First Impressions

Time keeps on ticking for bond markets
Jim Kharouf – John Lothian Newsletter

Today’s top story from Bloomberg, “Bond’s Liquidity Threat Is Revealed in Derivatives Explosion” illustrates the ongoing fallout from central bank interventions, which is the lack of liquidity in various bond markets around the globe.

One can say that this phenomenon will likely continue in the face of new regulations coming down the pike in the US and EU, especially as it pertains to capital requirements for banks. In the end, what we are seeing is a fixed income market that is either bored or fed up with central bank races to the bottom of the interest rate scale. With rates essentially stuck, and with more capital required by banks and other systemically important entities, what else could the end result be?

The question for everyone in the fixed income space is simply one of time – when will this structure give way to a new and more traditional market? When, indeed.

Quote of the Day

“The greatest risk of all is that Wall Street excesses rather than Main Street recovery forces the Fed to tighten.”

Michael Hartnett, chief investment strategist at BofA Merrill Lynch in the Wall Street Journal’s piece “Here’s the Greatest Risk in Markets Right Now/”

Lead Stories

Bond’s Liquidity Threat Is Revealed in Derivatives Explosion
Anchalee Worrachate and Liz Capo McCormick – Bloomberg
The boom in fixed-income derivatives trading is exposing a hidden risk in debt markets around the world: the inability of investors to buy and sell bonds.

**JK – The fallout from the central bank interventions.

Here’s the Greatest Risk in Markets Right Now
Steven Russolillo – MoneyBeat – WSJ
Michael Hartnett, chief investment strategist at BofA Merrill Lynch, has defined what he calls the biggest risk in the markets right now. Drumroll, please…

**JK – A Wall Street guy worried again about Wall Street.

Pimco Sees Investors Profiting From Financial Crisis
Investors may still be able to profit from the 2008 financial crisis, according to Dan Ivascyn, a top-performing bond manager at Pacific Investment Management Co. (PEQWX)
Money can be made from the “prolonged and significant dislocation” in bonds backed by assets issued before markets collapsed, Ivascyn, one of Pimco’s six deputy chief investment officers, said today in a Q&A article in the firm’s Secular Outlook Series publication. Opportunities also may be found in new regulations and “bad experiences” constraining financial institutions including Wall Street banks, he said.

China bourse approves landmark securitisation deal
Financial Times
The Shanghai stock exchange has approved a deal to list a securitised product backed by bank loans, marking a major step for China’s fledgling securitisation market. China’s Ping An Bank is poised to list an asset-backed security (ABS) backed by small consumer loans totalling Rmb2.63bn ($423m), the exchange said over the weekend, the first time a credit-backed security will trade on a Chinese bourse.

**JK – Another step in the capitalization of China’s markets.

Companies to Seek $60 Trillion New Debt as Asia’s Needs Grow
Katrina Nicholas – Bloomberg
Corporate issuers globally will seek about $60 trillion in new debt and refinancing through 2018, as China surpasses the U.S. as the country with the most company debt outstanding, Standard & Poor’s said.
Debt in the Asia-Pacific region as a whole will overtake North America and Europe combined by 2016 as China and neighboring countries widen their lead as the world’s largest group of corporate borrowers, the ratings company said in a report published today. Bonds, as opposed to bank loans, will also become a more important source of financing, increasing 3.5 percent, or nearly $3.1 trillion.

China overtakes US in company debt issued
Sarah Gordon, Europe Business Editor – Financial Times
China has more outstanding non-financial corporate debt than any other country, says Standard & Poor’s, having overtaken the US last year. Corporate debt issued by Asian borrowers is expected to exceed that of North America and Europe combined by 2016, says the rating agency.

Investors can survive rich world lowflation
Luke Smolinski –
As the European Central Bank struggles to fend off deflation and US inflation is lower than expected, are prospects of ‘lowflation’ perilous for the world economy?

**JK – This is so deflating.

IMF Cuts U.S. Growth Outlook, Sees More Scope for Zero Rates
Sandrine Rastello and Nina Glinski – Bloomberg
The International Monetary Fund cut its growth forecast for the U.S. economy this year and said the Federal Reserve may have scope to keep interest rates at zero for longer than investors expect.
The Washington-based IMF now sees the world’s largest economy growing 2 percent this year, down from an April estimate of 2.8 percent. The IMF left a 2015 prediction unchanged at 3 percent, and said it doesn’t expect the U.S. to see full employment until the end of 2017, amid low inflation.

Cost of insuring against bank defaults back at pre-crisis levels
Tracy Alloway and Tom Braithwaite in New York – Financial Times
The cost of insuring against global bank defaults has plunged to its lowest level since the financial crisis in a sign that investors are willing to bet the industry has become safer.

**JK – Capital higher, liquidity lower.

Too much of a good EM thing is just right
James Mackintosh – Financial Times
It took exactly a year for emerging market bond investors to make back their losses from last May’s taper tantrum. After losing 12 per cent in short order when Ben Bernanke raised the prospect of ending bond buying by the US Federal Reserve he chaired, the eventual calming in long-term US rates helped bulls return to the market.

Indonesia joins EM rush to issue euro debt
Robin Wigglesworth – Financial Times
Developing countries are rushing to issue debt in euros at the fastest pace on record to take advantage of Europe’s ebullient bond market, with Indonesia the latest to prepare a debut or return to the eurozone bond market.

U.S. to sue Citigroup over faulty mortgage bonds -sources
The U.S. Department of Justice is preparing to sue Citigroup Inc on charges that the bank defrauded investors on billions of dollars worth of mortgage securities in the run-up to the financial crisis, after talks to resolve the probe broke down, people familiar with the matter said on Friday.

**JK – How must it feel to live 2008 over and over and over?

IMF makes case to lift inflation targets
David Uren – The Australian
THE International Monetary Fund has refreshed its call for central banks to raise their inflation targets to 4 per cent, arguing the additional inflation would come at little cost while preventing interest rates getting stuck at zero after recessions.

Phillip Futures Selects FlexTrade For White Label FX & Precious Metals Trading
Margin FX Brokerage Arm Of PhillipCapital Group Deploys MaxxTrader, A Complete Turnkey ASP Front-End, For Trading NDFs, Spot Currencies & Precious Metals

Central Banks

ECB Seen Buying Assets Within a Year as Draghi Rate Cuts End
Alessandro Speciale and Andre Tartar – Bloomberg
Mario Draghi is poised for even bolder steps to stave off the threat of euro-area deflation, say economists.

ECB Likely to Refrain From New Measures for Next Months
Stefan Riecher – Bloomberg
The European Central Bank is likely to refrain from any new stimulus package in coming months as it reviews lenders’ balance sheets, according to two euro-area central-bank officials familiar with current policy discussions.
The effect of any ECB measures could be blunted by the reluctance of banks to increase lending during the assessment, the people said, asking not to be identified because the deliberations aren’t public. The health check is scheduled to end in October. An ECB spokesman said that the Governing Council discusses its policy stance every month.

Central banks shift into shares as low rates hit revenues
Ralph Atkins in London – Financial Times
Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions.

Fed ponders fresh cuts to growth and unemployment forecasts
Robin Harding in Washington – Financial Times
For the umpteenth time since the start of the economic recovery, the US Federal Reserve is set to lower its growth and unemployment rate forecasts this week, along with another taper of asset purchases to $35bn a month.

European Inflation Lows to Spark Other Central Bank Moves
The annual rate of inflation in the 28-member European Union fell back to its lowest level in 4½ years in May, making it more likely that a number of other central banks will follow the European Central Bank in providing fresh stimulus to their respective economies.

‘Yellen Index’ flashes imminent Fed tightening
Stephen Foley – Financial Times
Investors are not betting Janet Yellen will follow a fellow central banker’s lead and declare interest rate rises “could happen sooner than markets currently expect”.

Ecuador returning to bond market after 2008 default
Vivianne Rodrigues in New York and Andres Schipani in Bogotá – Financial Times
Ecuador is set to return to international debt markets as early as this week, offering US-dollar bonds for the first time since it defaulted on $3.2bn worth of debt in 2008, testing global investors’ appetite for higher-risk assets.


Draghi Unites Euro Bulls With Bears All Watching $1.35
Andrea Wong and Rachel Evans – Bloomberg
The over/under for Mario Draghi, and the euro-zone recovery, is $1.35.
That’s the euro rate that dealers from UBS AG to JPMorgan Chase & Co. see as the dividing line between success and failure for the European Central Bank’s latest attempts to boost growth and avoid deflation.

Venezuela signals relaxation of foreign exchange regime
Neil Hume, Commodities Editor and Andres Schipani in Bogotá – Financial Times
Venezuela’s oil minister has signalled further relaxation of the country’s complex foreign exchange rate system, saying its three rates were no longer suitable and would progressively converge.

Renminbi slide could be symptom of deeper issues
Josh Noble in Hong Kong – Financial Times
After a five-month slide, the renminbi seems to be getting its mojo back. Last week, the Chinese currency rose 0.5 per cent against the US dollar over five days, the most since 2011.

Indexes & Index Products

Exchanges line up to buy index operations as banks bail out
Tim Cave, Anish Puaar and Sarah Krouse – Financial News
Exchanges are stepping up their efforts to expand into indices and benchmarks to help them launch new derivatives products and profit from rising demand for passive investment.

ETF strategy waits to gain in currency
Peter Davy – Financial News
While investors have been ploughing money into exchange-traded products over the past few years, niche exchange-traded funds that specialise in currency strategies have proved an exception to the rule.

China ETF Hedging Costs at Record Low on Stimulus Wagers
Belinda Cao – Bloomberg
The cost of hedging against losses in the largest Chinese exchange-traded fund in the U.S. has fallen to a record low on optimism that government stimulus will help sustain growth in the world’s second-biggest economy.


Technical Trading: Gold Bulls Seize Control Of Short Term Trend
Kitco News (via Forbes)
August Comex gold futures bulls have the edge Monday morning. Action over the last three weeks formed a type of “morning doji star” pattern on the weekly candlestick chart. This is a “bottoming” formation, which suggests for now the recent sell-off phase has come to an end. The short-term trend outlook is bullish.

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