First Impressions

From the Top
By John J. Lothian

The Brexit debate came to a screeching halt yesterday in the UK when a member of Parliament was ruthlessly killed in her home town. As an American and a Chicagoan bombarded with news of endless shootings and death, this one struck me and made me pause. I do not expect this type of thing to happen in the UK, even with the heated debate going on.

One has to wonder if this senseless act will impact the outcome of the approaching referendum. See the story below about the immediate market reaction. The Bank of England is reported to believe an out vote will see a “sharp” drop in the sterling.

I heard via Twitter from Dan Day-Robinson, chairman of the International Commodities and Derivatives Association, formerly the Swiss Futures & Options Association, who said he is voting out. It is a complicated issue, with lots to consider, but he is out, he said.

Bloomberg brought out the “Greater Fools Theory” to report about the fall in global bond yields. Of course, every day the markets are about finding greater fools, or steely-eyed speculators.

Bloomberg also has a non-cheery story about how the world economy looks a lot like the 1930s. That should give you a something nice to think about for the weekend.

On a lighter note, the New York Times has a piece on one of my favorite story tellers, Garrison Keillor, as he heads off to retirement. He has been on the radio forever on a program he created, “A Prairie Home Companion.” You might know the imaginary town he said he grew up in, Lake Wobegon

A speaker we have not mentioned before for the MarketsWiki Education World of Opportunity in Chicago is Christian Domin of Glenstar Properties. Christian will be speaking about real estate risks related to being a trader or trading group. Don’t forget to sign up your interns and newer employees for the series in Chicago or New York here

Have a great weekend and a happy Father’s Day for all you dads.


Quote of the Day

“This is a Fed accepting the new normal — we’re in a world where 2 percent growth is as good as it can get. There’s a lot of Brexit ‘bremains’ in the market. But I have to say the bigger story is the Fed running out of tools and influence.”

Kit Juckes, a London-based strategist at Societe Generale SA in the story, “Dollar Weakens on Fed Fallout as Brexit Risk Whipsaws Currencies”

Lead Stories

Another Brexit Headache: Margin Calls And Contract Uncertainty
With the U.K. set to vote next week on whether to remain in the European Union, some lawyers said they have taken flurries of calls from financial institutions asking about the ramifications of any “Brexit” decision on their trading contracts. One potential risk: margin calls on borrowers. Andrew Evans, head of finance at European law firm Fieldfisher in London, said clients are preparing in case they need to post additional securities as collateral against their bets in case a vote to leave the E.U. drives down the price of their stocks, derivatives or other assets denominated in British pounds. Clients are “looking at their documents quite carefully to make sure [they are prepared] if they need to make margin calls quite quickly, and banks will be planning for that,” he said in an interview.

Why ‘Brexit’ Isn’t Game Over for These European Banks
The dangers of ‘Brexit’ are infecting banks across Europe, especially in the south, but investors may be overdoing the stampede. Share prices for some of the continent’s largest institutions, such as Credit Suisse, Deutsche Bank and UniCredit, have in the past week hit lower levels even than during the financial crisis. But the steepest falls in June have been among mainly Italian, Greek and Portuguese lenders.

The Brexit Briefs
The Economist
ON JUNE 23rd Britain will hold a referendum on whether to remain in or leave the European Union. This will be the country’s most important vote in at least half a century. Alas, the debate has often been neither informative nor enlightening. The Economist is not neutral: we are convinced that a decision to leave (a so-called Brexit) would be bad for Britain, Europe and the world. But we also believe in the importance of objective analysis and reasoned argument. Over the past few months we have published a series of factual briefs that examine the main issues around Brexit. To help interested readers, we have now assembled all our Brexit briefs together.

Credit Traders Bolster Brexit Defenses as Leave Camp Pulls Ahead
Debt investors rushed to hedge against the risk that Britain votes to exit the European Union this week as polls show a departure has become a real possibility.
Credit derivatives trades on investment-grade debt in Europe already exceeded the average for a full day by 1 p.m. in London on Friday, according to data compiled by Bloomberg. Trading volumes across global credit-default swap benchmarks soared this week, sending up volatility and the cost to protect against losses.

Brexit vote has markets, central banks on alert
The shaky world economy faces a potentially severe test in the coming week, when Britain could turn its back on the European Union, which would shock financial markets and put pressure on already stretched central banks to prevent a new slump. As well as delivering at least a short-term hit to the British economy and its trading partners, an “Out” vote in Thursday’s referendum would raise questions about the future of the EU, which accounts for nearly a quarter of global output. It would also add to nervousness among investors about the rising anti-establishment mood in many rich economies, just as Republican candidate Donald Trump gears up to fight the U.S. presidential election on a populist platform

ICE To Acquire Majority Equity Interest in MERS and Build Updated Mortgage Registry Infrastructure
Press Release
MERSCORP Holdings, Inc. and Intercontinental Exchange (NYSE: ICE), today announced that ICE will acquire a majority equity position in MERSCORP Holdings, Inc., owner of Mortgage Electronic Registrations Systems, Inc. (collectively “MERS”). In addition, ICE and MERS have entered into a software development agreement to modernize and enhance the MERS System.

Japanese corporate pensions flee stocks in search of new options
Nikkei Asian Review
A volatile stock market and negative interest rates are pushing Japanese corporate pension funds away from traditional investments and toward alternatives such as hedge funds and real estate promising more stable returns. Domestic and foreign stocks accounted for 27% of roughly 11 trillion yen ($105 billion) in assets under management at about 110 funds at the end of fiscal 2015, according to Rating and Investment Information. The weighting has fallen more than 20 points from fiscal 2005 to drop below 30% for the first time.

Central Banks

The Fed’s Policies Have Gotten It in a Tangle
New York Times
The markets have been sending out distress signals. Stock volatility has risen sharply and bond yields have fallen below zero in part of the world while rising sky high elsewhere — all indications of distress as Britain approaches a pivotal vote on whether to exit the European Union.

The Collapse of FOMC Expectations
The Alpha Blog
When do you admit that you are wrong? Do you do it publicly? Do you hide it? Do you hide it plain sight? When I look at the graph for Fed funds for 2017 and later, I think the FOMC is admitting that they were wrong for a long time, and now hide that in plain sight. They don’t admit that they were wrong. They don’t admit that the economy has proven to be a lot weaker than they ever expected, and that they now expect that to persist for a while. That’s what the graphs for Fed funds and GDP say.

Fed’s Bullard Changes View on Economy, Now Sees Only One More Rate Rise
Federal Reserve Bank of St. Louis President James Bullard said Friday he now favors just one interest-rate increase through 2018 after changing his view of where the economy is headed, putting him at odds with other policy makers.

The Federal Reserve is finally facing reality
The Washington Post
The Federal Reserve keeps looking for reasons to raise interest rates, and it keeps not finding them. Inflation, after all, is still far below its 2 percent target, inflation expectations are also low, and, in some cases, falling further, and the labor market has lost as much momentum the last 5 months as it has before the Fed has cut rates in the past. It was no surprise, then, that the Fed decided not to increase interest rates, but rather kept them at the same 0.25 to 0.5 percentage points they’ve been since the start of the year. No, the only real surprise was that it thought it might do so as recently as a month ago.

Rate Uncertainty Embroils Central Banks
Money markets are flashing warning signals as rising credit risk, spurred in part by fears of Brexit, makes it harder for big banks to obtain U.S. dollar funding. A gauge of bank borrowing costs — the FRA/OIS spread — hit the most extreme level since 2012 on Thursday, and the premium to swap foreign currencies into dollars reached the highest since late last year as deteriorating investor sentiment ahead of Britain’s June 23 referendum on European Union membership strained the financial system.

Gundlach: Central banks don’t understand their policies—and ‘they’re out of control’
Central banks are “out of control” because they don’t understand the consequences of their own policies, according to Jeffrey Gundlach, the chief executive officer at DoubleLine Capital.

Some thoughts on very low interest rates
Bronte Capital
I have been having Twitter arguments with people I usually respect who think that it is self-evident that very low rates (even negative rates) are a function of Fed intervention – and not a function of the supply and demand for funds. I don’t normally blog about macroeconomic issues because I know enough to know that I will be wrong most the time. However I feel I need more than the 140 characters on Twitter to explain why I am unconvinced that negative rates are that unnatural.

Fed’s warning: Economic hurdles to persist
USA Today
The Federal Reserve made a stark concession this week: The economy is likely to grow at a listless pace for the foreseeable future.
While the Fed left its key interest rate unchanged and signaled it could raise it twice this year, policymakers raised eyebrows by predicting markedly slower hikes in coming years amid persistent headwinds to economic growth. Those hurdles include meager productivity gains, an aging labor force, low household formation and the weak global economy, Fed Chair Janet Yellen said at a news conference following the Fed meeting.

Regulatory News

Ten EU States Vow to Push Ahead on Financial-Transaction Tax
The 10 European Union countries working on a financial-transaction tax will continue their efforts in the second half of the year despite skepticism about the plan’s feasibility. “We as chair of the working group submitted a proposal today that was broadly accepted,” Austrian Finance Minister Hans Joerg Schelling said on Thursday. “There are two technical issues that need to be solved. For these two technical issues a task force was set up.”

Watchdogs exempt sovereign wealth and pension funds from study
Financial Times
Sovereign wealth funds and pension funds have won a temporary break from tighter regulatory scrutiny, as global watchdogs exempted them from an ambitious study aiming to curb systemic risks from financial institutions that are not banks or insurers. Asset managers are bracing for long-awaited findings on risk due to be released next week by the Financial Stability Board. The Basel-headquartered group of central bankers and regulators is also expected to recommend new policies and rules to deal with the dangers they uncovered.


Bookies Are The New Brokers
Bloomberg Gadfly
If the contemporary philosopher Beyonce has taught us all anything, it’s that when life gives you lemons, you might as well make lemonade. That seems to be the case with some of the more interesting financial news of the week. For example, how about when life gives you a presidential candidate like Donald Trump? The lemonade recipe appears, at least theoretically, to be pretty simple: Short the Mexican peso.

The Rally in Asian Currencies Won’t Last the Year, Say Strategists
The rally in Asian currencies from January’s seven-year low hasn’t convinced strategists that this newfound strength can last.
Every currency in the region will weaken by year-end, with those of Singapore, Taiwan and South Korea all predicted to drop at least 3 percent, surveys compiled by Bloomberg show. The cost of hedging against losses has climbed for seven straight days, the longest streak in a year. China’s economic slowdown and the Federal Reserve’s bias to consider raising U.S. interest rates will hasten declines, according to Standard Life Investments Ltd. and Societe Generale SA.

Dollar Weakens on Fed Fallout as Brexit Risk Whipsaws Currencies
The dollar weakened for a third day, the longest streak in six weeks, as investors cope with political and economic crosscurrents of a slower Federal Reserve tightening pace and a pending vote on Britain’s membership in the European Union.

Brexit: The Long Night of Currencies
Next week’s Brexit vote is one of the year’s biggest so-called risk events for banks’ foreign exchange activities. Traders at Credit Suisse and UBS are bracing for an all-nighter after polls close on June 23rd, which promises a night of volatility — and a lucrative one for business.


Beware of Global Bonds in a World Without Yield
Here are the key points of this article:
Near- or below-zero bond yields in major global markets are likely to persist into the second half of the year, due to soft global growth, central bank buying and strong investor demand for bonds.
However, we doubt the strong performance year-to-date can be repeated in the second half of the year, especially in the riskier areas of the fixed income market. With yields low and prices high, bonds are susceptible to setbacks.

ECB Bubble Means Sovereign Bonds Aren’t Worth It, Swiss Re Says
The European Central Bank has turned government bonds into one of the riskiest asset classes, prompting Swiss Re AG to move more of its investments into corporate debt, according to the reinsurer’s chief investment officer.

Falling bond yields — a moving message
Financial Times
A strange aspect of the financial system is how the question that may matter most to investors around the globe is one of the most deceptively familiar: what do falling bond yields mean?

Traders play $10 trillion musical chairs game as bond yields plunge
Sydney Morning Herald
To make money in today’s bond market, keep finding the greater fool.
That’s the strategy driving traders to bid up global sovereign debt even as yields fall to record lows and as over $US8 trillion ($10.8 trillion) of government securities yield less than zero. Investors who buy bonds with negative yields aren’t just willing to lose money as they seek safe havens – they’re hoping there will always be another trader ready to buy at a higher price.

Bond Traders Seek Greater Fools as Global Yields Extend Plunge
To make money in today’s bond market, keep finding the greater fool. That’s the strategy driving traders to bid up global sovereign debt even as yields fall to record lows and as over $8 trillion of government securities yield less than zero. Investors who buy bonds with negative yields aren’t just willing to lose money as they seek safe havens — they’re hoping there will always be another trader ready to buy at a higher price.

Indexes & Index Products

Ready, Fire, Aim: The ETF Industry Blasts Its Spaghetti Cannon
As of June 15, there were 1,926 exchange-traded products, or ETPs (the term includes both exchange-traded funds and exchange-traded notes), listed on U.S. exchanges. This number has increased without interruption since the first U.S.-listed ETF, SPDR S&P 500 ETF (SPY), was launched in 1993. The expansion of the ETP menu during the intervening 20-plus years has featured many truly useful new innovations, including international-equity ETFs and bond ETFs.

Stock action suggest a potential head fake in the major indexes
The action in the market right now is suggesting that it may be setting up for a bit of a head fake, with the current move lower punctuated by a bit of a pop, with the probability of a lower low and accelerated declines high after the bounce stalls.

The four trends powering growth in ETFs
Financial News
That was the question facing a big-name panel at the ninth annual Inside ETFs conference in Amsterdam on June 14. It’s a sign of the industry’s almost boundless potential for growth beyond its current global $3.1 trillion that the speakers struggled to agree on which factor was going to be most beneficial.

VIX Volume Explodes in Notes as 5 Days of Stress Sets ETN Record
Volume exceeded 4 percent of total U.S. trading for first time
Traders piled in to exploit a rare outsized jump in VIX
The worst market contortions since February are making stars out of once-obscure exchange-traded notes tied to equity volatility. Trading in five of the most popular securities linked to moves in the Chicago Board Options Exchange Volatility Index surged to more than 4 percent of total U.S. stock volume in the last four days, a level that before this week had never been reached once, according to data compiled by Bloomberg.

Brexit, Subprime, Corporate Welfare And Overvalued S&P Indices – SPDR S&P 500 Trust ETF Seeking Alpha
In continuing my series of analysis on ETF’s, Indices and Mutual Funds today I analyzed the S&P 600 Small Cap Index (NYSEARCA:SLY) with my Friedrich Algorithm . For those of you new to this type of analysis HERE is a detailed introduction.
Before I get into that though I thought that I would just mention a few things that are happening in the world right now that I find disturbing. The first is something that I never thought I would ever see in my career and that is the Swiss 30 year yield dropping into negative territory for the first time in history (happened today). So anyone buying the Swiss 30 year is basically letting the Swiss government borrow one’s money for 30 years and at the same time will have to pay that government interest for the privilege of doing so for the next 30 years.


Gold Pulls Back as Investors Take Profits
Gold prices fell Friday as a recent rally in the precious metal prompted some investors to cash out on previous positions.
Gold for August delivery was recently down 0.4% at $1,293.60 a troy ounce on the Comex division of the New York Mercantile Exchange, and traded as low as $1,289.70 on Friday morning. The move lower comes after a seven-day winning streak that led gold prices to a two-year high.

Why Precious Metals are Shining Brighter for Investors
Gold headed for a third weekly advance as concern the U.K. may vote to leave the European Union and the U.S. Federal Reserve’s decision to hold off raising interest rates boosted demand for the precious metal.

Gold Can Only Go Up As A Perfect Storm Of Brexit And Trump Presidency Loom Large
Gold shone brightly for a few days this week before running out of steam, but if anyone thinks gold has done its best for 2016 they’re not looking at what’s driving the “barbarous relic”, as Lord Keynes so unkindly and inaccurately described the precious metal.

Brexit Boosts Gold This Week But Metal’s Uptrend Not Just About U.K.
People tend to buy gold when they fear economic or financial crisis ahead. That makes it an urgent decision for U.K. savers right now. Money managers and retail investors have sent bullion demand higher across all Western markets to date in 2016, but the risk of a Brexit shock to the British pound and the FTSE stock index, however, is really concentrating minds amongst people in the U.K.


Brexit, Yellen, Zuckerberg Role: Week Ahead June 18-25
Speeches, debates mark countdown to U.K. national referendum
U.S. home sales, GE does digital, CES comes to New York City
The U.K. votes on membership in the European Union this week, ending a bitter campaign between the “Leave” and “Remain” camps. Follow the TOPLive blog June 23 for real-time coverage here.

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