Paris is home to many things, the Eiffel Tower, the Arc de Triomphe, burgers (ok, I made that one up!). In recent years, Paris’ financial community has grown, and indeed, every visit to Paris, there are an ever increasing number of firms who are interested in our services in economic forecasting at Turnleaf Analytics. Over the past few days, it was also home to the Fixed Income Leaders Summit in Europe, which brought together a large number of market participants, from the sell side, buy side and vendor space. Turnleaf Analytics was at the event, and I would like to say thanks to everyone who came by our stand to hear more about how we use machine learning and alternative data to do economic forecasting. I’d also like to thank everyone who came to my panel on fixed income and private markets.
In this article, I’ll try to give some of my takeaways from a few of the discussions at the event. Many of the panels were under Chatham House rules, so as a result, I’ll try to give a general flavour of discussions, as opposed to any direct quotes for those specific discussions. The sessions were spread across a multitude of different areas. Some focused mostly around the execution part of the puzzle in fixed income, discussing subjects like the relationship between buy/sell side, market structure etc. whilst other subjects were more related to the overall macro picture and views for the near term around inflation, central banks and of course the US election.
Jatin Vara (Blackrock) LHS and Yannig Loyer (AXA) RHS
The first session of the main day was centred around the relationship between the buy side and sell side, in the context of the evolving tech landscape. Moderating the discussion was Henri Mills (UBS), with panellists Jatin Yara (BlackRock), Yannig Loyer (AXA) and Peter Welsby (Manulife). The key point was that the relationship was not purely a question of execution, even if that was an important part of the jigsaw. The sell side provides other services, ranging from idea generation, syndicates, prime services, research etc. It is possible to monitor a bank’s ideas, and if they are profitable a value can be attributed to them. The theme of consistency came up repeatedly many times during the conference. Whilst a bank could provide liquidity during the calm times, what about during times of market stress? On the subject of execution, best execution was obviously key, the ability to offload risk being part of that. Banks needed to be able to identify where they were best. Broker reviews could help as part of that. Ultimately the relationship needs to be a 2 way street, so buy side also needed to say what they were doing. The environment is becoming more challenging, in terms of regulation, alpha generation etc. Whilst technology was changing things, relationships are still very important especially during times of market stress. New entrants are welcome (eg. non-bank market makers), and encourage innovation, helping the buy side get better pricing, and also causing banks to rethink how they show liquidity.
A market insights interview saw Enrico Bruni (TradeWeb) interviewing Philip Stafford (FT). Stafford noted that there had been a growth in the buy side and also principal market making firms, specifically citing firms like BlackRock, Citadel and Jane Street. This has resulted in investment banks rethinking their models. Some of the big hedge funds didn’t necessarily need “ideas”, they wanted liquidity. The big story he noted was a large principal trading firm making 1bn USD on Indian options. Whilst regulations had been a big driver in recent years, with MiFID and the consolidated tape, Stafford, felt other areas were now driving change, such as AI, crypto etc. He noted also that tokenising an asset in isolation didn’t really make a difference, but using that token for collateral mobility could be. Whilst solutions like Tether, might not have regulatory approval, tokenised money market funds are close to digital cash.
Philip Stafford (FT)
David Bullen (Longwood) moderated a panel on market structure featuring Carl James (S&P Global), John Showell (Mosaic Smart Data) and Corentine Poilvet-Clédière (LSEG). The panel was kicked off with a poll of the audience, which identified primary markets as a particular area of interest. James suggested he was not surprised by the result, and discussed S&P’s tech solution for primary markets, which has 700 buy side clients and 200 banks on the issuing side. He suggested the industry needed to adopt the solution and electronify this area of primary markets, and they had done integration with a number of platforms such as Charles River. He later noted that the primary market dataset generated from the platform is owned by users. Showell meanwhile discussed the process of cleaning through large amounts of data held by Euroclear. Euroclear sit on a large amount of settlement data. Once the dataset is cleaned, normalised, it can be turned into a dataset that is useful for the front office. Essentially, it can give the buy side a better understanding of liquidity. The use cases include market colour reports, also understanding trading around events, like elections, and more broadly what has been traded.
ETFs in fixed income have grown massively in recent years. It was perhaps unsurprising that there was a panel on the subject. The panel was moderated by Theo Andrew (ETF Stream), with panellists Raphael Stern (Invesco), Lucette Yvernault (Fidelity International), Laura Carlyle (BlackRock), Silvia Bosoni (Euronext) and John Olivares (ICE). One important point which was mentioned was the way that fixed income ETFs brought transparency, and they helped with liquidity. It was possible to use them for instant risk transfer with low touch fixed income flow. There were also alternative liquidity providers active in this space. It was a large segment of the market both in Europe and the United States. There were also actively managed fixed income ETFs. However, even the passive ETFs was perhaps a misnomer, because there are lots of active decisions that need to be made to minimise the tracking error. There were also some benefits for ETF users versus futures, given they did not have to be rolled. There were also a larger number of ETFs now, for example catering for target maturities.
John Olivares (ICE) LHS, Laura Carlyle (BlackRock) centre and Silvia Bosoni (Euronext) RHS
There were also several panels discussing the macro picture. The global investment cycle panel was moderated by Dan Barnes, and featured panellists Iain Stealey (JPM AM), Olivier De Larouzière (BNP AM) and Anna Maria Reforgiato Recupero (Generali). Stealey noted that the investment cycle was one that no one had seen, with COVID, then the euphoria of leaving that behind, and now we are coming out the other side, and reaching a normal cycle. Inflation is understand control, and there’s a shift in central banks towards looking at activity. The Fed has moved, but so have ECB. Whilst rates have been very high, their impact is starting to to feed through. Central banks are keen no allow for a recession, and Powell wants a soft landing. The environment is good for most asset classes, given the inflation picture and easing. Whilst the Fed impacts everywhere, EM central banks typically don’t have the same impact. They were early to hike and cut, but also paused. De Larouzière suggested that whilst central bank balance sheets are still far more normalised. We saw the inverted yield curve. There was room for steepening, but at the long end of the curve, what about the size of the debt? Central banks were lenders of the last resort. Recupero said that we had an idea of where we’ll land. US CPI is comfortably around 2pc, but debt levels was high. In France, there were concerns about the size of debt.
Also on the macro side, Dan Barnes interviewed Desmond Laurence (SSGA). Laurence noted that whilst central bank policy had been reasonably effective, there was also an element of serependity, with energy prices rolling over. There was also a different impact from rate hiked in US versus Europe. In the USA, there was a lot of fixed rate debt, hence, the impact of rate hikes had been less. Whilst the consensus was for a soft landing, Treasuries in the longer end at 3.5% seemed be suggesting a harder landing. The political picture could also impact markets, for example a possible stagflation scenario if Middle East tensions persisted. On the US election, whilst a Trump victory could impact inflation, the long end of the rates and the dollar (strengthening), it would depend on a Republican sweep (ie. winning not just the presidency, but also Congress and Senate).
Graeme Leach meanwhile presented his outlook on both macro and geopolitics. His view was an out of consensus take on a hard landing. It was driven by a contraction in the money supply which had yet to feed through. Historically he noted this tended to result in recesssions. Also the yield curve has inverted and in the past once the curve reverses its inversion, that has typically been the time when the economy has gone into recession. Recessions also tended to follow the lows in unemployment. On the US election, he felt it more likely that Trump would win. Biden’s lead at this stage in 2020 was around 7% and he finally won by 4/5%. This time around Harris’ lead is tighter at 2%. Maybe pollsters underestimated Trump in the past, but not now? Leach was not convinced by that argument. Indeed, party identification was more with the Republicans.
I enjoyed the conference, and it was great opportunity to catch up with other market participants. Let’s see what markets will be about this time next year, and if the themes at next year’s Fixed Income Leaders Summit will be different!
Iain Stealey (JPM AM) LHS, Olivier De Larouzière (BNP AM) centre and Anna Maria Reforgiato Recupero (Generali ) RHS