First Impressions

Mike Forrester reflects on 50 years of trading at the CBOT

For the better part of the Chicago Board of Trade’s history, the exchange was built on the backs of grains traders. Mike Forrester, who started at the CBOT in 1963, has seen the best and worst of corn, wheat and soybean markets during his time on the floor. John Lothian News sat down with Forrester and spoke with him about a career that lasted more than 50 years.

Watch the video »

Quote of the Day

“The ECB is acting as an ersatz economy ministry, but it’s not made for that, because its only instrument is printing money. Wherever fiscal investment and growth impulses are lacking among European Union states, the ECB jumps in with liquidity.”

German Vice Chancellor Sigmar Gabriel in the story, “Merkel’s Deputy Says ECB Has Reached Limit With Low-Rate Policy”

Lead Stories

Banks pile into equities trading as salve for bond wounds
Wall Street banks are piling into equities trading and doing increasingly creative things to win over clients. But as competition heats up, the low-margin business may come under further pressure. The list of banks focused on growing equities spans both sides of the Atlantic, including Citigroup Inc, UBS Group AG and Deutsche Bank AG. They are taking different tacks, with some focused purely on old-fashioned buying and selling of stocks, others on derivatives or exchange-traded funds, and others on prime brokerage or electronic trading. Some aim to do all things for all clients.

Why We’re Reviewing Asset Management
Jacob Lew – WSJ
Opponents of financial reform are cheering a court decision to rescind the Financial Stability Oversight Council’s designation of MetLife for heightened regulatory supervision. FSOC designated MetLife after determining that material financial distress at the company could threaten U.S. financial stability. Leaving aside whether the decision will be overruled on appeal, efforts to depict the court’s decision as a positive for our financial system are mistaken and dangerously ignore the lessons of the financial crisis.

****SD: This piece is getting overshadowed by Lew’s open letter regarding the $10 bill (see our “Currencies” section if you somehow didn’t hear about Harriet Tubman/Hamilton/Jackson).

Big U.S. banks grapple with costs as they face an ominous 2016
Five large U.S. banks cut more than $5 billion from their expenses during the first three months of the year, but it was still not enough to stop the financial bleeding in what was by many measures the worst quarter for Wall Street since the financial crisis. Volatile stock and bond markets, a rout in energy prices and stubbornly low interest rates left big banks’ earnings in the dumps. As they reviewed results over the past week, some bank executives said conditions have improved in the early days of the second quarter, but there was little optimism that 2016 will be a year to celebrate.

****SD: From the Financial Times: US banks endure biggest drop in revenues since 2011

“25-year-old credit traders are going to make things a lot worse” – a view from a ‘veteran’ bond trader
Longevity and trading do not go hand in hand. Investment banks are drafting in younger traders to replace the old guard – ‘juniorisation’ is the new buzzword – and those with deep market experience are on the periphery. At nearly $9 trillion, U.S. corporate bond market is one of the largest in the world and one of the most important as institutional fund managers rack up a higher concentration of bonds in their portfolios. But for market ‘veterans’ – and this can mean anyone with over a decade of experience – the growth of electronic trading, combined with balance sheet restrictions, means that they are often finding their skills out of date. We spoke to one survivor – who has over 13 years experience – on how the job has changed. He wished to remain anonymous.

SWIFT And Accenture Outline Path To Distributed Ledger Technology Adoption Within Financial Services
Press Release
SWIFT announces today the availability of a new paper investigating how Distributed Ledger Technologies (DLTs) could be used in financial services. Published in collaboration with Accenture, the paper is based on an in-depth technology assessment by SWIFT of DLT usage across financial institutions, highlighting the opportunities as well as the challenges for industry wide adoption.

After a Rough Quarter, Goldman Faces Questions on Strategy
Nathaniel Popper – NY Times
Goldman Sachs has been betting that it will again see around the next corner better than its competitors. As other large banks have been cutting back the trading and investing businesses that have long defined Wall Street, Goldman has fearlessly stuck to its guns.

Why the Return of Subprime Lending Isn’t All Bad
These loans can be a lifeline for the self-employed, though borrowers could potentially overreach. For shoppers and homeowners alike, today’s mortgage market offers plenty to cheer about. After edging up last year, interest rates are again ultralow. With the financial crisis long over, lenders are loosening up, approving borrowers with a few credit blemishes in their past. First-time buyers can again put down as little as 3%. You can apply for a mortgage right from your smartphone. More affordable “interest-only” loans are showing up on the menu at major banks. And not having a steady paycheck is no longer a barrier to financing a home.

CME Invoice Spread Volumes – updated
Clarus Financial Technology
We update our analysis on the new CME Ultra 10 UST Future by looking at volumes in Invoice Spreads with matching dates to the futures contract.
We find continued impressive volumes.
About 6% of the risk-weighted volume in futures can be attributed to Swaps-related trades.

COLUMN: Roots of the next financial crisis: the last one’s veterans give views
Lawrence Hsieh – Reuters
There is a general consensus that the next financial crisis will follow the familiar arc of bubble, falling asset values, a run, credit/liquidity crunch, finger-pointing, new regulation, financial innovation, and unintended consequences for both regulation and innovation. There is less consensus about the where, when, how, and why. Perceived risks range from disruptive financial technologies and shadow banking to political turmoil in Brazil and economic weakness in China. I asked experts including policy veterans of the last crisis for their thoughts on the near-term probability of another one, including their views on sources of risk listed below. Their responses, which reflect their own views and not necessarily the views of the organizations that they work for, are set out below this list.

Central Banks

Trump leans toward replacing Fed chief if he wins White House
Republican presidential candidate Donald Trump would be inclined to replace Federal Reserve Chair Janet Yellen if he wins the White House despite supporting the U.S. central bank’s efforts to keep interest rates low, he told Fortune magazine. “I think she’s done a serviceable job,” Trump said in an interview published late on Tuesday, as the billionaire real estate mogul moved a step closer to becoming his party’s nominee with a resounding win in the New York state nominating contest.

ECB threatens ‘go big or go home’ adage in bond market
Financial Times
A recent flurry of smaller euro-denominated corporate bond sales shows that the paradigm of “go big or go home” which has ruled in bond markets may be coming to an end. The European Central Bank’s plan to start buying corporate bonds has compelled investors to increase their exposure to the sector. That increased demand has, in turn, reduced the premium paid by companies selling smaller and less liquid bonds.

****SD: Just so long as this doesn’t turn into one of those “go big and go home” scenarios — far worse.

China’s Central Bank Injects Most Funds in Almost Two Months
The People’s Bank of China injected the most funds into the financial system via open-market operations in almost two months, stepping up efforts to avoid a seasonal cash squeeze. The central bank auctioned 250 billion yuan ($38.7 billion) of seven-day reverse-repurchase agreements on Wednesday, the most since Feb. 26. This brings the net additions so far this week through open market operations to 255 billion yuan, data compiled by Bloomberg show. Maturing Medium-Term Lending Facility loans, tax bills and payments toward banks’ required reserves will drain more than 1 trillion yuan from the financial system in April, according to a Huachuang Securities Co. estimate.

Merkel’s Deputy Says ECB Has Reached Limit With Low-Rate Policy
Patrick Donahue and Birgit Jennen – Bloomberg
German Vice Chancellor Sigmar Gabriel said the European Central Bank has “reached its limit” with stimulus measures, wading into the euro area’s debate over monetary policy with a call for governments to step into the breach with higher spending.

Brazil official expects central bank to reduce FX intervention
Brazil’s central bank will intervene less in the foreign exchange market as it expects volatility to ease in coming days after lawmakers voted to impeach President Dilma Rousseff, a senior government official told Reuters on Tuesday. “Given the market today, the work will be done with a lighter hand,” said the official who asked not to be named because he was not allowed to speak publicly. “If you intervene in the market more than necessary, then you end up weighing too much.”

EU Bank Sovereign Cap May Raise Yields, Central Bank Study Says
European countries may see increased debt-financing costs if the region’s finance ministers approve restrictions on bank holdings of sovereign bonds that the officials will first review this week, a study published by the Bank of Italy showed. The cap “could lead to increases in sovereign yields,” members of the Rome-based central bank’s financial supervision and economic directorates said in a paper. The “costs of a reform could be sizable, while the benefits are uncertain,” the study said.

Regulatory News

Exclusive: U.S. regulators query banks on their ‘Brexit’ contingency plans
U.S. financial regulators are demanding regular updates from Wall Street banks about their contingency plans should Britain vote to leave the European Union, banking and regulatory sources told Reuters. Scenarios under scrutiny range from how their London operations would handle lengthy uncertainty if Britons opt to quit the bloc in a June 23 referendum, to whether they could still offer financial services in continental Europe from a non-EU Britain.

Don’t gamble on a wager
In WW Property Investments Limited v National Westminster Bank plc(1) – one of many interest rate swaps claims that have been made since the global financial crisis – the High Court confirmed, in line with previous decisions, that interest rate hedging agreements are not wagers in law where at least one party entered into the contract for a genuine commercial purpose and not to speculate. Interestingly, the High Court also struck out a claim that the bank had breached an implied term of the swap agreement that it would not manipulate the London Interbank Offered Rate (Libor).


Harriet Tubman will replace Andrew Jackson on $20 bill
Politico reports that 19th century African-American abolitionist Harriet Tubman will replace Andrew Jackson on the US $20 bill. The news site is also reporting that Alexander Hamilton, the first US Treasury secretary, and the subject of a hit Broadway musical at the moment, will remain on the $10 bill.

****SR: There was an Andrew Jackson “rock musical” called “Bloody Bloody Andrew Jackson.” I guess it wasn’t popular enough to keep him on the $20.

Currency Managers Grasp for Next Winning Trend as Dollar Falters
After years of global easing made buying the dollar one of the world’s most popular trades, currency traders are latching on to any glimmer of economic brightness to try to uncover the next big theme. Even hints that central bank stimulus may be no longer required is enough to spark buying. Sweden’s krona climbed last week to its strongest level against the euro since January after a report showed the nation’s inflation rate exceeded economists’ predictions in March, damping bets for further easing. In Canada, a recovery in crude oil and non-commodity exports pushed the currency to the biggest gains in the developed world during the past three months, even as the central bank warned of the currency’s strength.

Counting the numbers: latency and FX
Why does the international FX community continue to discuss and compare network latencies when other industries have chosen a more service-led approach to selecting a telecommunications provider? Time and money, that’s why.

Market Scramble: Forex hedges amplify yen-stock feedback loop
Nikkei Asian Review
As the link between the yen and Japanese share prices seems to grow ever tighter, market watchers see a connection to attempts by foreign investors to beat currency risk. The Nikkei Stock Average advanced nearly 600 points, or 3.68%, on Tuesday as it lurched back into forward gear following the previous day’s reversal. The Japanese currency zigzagged in a range of nearly 1 yen against the dollar on a volatile day in Tokyo markets.

‘Brexit’ may knock 25% off sterling: Hedge fund CEO
Sterling may lose one-quarter of its value if the U.K. votes to leave the European Union in its upcoming referendum, the head of a top London hedge fund told CNBC. “If there’s a ‘Brexit,’ the currency is going to fall a great deal from here; so estimates range, but 25 percent is a possible estimate,” Jonathan Martin, CEO and chief risk officer of London-based Markham Rae, told CNBC on Tuesday at the Investors Choice Awards.


How did Argentina pull off a $16.5bn bond sale?
Financial Times
After more than a decade in limbo, Argentina and its new, reforming president Mauricio Macri have been given the red carpet treatment by global bond investors. With orders reaching almost $70bn, the Latin American country sealed the largest ever bond issue from an emerging market economy on Tuesday, with a $16.5bn sale of government debt. Enthusiasm has been absent over the past two years from Latin American borrowers, as a rout in commodities and the prospect of higher interest rates in the US turned bondholders off a continent that was once highly favoured.

5 Reasons Bond Funds Beat Individual Bonds
I often hear people (including financial advisers) say that individual bonds are better than bond funds, and I couldn’t disagree more. Here are some reasons to use low-cost bond funds for your clients.

Hedge funds to see increased role in Europe’s bond market
The Trade
Hedge funds and other independent market makers could see an increased role in Europe’s fixed income market, as banks look to pull back as liquidity providers. According to a new report from the International Capital Markets Association (ICMA), hedge funds are looking to adapt to the new fixed income landscape and could see a role as price makers.

RBS cries ‘sell everything’ as deflationary crisis nears
The Telegraph
RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel. The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman crisis in 2008. “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it said in a client note.

Indexes & Index Products

The New All-Time High in SPY That Was Considered Impossible
The Fat Pitch
Summary: SPY made a new all-time high on Tuesday despite falling margin debt, the end of QE, negative household fund flows, flat profit growth and a host of other reasons. In other words, exactly as a rationale and objective investor should have expected.

Why Glenn Stevens ‘fragile’ financial markets call is worth listening to
Australian Financial Review
With the major S&P/ASX 200 index up around 10 per cent over the past two months and now hovering around the 5200 level, there is naturally a lot of chat about whether the market has come too far, too fast. If Glenn Stevens is right, perhaps investors should be wary about the recovery in financial markets and the gains made since February when the sharemarket fell to an intra day low of 4706, it’s lowest level for the year. In a speech in New York on Tuesday night the governor of the Reserve Bank said that although “things have calmed down somewhat” since those wild days, the concern is that “while some recovery is welcome, the relative ‘calm’ seems a little eerie – perhaps fragile”.

The Papal Approach To Investing: A New Catholic Values ETF
There are multiple ways to approach socially responsible investing. One approach includes faith-based investing and investors have a new option to consider in the Global X S&P 500 Catholic Values Index ETF, which debuted Tuesday.


How Badly Does Gold Need A Brexit?
Kitco News via Forbes
Barring a major geopolitical event to push gold prices higher, the market is destined to fall below $1,200 an ounce, says one market economist.
According to KC Chang, senior economist with IHS, the biggest event on the horizon that is currently supporting prices is Britain’s upcoming referendum, June 23, on whether or not the nation will leave the European Union. A “Brexit” could be the game changer that pushes prices above $1,300 an ounce, he said.

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