First Impressions

FinTech Exchange Chicago: Future Is Now For Some FinTech and Right Around The Corner For Other Technology
Spencer Doar,

FinTech Exchange 2016 Chicago was no wistful exercise in futurology last month. It was firmly set in the do-or-die present of technological solutions and opportunities.

Chicago may not be thought of as a fintech hub among key global financial centers such as New York or London, but the homegrown talent was out in force along with a slew of imported presenters on the forefront of finding and pioneering new technology opportunities.

The themes were well known — big data analytics, blockchain, machine learning and the necessity of reimagining the assumptions around how a business runs. And of course, the event’s overarching message of “Run, don’t walk, to the cloud” was loud and clear.

Watch the videos and read the story »

Quote of the Day

“Markets say the ECB is done, their box is empty. But we are magic people. Each time we take something and give to the markets — a rabbit out of the hat.”

ECB Governing Council member Vitas Vasiliauskas in the story, “ECB Can Still Pull Rabbits Out of the Hat, Council Member Says”

Lead Stories

Cracks are appearing in fintech lenders
Financial Times
Benjamin Franklin, one of the US founding fathers, wrote that, “in this world nothing can be said to be certain, except death and taxes”. To those one could add a third, which is equally inevitable: the credit cycle. People who are only allowed to borrow when money is easy may default on their loans when times get tougher. This principle has brought banks low for centuries and it has now struck fintech, the blend of finance and technology that was supposed to be cleverer and more efficient than them.

****SD: Other related news: Bloomberg Gadfly’s Fintech Needs to Expand the Club, from the AP via Business Insider Google plans to ban ads from the ‘harmful’ and ‘deceptive’ payday lending industry, Dimon Says Online Lenders’ Funding Not Secure in Tough Times, Lending Club bombshell rocks marketplace lending and LendingClub’s Troubles Bring Back Bad Memories

Bond Traders Are Worried About Negative U.S. Treasury Yields
Ben Eisen – WSJ
The proliferation of negative government bond yields has largely been confined to Europe and Japan, where central banks have taken interest rates below zero in efforts to stoke their economies. But in the U.S., where the Federal Reserve is intent on lifting interest rates, not lowering them, bond traders are still worried that short-term U.S. Treasury yields could dip below zero.

Macro funds miss out on trade of lifetime
Financial Times
In Moby-Dick, Captain Ahab becomes obsessed with the whale that tore off his leg, chasing it through the seas until it eventually destroys him. For the word’s hedge fund managers, the whale is quantitative easing. Those who have obsessively bet against the central banks’ preferred stimulus measure have been battered. Some funds have not lived to tell the tale. This week has only served to highlight how the hedge funds that specialise in predicting central bank moves have missed one of the biggest macro trades of all time: being long stocks and bonds since the financial crisis.

****SD: Will there ever be enough stock images of sad traders?

Recession May Loom for Next U.S. President No Matter Who That Is
Talk about a poisoned chalice. No matter who is elected to the White House in November, the next president will probably face a recession. The 83-month-old expansion is already the fourth-longest in more than 150 years and starting to show some signs of aging as corporate profits peak and wage pressures build. It also remains vulnerable to a shock because growth has been so feeble, averaging just about 2 percent since the last downturn ended in June 2009.

What’s the average trade size in swap markets?
Clarus Financial Technology
We answer a simple question – what is the average size of a swap trade?
We find that average size varies by maturity and currency
Average trade size is also different between Dealer to Dealer and Dealer to Customer execution platforms.
Overall, we find that USD swaps have the largest average trade size, at $45,000 in DV01

Fitch: be wary of big banks’ talk of strong deal pipelines
Financial Times
Investors should disregard assurances from investment banks about their strong deal pipelines, according to a new report from Fitch Ratings, which suggests that market conditions have a much stronger bearing on ultimate activity.

Chip Cards Slap U.S. Merchants With Unexpected Higher Debit Fees
Wal-Mart Stores Inc.’s lawsuit this week against Visa Inc. over how debit transactions are verified is casting a spotlight on an issue that’s been plaguing U.S. retailers since they began accepting European-style chip cards last year. Some merchants have seen their debit-transaction fees increase by about 20 percent since Oct. 1, the deadline by which most stores were supposed to start accepting chip cards or face some fraud liabilities, according to Crone Consulting LLC, which specializes in retail payments.

Central Banks

Stock-buying pill tempts ECB, BOJ as deflation headache builds
The European Central Bank and Bank of Japan may soon be spending as freely on shares as they already are on bonds, especially if the weapons so far deployed from their monetary policy arsenals continue to fire blanks.

****SD: The red stock-buying pill or the blue stock-buying pill?

ECB Can Still Pull Rabbits Out of the Hat, Council Member Says
The European Central Bank can still conjure up policy surprises if needed to combat economic shocks and restore euro-area inflation, Governing Council member Vitas Vasiliauskas said.

****SD: And if you go chasing rabbits / And you know you’re going to fall / Tell ’em a hookah-smoking caterpillar / Has given you the call

BlackRock helps ECB in bank stress test
A consultancy owned by the world’s biggest investor, BlackRock, will help the European Central Bank in its stress test of top banks, the two organizations said on Wednesday. The tests uncover sensitive information about banks, such as how many of their loans are likely to go unpaid, but the ECB said there was a strict separation between investors at BlackRock, which owns shares in all top European banks, and the consultancy arm.

The Fed Made the Poor Poorer
Narayana Kocherlakota – Bloomberg
Have the U.S. Federal Reserve’s policies contributed to wealth inequality? Probably, but not in the way the central bank’s detractors think.

Thursday’s Bank of England inflation report — the issues
Financial Times
For once, we can forget about house prices. The Bank of England’s quarterly inflation report at midday on Thursday will be about just one thing: Brexit. Governor Mark Carney is preparing for a difficult day in which he is guaranteed to upset somebody.

The hurdles to ‘helicopter money’ are shrinking
Financial Times
Next time you’re struggling to keep up with the pace of change in the world, spare a thought for the publishers of monetary policy textbooks. Deflation, the mechanics of bank runs, quantitative easing, negative policy rates — in the past decade a slew of topics have moved from the realm of academic footnotes to the centre of economic debate.

Update on the Fed’s current thinking
Financial Times
This blog has barely commented on the Federal Reserve’s thinking in the past few weeks, which is unusual. It probably indicates that the Fed has temporarily disappeared from the centre of the markets’ focus, as the probability of a June rate hike has receded. Even the earlier hawks among the analyst community have been sharply reducing the number of rate hikes to be expected this year.

BOJ to wait ‘a few months’ to see effect of stimulus: Kuroda
The Bank of Japan needs to wait a few more months to see the impact of its stimulus measures on the economy, its governor said in an interview published on Wednesday, adding that the bank could ease policy further if needed.

ECB’s easy policy justified by subdued growth: Bundesbank’s Dombret
The European Central Bank’s easy monetary policy is justified by a subdued growth outlook in the euro zone, a top official at Germany’s Bundesbank said on Wednesday, reaffirming his institution’s defence of the ECB against German criticism.

Regulatory News

BoE wants global stress-testing of derivatives clearers
Clearing houses for financial derivatives should be stress tested on a global basis to prevent them becoming “too big to fail”, the sector’s regulator in Britain said on Wednesday. Regulators are requiring swathes of the world’s $493 trillion market for credit default, commodities and interest rate swaps to pass through a clearing house or central counterparty (CCP) to ensure completion of trades and greater transparency.

Ex-Barclays Trader Johnson Pleaded Guilty to Libor Fixing
Peter Johnson, a former Barclays Plc trader, pleaded guilty in October 2014 to conspiracy to manipulate Libor, U.K. prosecutors said after lifting a court order in the case.

Treasury Aims to Boost Online Lenders’ Transparency
The U.S. Treasury Department is calling for more transparency in online lending and urging regulators to better coordinate on overseeing the rapidly expanding industry.


Why being the king of currencies has its pitfalls
Mike Dolan – Reuters
The world is getting an object lesson on the problems of having one dominant global currency and even the supposed prime beneficiary, the United States, can see the downside. Alarming bouts of volatility in world financial markets over the past 12 months have been rooted in a fear of what happens when a world with its highest-ever peacetime debt pile faces even a hint of higher interest rates.

****SD: The bigger they are the harder they fall.

Yuan losing luster as international currency
Nikkei Asian Review
Speculative investors have added fuel to the “selling of China.” The nation will run out of foreign currency reserves sooner or later, said Kyle Bass, founder and principal of Hayman Capital Management, a U.S. hedge fund that’s short-selling the yuan. A report issued by the fund to investors featured a photo of a Chinese citizen trying to “smuggle” banknotes from China by wrapping his body in them. Stanley Druckenmiller, an American hedge fund manager close to renowned investor George Soros, has also been reported to be short-selling the Chinese currency.

****SD: That was a short honeymoon.

U.S. wants Japan to refrain from FX action: PM Abe’s aide
U.S. policymakers are “pretty clear” in their views that Japan should refrain from any steps to intentionally weaken the yen, such as intervention in currency markets, a key economic adviser to Prime Minister Shinzo Abe said on Wednesday.

Fired Citigroup FX Trader Tells Tokyo Court He Was Scapegoat
A former Citigroup Inc. trader in Japan who was fired for allegedly trying to manipulate foreign-exchange rates in violation of internal policy told a Tokyo court he was made a scapegoat and his actions were condoned by his employer, echoing claims made by several ex-Citigroup employees in courts in other parts of the world.

Nigeria should ‘re-evaluate’ FX policy – Osinbajo
Financial Times
Nigeria needs to “substantially re-evaluate” its foreign exchange policy and a “more flexible approach” to the currency should be expected “soon”, the vice president said on Wednesday amid the country’s worst economic slowdown in decades.


Spring Hasn’t Sprung for Wall Street’s Bond Traders
After a miserable first quarter in fixed-income trading for U.S. banks, there were tentative signs of a rebound in April. But activity isn’t likely to bounce back all that strongly, meaning banks’ trading arms aren’t going to bolster profits in a big way anytime soon.

Goldman: The Search for Yield Is Just Getting Started
“Just when I thought I was out, they pull me back in,” Michael Corleone famously quipped in The Godfather: Part III. The same might be said by credit fund managers who, having largely sat out on the recent rally in junk-rated debt, now find themselves forced to re-enter the fray after underperforming the wider market.

****SD: The Search for Yield — wasn’t that a Star Trek episode?

Mystery Bond Seller Exposed as Bank of Russia Saps Liquidity
Russia’s central bank stepped forward as a seller of local-currency government bonds that triggered a spike in trading as an approaching liquidity surplus prompts policy makers to drain excess rubles.

U.S. Corporate And Municipal Debt Issuance Projected To Grow, CUSIP Requests Show
Press Release
CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for April 2016. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity, suggests continued growth in issuance of new corporate and municipal debt offerings over the next several weeks.

Indexes & Index Products

Hardcore Bear ETFs Poised to Swell Past Bulls as Inflows Surge
The most aggressive traders are joining the growing ranks of those betting against the three-month rally in U.S. stocks. Since the end of February, investors who use leveraged exchange-traded funds have sent $1.3 billion into exchange-traded notes that pay two or three times the inverse of the market’s return, meaning they go up when stocks fall. So big have been the inflows that the market capitalization of inverse products is on the verge of eclipsing bullish notes for the first time since 2013.

There’s a Reason New ETFs Look Too Silly or Complex
When it comes to new exchange-traded funds, investors are doing a lot of eye-rolling and head-scratching. And rightfully so. Out of the 72 ETFs created this year, most either have an overly complex design or track a trendy (yet less than substantive) theme. This is illustrated by looking at the last 10 ETFs to roll out

The Largest High-Yield ETF Just Saw Record Outflows: Deutsche – Focus on Funds
The iShares iBoxx High Yield Corporate Bond ETF (HYG), the largest high-yield ETF, saw $3.6 billion in redemptions in the six days ended May 6, a new record, writes Deutsche Bank’s Sebastian Mercado.

Keep Your Focus on Fees
Our semi-annual Active/Passive barometer shows that expenses are one of the only reliable predictors of success, writes Morningstar’s Ben Johnson.

The Last Active Investor – A Work Of Fiction
Seeking Alpha
The rise of passive management has been the investment industry story over the past 40+ years. But all the money can’t be passively managed. What happens to markets as the passive percentage rises?

Assets Invested In ETFs/ETPs Listed In The United States Reached A New Record High Of 2.217 Trillion US Dollars At The End Of April 2016, According To ETFGI
Press Release
Assets invested in ETFs/ETPs listed in the United States reached a new record high of US$2.217 trillion at the end of April 2016, according to preliminary data from ETFGI’s April 2016 global ETF and ETP industry insights report.

STOXX Announces Results Of Annual Emerging And Developed Markets Classification Review
Press Release
STOXX Ltd., the operator of Deutsche Boerse Group’s index business, and a global provider of innovative and tradable index concepts, today announced the results of the annual Emerging and Developed Markets Country Classification review. All changes will become effective at market open on Sep. 19, 2016.


Gold has entered a new bull market: JPMorgan
Gold prices are surging this year, and that has one of Wall Street’s largest banks flocking to the yellow metal. “We’re recommending our clients to position for a new and very long bull market for gold,” JPMorgan Private Bank’s Solita Marcelli said Tuesday on CNBC’s “Futures Now.” After seeing three back-to-back years of losses, the precious metal has rallied 20 percent in 2016. And that’s just the start of the next leg higher, according to Marcelli. “$1,400 is very much in the cards this year.”

Central banks load up on gold
Business Insider
This has been a great year for gold. The precious metal is up 19%, and recently crossed $1,300 per ounce for the first time in 15 months before pulling back into the $1,265 area. One of the most encouraging signs for the yellow metal is that demand has come from all sorts of places.

Smuggling to avoid taxes to boost Indian gold imports to record: ANZ
India’s gold imports could hit a record high this year amid widespread smuggling to sidestep government levies on overseas shipments, Australia and New Zealand Bank, Asia’s biggest shipper of physical gold, said on Wednesday.

Singer Says Gold Rally Just Beginning as Goldman Sees Losses
Billionaire hedge fund manager Paul Singer said that gold’s best quarter in 30 years is probably just the beginning of a rebound as global investors — including Stan Druckenmiller — weigh the ramifications of unprecedented monetary easing on inflation.

****SD: Would be more interesting if the article was about Adele.

Negative Interest Rates Fillip Gold (VIDEO)
CME Group
Gold prices have rebounded, buoyed by central banks turning to negative rates in an attempt to stoke growth in moribund economies, and from political risk in developed countries.

****SD: Whoa, “fillip?” Interesting archaic word choice CME.

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