U.S. Inflation Worries Analysts Ahead of Looming Recession

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U.S. inflation surprised with a CPI increase of 9.1% in June, versus the 8.8% expected by analysts’ consensus, representing a new record since November 1981, and the rise in the core inflation index worries analysts as recession looms.

Energy continues to be a key driver of overall inflation as fuel oil rose sharply. However, the core inflation figure at 5.9% is also quite solid and above economists’ forecast of 5.7%, says an AXA IM report accessed by Funds Society.

While energy and food contributed significantly (7.5% and 1%, respectively), price increases were broad-based, say the fund manager’s experts.

The underlying CPI rose by 0.7% and was also higher than the Bloomberg consensus forecast of 0.5%. The categories that rose the most were transportation services +2.1%, used cars and trucks +1.6% and clothing +0.8%. Components that tend to be more durable, such as housing and medical care, continued the upward trend of recent months with +0.7%. Within the core components of the basket, only airfares fell -1.8% after rising 12.6% last month; hotels also declined. These two components appear to have softened, but should be supported in the coming months as the summer vacations begin.

Nominal rates rose following this stronger than expected inflation figure and inflation breakevens rose. With inflation surprising to the upside, the Fed may be forced to tighten the aggressiveness of its monetary policy, increasing the likelihood of a stagflation scenario.

Under this backdrop, AXA IM continues to favor exposure to inflation-linked bonds, as indexation will remain elevated and continues to surprise to the upside, providing inflation-linked bonds with a solid rate of return.

“Elevated indexation should also cushion against interest rate increases. We have also taken advantage of the increase in long maturity real rates to add duration to portfolios as the risk of a recession increases,” the report said.

On the other hand, PIMCO says that for the Fed, this inflation data amounts to “a five-alarm fire”.

Core inflation appears broadly entrenched across all goods and services and, as a result, we raise our core CPI inflation forecast, and now expect core CPI inflation to end 2022 at 5.5%, the manager’s report says.

“At a minimum, we expect the FOMC to announce another 75 basis point hike in July and September, and a 100 basis point hike is now also likely. Today’s data will increase the confidence of Fed officials that tight monetary policy is appropriate,” the experts say.

In addition, Wednesday’s inflation reading “should also increase the odds of recession, which we now estimate is likely sooner rather than later and possibly more severe.”

 

UBS International Hires Luis Sánchez Kinghorn to Its New York Office

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Luis Sánchez Kinghorn se unió a UBS Internacional en New York procedente de Citi.

“Please join me in welcoming Luis to our New York International family at UBS! Luis brings with him a breadth of experience and knowledge, along with a genuine care for his clients. Welcome Luis!”, published Catherine Lapadula, Managing Director, Market Head en UBS New York International in LinkedIn.

Sanchez has more than 25 years in the industry, starting in 1996 in the San Francisco office of Wells Fargo, according to his LinkedIn profile.

However, his first Finra record is from 2001 for Citi in Miami where he stayed until 2007 and then returned in 2017 until last week when he moved to UBS in New York, according to his BrokerCheck profile.   

He holds an MBA from Texas McCombs School of Business and completed an Executive Program from The London School of Economics and Political Science and another from Stanford University. 

Crypto-Assets and Decentralized Finance through a Financial Stability Lens

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Although heralded as a fundamental break from traditional finance, the cryptocurrency financial system turns out to be susceptible to the same risks that are all too familiar in traditional finance, such as leverage, liquidation, opacity and maturity and liquidity transformation, Fed Vice Chair Lael Brainard said in a speech at the Bank of England in London.

“As we work to prepare our financial stability agenda for the future, it is important to ensure that the regulatory perimeter encompasses cryptofinance,” said Brainard who also reviewed that “recent volatility has highlighted serious vulnerabilities in the cryptocurrency financial system.”

Distinguishing responsible innovation from regulatory evasion

New technologies often promise to increase competition in the financial system, reduce transaction costs and settlement times, and channel investment into new productive uses. However, new products and platforms are often fraught with risks, such as fraud and manipulation, and it is important, and sometimes difficult, to distinguish between hype and value.

If past innovation cycles are any guide, for distributed ledgers, smart contracts, programmability and digital assets to fulfill their potential to bring competition, efficiency and speed, it will be essential to address the basic risks that plague all forms of finance. These risks include leakage, crowdselling, deleveraging, interconnectedness and contagion, along with fraud, manipulation and evasion. In addition, it is important to be alert to the possibility of new forms of risk, as many of the technological innovations underpinning the cryptocurrency ecosystem are relatively novel.

Far from stifling innovation, strong regulatory barriers will help investors and developers build a resilient digital native financial infrastructure. Strong regulatory barriers will help banks, payment providers and financial technology companies (FinTechs) improve the customer experience, streamline settlement, reduce costs and enable rapid product enhancement and customization.

“We are closely following recent events where system risks have crystallized and many crypto-investors have suffered losses,” he warned.

However, despite the significant losses suffered by investors, the cryptocurrency financial system does not yet appear to be so large or so interconnected with the traditional financial system as to pose a systemic risk.

“Therefore, this is the right time to ensure that similar risks are subject to similar regulatory outcomes and similar disclosure, in order to help investors distinguish between genuine, responsible innovation and the false allure of seemingly easy returns that conceal significant risk,” the vice chairwoman said, according to text posted on the Fed’s website.

In addition, Brainard called for establishing which cryptocurrency activities are permitted for regulated entities and under what restrictions, so that spillover effects on the core financial system remain well contained.

Due to the cross-sector and cross-border reach of cryptocurrency platforms, exchanges and activities, it is important for regulators to work together domestically and internationally to maintain a stable financial system and address regulatory evasion, the vice chair of the U.S. monetary authority reflected.

In applying a principle of “same risk, same regulatory outcome,” we should start by ensuring basic consumer and investor protection. Retail users must be protected against exploitation, undisclosed conflicts of interest and market manipulation, risks to which they are particularly vulnerable, according to a large body of research. If investors lack these basic protections, these markets will be vulnerable to runs.

Second, because trading platforms play a critical role in cryptoasset markets, it is important to address non-compliance and loopholes that may exist.

“We have seen that crypto trading platforms and crypto lending companies not only conduct activities similar to those in traditional finance without comparable regulatory compliance, but also combine activities that should be separate in traditional financial markets,” he commented.

Third, all financial institutions, whether in traditional finance or cryptofinance, must comply with regulations designed to combat money laundering and terrorist financing and to support economic sanctions.

The exchange of assets without permission and tools that conceal the origin of funds not only facilitate evasion, but also increase the risk of theft, hacks and ransomware attacks. These risks are particularly prominent in decentralized exchanges that are designed to avoid the use of intermediaries responsible for customer identification and may require adaptations to ensure compliance at this most fundamental layer.

Finally, it is important to address any regulatory gaps and adapt existing approaches to new technologies. While regulatory frameworks clearly apply to DeFi activities just as they do to centralized cryptographic activities and traditional finance, DeFi protocols may present new challenges that may require adaptation of existing approaches.

By way of conclusion, Brainard says that innovation has the potential to make financial services faster, cheaper and more inclusive, and to do so natively in the digital ecosystem.

“Allowing responsible innovation to flourish will require that the regulatory perimeter encompasses the crypto financial system in accordance with the principle of similar risk, similar regulatory outcome, and that new risks associated with new technologies are adequately addressed. It is important that the foundations for sound regulation of the cryptocurrency financial system are established now before the cryptocurrency ecosystem becomes so large or so interconnected that it may pose risks to the stability of the broader financial system,” he concluded.

The text is an excerpt from Fed Vice Chair Lael Brainard’s speech at the Bank of England in London. To read the full text you can access the following link. 

 

Itaú Unibanco to Buy 35% stake in U.S. broker Avenue

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Itaú Unibanco informs that entered into a share purchase agreement, through its subsidiaries, with Avenue Controle Cayman Ltd and other selling stockholders, providing for the acquisition of control of Avenue Holding Cayman Ltd (Avenue).

After obtaining the required regulatory approvals, Itaú Unibanco will initially acquire 35% of the total and voting capital of Avenue through a capital contribution of $30 million and a secondary acquisition of shares, totaling approximately $92 million.

After 2 years from the closing date of this first tranche, Itaú Unibanco will acquire an additional stake of 15.1%, for an amount to be determined based on a predefined multiple of adjusted revenues, achieving the control with 50.1% of the total and voting capital. After 5 years from the closing date of the first tranche, Itaú Unibanco will be able to exercise a call option for the remaining equity interest held by the current stockholders of Avenue.

Avenue holds a U.S. digital securities broker, incorporated 4 years ago, aimed to democratize the access of Brazilian investors to the international market and currently has over 229 thousand active clients, 492 thousand accounts enabled and approximately R$1.2 billion under custody, according the press release.

In line with initiatives already announced, such as the acquisition of Ideal Corretora and the launch of the Íon platform, this operation strengthens Itaú Unibanco’s strategy of setting up an investment ecosystem that prioritizes customer satisfaction by providing products and services through the most convenient channels for each client profile.

Avenue’s investment intermediation services offered through Itaú Unibanco’s wide distribution franchise and client base will enable the increased access to the foreign investment market and the functionality of opening an international current account, the international diversification of products and services through a simple, streamlined self-service experience, and the reliance on Avenue’s renowned professionals’ talent and expertise.

The operation and management of Avenue will remain separate from Itaú Unibanco, which will become one of the institutions that will make Avenue’s services available to its clients abroad.

The completion of this operation is subject to the approval from the regulatory bodies in the proper jurisdictions.

This transaction is in addition to Itaú’s purchase of XP.

Integrating ESG in asset-backed securities analysis

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Historically, the development of ESG analysis has focused on equities and corporate bonds. As such, there is no agreed or standard approach to ESG investing in the securitized market. However, investors are coming to understand that ESG factors are material and relevant to security analysis, particularly for a space that, at $12 trillion in total size, accounts for over 25% of the total public fixed income market. In a recently published white paper, Thornburg’s experts Jake Walko, Rob Costello and Jeff Klingerhofer explain the way ESG is applied to the securitized market analysis of the company: “The evaluation must focus on financial materiality: determine material factors, understand their disclosures and ESG performance as part of the broader security analysis and use material factors – factors that are both important for the issuer’s financials and decision-making process as well as by reasonable investors- as part of the decision-making process to determine if there is an actual ESG commitment or greenwashing, and therefore purchase or sell a security. 

“One of the challenges of incorporating securitized ESG analysis is the degree (or lack thereof) to which issuers provide ESG disclosures. To tackle this challenge, we engage with issuers on a frequent basis to obtain information we feel is material to ESG analysis. We advocate with all issuers to provide as robust and detailed ESG disclosure as possible”, explain Thornburg’s experts. In fact, they point out that this practice “is more important than what can be gleaned from quantitative data only”.

For the fund management company, establishing and maintaining a proprietary ESG securitized framework is more important than wait for an industry standard to evolve. That’s why they have developed an integrated approach, meaning that each investment team member executes on this ESG process. “The benefit of integration is that investment team members consistently apply the process across the analysis of every security. As such, it keeps the professionals, who know their specific markets the best, responsible for ESG analysis”, Walko, Costello and Klingerhofer explain.

ESG Analysis in Securitized – Challenges and Progress

There have been a number of historic challenges to implementing effective ESG analysis in the securitized market. Thornburg’s experts highlight the fact that Issuers provided little or no disclosure of ESG factors that could impact future cash flows. “Indeed, most mortgage and asset-backed issuers were and are small, privately held companies that are not accustomed to providing these disclosures. The exception has been asset-backed issuers that also issue in the corporate market – for example, a large auto company with both secured and unsecured debt outstanding”, they add. Fortunately, investors are beginning to make issuers of all types more aware of the importance of ESG disclosures in analysis. Today, robust disclosures can attract a larger investor base that can lower the cost of capital for issuers, and ultimately, underlying borrowers.

Another challenge to ESG analysis according to Thornburg’s white paper is understanding the cash flow dynamics of hundreds or even thousands of underlying loans. Traditionally, the ESG corporate focus has centered around how management teams evaluate and manage ESG risks and opportunities. Securitized fixed income is unique in that idiosyncratic risk in individual loans is diversified away, necessitating a more holistic focus on how lending and underwriting standards, and broader social factors, impact security cash flow.

“Fortunately, lending and underwriting standards, particularly in the mortgage-backed securities market, improved meaningfully in the years since the global financial crisis. This effectively makes the space more ESG investor friendly”, managers point out.  

It is Thornburg’s belief that an effective ESG securitized framework should center on how the lending process itself ties to ESG considerations. At the investment firm, analysts aim to understand the issuer’s underwriting process for the individual’s ability to repay their loans, which can also include influences related to ESG factors. They have directly identified, for each securitized sub-market, the environmental, social and governance factors they consider material to underlying cash flow.

 

Environmental

Though environmental considerations vary by submarket, a common material factor is assessing how carbon emissions, and further regulation/legislation to reduce emissions, impact cash flow. For example, in auto ABS, they assess potential recovery values (in case of default) of gas vehicles, given the trend toward higher fuel efficiency and expected increased market share of electric vehicles.  

Energy and water management are closely associated with commercial properties, therefore impacting the analysis of commercial mortgage-backed securities (CMBS). Newer, energy efficient buildings will be more desirable to tenants, given the reduced likelihood of costly upgrades necessary to comply with new regulation and building codes. This factor translates to favorable cash flow generation as well as higher property values.

Another material factor is heavy geographic concentration. Loan pools with large exposure, for example, to the state of California, are vetted for proximity to potential wildfires and earthquakes. Similarly, exposure in Florida and Texas is analyzed for collateral in hurricane sensitive areas. Of course, it is difficult to assess the precise impact to cash flows as a result of natural disasters for which timing and magnitude is uncertain. However, it’s important to understand geographic concentration as it impacts nearly every type of securitized sub-market, whether cash flows are backed by hard collateral or not.

Social

It can be reasonably argued that social factors have a direct impact, given the underlying loans in many sub-markets go to individual consumers. Therefore the ability (or inability) to repay can have a meaningful effect on human lives. In Thornburg, they believe research into material social factors lies in the analysis of the lending process itself. The goal is to understand issuers’ underwriting processes for its effectiveness in assessing consumers’ ability to repay. Loan structures which make repayment challenging may cause consumer credit impairment that can have financial reverberations for individuals many years following a default. This risk applies both to residential mortgage loans as well as consumer loans (i.e. home improvement) and credit card payments which flow through to asset-backed securities.

Governance

Governance factors are focused primarily on the issuer’s lending and securitization structure, operational considerations, and overall support and disclosure of ESG factors. Issuers with streamlined and centralized credit, funding and collections signal a strong underwriting platform and reduced risk of fraud. In a similar vein, poor securitization reporting increases the risk of weak performance or fraud, which may not be detected quickly. 

“To conclude, we believe the analysis of ESG material factors in securitized is essential to a full understanding of risk and return. The ability for managers to incorporate an effective process for ESG analysis in securitized we believe will enhance alpha potential as well as allow allocators to fully understand ESG exposures across their entire investment program”, Thornburg’s experts conclude.

 

Important Information

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

This is not a solicitation or offer for any product or service. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein.

Investments carry risks, including possible loss of principal.

Outside the United States

This is directed to INVESTMENT PROFESSIONALS AND INSTITUTIONAL INVESTORS ONLY and is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to the laws or regulations applicable to their place of citizenship, domicile, or residence.

Thornburg is regulated by the U.S. Securities and Exchange Commission under U.S. laws which may differ materially from laws in other jurisdictions. Any entity or person forwarding this to other parties takes full responsibility for ensuring compliance with applicable securities laws in connection with its distribution.

 

FinTech Acquisition Corp. V and eToro Mutually Agree to Terminate Merger Agreement

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FinTech Acquisition Corp. V and eToro Group Ltd announced that they have mutually agreed to terminate their previously announced agreement and plan of merger (the “Merger Agreement”), effective immediately.

The proposed merger, initially announced in March 2021, was conditioned on the satisfaction of certain closing conditions, including relating to the Company’s registration statement, within the timeframe outlined by the Merger Agreement and as extended by the Merger Agreement Amendment. Despite the parties’ best efforts, such conditions were not satisfied within such time frame and the parties were unable to complete the transaction by the June 30, 2022 deadline.

Betsy Cohen, Chairman of FinTech V commented: “eToro continues to be the leading global social investment platform, with a proven track record of growth and strong momentum. Although we are disappointed that the transaction has been rendered impracticable due to circumstances outside of either party’s control, we wish Yoni and his talented team continued success.”

Yoni Assia, Co-founder and CEO of eToro commented: “We would like to thank Betsy and the entire FinTech V team for their hard work, diligence and support throughout this process. While this may not be the outcome that we hoped for when we started this process, eToro’s underlying business remains healthy, our balance sheet is strong and will continue to balance future growth with profitability. We ended Q2 2022 with approximately 2.7 million funded accounts, an increase of over 12% versus the end of 2021, demonstrating continued customer acquisition and retention rates that have been improving over time. We remain confident in our long-term growth strategy and excited for the future of eToro.”

Neither party will be required to pay the other a termination fee as a result of the mutual decision to terminate the Merger Agreement.

 Additional information about the termination of the Merger Agreement will be provided in a Current Report on Form 8-K to be filed by FinTech V with the U.S. Securities and Exchange Commission and available at SEC website.

Raymond James Financial Completes the Acquisition of SumRidge Partners

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Raymond James Financial completed the previously announced acquisition of SumRidge Partners, LLC.

“SumRidge has a people- and service-driven culture, similar to Raymond James, and I’m pleased they are now officially part of our firm,” said Raymond James Chair and CEO Paul Reilly.

“Adding SumRidge and its innovative institutional market-making operation and sophisticated trading technologies to our Fixed Income Capital Markets division is another example of our commitment to serving advisors and clients through industry-leading technology,” he added.

SumRidge Partners’ institutional market-making operation sits alongside and complements Raymond James’ core client-facing business with the goal of identifying additional opportunities for the two business units. Based in Jersey City, New Jersey, SumRidge Partners operates within the firm’s Fixed Income Capital Markets business under the leadership of SumRidge’s co-founders, Tom O’Brien and Kevin Morano.

The addition of SumRidge Partners to the firm’s Fixed Income Capital Markets (FICM) division adds an innovative institutional market-making operation with sophisticated trading technologies and risk management tools.

Founded in 2010 with the vision of becoming a premier, technology-enabled fixed income market maker, SumRidge Partners currently ranks among the top liquidity providers for cash trading on most major electronic bond platforms. The SumRidge organization has about 45 employees.

U.S. Workers Readjust Retirement Goals Amid Recent Market Volatility and Inflation

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U.S. workers say saving enough for retirement is their top financial priority in a new survey from Principal Financial Group, replacing dreams of a lavish retirement with simpler goals of maintaining current living standards amid ongoing market volatility and inflationary pressures.

The Principal Retirement Security Survey included nearly 1,000 consumers and 215 plan sponsors in the United States.

According to the findings, the 71% said their key goal in retirement is “maintaining my standard of living,” while 44% cited splurging periodically in retirement as a priority.

The biggest concerns workers say they have in retirement, in order, are maintaining a healthy lifestyle, enduring market losses, outliving savings, and meeting daily expenses.

“For most Americans, living comfortably with the occasional splurge on their favorite activities or travel destinations is the ultimate goal in retirement,” said Sri Reddy, senior vice president, Retirement & Income Solutions at Principal.

“In the current environment of high inflation and potentially lower investment returns, we are seeing something of a retirement reset among U.S. workers. As a company, we are focused on providing the solutions people need to help feel secure in their planning for their post-working years,” he added.

Current stressors for retirement savers 

Unfortunately, 40% of those surveyed said they feel behind in their retirement savings. Like most Americans, this group has likely felt the effects of recent stressors from inflation to market volatility and the ongoing impacts of the COVID-19 pandemic. In fact, surveying showed inflation, the economy, and the future of the nation—alongside mainstay concerns such as healthcare and aging parents—are among the top stressors for U.S. workers.

Financial health: Resources available, but often neglected

Retirement planning remains a focal point for 40% of workers, who list the activity as their top financial priority—followed by reducing debt (37%) and updating or creating a will, trust, or estate plan (30%). This financial focus is especially true for workers who are making career moves in the current labor market. When considering a job change, “benefits that will help my financial well-being” ranked third among top considerations (58%), behind “competitive salary” (79%) and a “good culture where I feel valued” (64%). 

As a result, plan sponsors appear focused on providing options to help meet current and future employees’ retirement planning needs. A majority of plan sponsors (88%) agree their organization is responsible for ensuring employees have access to benefits that help maintain their financial well-being. Meanwhile, 87% agree providing the right financial tools, resources, and education can help employees better prepare for retirement.

There may be a disconnect, however, with how well workers actually utilize the programs offered by their employers. Surveying showed only 35% of workers participate in financial wellness programs, and nearly half (46%) don’t even know whether they are available.

US Wealth Managers “face pressure” to Advise on Crypto Assets

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A new study from London-based Nickel Digital Asset Management shows professional investors in the US expect wealth managers to come under increasing pressure to advise on crypto/digital assets.

Nickel commissioned research with professional investors in the US who collectively manage around $116.13 billion in assets, which found two-thirds (67%) believe wealth managers will face increasing pressure from high-net-worth clients to offer crypto and digital solutions over the next two years.

One in five believe they will face significantly more pressure to provide advice with 65% warning that wealth managers will risk losing business if they do not respond to demand.

Similar pressure for advice and education will come from pension fund trustees – 60% of investors believe the level of advice they want will increase over the next two years.

The investors, who work for institutional investors, wealth managers, fund managers and hedge funds, are increasingly optimistic about the crypto regulatory framework over the next two years with 38% expecting an improvement.

Around a fifth believe there will be a rise in the number of crypto/digital investment funds being launched over the next two years while more than half (58%) predict pension funds and other institutions will increase allocations.

Fiona King, Managing Director, Institutional Sales, at Nickel Digital, said: “US investors expect investment strategies around digital assets to develop rapidly and are optimistic about regulatory change. Since our business was formed in 2018, we have launched four distinct digital asset funds, and are looking to develop more products to cater to our client’s needs.

Nickel’s research found strong support for digital assets among US investors – three-quarters (75%) questioned believe they will become mainstream assets while 73% believe that digital assets – in particular DeFi protocols – are emerging as an important disruptive technology for traditional finance.

When asked for their main overarching view on blockchain and digital asset technology, 37% of professional investors said it is scalable and, on the way, to achieving mainstream adoption, while 23% said it bears strong transformative potential for the global economy. 

 

AIS Financial Group Hires Juan Ballester for the Latin American Market

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ali noticia

Juan Ballester Molina has recently joined AIS Financial Group with the aim of strengthening the firm’s presence in the South American region, representing the Nomura, Alken and Katch fund families.

He will be reporting to Artemio Hernandez, head of Fund Solutions and Samir Lakkis, founding partner of the company.

AIS currently distributes over 2.3 billion dollars a year in structured products and is currently looking to expand in order to diversify its business offering.

Ballester Molina holds a degree in Industrial Engineering from the Universidad Austral and was most recently a Sr. International Representative for BECON, previously also working for Riva Asset Management.

With offices in Madrid, Geneva, Bahamas and Panama, AIS will look to partner with those managers who want to outsource their sales force and benefit from the knowledge and experience that the company has in the region.