First Impressions

The Right Stuff: Divento Academy Looks to Train the Next Generation of Traders
Jim Kharouf, JLN

In the height of the 2008-09 financial crisis, many in the financial industry wondered where the next generation of traders would come from. Amid the meltdown of Lehman Brothers, the Libor scandal and other high-profile enforcement actions, and a massive downsizing of bank trading desks, there has been real concern that the existing pool of trading talent was being tossed out and the stream of new traders was drying up.

Some proprietary trading firms have taken it upon themselves to attract students, teach them what they know and set them on course to trade these markets successfully. Firms like London-based prop firm Divento Financial, which launched Divento Academy last July, have taken a different approach to the more traditional prop shop methods of simply training them for their own use and discarding the weakest candidates.

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Quote of the Day

“There were two mistakes by the government, in my opinion — requiring the use of credit ratings and then moving to the opposite extreme in Dodd-Frank, telling that they can’t rely on credit ratings. The point should be to achieve a market where you are not forced to use them, but you are also not forbidden to use them.”

Alex Pollock, a senior fellow at Washington public policy research organization R Street Institute, in the story, “Big three in credit ratings still dominate business”

Lead Stories

These 7 Big Banks Agreed to Pay $324 Million in a Rate-Rigging Lawsuit
They were accused of conspiring to rig the “ISDAfix” benchmark. Seven of the world’s biggest banks have agreed to pay $324 million to settle a private U.S. lawsuit accusing them of rigging an interest rate benchmark used in the $553 trillion derivatives market.

Big three in credit ratings still dominate business
US regulators have largely failed to loosen the grip that the big three credit rating agencies have on the bond rating business, even after reforms put in place in the wake of the last financial crisis. Moody’s Investors Service, S&P Global Ratings and Fitch Ratings dominate the market, and post-crisis legislation aimed at cutting the reliance on them has been ineffective, market participants say.

Regulators Want to Slow Runs on Derivatives
Nobody quite knows what it means for a bank to be “too big to fail,” so the regulators in charge of solving the problem have an understandable focus on tidiness. A bank that fails tidily, sensibly, in neat little compartments, probably won’t do much damage to anyone else. A bank whose failure is sprawling and incomprehensible might well turn out to be catastrophic.

The ‘Missing Link’ in Today’s Interest Rate Derivatives Markets
TABB Forum
Reduced market liquidity and structural market changes are driving up the cost of accessing traditional interest rate products for end users, pushing them to find alternatives. The evolving sub-asset class of IR swap futures sits neatly between the precision and flexibility of over-the-counter products and the liquidity and transparency of exchange-traded derivatives.

****SD: Pretty sure the missing link is well-preserved in a Scottish bog somewhere.

Prospects Brighten for Big Bank Earnings
Institutional Investor
The rest of 2016 looks somewhat rosier for the big six U.S. banks, as the economy continues its gradual growth path and the Federal Reserve continues its gradual interest rate increases, analysts say.

Deutsche Bank Says `Hidden Reserves’ Available for AT1 Coupons
Deutsche Bank AG has “hidden reserves” that may help pay coupons on its riskiest bonds in a crisis, according to the German lender’s chief financial officer.

****SD: Referencing “hidden reserves” is the exact type of opaqueness that gives the general populace distaste for big banks.

Economies could shrink by mid-century due to scarce water
Economies across large swathes of the globe could shrink dramatically by mid-century as fresh water grows scarce due to climate change, the World Bank reported on Tuesday. The Middle East could be hardest hit, with its gross domestic product slipping as much as 14 percent by 2050 unless measures are taken to reallocate water significantly, the Washington-based institution said in a report.

Bill Gross Investment Outlook May 2016
A respected reporter recently asked me what were a few important things I had learned from all this and all of that during the past decade and I surprised myself and perhaps him by answering that I now realized that younger generations – the Xers and Millenials – were far different generations from my own. “How so?” he asked. They are ephemerally connected as opposed to hardwired, I replied. They hold history less dear and appreciate freshly baked inclusiveness more; they are inclined to move on instead of settle and build, perhaps because employer loyalty has weakened as well; they are more temporary residents than architects. But they are the future.

****SD: Your installment of Bill Gross waxing poetic. Here is Reuters’ take on the letter.

Imagining a New Bretton Woods
Yanis Varoufakis – Project Syndicate
The financial meltdown of 2008 prompted calls for a global financial system that curtails trade imbalances, moderates speculative capital flows, and prevents systemic contagion. That, of course, was the goal of the original Bretton Woods system. But such a system today would be both untenable and undesirable. So, what might an alternative look like?

Is Greece just weeks away from another debt crisis?
The Telegraph
Gruelling negotiations between Greece and its creditors last year pushed its economy and financial system into meltdown. Two national votes and a finance minister later, an agreement was finally reached and the country started passing reforms and getting some much-needed bailout cash.

****SD: Well, even if the next crisis is years away, it’s still weeks away.

Poor earnings suggests bear market looms
Financial Times
If you want the good news on this quarter’s US earnings season, there is at least this: profit margins have held up much better than expected. Earnings have slightly surpassed the dreadful expectations for them — even though, and this is the bad news, revenues have been even worse than the dire forecasts that preceded them.

Barclays launches first 100% mortgages since crisis
Financial Times
Barclays has become the first high street bank since the financial crisis to launch a 100 per cent mortgage in the latest sign of a return to riskier lending. The bank is allowing some buyers to take out a mortgage to 100 per cent of the value of the property, without needing a deposit. Most banks require at least a 5-10 per cent lump sum.

Goldman Sachs nails the staggering size of China’s debt in 3 simple charts
Business Insider
ant to know why everyone is obsessed with China’s massive debt buildup? Goldman Sachs analyst Andrew Tilton and his team just published a note on that topic, which contains three charts that really sum the whole thing up.

****SD: More on Goldman and China from CNBC: Goldman Sachs advises cutting exposure to Chinese property sector despite tier 1 boom

A Tale of Two Quarters
Neuberger Berman via Nasdaq
The New Year began with investors fleeing most risk assets as markets struggled to absorb the Federal Reserve’s December interest rate increase. The Fed’s confidence that the U.S. economy was finally ready for a modest tightening of monetary policy was not shared by markets. While Fed officials began 2016 saying that three to four interest rate increases were possible during the year, the markets did not buy into that storyline, as evidenced by the Fed Funds Futures market, which projected a much lower path for interest rates.

****SD: A tale of two quarters is just a fifty cent story.

Central Banks

China Opens Taps to Policy Banks in Bid to Sharpen Stimulus
China’s central bank is turning on the credit taps to its policy banks as it seeks to support the economy by channeling credit to designated areas of the government’s choosing.

The Fed’s Risky New Mandate
Alexander Friedman – Project Syndicate
“In this world, there are only two tragedies,” Oscar Wilde once wrote. “One is not getting what one wants, and the other is getting it.” As the US Federal Reserve inches closer to achieving its targets for the domestic economy, it faces growing pressure to normalize monetary policy. But the domestic economy is no longer the Fed’s sole consideration in policymaking. On the contrary, America’s monetary authority has all but explicitly recognized a new mandate: promoting global financial stability.

BOE Overhaul Becomes Law With New Rules for Financial Services
Britain’s latest overhaul of financial regulation and the Bank of England was signed into law on Wednesday after months of debate that included controversy over how tough the rules should be. The bill includes internal changes at the institution that oversees London’s financial center, such as moving the Prudential Regulation Authority fully within the BOE and changes to the status of the Financial Policy Committee, the body that oversees financial stability. It also allows Governor Mark Carney to reduce the number of Monetary Policy Committee meetings to eight from 12 a year, bringing it into line with the frequency of the Federal Reserve and the European Central Bank.

SNB’s U.S. Equity Holdings Hit Record $54.5 Billion Last Quarter
The Swiss National Bank’s U.S. stock portfolio rose to $54.5 billion francs at the end of March as the central bank boosted the proportion of equities in its foreign exchange reserves.

An End to Asia’s Rate Cuts?
Amando Tetangco is clearly on to something. As Asia’s central bankers scrambled to cut interest rates in recent years, the Philippine governor stood pat. Never mind that metrics like moderating growth, downside inflation risks and the “Taylor rule” suggest Tetangco could be easing. Bangko Sentral ng Pilipinas hasn’t touched rates since September 2014, and odds are it will avoid a cut on May 12, the next scheduled board meeting. Tetangco isn’t negligent in his duties, just cognizant of the limits of monetary policy in a world of zero rates. And what might be termed the “Tetangco rule” appears to be catching on.

Bundesbank’s Dombret weighs in on ECB autonomy debate
Bundesbank board member Andreas Dombret has weighed in on the debate over the independence of the European Central bank (ECB), defending its autonomy and saying it faced growing pressure from politicians.

Regulatory News

Tom Hayes Taps Crowdfunding to Raise $218,000 for Appeal
Tom Hayes, the former UBS Group AG trader serving 11 years in prison for rigging Libor, has turned to crowdfunding to raise 150,000 pounds ($218,000) for an appeal.

****SD: For the appeal, Hayes also hired a new lawyer (Telegraph article).

Insiders: Break up the big banks
Politicians, regulators and campaigners who want to downsize big banks received a surprise boost from POLITICO Europe’s first-ever Caucus of financial services stakeholders. The group, a cross-section of 55 high-level influencers, including European and U.S. policymakers, financial executives, academics and consultants, narrowly came out in favor of the drastic regulatory action against financial behemoths.

Dodd-Frank Failures Bolster Case for Revamp
American Banker
In the span of the past several weeks, we have seen regulators created by the Dodd-Frank Act lose two important court decisions over their processes while a third looming ruling could take another swipe at the Consumer Financial Protection Bureau’s authority. Meanwhile, several big banks failed yet again to meet a Dodd-Frank standard meant to eliminate “too big to fail.”

The E.U.’s financial rules should have stopped the euro crisis. Why didn’t they?
The Washington Post
European Union member states, either bilaterally or jointly, have provided bailouts to five euro zone countries since 2010. Other authors here in the Monkey Cage have looked at the broad lessons from the euro crisis, but why was the E.U. system unable to prevent the crisis in the first place?


Euro Bears See Rally Running Out of Steam
The euro’s recent rally against the dollar could soon run out of steam. The common currency hit a nine month high against the dollar this week, in gains that pose potential challenges for the European Central Bank and the eurozone’s already anemic economic growth rate. But many analysts believe that further strength will be capped by the prospect of ECB intervention and of foreign investors selling off eurozone assets. Despite the rally, many analysts are standing by long standing predictions that the euro will hit parity with the dollar by the end of this year.

Janet Yellen drives the currency bus as dollar dives
Financial Times
Federal Reserve chair Janet Yellen and her central bank counterparts in Europe and Japan are turning on its head that old idiom about actions speaking louder than words. In the European Central Bank, president Mario Draghi struggles to find a policy mix that stimulates economic growth and fans inflation. At the Bank of Japan, governor Haruhiko Kuroda battles to defend the decision to send interest rates into negative territory.

Japan Finance Minister Fires Off Again on Yen-Trading Concerns
Japanese Finance Minister Taro Aso extended his verbal campaign of expressing concern about his nation’s exchange rate after the yen jumped to an 18-month high. For at least the second time since the U.S. Treasury Department cited Japan on a currency watch list last week, Aso said his government is monitoring speculative trades in the yen and will respond if needed. Japan hasn’t intervened in the foreign-exchange market since 2011, instead sticking to verbal jawboning in a climate where monetary policy has played a bigger role in determining the yen’s value.

Latam forex outlook limited by Brazil’s fiscal worries, Fed doubts: Reuters Poll
The outlook for Latin American currencies has improved further, a Reuters poll showed on Wednesday, but questions about the ability of Brazil’s likely new government to plug a massive budget deficit stand in the way of future gains.

EUR500 ‘Bin Laden’ banknotes to be axed
The Guardian
The European Central Bank is to phase out the EUR500 (£400) note, nicknamed the “Bin Laden” because of its association with money-laundering and terror financing – and because while many people know what it looks like, few have ever seen one. The ECB announced on Wednesday that the fuchsia-coloured bills, the highest denomination of the eurozone’s seven banknotes, would no longer be printed or distributed from 2018, on the grounds that they are too often used to finance crime.

Kraken to provide pricing data for new CME Group bitcoin products
The Merkle
Kraken, one of the most trusted global bitcoin and digital assets exchanges, has been selected as a key supplier of market data for reference and real-time bitcoin price indices being launched later this year by the CME Group – joint operator of the S&P 500 and Dow Jones Industrial Average and one of the world’s largest options and futures exchanges.Kraken’s market data was previously recognized as a reliable standard in 2014, when it became the first bitcoin exchange to provide complete price and volume data to the Bloomberg Terminal.

****SD: Release the Kraken!


Investors Fleeing Negative Rates May Cap U.S. Yields, Fitch Says
Bond investors seeking alternatives to negative yields in Japan and Europe by buying Treasuries and government securities in other countries may keep long-term interest rates down, according to Fitch Ratings.

US Treasury debates new-for-old bond swap
Financial Times
The US Treasury has debated a sweeping overhaul of the $13tn government bond market, including a proposal to buy back old debt as officials focus on the health of trading in a core asset of many global investment portfolios. The idea being discussed would involve retiring older Treasury debt, then replacing it with new benchmark securities, which are more widely traded, according to people familiar with the matter.

Buy-side ‘in control’ of fixed income liquidity
The Trade
A survey on fixed income markets in the US has found that 68% believe the buy-side holds the key to unlocking liquidity in fixed income markets. US fixed income market participants have agreed that liquidity is now in the hands of the buy-side, and the challenge is actually moving the liquidity from buy-side books, rather than sourcing it.

****SD: AKA, “quit it with the phones people — let’s get with the times and go full-on electronic.”

When stocks and bonds send mixed messages, these investors sense opportunity
Financial Post
During times of heightened volatility in financial markets, stocks and bonds of the same company can often tell investors very different things.
A falling stock price may be suggesting a company is going out of business, while the bond is indicating there is little bankruptcy risk, and vice versa.

Negative Yields No Bar to Best Bond Market Conditions Since 2009
Susanne Walker Barton and Liz McCormick – Bloomberg
In a world awash with debt, it’s hard to imagine that there may not be enough to go around. Yet that’s exactly what JPMorgan Chase & Co. says is happening. The world’s biggest bond underwriter predicts record-low global yields ahead, based on forecasts of $1.86 trillion of net worldwide issuance this year versus $1.74 trillion of estimated net purchases. While those figures signal that supply will outstrip demand for the fifth straight year, the key for the bank is that the gap — the amount of excess issuance — is set to shrink the most since 2009.

Indexes & Index Products

China’s Stock Suspensions Seen as Obstacle to MSCI Inclusion
If anything stops MSCI Inc. from including Chinese shares to benchmark indexes in its review, it will be the overuse of trading halts. That’s according to a Bloomberg poll of strategists and fund managers, with 16 of the 23 surveyed naming stock suspensions as a main obstacle to inclusion. Capital controls, government intervention, stock beneficiary ownership and cross-border investment quotas were other common concerns ahead of MSCI’s decision in June, the survey showed.

Will Smart-Beta Fixed-Income ETFs Catch On?
Market cap weighted equity indices are somewhat like a popularity contest. The more investors bid up certain stocks, the larger weight that stock will garner in the index. But as we are often reminded by looking at the wall in many 5th grade classrooms: “What is right is not always popular and what is popular is not always right.”

FTSE 100 Sector Rotation: Cyclical shift or long term trend?
FTSE Russell
For the first time in over 10 years, the weighting of the financials sector in the FTSE 100® Index fell below that of the consumer goods sector at the end of February, just before quarterly review results were announced. This brief sector rotation made headlines in the UK as it was believed to highlight the struggles that financial services companies have faced since the global financial crisis. But was this just a temporary cyclical shift or a reflection of a longer-term trend?

Nadig: Net Asset Values Can Fool You
It’s nice to have things you can count on in investing—it’s also pretty rare. One of those stalwart items is the “net asset value” (NAV) calculated by all mutual funds and ETFs. It’s a nearly paternalistic piece of data-from-above that tells you with absolute certainty “this is what your investment is worth.” Alas, it’s not, really, and it’s important to understand why.

Now we know why investors have been getting walloped; JPMorgan on fund manager underperformance
Business Insider
Investors have been having a terrible time of it. Only 38% of funds are beating their benchmark for the year to date, according to JPMorgan. Only 35% of quant funds are doing so. That compares with 49% and 57% that were beating their benchmark this time last year.


Gold Investors Bet on Resilient Rally as Open Interest Surges
Add a jump in open interest to signs that gold’s rally may persist after the best start to a year in a decade. Open interest, a tally of outstanding contracts in Comex futures, rose 3.1 percent to 565,774 on Tuesday, the highest since January 2011.

Druckenmiller Loads Up on Gold, Saying Bull Market Exhausted
Stan Druckenmiller, the billionaire investor with one of the best long-term track records in money management, said the bull market in stocks has “exhausted itself” and that gold is his largest currency allocation.

Negative Interest Rates Help Denmark’s Saxo Bank See Gold Going To $1500 An Ounce
Four years of negative interest rates in Denmark have had at least one positive effect; a growing appetite for gold. The small European country has been conducting the world’s longest running experiment in negative rates, though not without problems. One result of negative rates is that a leading Danish bank has grown bullish about gold in what could be an early indicator of what might happen in bigger European countries which have gone negative more recently.

California gold miners seek a different type of glitter: celebrity
The Guardian
In the original California gold rush, thousands of prospectors scoured the San Gabriel mountains for nuggets, a scramble marked by rivalry and secrecy: see a gleam, keep shtum. Two centuries later, a handful of descendants use similar equipment to pan in the same crystal cold river, surrounded by the same wilderness, lured by an additional, different type of glitter: celebrity. Instead of concealing pay-dirt spots, these prospectors broadcast them on YouTube, giving locations and encouraging viewers to trek out and join them.

****SD: Haven’t seen “shtum” used in a hot minute.


What will happen when everyone in the Panama Papers is revealed next week
On Monday, May 9, a trove of information from the Panama Papers will hit the web. Mostly, it will be a list of names. And that’s a big deal: There’s a battle going on over whether you should have to link your real name to the things you own, unravelling the lucrative industry that has sprung up around creating “shell companies” to hide the true owners of assets.

Even ‘small crisis’ enough to tear EU apart, Moody’s warns
The Telegraph
Fresh turmoil in the European Union risks triggering the disintegration of the entire bloc, according to Moody’s. In a stark warning, the rating agency said the “painful adjustment” faced by some countries in the eurozone meant the collapse of the single currency area and wider EU was believed by some to be a question of “when” not “if”.

****SD: There are plenty of crises already there or in the making (immigration, terrorism, Greece and the chance of a Brexit). So, if we are to believe Moody’s, the EU will be torn asunder shortly.

Bill Gross Sells a Prized Investment: Stamps
NY Times
William H. Gross, as prominent a stamp collector as he is a bond investor, has just sold a sizable chunk of his stamp collection — netting $4.5 million. Mr. Gross, who says he has spent more than $100 million on his collection since the early 1990s, will donate $2 million each to the Pimco Foundation, the philanthropic arm of his former employer, and The New York Times Neediest Cases Fund. The rest will go to smaller charities.

****SD: I was unaware Gross was an avid philatelist.

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