Last Week In Review: A Financial Roundup
Monday
AIM hit by sharp liquidity drop in further blow to London market
The UK's Alternative Investment Market (AIM) has experienced a significant decline in the average daily trading value of its listed companies' shares, dropping over 15% in the past year and 44% in three years, raising concerns over the stock exchange.
Various factors contribute to this, including high costs, volatility, and the appeal of private financing over public listing. Delistings are increasing due to low liquidity, leading to volatile share prices and difficulties in raising finance, with institutional investors hesitant to invest substantially in AIM companies due to liquidity concerns.
The number of firms listed on AIM has decreased by 30% since 2015, with delistings rising by 62% in the past year. AIM's trading volume has dropped, partly because UK investors are favouring US stocks over AIM's flagship companies, whose stock prices have plummeted. Overall, measures are needed to maintain AIM's attractiveness as a trading platform and investment venue.
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Tuesday
Race for Europe's first 'real-time' stock trade tape heats up
European banks, asset managers, and exchanges are competing to develop technology that can enhance the continent's capital markets, similar to the US's 'consolidated tape', which aggregates stock and bond prices.
The aim is to democratise market data access and enhance transparency. Yet, conflicts have emerged between exchanges and banks regarding market data pricing, with exchanges resisting a tape to safeguard their profitable data streams.
EuroCTP and Adamantia are the primary contenders for running an EU stock tape. EuroCTP is actively investing to initiate the construction of the tape, while Adamantia is conducting a feasibility study supported by 10 institutions from both buy- and sell-side sectors. Both entities are progressing towards the operational phase, with plans to commence testing by early 2025.
ESMA intends to solicit bids for a bond tape in the upcoming year, followed by a stock tape. Similarly, the UK's FCA is preparing for its own tapes. An Oliver Wyman report for FESE projects the construction of a European stock tape to cost €98 million ($105.09 million). Despite the expense, proponents argue that a real-time snapshot of prices would simplify cross-border trading and attract more investors.
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Wednesday
Maturities, portfolio maneuvers soften damage to banks' bond holdings
Banks are employing strategies such as maturing securities and portfolio management to mitigate the adverse impacts of rising interest rates on their bond holdings.
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According to S&P Global Market Intelligence, the waning expectation of rapid rate cuts has led to an increase in interest rates across the board, exacerbating unrealized losses on banks' available-for-sale (AFS) portfolios. For the top 15 publicly traded banks in the US, accumulated other comprehensive income (AOCI), which reflects these losses, deteriorated by $6.26 billion sequentially, reaching negative $144.52 billion in the first quarter.
Nevertheless, many banks have observed improvements in tangible common equity per share and year-over-year gains. To counteract losses, banks are restructuring their bond portfolios through loss trades and repositioning activities. Despite the ongoing rise in interest rates in the second quarter, which presents additional challenges for bond prices, markets anticipate a rate cut by the Fed later in the year, potentially impacting banks' investment strategies.
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Thursday
BOE and Markets Fall Into Line Over Prospect of June Rate Cut
After a period of disagreement between the Bank of England and markets over the direction of interest rates—influenced more by the US Federal Reserve than the UK central bank—alignment seems to now be evident.
Governor Andrew Bailey stated that a quarter-point reduction in Britain's benchmark lending rate to 5% is possible but not definite. He noted that reductions are probable "over the coming quarters."
Seven out of nine members voted to maintain rates, with two advocating for a quarter-point decrease. Bailey suggested that inflation may approach the 2% target soon, but more evidence is needed to confirm sustained low inflation before considering rate cuts.
The Bank predicts inflation to fall below target between April and June but rise to 2.6% later in the year.
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Friday
Fastest growth in two years lifts UK out of recession
The UK economy saw unexpected 0.6% growth in Q1 2024, marking its recovery from the 2023 recession. Strong services and car manufacturing performance drove this growth, surpassing Bank of England and economist forecasts.
The UK's growth outpaced both the Eurozone (0.3%) and the US (0.4%) for the same period; however, when compared to the US and Eurozone, the UK's growth is modest. Despite pre-pandemic per capita levels not yet reached, Chancellor Jeremy Hunt hailed it as proof of economic health, while Labour's Rachel Reeves urged caution.
Economic prospects are bolstered by falling inflation and improving conditions in continental Europe. March saw a significant month-on-month GDP increase, suggesting accelerating recovery momentum. Chief Economist at KPMG UK, Yael Selfin, says falling inflation and a real-term pay increase would help growth continue for the rest of 2024.
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