First Impressions

Big Newsletter Changes
Starting tomorrow, JLN Financials will no longer be published. Our flagship morning newsletter is getting a makeover — content that would usually be found in JLN Financials will now be included in the morning newsletter. Subscribers to JLN Financials will now get the morning newsletter instead (if they do not already subscribe). We hope you will enjoy the expanded coverage.

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Have a great weekend!

Quote of the Day

“At the beginning everyone thought [Tidjane Thiam] could walk on water. Nowadays everyone thinks he struggles to swim.”

Zuercher Kantonalbank analyst Andreas Brun in the story, “A year into the job, Credit Suisse CEO’s superstar status loses shine”

Lead Stories

Most big U.S. banks pass Fed’s stress test, boosting shareholder payouts
Nearly all of the largest U.S. banks are on steady enough footing to increase payouts to shareholders, the U.S. Federal Reserve said on Wednesday, with just two subsidiaries of foreign banks failing its annual stress test.

Banks warned over conflict of interest
Financial Times
Banks have been warned about conflicts of interest by a new body charged with cleaning up the City of London in the wake of a string of financial scandals. A year after the Bank of England and Treasury called for its creation, the FICC Markets Standards Board made its first concrete proposals on Thursday, concentrating on so-called reference-price transactions.

Britain’s biggest banks called to BoE for ‘fireside chat’
Financial Times
The chief executives of Britain’s biggest lenders were called into the Bank of England on Wednesday to discuss the impact on the financial system of the country’s vote to leave the EU in last week’s referendum.

A year into the job, Credit Suisse CEO’s superstar status loses shine
Joshua Franklin and Oliver Hirt – Reuters
Credit Suisse Chief Executive Tidjane Thiam likes to joke he has a predilection for being under pressure. A year into the job he may have got more than he bargained for. Shares in Switzerland’s second-biggest bank touched record lows in June, and have plunged more than 50 percent since the former head of British insurer Prudential took up his new post on July 1 last year.

German ratings agencies merge to gain clout in U.S.-dominated market
Two small German ratings agencies with a combined European market share of less than 3 percent are merging to increase their clout in a market dominated by the big three U.S. groups Standard & Poor’s, Moody’s and Fitch. Berlin-based Scope said on Thursday it was acquiring Feri Eurorating from financial services group MLP (MLPG.DE) for an undisclosed sum and would expand its coverage to include sovereign ratings.

Was Brexit fear a giant hoax or is this the calm before the next storm?
The Telegraph
Let us separate matters. We face a political upheaval of the first order, but this is a necessary catharsis. Governments come and go. So do political parties. We face a much more serious constitutional crisis. It is why some of us want a national unity government, keenly alert to the interests of Scotland and Northern Ireland. As Professor Kevin O’Rourke from All Souls College argues here, most Leavers waltzed into Brexit with scarcely a moment’s thought for trauma inflicted on both sides of the Irish border. This carelessness must be rectified immediately.

The infrastructure of power
The Economist
China’s growing global clout can be unsettling for the incumbents who must make room for it. At the same time, China’s recent financial tumult has been unnerving for the investors exposed to it. This combination of vastness and vulnerability has left some people afraid of China and others afraid for it. Both groups have found reason to worry about the Asia Infrastructure Investment Bank (AIIB), which has just held its initial annual meeting in Beijing and approved its first $509m-worth of projects.

Islamic banking can be the ideal support system
There are mounting concerns currently being voiced by organisations such as the International Monetary Fund (IMF) and the Bank of International Settlements over the long-term impact of the slow growth rate reported across all major regions from the latter part of 2015 to early this year. Significant losses in the global financial and commodity markets have been observed following crucial developments such as the slowdown of the Chinese economy, volatile oil prices, and currency weaknesses in emerging economies.

GE Capital Sheds ‘Systemically Important’ Label
Ted Mann and Ryan Tracy – WSJ
General Electric Co.’s lending arm became the first big financial institution to escape stricter postcrisis rules by dramatically shrinking its business, a strategic pivot in sync with regulators’ demands for firms to reduce risk-taking.

JPMorgan is launching a startup residency program for fintech
Business Insider
JPMorgan is taking a new approach to working with tech startups. The firm is expected to launch a residency program for financial technology, or fintech, companies on Thursday in an effort to tackle strategic and security-related challenges.

Central Banks

Carney Signals Rate Cuts as Brexit Chaos Engulfs Political Class
Mark Carney signaled the Bank of England could cut interest rates within months as the central bank tries to shield an economy rattled by the shock of Brexit and the chaos engulfing Britain’s political classes.

Britain’s biggest banks called to BoE for ‘fireside chat’
Financial Times
The chief executives of Britain’s biggest lenders were called into the Bank of England on Wednesday to discuss the impact on the financial system of the country’s vote to leave the EU in last week’s referendum.

The arcane world of central banks have been put on notice
The Australian
Of all the chairmen of the US Federal Reserve, Alan Greenspan stands alone. He shamelessly used the office to promote himself as an international celebrity. He toyed with Wall Street, which hung on his every word. He once contemptuously quipped: “I know you think you understand what you thought I said, but I’m not sure you realise that what you heard is not what I meant.” In 1996, by using the words “irrational exuberance”, he knocked 2 per cent off stock prices in a half-hour. He never clarified whether he had the stockmarket in mind, yet such was his influence.

Let’s Talk It Over, Says BOJ, as Banks Lead Japanese Bond Revolt
Struggling to feel positive about negative yen bond yields? Record-low trading getting you down? The Bank of Japan wants to hear from you. The BOJ has added its own surveys of investors and primary dealers since last year, on top of separate Ministry of Finance panel discussions with traders and economists. Never before have Japanese authorities opened so many avenues of discourse with market participants.

China central bank criticizes media for publishing ‘inaccurate information’ on yuan rate
China’s central bank criticized the media on Thursday, saying some media continuously publish “inaccurate information” on the yuan foreign exchange rate, which help some “speculative forces” short the yuan.

Mexico Raises Key Rate More Than Expected After Brexit Vote
Mexico raised its key interest rate after the peso plunged on the U.K.’s vote to leave the European Union, outweighing concerns revealed in the same central bank decision of a weaker domestic economy. The currency rallied.

Regulatory News

Brexit gives Valdis Dombrovskis big sway over banks
Financial Times
Valdis Dombrovskis had a blunt message for Latvians when he took over as the country’s prime minister in the depths of a financial meltdown in 2009: “We are facing national bankruptcy. It’s going to be tough.” In a twist of fate — Britain’s shock vote to leave the EU — Mr Dombrovskis now finds himself in charge of bank regulation across Europe, and with a mandate to prevent a recurrence of the sort of crisis that rattled his Baltic nation.

How Banks Fared in This Year’s Stress Tests
The Atlantic
Last week, it was announced that the results of the first round of the Federal Reserve’s annual “stress tests”—which evaluate whether U.S. banks have enough capital to withstand a financial crisis—were positive: All 33 U.S. banks passed the “warm up” stress tests, signaling that they could, hypothetically, withstand an estimated $385 billion in losses should a recession occur. But the second round of results—released just after markets closed on Wednesday—were less promising.

Europe’s banking watchdog set for costly HQ exit on Brexit vote
Financial Times
Europe’s banking watchdog is set to take a multimillion pound hit as it looks to force through an early exit of its Canary Wharf headquarters following the UK’s decision to exit the EU. The European Banking Authority — which oversees EU-wide bank policy and stress testing — has said that it would move in the event of a vote to leave the EU. The regulator is locked into a £1.8m-a-year lease on a Canary Wharf tower until the end of 2020, meaning that its early departure will leave the EBA on the hook for the Docklands offices.

Morgan Stanley Must Resubmit Capital Plan in Fed Stress Test
Morgan Stanley was alone among the largest U.S. banks in stumbling through the Federal Reserve’s annual stress tests, getting conditional approval to increase payouts to shareholders. Thirty other firms passed, while two subsidiaries failed.


How China Took Center Stage in Bitcoin’s Civil War
Nathaniel Popper – NY Times
A delegation of American executives flew to Beijing in April for a secret meeting at the Grand Hyatt hotel, just blocks from Tiananmen Square. They went to meet with the new kingmakers in what has become one of the grandest and strangest experiments in money the world has seen: the virtual currency known as Bitcoin. Against long odds, and despite an abstruse structure, in which supercomputers are said to mine the currency via mathematical formulas, Bitcoin has become a multibillion-dollar industry. It has attracted major investments from Silicon Valley and a significant following on Wall Street.

FX: Retail investors dodge sterling Brexit bullet
Euromoney Magazine
As the polls closed on the UK’s EU referendum, the market was heavily positioned for a Remain victory. As news came in the result had gone the other way, traders scrambled to reverse their positions, triggering heightened volumes and volatility.

FX traders pick through Brexit wreckage
Euromoney Magazine
A week since Britain voted to leave the European Union (EU) after 43 years of membership, it is still no clearer who will lead the UK government or how Britain will negotiate its exit from the EU. Markets are on tenterhooks for more details, but some traders have already profited from currency bets. Paul Chappell, founder and chief investment officer at C-View, says it has been a while since currency markets have seen such sudden moves.

How Brexit Makes China’s Currency a Crucial Thing for Markets to Watch
For markets, Brexit is not just a story of European disintegration. The financial market stresses that could emanate from the results of the U.K. referendum bear a close resemblance to what investors were worried about in the summer of 2015 and the start of 2016: the potentially unwelcome tightening in financial conditions in Asian countries. Many in the Far East, including China, operate under managed exchange rate regimes that have historically tended to rise along with the U.S. dollar when investors seek refuge in safe havens.

The yen as a safe haven: a familiar but painful refrain for Japan
A weak economy, deflation, massive public debt, negative interest rates and an ageing citizenry don’t seem like good reasons for a country’s currency to surge, but that’s exactly what happened to Japan’s yen after Britain’s vote to leave the European Union.

BOJ board newcomer Masai warns against excess FX volatility
The Bank of Japan’s new board member, Takako Masai, said on Thursday excessive currency moves that do not reflect economic fundamentals are undesirable. “Excess volatility in currency markets risks hurting companies’ investment activity,” Masai said at her inaugural news conference.

Yuan Heads for Worst Quarter on Record as Outflows Seen Rising
Losses deepen after U.K. vote to leave European Union
Depreciation pressure seen for yuan over coming years: Danske
The yuan’s worst quarterly performance on record is raising the risk of capital flight.

Winklevoss Bitcoin Trust dumped NASDAQ for the largest market operator for exchange-traded funds, BATS
Brave New Coin
On Wednesday the Winklevoss twins filed a sixth amendment to their Securities and Exchange Commission (SEC) registration for the Winklevoss Bitcoin Trust. The amendment includes two major changes, the price and their chosen exchange. Cameron Winklevoss, CEO of the Trust, originally filed the Winklevoss Bitcoin Trust Registration Statement with the SEC on July 1, 2013. An amendment on May 8, 2014, named NASDAQ as the chosen exchange for trading. On July 1, 2014, a further amendment was revealed that the shares will be traded under the symbol “COIN.”


The ECB Admits: “We Are Concerned About The Shrinking Pool Of Eligible Debt”
Zero Hedge
Back in April of 2015 in a post titled “Mario Draghi, Collateral Scarcity, And Why The ECB Will Soon Buy Corporate Bonds”, we explained not only why, one year before it was unveiled, the ECB would buy corporate bonds, but why in Europes highly supply constrained bond market, Mario Draghi would not only have to expand his central bank’s collateral pool as it runs out of eligible bonds whose yields are below the ECB’s deposit floor thus making them ineligible for ECB purchases, but may have to do even more QE in a vicious loop as frontrunning the ECB leads to ever lower yields, and thus even more deflation.

Puerto Rico Faces Record Default: A Look at the Bonds Due
Puerto Rico Governor Alejandro Garcia Padilla says the island won’t pay general-obligation debt coming due on Friday even with President Obama poised to sign a bill that enables the commonwealth to restructure its $70 billion debt load.

The 96% Gainer: Government Bonds
Mike Bird and Christopher Whittall – WSJ
A corner of the market once sought after for steady returns has been this year’s jackpot investment: the government debt of advanced economies.

U.K. Opens Bond Market With Cigarettes and Alcohol After Brexit
The U.K. has reopened its corporate bond market with cigarettes and alcohol. British American Tobacco Plc and Jack Daniel’s whiskey maker Brown-Forman Corp. sold sterling bonds on Thursday, ending a month-long shutdown surrounding the nation’s vote to leave the European Union. BAT’s deal comprised 500 million pounds ($663 million) of notes, while Brown-Forman issued 300 million pounds of securities, according to data compiled by Bloomberg.

Here’s why investors bought S&P 500 bonds — not stocks — after Brexit
The bonds of companies in the S&P 500 index enjoyed a good run following the victorious “leave” vote in the U.K.’s referendum on EU membership — even as their stocks got crushed. The strong performance baffled analysts at first because corporate bonds are considered so-called risk assets, if not typically as risky as their stock brethren. Demand for corporate bonds over government-issued debt, for instance, tends to rise when risk appetite spikes and fall when markets are in panic mode; that’s typically true of stocks, too.

Indexes & Index Products

Investors, Don’t Play Footsie With Brexit
James Mackintosh – WSJ
Don’t be fooled by the Footsie. The U.K.’s FTSE 100 index is back above last Thursday’s close, just before Britons voted to leave the European Union, and those in favor of Brexit are crowing that everything’s fine. It isn’t. The FTSE 100 is a very poor representation of the U.K. In fact, it’s probably a better representation of the rest of the world than it is of Britain: Only 22% of its companies’ sales come from the U.K., according to Goldman Sachs. Many of the companies don’t even operate in sterling, with more than a third of dividends declared in dollars.

Vanguard’s King Sees No Future For ETFs In 401(k)s
Defined contribution retirement plans—such as 401(k)s—are a $6.7 trillion market today, covering some 90 million working Americans. Vanguard manages about $800 billion of those assets. That market has grown and improved significantly in the past decade, Vanguard Managing Director Martha King says, but there’s plenty of room to improve. What there doesn’t seem to be is a whole lot of demand—or use—for ETFs.

Here’s how ETF traders rode out post-Brexit stock-market rout
ETF investors kept their cool in the market turmoil that followed the U.K.’s vote last week to exit the European Union. A more than twofold jump in value of total market trading on Friday—a day that saw the biggest one-day rout for global equities in history—was almost entirely driven by trades in individual stocks, while ETF traders appeared to shrug off the most anticipated economic event of the year, said Dave Nadig, director of exchange-traded funds at FactSet, on Wednesday.

This Week’s ETF Launches: AccuShares Builds a Better Oil ETF
Yahoo Finance
Contango and backwardation. For professional commodity investors, the two terms are common knowledge. However, for regular retail investors, many are blissfully unaware of how these two situations can affect their returns – even if they own popular commodity-linked ETFs like the United States Oil ETF (USO A). In fact, the two situations can actually put investments into some pretty nasty losses.


Cheap Gold Mines Disappear as Buyers Splurge for Surging Bullion
So much for the run on cheap gold mines. Producers who were forced by slumping prices to unload assets last year are regaining leverage.

Gold expert: ‘I don’t think anyone has missed the boat at this point’
Yahoo Finance
Gold investing pro George Milling-Stanley, head of gold investment strategy at State Street Global Advisors, says investors haven’t missed the boat on investing in gold. Following the stunning Brexit vote last week, investors piled into gold, which is considered a “safe-haven” asset, pushing the precious metal’s price to a two-year high.


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