Markets brace for heavy Gilt supply; money market outflows and major upcoming liquidity events

Published on 26 February 2024

Ed Wicks, global head of trading at Legal & General

Ed Wicks, global head of trading at Legal & General Investment Management, discusses how his trading desk will be preparing for the week ahead amid the expected heavy Gilt supply (UK government bonds) and the upcoming MSCI index rebalancing.

Wicks looks at how markets have had to adjust their outlooks on the global rate cycle and when we can expect central banks, such as the Federal Reserve, the European Central Bank, and the Bank of England, to begin cutting interest rates this year.

In this episode, the global head of trading also unpacks why and how he’s monitoring money market flows; how he’s preparing for major upcoming liquidity events in May, and tells us why trading desks should be paying close attention to activity in mergers and acquisitions.  

North America: Weekly Review and Outlook on Markets

  • Last week, US volumes were down week on week, despite the Nvidia rally, and liquidity has been poor for February.
  • Last week, US investment grade saw the second-highest daily volumes of 2024 on Thursday and liquidity has improved over the last 3 weeks.
  • This week’s data: US GDP, Initial Jobless Claims, Core PCE Index. MSCI quarterly review and earnings e.g. Berkshire Hathaway.
  • This week in primary equities: 4 IPOs expected to price this week. The largest should be from Ninepoint Partners

Europe: Weekly Review and Outlook on Markets

  • Last week, equities volumes dropped but still elevated for historical averages and liquidity has worsened since the end of January.
  • Last week, Euro investment-grade volumes continue to be high relative to levels seen for the same week for the past 4 years and markets saw the best week for liquidity since May 2022.
  • This week’s data: UK Mortgage Approvals on February 29 and EU Unemployment Rate on March 1. Earnings e.g. Air France
  • This week in primary equities: No IPOs expected on European exchange as of Friday noon GMT.

Interview Transcript

Jo Gallagher And we have lots to unpack in this discussion. What do traders need to be focusing on and what might impact liquidity?

Ed Wicks I think there’s a lot to keep in mind this week. I mean, you’ve got the usual slew of economic releases that we will be keeping a close eye on. I think specifically, I’ll be looking at the UK rates, markets, keeping a close eye on the supply that we anticipate coming this week. It’s obviously a combination of QT and auctions around gilts and linkers. So that’s going to be quite interesting to see how the market digests that. I’ll be looking out for news around the potential syndication that we anticipate in the coming weeks.

I think depending on the duration of that syndication, that could be a particularly interesting event, particularly for LDI accounts. And just in the context of supply and issuance we did see a very interesting piece out last week that said, the UK is actually opening up the Gilt market for retail investors first time. So I think that’s going to be an interesting story to follow as well in the coming weeks and months, particularly in the context of the heavy supply that we anticipate.

Away from rates, the other thing I’m going to be keeping a close eye on is the MSCI rebalance, which is due Feb 29th. The global forecast is around, in excess, actually of $50 billion. So it’s a significant event. And I think if you combine that with the month end flow that we doubtless will see, it becomes a meaningful liquidity opportunity for investors to consider.

Jo Gallagher Markets have had to become more conservative in their projections for rate cuts this year. Have you had to adjust your investment and trading strategy and if so, how?

Ed Wicks Yeah, I think that’s right. If you look at some of the recent data points, the US CPI, for example, and then you couple that with some of the minutes that have been released from the most recent Fed meetings. I think investors are now anticipating fewer rate cuts this year. That’s pretty obvious. But actually, as well as that, the actual start points of those rate cuts are being pushed out further as well. We’re now looking around probably July to see the first cut come to fruition.

Conversely, if you look at the UK, actually some of the central bank commentary has actually been more supportive for rate cuts. So that could be an interesting dynamic to keep an eye on as well. I’m going to be looking pretty carefully at the money market fund data, specifically the AUM data.

If you look across the offshore and the onshore, you can see that there’s actually been modest inflows year to date. But if you keep a close eye on it, it’s quite a good indicator because actually you could see investors tempted to start putting money to work in riskier assets. And if that does occur, one of the places that you might see it first is in the AUM data from these funds.

One area we are seeing investors put cash to work actually quite actively is in credit markets, even with spreads continuing to tighten. I do think we’re going to continue to see demand across IG. The new issuance activity as well across credit markets. That’s been pretty strong. And the performance of those has also been strong. So that’s interesting to see. And in terms of supply that’s also encouraging. We’ve seen corporates launching some pretty significant deals. I was in the US last week and we saw the deal come through that was 15 billion and market commentators tell us that was meaningfully oversubscribed. So the signs are that that market’s looking pretty healthy.

Jo Gallagher May is expected to be a busy period in the trading calendar. What are some of the potential events are coming up that might disrupt liquidity, disrupt markets. And how are you preparing for that May trade?

Ed Wicks I think there’s a couple of known knowns that are coming up across May and June. The first one that’s been talked about is obviously the changing settlement cycle in the US market. So the securities market will go to T+1 rather than T+2. And I think some investors may struggle with adapting to that change.

Actually one of the most important facets is that the implementation date is just a couple of days before a pretty significant MSCI index rebalance, depending on the composition and the makeup of that rebalance. It’s not inconceivable that we could see some funding challenges, as investors have to move to nonstandard settlement to ensure that they can participate in the US market. So that’s definitely something that we’re going to be watching.

Another thing, as we come towards the end of May and into June is the inclusion of Indian bonds into the J.P. Morgan indices. I think from a demand perspective, I’m less concerned simply because it’s a very much a phased approach. However, associated workflows in that market are pretty manual. So in order to get the scalability and efficiency that we require, we’re going to be working very closely. And we have been working very closely with electronic platform providers to ensure we’re ready when the time comes.

Jo Gallagher Tell me, why should Trading Desk be pay attention to M&A activity this year?

Ed Wicks Well, look, I think it’s early days, but we are definitely starting to see some tailwinds in the M&A space. As I already touched on, actually, I think the funding conditions are supportive of M&A activity. And we’ve seen that with sizable issuance in that regard. And aside from market conditions, we are actually starting to see some interesting deals hit the take.

Notably, in the US last week, we saw the announcement that Capital One and Discover were looking to combine in a $35 billion deal. And similarly, in the U.K., we saw news that there’s a number of suitors potentially looking at the retailer Currys. So the news flow is definitely starting to pick up. And it’s something that I think is pretty positive for market sentiment.

From a trading perspective itself, I would say a sustained increase in M&A activity can provide a real fillip to the market in terms of both performance opportunities that are there for fund managers to capitalize on. But it can also have a really positive effect on sentiment and liquidity. And that’s something I think we would all like to see across Europe, the UK and the US as we go into the rest of the year.

Jo Gallagher Thank you Ed for your insights and thank you for watching. This has been Trader TV This Week.

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