First Impressions

Eurex to Launch New Interest Rate, FX Contracts
John Lothian News
This morning began with an early conference call with Eurex, which just announced the launch of several new contracts. Here are the highlights:

Eurex plans to launch two new interest rate products in September that will round out its product mix to reflect current trends – futurization of swaps and alternative short term funding benchmarks. On September 1, Eurex will launch physically delivered Euro-Swap Futures. On September 10, the exchange will launch One-month EUR Secured Funding Futures, based on the STOXX GC Pooling family of indexes.

The exchange is also set to launch its suite of futures and options contracts on six currency pairs – EUR/USD, CHF/USD, EUR/CHF, EUR/GBP, GBP/USD and GBP/CHF. These contracts will be physically settled through CLS. Recall these contracts were set to launch last fall but there was a problem with the third-party bank providing settlement through CLS. They are good to go now, with an expected launch date of July 7, 2014.

Link to interest rate press release =>

Link to currency press release =>

Quote of the Day

“The market’s pricing in an extraordinarily slow Fed. Potential growth is a huge determinant of that long-term rate and most people are buying into the idea of lower potential growth.”

Margaret Kerins, the Chicago-based head of fixed-income strategy at Bank of Montreal in the story, “Bond Market to Fed: Your 4% Rate Forecast Is Way Too High”.

Lead Stories

Bond Market Flips the Script on Risk and Reward
Katy Burne and Min Zeng – WSJ
For many bond investors this year, the reach for yield has come up short. Bonds perceived as safe have produced better returns than riskier ones for the first time since 2010 and the second time since 2006, according to data from Barclays PLC. U.S. government bonds have rallied, high-grade corporate bonds have posted larger gains than junk bonds, and higher-rated junk bonds have risen more than more-speculative ones.

***DA: I said it in 2006 and I will say it again now: this will not end well.

Three radical new shifts in bond-market structure
Peter Lee – Euromoney Magazine
Algorithmic trading comes to the government bond market, while large virtual networks compensate for reduced dealer balance-sheet holdings of corporate bonds.

Bond Market to Fed: Your 4% Rate Forecast Is Way Too High
Daniel Kruger, Liz Capo McCormick and Craig Torres – Bloomberg
The bond market, unparalleled in predicting shifts in the U.S. economy over the decades, has a message: interest rates aren’t going to rise as high as even the Federal Reserve’s own forecast.
From bond yields to futures and swaps, traders see little chance the economy will strengthen enough over the course of its expansion to compel the Fed to lift its overnight rate beyond about 3.3 percent.

***DA: My chief metric is assessing at what rate the yield curve will be flat. That rate will be at or near the top.

EU Austerity Rethink Urged as Voters Back Protest Parties
Ian Wishart – Bloomberg
European Union leaders north and south of the economic divide are channeling an anti-austerity electoral backlash as they seek to push the case for an easing of fiscal policy throughout the euro zone.

***DA: Anti-austerity? I think they mean “pro-stimulus.”

Here comes the great bond liquidity drought
Peter Lee – Euromoney Magazine
Liquidity in the world’s bond markets has reached crisis point. Investors can no longer rely on banks to provide a crucial intermediary function in secondary markets. It’s now time that investors took responsibility and did something about the liquidity challenge themselves. Failure will be disastrous for global financial markets.

***DA: I have no patience for such alarmist comments. Except when I am making one.

Bond funds tide turns in Spain and Italy
Ralph Atkins and Elaine Moore in London – Financial Times
Spanish and Italian bond funds have seen the longest series of weekly outflows since at least late 2012 as investor sentiment turned against the eurozone’s previously crisis-hit periphery.

Banks’ FX cash cow runs out of milk
Farah Khalique – Euromoney Magazine
Market rigging lawsuits, trader suspensions and a move to swap execution facility trading are hurting banks’ ability to make money in foreign exchange, warn analysts.

***DA: Hamburger, anyone?

Piketty findings undercut by errors
Chris Giles in London – Financial Times
Thomas Piketty’s book, ‘Capital in the Twenty-First Century’, has been the publishing sensation of the year. Its thesis of rising inequality tapped into the zeitgeist and electrified the post-financial crisis public policy debate.

Piketty defends best-selling book from criticism
Vanessa Houlder – Financial Times
Thomas Piketty, the French economist who wrote a best-selling book on inequality, has defended his work against criticism by the Financial Times of shortcomings in his data.

The FT Claims Thomas Piketty’s Numbers Don’t Add Up, Piketty Calls The FT Ridiculous
Tim Worstall – Forbes
This has rather put the cat amongst the pigeons: the Financial Times went through the data that Thomas Piketty used to prove that wealth is becoming ever more concentrated and found, at least so they claim, that the evidence isn’t actually there. There are some minor transcription errors, there’s also some questionable interpolations in the data sets. But the real killer is that the claimed concentration of wealth, the thing that Piketty insists is going to get ever worse, doesn’t actually seem to exist. So the assumption that it is going to get ever worse doesn’t really stand, given that it’s not actually happening.

Leverage Addicts Get Junk-Loan Fix With Derivatives ETF
Lisa Abramowicz – Bloomberg
Forget complicated total-return swaps and collateralized loan obligations. A proposed exchange-traded fund will make it much easier for anyone to use borrowed money to double down on junk-rated loans.

IMF’s Lagarde says bank reforms slowed by fierce industry pushback
Progress in completing banking reforms to plug gaps highlighted by the 2007-09 financial crisis is too slow and is being hampered by fierce industry lobbying, the International Monetary Fund said on Tuesday.

***DA: Ya think?

Krugman Warns ECB Panel World’s Central Bankers Have It Wrong
John Fraher and Jeff Black – Bloomberg
Paul Krugman thinks Mario Draghi’s biggest thinkers have got it all wrong. Speaking to a gathering of the European Central Bank’s top researchers and policy makers, the Nobel Laureate said the ECB and other banks around the world need to raise the inflation targets they have clung to since the 1990s.

Central Banks

ECB decamps to debate monetary fixes
Claire Jones in Sintra – Financial Times
The European Central Bank’s top brass have decamped to Sintra, a picturesque town in the hills near Lisbon, this week to brainstorm with academics on new ways to use monetary policy to fix fragile economies. Their timing could prove as remarkable as the setting.

***DA: Maybe they will come away with the idea that there are neither easy nor painless fixes available.

ECB chief Mario Draghi warns of threat to eurozone recovery
Claire Jones in Sintra – Financial Times
Mario Draghi has warned that a “pernicious negative spiral” of low inflation and weak lending risks derailing the eurozone’s fledgling recovery, in a further hint that the European Central Bank will offer a package of rate cuts and credit easing measures at next week’s crucial policy vote.

Draghi’s Asset-Backed Drive Rouses Academic Skeptics
Jeff Black and Alessandro Speciale – Bloomberg
Mario Draghi’s plans for credit easing may not turn out to be all that easy.
In seeking to unblock the supply of loans to the economy by reviving the European market for asset-backed securities, the European Central Bank president risks an unprecedented reach into the functioning of the financial system that could backfire, according to academics including former Bank of England Deputy Governor Paul Tucker.

Turkey’s Premier to Central Bank Governor: Are You Kidding?
Emre Peker and Yeliz Candemir – MoneyBeat – WSJ
Turkey’s Prime Minister Recep Tayyip Erdogan is no fan of interest rates, and if the central bank does not quickly undo a four-month-old massive emergency rate hike, monetary policymakers are poised to make the premier’s blacklist too.

***DA: The cure for high prices is still high prices.

ECB’s Mersch: Banks need to be strong enough to meet credit demand
Euro zone banks need to be strong enough to support a pick up in credit demand to keep the euro zone recovery going, European Central Bank Executive Board member Yves Mersch said on Saturday.

BOJ’s Sato proposed highlighting risks on price target: minutes
Bank of Japan board member Takehiro Sato proposed changing the central bank’s assessment of prices to say that risks are tilted somewhat to the downside, highlighting skepticism within the board that Japan would be able to decisively beat off deflation in a year’s time.

***DA: What’s the hurry? It’s only been 22 years.

Bank of Japan, more confident about recovery, quietly eyes stimulus exit
The Bank of Japan has begun shifting its focus from supporting growth to ways of phasing out its massive stimulus, taking first tentative steps towards a potentially momentous move for the world economy.

Bank Of England: Responses To CP5/14 – PS4/14


Parallel between Japan’s stock and forex markets fades
Ben McLannahan in Tokyo – Financial Times
A weaker yen is good for Japanese stocks, right? The lower the currency, the higher the index? Wrong.

FX survey 2014: The reign of terror
Clive Horwood – Euromoney Magazine
Investigations into allegations of market fixing in foreign exchange are spreading into the very heart of the business. Those running the world’s biggest FX houses live in fear of what analysis of hundreds of millions of calls and emails will unearth. Do investigators and regulators risk bringing down the axe on a market that has always provided unrivalled liquidity and ultra-tight pricing for clients?

***DA: Is the author suggesting that benchmark rigging is a necessary by-product of liquidity and tight pricing? Let us hope not.

‘Darling’ sterling faces strong headwinds
Farah Khalique – Euromoney Magazine
The UK pound has steadily appreciated against leading currencies during the past year, as positive economic data have provided a much-needed boost – but Scotland’s looming referendum on independence and escalating fears of a UK housing bubble suggest the rally is reaching its final stages, predict analysts.

Currency Chaos in Venezuela Portends Write-Downs
Doing business in any foreign country can be risky. Then there’s Venezuela. With the highest inflation rate in the Americas and at least five currency devaluations in the past decade, the South American country is a corporate guessing game.

BitBeat: These Digital Currencies Are a Gold Bug’s Delight
MoneyBeat – WSJ
Love the ease of digital-currency payments but hate the volatility? A couple of precious metals-backed digital currencies claim to be the answer. Whether currencies such as NoFiatcoin and Minacoin can live up to their implied promise of a gold standard for cryptocurrency era is yet to be seen, though.

Bitcoin Set to Overtake eBay’s PayPal in Transaction Volumes
Jerin Mathew –
Popular digital currency bitcoin is expected to overtake e-commerce giant eBay’s payment processor PayPal in terms of US dollar transactions in the near future. California-based hedge fund Laureate Trust says that bitcoin is fast establishing itself as the currency to use globally and instantly to make purchases or payments over the internet recording nearly $300m (£178m, €220m) daily in transactions.

Indexes & Index Products

‘Closet indexers’ face legal action from investors
Madison Marriage – Financial Times
Investors in the US and Europe are considering taking legal action against fund groups that have sold expensive active funds that do little more than track market performance.

MTS spans Atlantic with ETF initiative
Sarah Krouse – Financial News
London Stock Exchange Group’s European electronic fixed income trading platform is bringing an exchange-traded fund initiative across the Atlantic.

Smart beta is the overnight success that took decades to arrive
Mike Foster and Sarah Krouse – Financial News
Today’s alternative indices or “smart beta” strategies are a far cry from Charles Dow’s humble Dow Jones Industrial Average index.

Warning on smart beta: ‘If it isn’t simple, walk away’
Mike Foster and Joe McGrath – Financial News
Three pioneers in the fast-growing field of smart beta have warned of complicated, expensive and opaque imitation smart beta strategies that could lead to heavy losses for investors and damage the sector’s reputation.

***DA: Key takeaway regarding smart beta: when it is good it is very very good, but when it is bad it is horrid.


Is the London Gold Fix Broken?
Francesca Freeman – MoneyBeat – WSJ
The future for London’s historic gold fix is looking less certain by the day. The U.K.’s Financial Conduct Authority slapped Barclays PLC with a GBP26 million ($43.7 million) fine Friday after one of its traders allegedlly manipulated the benchmark at the expense of a client.

***DA: The London Gold Fix would be turning 100 soon. Will it not make it to the milestone?

Barclays Manipulated Gold as Soon as It Stopped Manipulating Libor
Matt Levine – Bloomberg
If you were writing a paranoid fantasy of gold price manipulation you’d be hard pressed to come up with something more on the nose than the U.K. Financial Conduct Authority’s order against Barclays. It has everything; it is the benchmark of manipulation by which all future manipulation will be measured. Well, this or Libor. Delightfully, this manipulation occurred on June 28, 2012, the day after Barclays was fined 290 million pounds for manipulating Libor. They just really wanted to perfect their manipulating technique.

***DA: Delightfully????

With London ‘fix’ under fire, China seeks bigger sway in gold trade
China has approached foreign banks and gold producers to participate in a global gold exchange in Shanghai, people familiar with the matter said, as the world’s top producer and importer of the metal seeks greater influence over pricing.

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