said at a Financial Times conference this week that he suspected the share trading shifts were “going to be a permanent change”.

In one of the most symbolic changes in leadership to date, Amsterdam supplanted London last month as Europe’s main share trading hub, after dealing in EU companies moved back to the bloc.

So far in February there has been an average €8.7bn a day traded in the Dutch city, compared with €7.8bn on venues in London, CBOE Europe data show. Last year London traded an average of €17.6bn shares a day and Amsterdam languished behind Paris, Frankfurt and Zurich, with just €2.6bn.

Bar chart of Average daily volume (€bn) showing London loses crown as Europe's share trading centre

Trading in euro-denominated swaps, a $1.6tn-a-day global market that was a City mainstay, also began leaving in the run-up to the UK’s departure from the single market as EU banks dealing derivatives in London were caught in a stand-off between London and Brussels over greater oversight of their activities.

New York has swept up the majority of business with $4tn of deals moving out of Europe to US marketplaces in the four weeks, according to Clarus FT, a data provider. Intercontinental Exchange said on Monday it will transfer the EU’s €1bn-a-day carbon emissions trading market from London to the Netherlands, although clearing will remain in the UK capital.

While the move in trading away from London has been rapid for some securities, many UK bankers and asset managers are sanguine.

“I’m not a ‘declinist’ about London’s future,” said Paul Marshall, a supporter of Brexit and co-founder of London-based Marshall Wace, one of the world’s biggest hedge funds.

“Irrespective of where trades are booked — and there is bound to be some shift due to the protectionist attitude of the EU — most of the money should continue to be managed from London,” he said. Sir Paul added he expected issues facing the City to be “looked after” by the government in due course.

Line chart of Market share (%) showing UK trading venues fall below US and EU in euro swaps trading

The impact of Brexit on London’s large fund management and hedge fund industries has been muted so far.

While some managers have had to set up offices or use the services of a third-party company in the EU, very few have left the UK.

While Esma, one of the EU’s main financial watchdogs, has recommended tightening rules that allow UK managers to run EU-based funds, few executives see this as a major threat because such restrictions would also hit US and Japanese fund managers.

Bankers also said the move in trading would have only a subtle effect, at least initially, since modern day trading is mostly done on computers. “The euro share and derivative trading that has moved elsewhere is a tiny sliver of the global pie. Tiny. None of my people are moving to Amsterdam from London”, one bank executive in the UK said.

The trading moves “are significant but they are not the harbinger of doom for the City of London,” added William Wright, head of think-tank New Financial.

In most other areas of the City the effect is “not black and white”, he said. “I don’t think we can read too much from these two examples to the longer-term impact of Brexit on the City,” he added, referring to share and derivative trading.

Line chart of Market share (%) showing London loses ground in sterling swaps trading

For the UK, better terms of access to the vast single market relies on Brussels judging the UK’s regulation and supervision to be as good as its own, under a system known as equivalence. Granting a range of permits would make it far easier for brokers to conduct cross-border business and sell services to EU customers.

The City is holding out little hope that coming discussions on financial services between Brussels and London will yield much of substance. The two sides have committed to trying to find an accord by the end of March. Some firms have decided not to wait: investment bank Numis announced this week that it would open an EU office within 12 months.

Brussels is keen to assert its own financial independence from London and is wary of the extent of UK plans to deviate from EU laws. Andrew Bailey, governor of the Bank of England, weighed in this week, arguing that “now is not the time to have a regional argument.”

But the current flow of business to the EU may energise the bloc’s policymakers to extend their current stance. Leonard Ng, a partner at law firm Sidley Austin in London, said banks and fund managers may wait only a short period before moving on.

“If equivalence isn’t granted in the next three-six months, things will get settled and then banks won’t want to change back,” he said.

He added that the UK could strike out on its own path without equivalence. “But there’s no point in having better infrastructure if you don’t have clients,” he said.

Some bankers warn that the early shifts should not be underestimated over the longer-term. “The European Central Bank over time will insist on banks creating holding companies inside the EU, just as the US has done,” said the chief executive of one UK bank.

“One can imagine that in 10 years London will be a subsidiary of Paris, not the other way around. Banks will want to locate as much as they can of central costs in the holding company to take advantage of economies of scale. I am not being pessimistic, I am being realistic,” he said.



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Financial bubbles also lead to golden ages of productive growth

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Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

john.thornhill@ft.com



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US tech stocks fall as government bond sell-off resumes

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A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



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UK listings/Spacs: the crown duals

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City-boosting proposals are not enough to offset lack of EU financial services trade deal



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