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The EU’s financial markets watchdog wants expanded powers to oversee major stock exchanges and other critical parts of the bloc’s financial infrastructure, as it bids to become a European version of the US Securities and Exchange Commission.

Verena Ross, chair of the European Securities and Markets Authority, said “there is clearly a political appetite” in the newly appointed European Commission to centralise more EU financial market supervision as part of a renewed push to revive the region’s struggling capital markets.

“Let’s evaluate in which areas it would make sense to move a step further to central EU supervision. We need to look particularly at all the cross-border systemically important infrastructure players,” Ross told the Financial Times, adding this would include exchanges, clearing houses and settlement systems. 

Esma was launched in 2011 to improve harmonisation of rules across the EU but most of its financial market activities continue to be supervised by the bloc’s 27 national authorities.

Paris-based Esma directly supervises relatively few entities, such as credit rating agencies, non-EU central counterparty clearing houses, securitisation repositories and benchmark administrators.

The idea of transferring more powers from national authorities to Esma has gained momentum in recent months as Brussels officials look for ways to boost capital markets activity to help finance an estimated €800bn of extra investment needs.

Mario Draghi, the former European Central Bank president, last month identified the transformation of Esma into a version of the SEC as “a key pillar” of boosting Europe’s capital markets in a landmark report on how to boost the EU economy.

Draghi said: “Esma should transition from a body that co-ordinates national regulators into the single common regulator for all EU security markets” by giving it power to supervise large multinational issuers, cross-border financial markets and all central counterparties.

Some smaller EU countries such as Luxembourg and Ireland have opposed the idea, fearing it could undermine their thriving financial sectors.

But Ross is convinced that the shift would improve the efficiency of Europe’s financial markets for both investors and issuers.

“Having an effective regulatory and supervisory framework has a big impact on making a single capital market work, and we don’t have that in Europe. So that is one of the areas that we need to focus on,” Ross said.

In a nod to the criticism from smaller countries, she said a “step-by-step” process of building up Esma’s powers was preferable to trying to turn it into an all-powerful European SEC overnight.

“It is more about thinking practically. We shouldn’t forget that the EU markets are quite different from the US markets in terms of the diversity of the legal systems,” she said. “Let’s make an EU central supervision role happen where it makes most sense at this point.”

The process could start by handing Esma more powers to supervise the “bigger, cross-border players” such as Euronext and Deutsche Börse that were “often servicing not just one country or a couple of them but genuinely serving investors across all the EU”, she said, adding that smaller markets and companies would continue to be supervised locally.

She suggested the EU missed an opportunity with its landmark crypto markets regulation, which comes into force at the end of the year but will leave oversight of companies in the hands of national authorities. “Would it have been more effective to have done it at an EU level? That was a debate we had at board level,” she said.

Draghi also called for Esma to strengthen its independence from national authorities that hold most of the voting positions on its board, by introducing independent members similar to those sitting on the ECB’s supervisory board, which oversees major Eurozone banks.

Ross rejected this, saying “the governance structure works pretty well at the moment”. It was important “to ensure that the national supervisors are fully part of that decision-making because a lot of the implementation is at national level,” she added.

Money makes the business world go around, but there is more to successful businesses than profits.

Financial advice firms are increasingly aware of their social responsibilities and are meeting them in numerous ways, from pro bono and charity work to B-Corp certification, which assesses the social and environmental impact of business practices.

Some firms are focusing their efforts on addressing the ‘advice gap’, where people who would benefit from financial advice cannot afford it.

It starts off about financial advice, but it will have a social impact. That’s why, for us, social enterprise is a win-win

But could social enterprises — businesses that trade for a social and/or environmental purpose — provide a longer-term solution?

A different approach

Social enterprise entrepreneur Nicole Bremner — who qualified as a non-practising financial adviser in Australia — is setting up a community interest company, Your Prosperity Group, to tackle the UK’s advice gap.

Bremner was motivated by seeing how distressed an elderly customer in a high-street bank had been as he insisted on making a payment to the bank or risk losing his life savings.

He did not receive the support he needed from the bank, and Bremner could not get this out of her mind.

Social enterprises rely on volunteers — but how do you maintain the quality and consistency of what is provided?

Drawing inspiration from the business model of family lawyer Jenny Beck, co-founder of Beck Fitzgerald, Bremner thought about partnering with financial advisers and other professionals to provide guidance to people who could not afford advice, supported by a reasonable fixed-fee model for those who could afford to pay.

At Your Prosperity Group, guidance will be free where a person’s net assets or household income are less than £35,000 a year — the average UK income.

Above this amount, a one-off fee of £1,499 is applicable, with follow-up meetings at £499 or an optional subscription of £35 a month.

“There is a mass of clients with less than £30,000 to invest who don’t need regulated financial advice,” says Bremner. “For them, it’s about debt and whether they should pay down their mortgage — it’s financial guidance, not advice.

If you’re improving financial literacy within communities, cities and countries, what is the social return on that investment?

“It’s very early days [with the company], but the way I want to do it is, if [someone goes] to a financial adviser and has only £10,000 to invest, the adviser can say, ‘We can assist you,’ and refer the client to us.”

If the client’s circumstances change, says Bremner, and they need regulated advice — for example, if they inherit a large pot of money — they will be referred back to the financial adviser.

She also wants to create a panel of trusted financial advisers for clients who go directly to Your Prosperity Group but need regulated advice later on.

The challenges

Chris McCullam, investments director at consultancy firm Altus, says the social enterprise route is an interesting way of tackling the advice gap.

However, he thinks it is not without challenges, such as delivering at a price that works for the mass market, and the availability of people who can deliver the service.

“Social enterprises rely on volunteers — but how do you maintain the quality and consistency of what is provided?” he asks.

There will be more prosperity, less crime and less vandalism as people understand the role of job creators and the role that business plays

“There are plenty of professional services that do pro bono work, but the nature of the work we’re in is a commercial enterprise.”

McCullam says people do what they can to help while making a living for themselves, but there comes a point where that becomes unsuccessful.

“It’s about getting the balance right,” he says.

Benefits for all

Practical considerations aside, we would all potentially stand to benefit from better access to financial guidance or advice.

“If you’re improving financial literacy within communities, cities and countries, what is the social return on that investment?” says social entrepreneur Claudine Reid.

There are plenty of professional services that do pro bono work, but the nature of the work we’re in is a commercial enterprise.

“There will be more prosperity, less crime and less vandalism as people understand the role of job creators and the role that business plays.”

As Reid points out, if local businesses are prosperous, they will create jobs for people, provide work experience for those in education, and so on. From a financial adviser’s perspective, this could increase the number of paying clients.

“It starts off about financial advice, but it will have a social impact,” says Reid. “That’s why, for us, social enterprise is a win-win.”

This article featured in the October 2024 edition of Money Marketing. 

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Good morning. Nuclear energy stocks have soared to record highs on the back of big tech’s demand for green energy. Will this be the start of a new chapter for the technology? Or will regulation, accidents, and popular opionion get in the way? To adapt J. Robert Oppenheimer’s quoting of the Bhagavad Gita: “I am become uncertainty, ruler of markets.” Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.

Soft landing vs no landing

Recently there has been some debate across the financial-economic punditocracy about whether we are experiencing a “soft landing” or a “no landing” scenario. In a soft landing, growth slows but recession is avoided, while inflation returns to a low and stable level. In a no landing scenario, growth doesn’t slow and inflation remains either a worry — volatile, and not quite down to target — or an outright problem.

The difference matters. In a no landing scenario, the Fed has to keep the policy rate relatively high, which squeezes the rate sensitive and cyclical parts of the economy, as well as indebted consumers. Anyone who owns longer-duration fixed income is likely to feel some pain, and in equities, sectors with inflation-hedging characteristics — materials, for example — will do better. 

For a long time Unhedged has felt very confident that growth was falling gently and inflation was all but over with. Even just a few weeks ago, we were pretty dismissive about the odds of no landing. But our confidence, it pains us to admit, is wavering a bit. And it appears we are not alone. In the latest Bank of America fund manager survey, no landing remains a tail risk, but the tail is twice as wide as it was a month ago:

A summary of the recent growth data that is forcing this rethink:

• September’s stronger jobs report.

• September’s strong retail report, which showed 5 per cent annualised growth and cemented an accelerating pattern: the three month average rate is now higher than the six month rate, which is higher than the 12 month rate.  

• What we heard in the big banks’ earnings reports. JPMorgan’s CFO: “spending patterns [are] solid and consistent with the narrative that the consumer is on solid footing and consistent with the strong labour market and the current central case of a kind of no-landing scenario economically”; Bank of America CEO “[Consumer] payments were up 4 to 5 per cent year-over-year. The pace of year-to-year money movement has been steady since late summer . . . this activity is consistent with how customers are spending money in the 2016 to 2019 timeframe when the economy was growing, inflation was under control.”

• Wages are growing at a 4 per cent clip that has not slowed since April. 

• Markets’ increasing bullishness, which both reflects the economic growth and contributes to it. 

On the inflation side, there are a million ways to cut the data, but it is pretty clear that progress on inflation has slowed significantly; we have been stuck at 2.5 or 3 per cent for a few months now. Over at The Overshoot, Matt Klein gathers the various measures of CPI inflation with volatile components removed, and shows that 2024 looks a lot like 2023:

PCE inflation, which the Fed cares most about, is a bit better, but also appears to be stabilising a bit above target. The New York Fed’s model for the trend in PCE inflation is at 2.6 per cent:

Unhedged remains in the soft landing/inflation is over camp, and can point to various factors on both the growth side (manufacturing, housing, small business confidence) and the inflation side (shelter inflation finally coming down) to offset the uncomfortable warmth of recent data points. More importantly, zooming out, it simply makes sense that the economy should slow and inflation cool as we approach the five-year anniversary of the pandemic, especially in the context of a world economy that’s not all that great. There is no denying, however, that very recent trends are not supportive of this picture. 

Prediction markets

According to cryptocurrency-based prediction exchange Polymarket, Trump’s odds of winning in a few weeks are 60 per cent, while Harris is hovering around 40 — a much bigger lead than the neck-and-neck swing state polls would have you believe. Other popular US prediction markets PredictIt and Kalshi also show Trump ahead, but by a smaller margin.

Are election prediction markets accurate? Early iterations in the US were often on the mark, according to a historical study by Paul Rhode at the University of Michigan, predicting the winner of the US presidential race 11 times out of 15 in the late 19th and early 20th centuries. But election markets have been more or less banned in the US since the 1940s — this election will be the first in decades with tacit federal approval for elections futures exchanges. 

A better way of asking the question is: are the markets more accurate than polls-based models, like those put out by 538 and The Economist? We’d like to believe that markets know better, but the evidence is mixed. In a recent study, elections-betting expert Rajiv Sethi at Barnard College built virtual traders that mimicked the polls-based models, in order to see their profitability relative to other market participants. Sethi found that his virtual traders did relatively well, suggesting that the polls are at least as prescient as the election market consensus.

But as Sethi pointed out to Unhedged, “forecasting accuracy is incidental to the business model” for these exchanges. Stocks’ valuations are supposed to represent underlying value and future cash flows, but are pulled around by hype cycles, market narratives, and short-term traders. Election prediction markets have all that too, and some additional structural problems that could make them even worse. They are not particularly liquid; according to reporting by our colleagues, $30M in trades by four accounts helped swing Polymarket’s US elections market by up to 10 points this month. Plus the market participants are not particularly representative of the electoral base. According to Justin Wolfers at the University of Michigan, bettors on these exchanges are “more likely to be white, male, and Republican”, and the exchanges are not restricted to US voters.  

That does not mean these markets are useless. They incorporate new information quickly. By asking “who will win” rather than polls’ “who will you vote for”, they may also prove a better read of the popular mood. And for traders, they offer a very straightforward hedge to a particularly unpredictable and consequential US election this year.

Due to their structural issues, and because they are still still new, we would not put too much credence in the absolute levels of the election markets in this cycle. But there is clearly some information in these nascent markets, and swings could be good directional indicators, provided they are not driven by just a few big bets.

(Reiter)

One good read

Bhutan.

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ANGELA Rayner is gearing up for a housing revolution, promising to double the number of council houses built.

The Deputy Prime Minister is expected to unveil nearly £1 billion in next week’s Budget to kickstart the construction of tens of thousands of new homes.

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But the cash boost is expected to be just the start, with even bigger sums expected in next spring’s multi-year spending review.

Ms Rayner believes council housing is crucial for Labour’s target of 1.5 million new homes in the next five years.

Her team is arguing more council homes could slash the £9 billion benefit bill and cut the cost of temporary housing that’s crippling council budgets.

As part of her house building plan, the Housing Secretary is also set to crack down on the Right to Buy scheme, which has seen thousands of council homes sold off at massive discounts.

The Deputy PM wants to drastically reduce these discounts and tighten the rules, meaning tenants will need to live in their homes for ten years – up from the current three – before being allowed to purchase.

For newly-built council homes, the option to buy could be scrapped altogether, preserving much-needed social housing stock.

These moves are designed to stop the steady drain of social housing, with 23,000 homes being lost each year due to sales, demolition, or conversions, while only 11,000 are built.

Ms Rayner is determined to reverse this trend by 2026.

This is despite her buying her council house using the Right to Buy scheme in 2007 with a 25 per cent discount, making a reported £48,500 profit when selling it eight years later.

Backing her plans is Chancellor Rachel Reeves, who has agreed to top up the housing budget with up to £1 billion.

Despite disagreements over local government funding, both Ms Rayner and Ms Reeves appear united when it comes to tackling the housing crisis.

A senior government source told The Times: “Angela’s ambitions on social and council housing have the full backing of the prime minister and chancellor, and that will become even clearer in the weeks ahead.

“They are joined at the hip when it comes to getting Britain building.”

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China unveiled some of its biggest cuts to benchmark lending rates in years as the government stepped up efforts to reboot the economy and hit its year-end target of about 5 per cent GDP growth.

The People’s Bank of China said on Monday that the country’s one-year loan prime rate would be reduced to 3.1 per cent from 3.35 per cent, the biggest reduction on record, and the five-year LPR would be cut to 3.6 per cent from 3.85 per cent.

The rates have acted as the underlying reference for consumer or business loans and mortgages, respectively, since 2019. They were last cut in July and follow a blitz of easing measures announced in late September that mark the government’s most forceful intervention since the pandemic.

Widely anticipated against that backdrop, Monday’s cuts underscore growing urgency among policymakers to restore confidence in an economy grappling with a property slowdown, deflationary pressures and weak consumer demand.

“Today’s move echoes our view that the PBoC will be cutting rates more decisively,” said Becky Liu, head of China macro Strategy at Standard Chartered.

The September package, which included reduced mortgage rates and support for the stock market, came amid mounting pressure on policymakers to hit a GDP growth target of about 5 per cent for 2024.

Economists have widely called for more intervention, including fiscal stimulus and more support for households. China’s latest GDP figures on Friday showed growth of just 4.6 per cent in the third quarter.

“A meaningful turnaround in economic growth would require a larger fiscal response,” said Zichun Huang at Capital Economics, in response to the cuts.

Monday’s cuts were at the upper end of a range signalled by Pan Gongsheng, PBoC governor, on Friday when he reiterated the prospects of further easing before the end of the year.

In September, he announced cuts to China’s seven-day repo rate, another lending benchmark. The reserve requirement ratio, which influences bank lending, was cut 50 basis points that month, leaving the average rate across banks at 6.6 per cent. It could be cut by another 25-50 basis points.

Liu at StanChart pointed to a September statement from the politburo, China’s top leadership group, on the need to “implement forceful rate cuts”, which were “the first time ever for such precise guidelines on central bank interest rates”.

UBS on Monday raised its full-year target for China’s GDP growth to 4.8 per cent. “Both household and corporate confidence may be helped by expectations of more policies and property market stabilisation,” said the bank’s chief China economist Tao Wang.

China’s CSI 300 index of Shanghai- and Shenzhen-listed shares rose 0.3 per cent in volatile early trading on Monday. The CSI 2000 index of small-cap companies outperformed with a 2.8 per cent gain. Hong Kong’s Hang Seng index lost 1.2 per cent.

Additional reporting by Wang Xueqiao in Shanghai