Last Week In Review: A Financial Roundup
Monday
BOE’s Greene Says Strong Consumer Could Renew UK Inflation
Bank of England (BOE) policymaker Megan Greene cautioned that a consumer-driven recovery in the UK could trigger inflation, but she expects more interest rate cuts as prices are improving.
Despite an expectation of more interest rate cuts as pricing improves, the much anticipated October budget has led to weakened consumer and business confidence. While the UK’s saving ratio is high, a reduction could boost spending and potentially fuel inflation, according to Greene.
Despite inflation falling to 2.2%, Greene remains concerned about persistent service inflation, which is still well above the BOE’s 2% target. She believes the neutral interest rate has risen since the inflation shock but did not provide a specific figure. Strong wage growth and rising retail sales suggest UK households have spending power, but inflation risks remain.
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Tuesday
Euro zone inflation dips below 2%, strengthening rate cut case
Eurozone inflation fell to 1.8% in September, its lowest since mid-2021, driven by declining energy costs and stable goods prices.
The dip strengthens the European Central Bank's (ECB) case for a rate cut in October. Core inflation, which excludes volatile items like energy, also eased slightly to 2.7%, reflecting slower service price growth. Investors now see an 85% chance of an October cut and expect further cuts by year-end due to sluggish growth, falling wage pressures, and lower oil prices.
The ECB has been raising interest rates to combat inflation. However, recent data suggests inflation is now below the ECB’s projections, prompting discussions about how quickly to ease borrowing costs.
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Wednesday
World conflict seen as biggest threat to markets
93% of banks and investment firms have cited geopolitical risks as the biggest threat to the UK’s financial system, according to a recent BoE survey.
This marks an 8% increase from a similar survey conducted in H1 2024, reflecting heightened concerns, particularly as the Israel-Iran conflict intensifies.
The Bank’s Financial Policy Committee (FPC) also warned of potential financial instability and market vulnerability with the brief sell-off in August, driven by US economic concerns and the unwinding of a yen carry trade.
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Additionally, hedge funds have accumulated record short positions of $1 trillion in US Treasury futures, a potential risk that the FPC remains concerned could lead to future market turmoil.
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Thursday
Live trials of digital asset transactions on Swift to start in 2025
Starting in 2025, financial institutions across North America, Europe, and Asia will conduct live trials of digital asset and currency transactions over Swift's global network.
These trials mark a shift from experimentation to real-world application, with the goal to create a unified platform by addressing the issue of fragmented digital platforms, or "digital islands," by providing a single system for cross-border transactions in both digital and fiat currencies.
With the digital asset market projected to reach $30 trillion by 2034, Swift is positioning itself as a key player in global interoperability. The trials will support payments, foreign exchange, and securities transactions, collaborating with central banks and projects like Project Agora. This move is critical for global adoption of digital currencies and assets.
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Friday
Active ETFs triumph over passives in fees from new flows
In 2024, actively managed funds will have captured over 70% of the management fee income from net flows into US-listed ETFs.
Passive ETFs and mutual funds surpassed active funds in assets at the end of last year, leading to $450 billion in outflows for active funds, while passive funds attracted $529 billion.
However, active managers are regaining ground, with active ETFs representing 28% of net flows this year, significantly outpacing their 8% asset share. Active ETFs generated $265 million in fee revenues, in contrast to $105 million for passive ETFs. This shift is attributed to the growing popularity of actively managed alternatives, particularly in crypto and options-based strategies.
Despite the momentum for active ETFs, industry experts caution that high fees can impact long-term performance, emphasising the need for investors to be mindful of the costs associated with these products.
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2moInsightful update, Guy. Swift trials when?