First Impressions

It is that time of year (vacation time) and as it happens many of our staff writers are on vacation so our usual commentary in this space will be a bit hit-or-miss for the next week or so. All the usual great content is there below though.

Quote of the Day

“We’re definitely worried about breaking the buck. That’s our biggest problem, the notion of principal preservation.”

Verett Mims, assistant treasurer at Chicago-based Boeing in the story, “Half-Trillion-Dollar Exodus Magnifies Treasury Bill Shortage”.

Lead Stories

Argentina Default Is Ruled a Credit Event for Swaps
PETER EAVIS – Dealbook – NY Times
The repercussions of Argentina’s sovereign debt default continued to spread through global markets on Friday, as an industry body decided that financial instruments used to insure against the default must pay out.
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***JB: As we have for the past few days the stories on Argentina (there are a lot of them) are collected at the bottom of the “Lead Story” section.

Half-Trillion-Dollar Exodus Magnifies Treasury Bill Shortage
Liz Capo McCormick and Daniel Kruger – Bloomberg
One of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government.
Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp.
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**JK – Big demand for short-dated debt.

New ‘iBillionaire’ ETF looks to bring Buffett and Icahn to the masses
Ashley Lau – Reuters
Mom and pop investors hoping to emulate the investment savvy of Wall Street’s wealthiest like Warren Buffett and Carl Icahn will have a new way into markets on Friday when the latest low-cost exchange-traded fund tracking the stock picks of big name investors begins trading.
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Can this trio of ‘yield dampeners’ protect bonds from rate rise?
Alasdair Pal – Investment Week
Investors predicting historically-low interest rates will rise after the end of quantitative easing are misguided, M&G’s fixed income desk have said.
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**JK – A note on how savings will continue to support fixed income.

Stanley Ross, Bond Trader Who Changed Pricing, Dies at 83
John Glover – Bloomberg
Stanley Ross, the London-based Eurobond trader who revolutionized the system that priced debt securities in the 1970s, has died. He was 83.
Ross died at his home in Dunfold, England, on July 23, according to his friend Valerie Thompson. The cause of death is not yet known, she said.
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**JK – Great obit story on Mr. Ross.

New South Korea finance chief has a brand; product to follow?
Tony Munroe and Christine Kim – Reuters
Three frenetic weeks into the job, South Korea’s new finance minister Choi Kyung-hwan has made such a splash that his name already describes Seoul’s plans to rev-up faltering growth.
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**JK: Korean economic recipe: pour in spending, trim mortgage restrictions, add taxes to corporate reserves and ease up on interest rates – then stir.

All aboard the US$ flow merry-go-round!
Izabella Kaminska – Financial Times
Money managers have been stung hard this year due to US government bonds not performing the way their traditional mean-reverting strategies suggested they would. Taper was supposed to imply sell-off. That didn’t happen. And now everyone is trying to understand why not.
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**JK – Interesting theory from the FT.

Can ETFs Be Derailed?
Jonathan R. Laing – Barron’s
For all their popularity and éclat, exchange-traded funds are like blockbuster drugs — hugely beneficial when used correctly, but not bereft of potential adverse side effects. And, while the risks might seem small or unlikely, they could add up to an unpleasant experience. Some bankers, traders, and academics are increasingly voicing concerns that ETFs could exacerbate market downturns.
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Argentina’s Plan to Escape Default Is Hidden in the Fine Print
Sheelah Kolhatkar – BloombergBusinessweek
“Default is not to pay,” Argentina’s President Cristina Fernández de Kirchner declared last week during a dramatic press conference in Buenos Aires. “Conditions for default are stated in the debt emission, in the contract, and a payment block is not in it.” She was referring to the fact that a Manhattan federal judge named Thomas Griesa issued an order blocking Bank of New York Mellon, the trustee that holds $539 million in funds Argentina deposited for a bond payment due by July 30, from distributing the money to holders of the notes until Argentina settles its dispute with a group of hedge funds. Because the payment was blocked, the country was declared to be in default on its debt, sending the markets into turmoil and triggering approximately $1 billion in credit-default swaps.
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Citigroup Could Lose up to $80 Million From Argentina Default
Saabira Chaudhuri – WSJ
Citigroup Inc. said Friday it could lose up to $80 million as part of regulators’ response to Argentina’s default this week.
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Argentina’s Default: Lessons Learned, What Happens Next
Jon Hartley – Forbes
For the second time in 13 years, Argentina has defaulted on its debt. Since the 2001 Argentine sovereign debt default, the country has experienced more than an aftermath of lawsuits and bond restructures, with the U.S. Supreme Court most recently siding with “holdout” hedge funds NML Capital and Aurelius Capital in a 7-1 ruling, ordering that Argentina pay the hedge funds full principal plus interest, amounting to a payment of $1.5 billion dollars. Until now, the entire saga has been nothing but dramatic, with Elliott Associates, the parent company of NML Capital, making attempts to impound Argentina’s national assets, including an Argentine warship and even the Presidential plane. Following the Supreme Court Ruling, a U.S. District Judge barred Argentina from paying interest to investors who own restructured bonds (who previously accepted 33 cents on the dollar from 2005 or 2010 restructurings) until it pays the hedge funds $1.5bn in compliance with the ruling. Since the parties failed to reach an agreement by July 30, the country entered a “technical” default on its restructured debt.
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Argentina’s Default Is a Warning to Frothy Government Bond Markets
Michael J. Casey – WSJ
Of all the options available to investors, buying a sovereign bond is unique for one reason: There is no easy legal recourse when the debt goes unpaid.
That idea is worth contemplating after Argentina’s default on foreign bonds last week. Investor nerves over a buildup of risky bets have frayed as uncertainty grows over the timing of the Federal Reserve’s exit from its six-year-old zero-interest-rate policy.
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Central Banks

European Central Bank Picked Tough Time to Diet
Brian Blackstone – WSJ
The European Central Bank picked a difficult time to go on a diet.
Faced with a weak economy and inflation rates edging toward zero, the ECB’s balance sheet—its holdings of securities and loans—has been shrinking fast, by over EUR1 trillion since 2012.
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Lacker Says Markets May Be Surprised by Pace of Rate Rise
Craig Torres – Bloomberg
Investors may be underestimating the pace at which the Federal Reserve will raise interest rates over the next two years, said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.
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Grand Central: Test Approaches for Yellen’s Nerves and Judgment
Jon Hilsenrath – WSJ
Federal Reserve officials estimate that the unemployment rate in the long-run rate will settle in between 5.2% and 5.5%. The jobless rate rose to 6.2% in July from 6.1% in June, according to the latest Labor Department figures. That means it is still outside of the Federal Reserve’s comfort zone. Officials thus feel comfortable keeping short-term interest rates near zero to boost growth and hiring.
However, if the pattern of the past three years holds, the jobless rate will keep falling and the Fed could face challenging choices in the months ahead.
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Signs Of The Fed’s Era Of Secrecy Coming To An End
Ralph Benko – Forbes
“If I’ve made myself too clear, you must have misunderstood me,” Fed Chairman Alan Greenspan once famously said. The era of a mystagogue Fed may be ending. Recently, the House Government Oversight Committee passed, and referred to the full House, the Federal Reserve Transparency Act of 2014. This legislation is part of the legacy of the great former Representative Ron Paul. It popularly is known as “Audit the Fed.” How ironic that a mystery novel proves a device to dispel some of the Fed’s obscurantist mystery.
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China Central Bank Signals No Broad Monetary Easing
Bloomberg
The People’s Bank of China warned that the country’s credit and money supply have increased rapidly and indicated that it will refrain from broader monetary easing to support growth.
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PBOC’s $162 Billion Loan Spurs Speculation on Easing
Bloomberg
A Chinese central bank loan that’s almost the size of the U.S. bailout of American International Group Inc. has spurred speculation that policy makers have adopted a new form of monetary easing to shore up growth.
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Currencies

Euro Near Eight-Month Low as Short Bets Surge Before ECB
Anchalee Worrachate and Andrea Wong – Bloomberg
The euro traded at almost its lowest level versus the dollar since November as investors held the largest position in two years betting on a drop in the currency before the region’s central bank meets this week.
The pound snapped five days of declines versus the euro before reports this week that economists forecast will show U.K. growth. India’s rupee strengthened as emerging-market currencies gained for the first time in eight days.
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Euro Seen Vulnerable as Blowback From Sanctions on Russia Bites
Neal Armstrong – Bloomberg
European Union sanctions on Russia risk inadvertently denting the euro-area’s economic recovery and accelerating a decline in the currency, foreign-exchange strategists said.
Deteriorating trade relations with Russia led Barclays Plc economists to cut their forecast for euro-zone gross domestic product, while Royal Bank of Scotland Group Plc reiterated its forecast the euro will weaken as the sanctions take hold. Germany will suffer due to its close ties with the Russian economy, according to the Sentix institute.
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El Niño affects FX as well as commodities
Jamie Chisholm – Financial Times
“Currency forecasting is fraught with enough difficulties already,” says Adam Cole at RBC, “without making it subordinate to weather forecasting.” But the bank’s head of G10 FX strategy is brave enough to give it a go in relation El Niño, the climate phenomenon usually assessed for its impact on the commodity sector.
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Europe faces long wait on FX derivatives definitions
Anish Puaar – Financial News
European market participants will need to wait until 2017 for more clarity on how to define different types of currency trades after the European Commission said it would not be possible to solve the issue any earlier under current rules.
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Currency lull no fun for forex investors
Beat Siegenthaler – Financial Times
Recent months have not been much fun for foreign exchange investors. Volatility collapsed to historic lows as major currency pairs have traded in narrower ranges, with flows and risk-taking dropping sharply. Corporate treasuries might welcome the seemingly reduced need to spend money on hedges, but most will also realise their increased vulnerability to any sudden spikes.
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Macro woes leave HSBC nursing the effects of FX
Vivek Ahuja – Financial News
Credit and rates trading revenues surged by around a third at HSBC in the second quarter, but a similar year-on-year percentage drop in foreign exchange revenues – the biggest part of the UK bank’s trading business – tarnished the growth story.
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New Records Set For Yuan Trading On Moscow Exchange
Record volumes have been posted in trading of the Chinese Yuan/Russian Ruble (CNY/RUB) on Moscow Exchange”s FX Market.
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Hong Kong Defends Peg as Sanctions Fuel Russian Cash Flows
Kyoungwha Kim, Vladimir Kuznetsov and Ksenia Galouchko – Bloomberg
Hong Kong’s monetary authority intervened in the foreign-exchange market to curb gains in the local currency as sanctions over Ukraine stoke speculation of an influx of Russian cash.
The central bank bought $620 million today, data posted on the Hong Kong Monetary Authority website show. That adds to the $8.39 billion it purchased in July, the most since at least October 2012, according to data compiled by Bloomberg. Russian capital outflow was about $2.5 billion in July, according to Renaissance Capital Ltd.
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Indexes & Index Products

HKEx boosts promotion of China index futures
Joe Parsons – Futures & Options World
Hong Kong Exchanges and Clearing (HKEx) has furthered its promotion programme for its China CES 120 index futures as it prepares to launch its mutual market access link with Shanghai. According to a statement from the exchange group, it will launch a promotional programme between October 1 and December 15, in order to enhance the trading knowledge of HKEx staff and their clients for the contract.
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Fed Gets Hip to the VIX
Steven M. Sears – Barron’s
The Federal Reserve’s easy-money policies saved the financial system from failing under the weight of the credit crisis. But the hangover of the central bank’s quantitative-easing experiment of historically low interest rates and monthly asset purchases helped create historically high levels in the stock market. Some investors even worry of a postcrisis bubble. This is apparently not lost on the Federal Reserve.
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Checking Up on Fidelity’s New ETFs
Lewis Braham – Barron’s
If ETFs are like the Protestant Reformation to the fund industry, Fidelity is the Catholic Church. The House that Peter Lynch built is famous for its active management. That’s why to fund insiders it was as astonishing as Vatican II when the $2 trillion money manager launched 10 sector index ETFs of its own last October. Prior to that it had opened only one other ETF, Fidelity Nasdaq Composite Index, which it let languish for more than a decade.
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Financial Advisers Weigh Impact of SEC’s New Money-Fund Rules
Daisy Maxey – WSJ
Some financial advisers are reassuring their retail clients who own money-market funds that new regulations requiring a floating share price won’t affect them. But some institutional clients in money-market funds may consider moving their money into other types of money funds or other fixed-income products.
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Gold

Hedge Funds Cut Gold Bull Wagers by Most in Eight Weeks
Marvin G. Perez – Bloomberg
Hedge funds reduced bets that gold would rally from the longest retreat in a year as U.S. economic growth exceeded analysts’ estimates.
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India Snatching Up Swiss Gold, Silver
Kenneth Rapoza – Forbes
Gold loving India is hoarding Swiss gold, and recently accounted for 42% of total gold and silver leaving Switzerland.
According to the Swiss government, its total value of exported gold, silver and coins in the month of June stood at 3.9 billion Swiss franc ($4.3 billion), of which India accounted for 1.63 billion francs ($1.8 billion).
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Miscellaneous

Junk-Debt Liquidity Concerns Bring Sales
Katy Burne – WSJ
A shakeout in the junk-bond market is drawing only cautious interest from bargain-hunters, underscoring investor fears that many once-hot securities could prove hard to sell in an increasingly difficult trading environment.
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