First Impressions

MarketsWiki Education Series, day 2
John Lothian and Doug Ashburn
Chris Edmonds, senior VP of financial markets for ICE, kicked off the day’s event by explaining the rise of central clearing, and how regulation has changed the OTC landscape. He said that, when he accepted the job at ICE in the days after the financial crisis, his mother wanted him to resign because he was in charge of clearing credit default swaps, which she heard were “weapons of mass destruction” according to Warren Buffett.

Edmonds was followed by another Chris, Chris Hehmeyer of HTG Capital Partners, who related the price risks we face on a daily basis as consumers to the price risks in the financial markets. It turns out today is the 37th anniversary of Hehmeyer starting at the Chicago Board of Trade as a runner, beginning his illustrious career which he outlined at the beginning of his presentation.

Next, Pat Kenny, VP of client relations for CQG, discusses his transition from the trading floor to an electronic platform. When asked by one of the interns about how he knew when it was time to move from trading to sales, he admitted that he was a bit of a “trading addict” and he needed a clean break. Kenny is particularly suited to relationship management, as much of the job requires him to entertain clients. “And who doesn’t like to entertain?”

Stefani Sandow, who has been working on Trading Technologies’ Nextrader platform redesign, traced her career as an architect to her work designing trading software. She once designed the tilework in the bathrooms at the Philadelphia airport. That was not the basis of the software design though. She did introduce me and the audience to Vitruvius, a Roman writer who said design should incorporate three principles – firmitas, utilitas, venustas, or rather should be solid, usable and delightful.

Mead Welles of Octagon Asset Management concluded the event with a fascinating story of how and why he created A Leg to Stand On, a charity to help kids around the world to get life changing help to stand, walk and live a normal life. 12,000 kids so far and counting. By the way, ALTSO’s fundraisers Rocktoberfest in Chicago will be held on October 8 and Hedge Fund Rocktoberfest in New York will be October 22 (get your tickets HERE), with bands from professionals in our industry playing.

It was another great day at the Summer Intern Education Series. Next Tuesday we have another great lineup and our biggest audience signed up, over 200 interns. Thank you again to all the firms sending interns and to our sponsors, BATS, CBOE, CME Group, Spot Trading, The IFM and Illinois Institute of Technology Stuart School of Business

Quote of the Day

“It could be dangerous because there won’t be huge enough balance sheets to absorb huge moves in the market. That risk appetite won’t be as good as it has been in the past.”

Brian Edmonds, head of interest-rates trading in New York at primary dealer Cantor Fitzgerald LP in the story, “Primary Dealers’ Bond Cuts Drain Liquidity: Chart”.

Lead Stories

Argentina’s Fernandez Denies Default Ruling as Bonds Sink
Daniel Cancel and Camila Russ – Bloomberg
Argentina’s President Cristina Fernandez de Kirchner denied the country defaulted on its debt in her first public comments since Standard & Poor’s said the nation had done just that for the second time in 13 years.

***JB: Again, since there are many stories regarding Argentina today, we have compiled a selection of them at the end of this section.

Primary Dealers’ Bond Cuts Drain Liquidity: Chart
Susanne Walker – Bloomberg
Wall Street’s biggest bond dealers are paring inventories of Treasuries to an almost three-year low, adding to concern diminishing liquidity will amplify yield swings when the Federal Reserve begins raising interest rates.
The CHART OF THE DAY shows the Fed’s 22 primary dealers cut positions in Treasuries in July to the lowest level since 2011 as they reduced holdings in every maturity sector less than 11 years, according to New York Fed data. Primary dealers, which are obligated to trade with the central bank at auctions, trimmed their holdings to $18.3 billion in the week ending July 16, down from $27.7 billion the previous week and a record $146 billion in October.

***DA: The unintended consequences of Dodd-Frank, Part 29.

Central Bankers Heading for the Punch Bowl
Paul Vigna – MoneyBeat – WSJ
Funny what one day can do. U.S. stocks suffered their single-worst session in months on Thursday, with the Dow off more than 300 points. That alone sent the index into the red for the month – down 1.6% – and snapped a five-month winning streak.

***DA: Any central banker who uses the stock market as a proxy for economic health is a knucklehead.

Tokyo Funds Snap Up European Bonds
Kosaku Narioka – WSJ
As European government bond yields tumble to record lows, big fund managers in Tokyo are betting they haven’t yet hit bottom.

Rising rates not always emerging markets poison
James Saft – Reuters
The taper tantrum was brutal, but rising rates do not have to mean lousy performance for emerging markets.

***DA: No, but the hot money that flowed into emerging markets will head for the exits at the first sign.

Argentina Debt Dilemma Spotlights Knotted World of Default Swaps
Abigail Moses – Bloomberg
Whenever the knotted world of credit-default swaps is pushed to the forefront in a financial crisis, conspiracy theories abound. Argentina is no exception.

***DA: Sometimes the truth is stranger than the wildest conspiracy theory.

Argentina Is in Default, and Also Maybe in Denial
Argentina may be in default, but you might not know it if you lived in Buenos Aires. Speaking to the nation in a televised news conference on Thursday, Axel Kicillof, Argentina’s economy minister, called it “atomic nonsense,” to say that the country had entered into a default.

Argentine Debt Feud Finds Much Fault, Few Fixes
Nicole Hong, Ken Parks and Matt Day – WSJ
Argentina’s default on $29 billion in debt brought a stock-market selloff and finger pointing by the Argentine government and creditors Thursday. But investors held out hope that a resolution to the crisis could be reached.

ISDA Agrees to Review Whether to Trigger Payouts on Argentina Swaps
Ben Edwards and Katy Burne – WSJ
The International Swaps and Derivatives Association on Thursday agreed to review whether Argentina’s failure to make certain bond payments on Wednesday will trigger a payout on insurance-like contracts linked to that debt.

Here Are Seven Ways Argentine Debt Crisis Could Get Fixed
Katia Porzecanski and Camila Russo – Bloomberg
For the second time in 13 years, Argentina is in default on foreign-currency debt. Government talks with holdout creditors from its original 2001 default, including Paul Singer’s Elliott Management Corp., aimed at averting the crisis ended without resolution. Local and international banks have come with their own proposals, so far without success.
So how will the situation get resolved? Here are seven possible outcomes:

Central Banks

An Aggressive Fed? Think Again
MoneyBeat – WSJ
Patience is still a virtue at the Federal Reserve, even if investor tolerance is starting to wear thin. Wednesday’s policy statement made clear that the Fed will tread carefully amid a second-quarter rebound and deepening debate inside the central bank about when to start raising interest rates.

***DA: A passive-aggressive Fed.

No-Exit Strategy May Be Fed Burden in Unwinding Stimulus
Matthew Boesler and Rich Miller – Bloomberg
The Federal Reserve is trying to change as little as possible as it crafts its strategy to exit from record stimulus. The trouble is financial markets have changed so much that the still-developing plan may prove costly and ultimately unworkable.

***DA: I generally agree, except that in place of the word “may” I would say “will definitely.”

Wait for ECB Stimulus Leaves Bond Sales in the Doldrums
John Glover – Bloomberg
Bond issuance by banks in Europe slumped last month, making it the slowest July since 2001 as lenders waited for the next round of stimulus efforts by the European Central Bank.
Banks issued 21.7 billion euros ($29 billion) of notes in pounds and the single currency, according to data compiled by Bloomberg. The slowest month of the year for sales came after lenders priced 300 billion euros of debt securities since the start of the year, the busiest half since the same period of 2011, the data show.

U.S. House panel approves bill to force Fed to follow rule
Michael Flaherty – Reuters
The U.S. House of Representatives Financial Services Committee narrowly approved a bill on Wednesday that would require the Federal Reserve to set a specific rule to follow when implementing monetary policy.

BOJ’s Kuroda defends upbeat economic view despite soft data
Bank of Japan Governor Haruhiko Kuroda came out fighting on Friday, giving a spirited defence of the economy’s performance after a run of weak data, and reiterated his readiness to expand stimulus if inflation faltered on the path to his 2 percent target rate.


Brazil’s Real Leads Global Currency Losses as Argentina Defaults
Filipe Pacheco – Bloomberg
Brazil’s real led losses among global currencies as Argentina, the nation’s third-biggest trading partner, missed a payment on its bonds.

Hong Kong Buys $2.07 Billion in Week to Defend Currency Peg
Fion Li – Bloomberg
Hong Kong’s de facto central bank bought $2.07 billion this week to stop the local currency from strengthening beyond its 31-year-old peg to the greenback.
Share listings, dividends and mergers and acquisitions are driving demand, the Hong Kong Monetary Authority said July 26. OAO MegaFon, Russia’s second-largest wireless operator, has shifted some of its cash holdings into the city’s dollar as the U.S. and Europe ratchet up sanctions, Chief Financial Officer Gevork Vermishyan said in an interview yesterday.

Low Volumes Persist in Global FX Turnover
Profit & Loss
Average daily global FX turnover in key financial centres has seen modest growth or little change in April 2014 compared to October 2013, according to recently released central bank semi-annual surveys

***DA: Low volatility=low turnover. Why hedge price risk if there is no price risk?

Bitcoin Raises Its Washington Profile to Silicon Valley’s Dismay
Carter Dougherty – Bloomberg
The Bitcoin Foundation’s executive director, Jon Matonis, travels the world to promote the virtual currency as a replacement for traditional money. Some of his members want him to focus on a less lofty goal: helping them make lots of old-fashioned cash.

Indexes & Index Products

Emerging market ETFs still have a lot to show – John Prestbo’s Indexed Investor
John Prestbo –
Emerging markets have been on a tear for most of this year, even though many of the world’s growing number of trouble spots are seething close by. Should an indexed investor turn cautious or keep on going?

VIX Spikes Again as Fear Creeps In to Market
Steven Russolillo – MoneyBeat – WSJ
Options traders rushed for protective positions Thursday amid worries about the Federal Reserve potentially raising interest rates sooner than expected.

***DA: The VIX ticked above 17 this morning, ahead of the jobs report.

Index Providers Mull Removing Russian Companies Following Sanctions
Ben Edwards – WSJ
Index providers are mulling stripping out some Russian companies, potentially undermining a key structural support for the country’s markets. In a statement late Thursday, MSCI Inc. said it is considering removing VTB Bank’s ruble shares from its Russian index after the U.S. Treasury Department slapped the bank with sanctions restricting its access to U.S. financial markets.


Platinum to Palladium Fixings Join Precious Metals Revamp
Nicholas Larkin – Bloomberg
The company that runs platinum and palladium fixings in London is seeking a new administrator for the price-setting process after similar changes were proposed for rituals in gold and silver.

Chinese gold jewellery demand sees first quarterly drop in 8 years
A. Ananthalakshmi and Jan Harvey – Reuters
Chinese gold jewellery demand fell for the first time in eight years in the second quarter and could drop as much as 20 percent in the full year, a leading precious metals consultancy said.

***DA: A leading economic indicator?

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