First Impressions

Profiles: Lee Stern

Lee Stern has seen it all in his career – the highs of great markets and the lows of market scandal. After completing his military service in 1947, Stern found his way to the Chicago Board of Trade after answering an ad for a runner on the floor. Stern recalls the thrill of making his first spread trade and the low point in 1992, when a customer schemed to manipulate the bond market and lost $9 million. That event led to a brief suspension and its eventual exit as a clearing member firm.

And if trading was his first love, his second is certainly professional sports – as the founder and owner of the Chicago Sting soccer team and then as a part owner of the Chicago White Sox. John Lothian News presents the story of a career that has spanned more than six decades – and counting.

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Quote of the Day

“The strong arm of the law is being applied to areas where previously self-regulation and standard practice were the norm.”

Simon Maughan, head of research at financial-analysis firm OTAS Technologies in the story, “U.K. Seeks to Criminalize Manipulation of 7 Benchmarks”.

Lead Stories

Chinese Leaders Discuss Replacing PBOC Chief
Lingling Wei and Bob Davis – WSJ
Chinese leaders are discussing replacing the central bank chief amid disagreements over the direction of financial policy, raising questions over how quickly and deeply Beijing wants to remake the economy amid slowing growth.

Junk-Bond Investors Start to See Warning Signs
Mike Cherney – WSJ
Brian Kloss isn’t letting buoyant markets and U.S. economic expansion dull his sense of danger. Mr. Kloss, a portfolio manager who helps oversee junk bonds at Brandywine Global Investment Management, has been selling bonds from companies with some of the lowest ratings and highest levels of debt, or leverage.

U.K. Seeks to Criminalize Manipulation of 7 Benchmarks
Gavin Finch and Nicholas Larkin – Bloomberg
The U.K. government plans to criminalize the manipulation of seven more benchmarks in markets from foreign exchange to gold and oil as it tries to revive confidence in the integrity of London as a financial center.
The Treasury today started a review into whether it should extend legislation regulating the London Interbank Offered Rate to cover other key rates including the WM/Reuters 4 p.m. London currency fix, the Sterling Overnight Index Average, the London gold fixing and the ISDAFix, according to a statement. The government aims to have the rules in place by the year-end — five months before the next general election.

Hungary to help banks find euros, Swiss francs to ease mortgage burden
Krizstina Than and Gergely Szakacs – Reuters
Hungary’s central bank explained on Wednesday how it plans to extract households from expensive foreign currency mortgages while providing some support to the forint currency and to the banks that lent the money.

China hot money crackdown reveals $10bn in fake trade
Gabriel Wildau in Shanghai – Financial Times
China’s foreign exchange regulator has uncovered $10bn in fake cross-border trade since April last year and has turned 15 cases over to police in a crackdown aimed at curbing hot money flows.

Grand Central: Explaining Why U.S. Rates Have Suddenly Gone Negative – Real Time Economics
Jon Hilsenrath – WSJ
As my colleagues Min Zeng and Katy Burne report in today’s Wall Street Journal, rates on short-term U.S. Treasury bills have suddenly gone negative, opening a window onto challenges the Federal Reserve could face in the years ahead keeping short-term rates in a prescribed, quarter-percentage-point band.

Pimco’s ETF Probe Said to Be Separate From Industry Sweep
Mary Childs and Joshua Gallu – Bloomberg
The U.S. regulatory probe into Bill Gross’s Pimco Total Return ETF is separate from a broader scrutiny of disclosure in the exchange-traded fund industry, according to a person familiar with the matter.
The U.S. Securities and Exchange Commission is investigating whether Pacific Investment Management Co. bought smaller lots of bonds at discounts, then marked them up, according to the person, who asked not to be identified because the probe isn’t public. While the SEC is probing disclosure issues surrounding ETFs industrywide, the Pimco case is different from that investigation, the person said.

Pimco ETF Trading Belies Asset-Price Concern: Chart of the Day
David Wilson – Bloomberg
Concern that the Pimco Total Return exchange-traded fund may have inflated the value of its holdings has yet to have much effect on the ETF’s trading.
As the CHART OF THE DAY shows, the fund’s shares closed above their net asset value 69 percent of the time since June, according to data compiled by Bloomberg. The biggest premium, 0.37 percent, occurred on Aug. 1. Yesterday, the ETF’s price dropped 0.3 percent as bonds fell.

Argentina GDP Defies JPMorgan and Reignites Data Skepticism
Charlie Devereux – Bloomberg
Argentina’s gross domestic product was unchanged in the second quarter from a year earlier, the government said yesterday, reviving doubts over the veracity of the data after JPMorgan Chase & Co. estimated a 1.7 percent contraction.
First-quarter figures were also revised to an expansion of 0.3 percent from a 0.2 percent contraction, the national statistics agency said. From the previous three months, the economy grew 0.9 percent after shrinking for two quarters.

Argentina Bond Straightjacket Unshakable as Payments Loom
Katia Porzecanski – Bloomberg
The latest attempt to end Argentina’s second default in 13 years is faltering, a setback for overseas bondholders who are in jeopardy of missing out on a billion dollars more in payments through year-end.
A group of creditors may abandon an effort to get investors to waive a bond clause that Argentina says is an obstacle to resolving its decade-long dispute over unpaid debts, according to three investors with direct knowledge of the plan. The group planned to ask bondholders earlier this month to approve the waiver by Sept. 30, when about $190 million in interest comes due, said the people, who asked not to be identified because the discussions were being conducted privately.

Central Banks

Euro Shows Draghi Succeeding Where Loans Fall Short
Liz Capo McCormick and Lukanyo Mnyanda – Bloomberg
Traders are showing confidence in Mario Draghi’s ability to weaken the euro and stave off deflation, even as the initial results of a key part of the European Central Bank president’s plan fell below estimates.

Draghi Fuels Longest Winning Streak for Covered Bonds Since 2009
Alastair Marsh – Bloomberg
Mario Draghi is adding momentum to the longest winning streak for covered bonds in five years as the European Central Bank prepares to purchase the secured debt as part of efforts to boost the region’s economy.
Investors in the notes are poised to receive 0.43 percent in September, the ninth consecutive month of positive returns, according to Bank of America Merrill Lynch index data. That compares with the 0.11 percent earned on investment-grade company debt and a 0.26 percent loss from high-yield securities.

Why is 2 percent the Federal Reserve’s inflation target? Because it is.
Jared Bernstein – The Washington Post
People often stop me on the street and say, “Hey, nerd … why is Federal Reserve’s inflation target 2 percent?”
Good question. Here’s the Fed’s own answer:

Fed’s Mester calls for key ‘considerable time’ language to be reformulated
The Federal Reserve should reformulate key policy language on keeping interest rates low for a “considerable time,” the president of the Cleveland Fed said on Wednesday.
Loretta Mester, a voting member of the Federal Open Market Committee, said the controversial phrase is too reliant on the calendar as opposed to data.


The UK equity funds for a sterling reversal
Anna Fedorova – Investment Week
Renewed dollar strength has led forecasters to predict a tougher time for sterling in the coming months, despite a small relief rally last week as Scotland opted against independence. Which funds could benefit?

Political and fiscal risk to pose headwinds for sterling
Solomon Teague – Euromoney Magazine
Post-Scottish referendum, UK political risks have not gone away, while the fiscal picture remains dire – but it’s unclear if and when markets will decide to care.

Mandatory FX clearing in the US not an immediate priority
Jon Watkins – The Trade
New International Swaps and Derivatives Association (ISDA) chief executive Scott O’Malia believes FX clearing mandates in the US have been moved down the pecking order due to concerns over the ramifications of such rules.

Deutsche Bank Names Vos as North America Currencies Head
Nicholas Comfort – Bloomberg
Deutsche Bank AG (DBK), the second-biggest currency trader, appointed Adam Vos as head of foreign exchange in North America to replace David Wayne, who is returning to London.

Ripple Signs First Two U.S. Banks to Bitcoin-Inspired Payments Network
Michael J. Casey – MoneyBeat – WSJ
Ripple Labs, whose bitcoin-inspired payments network allows institutions to conduct low-cost international money transfers without the intermediation of large Wall Street banks, has signed its first two U.S. banks as customers.

Japan voices concern over weak yen
Delphine Strauss and Ben McLannahan – Financial Times
Japan’s government is voicing increasing concern at the speed of the yen’s decline, after a depreciation of almost 10 per cent against the dollar since early August that is squeezing smaller companies and complicating negotiations on a regional trade bloc.

Indexes & Index Products

Dow Index Overseers Make It Official: U.S. Firms Only
Telis Demos – WSJ
The keepers of the Dow Jones Industrial Average have made it clear that companies that do business in the U.S. but are incorporated overseas aren’t eligible for the stock-market benchmark. The new definition will preclude companies that have moved abroad through tax-lowering inversion deals from being in the blue-chip index.

Source, Kranefuss Go After U.S. ETF Market
Chris Dieterich – MoneyBeat – WSJ
One of the ETF industry’s founding fathers established a new beachhead in the American market on Tuesday with a war chest for potential deals.

The Fuzziness Behind Some Funds’ Precise Asset Values
Karen Damato – MoneyBeat – WSJ
Mutual funds and exchange-traded funds report the value of their holdings with seeming precision every trading day. But in some cases there is far less certainty about the worth of a fund’s holdings than that per-share “net asset value”—which may be quoted out to tenths or hundredths of a penny—might suggest.

BlackRock and Deutsche boost ETP sales ranks
Sarah Krouse – Financial News
Europe’s two largest exchange-traded fund businesses have made senior sales appointments in the region.


Gold price seen near tipping point for mine cuts, closures
Nicole Mordant – Reuters
The price of gold, down more than a third in three years, is approaching the tipping point where the mining industry would see a spike in the number of producers reducing output or even shutting down operations.
Several mines globally have already suspended output in the past 18 months, but not as many as industry watchers expected as producers focused on slashing costs and reworking mine plans to extract more profitable, higher-grade ounces.

Gold Downside Risk Seen ‘Significant’ to Goldman Sachs
Debarati Roy – Bloomberg
Goldman Sachs Group Inc.’s Jeffrey Currie says the worst isn’t over yet for gold after prices erased almost all of this year’s gain.

China Moves To Dominate Gold Market With Physical Exchange
China is slowly moving to dominate the global gold market and it is important to join the dots regarding a few key recent developments in China relating to gold.
When the International Board of the Shanghai Gold Exchange (SGE) was launched last Thursday September 18 during an evening trading session, it was notable that the first transactions were put through by a diverse group comprising HSBC, MKS (Switzerland), and the Chinese banks, ICBC, Bank of China and Bank of Communications.

A Rational Look At Gold
Michael Lombardi –
The fundamentals that drive Gold prices higher are in full force and improving. Central banks are buying more of the precious metal — to reinforce their reserves — while countries that are known to be big consumers of gold bullion post increased demand.

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