First Impressions

BlockChain, BlockChain Wherefore Art Thou? (Progress, that’s wherefore!)
Carl Gilmore, President, Integritas Financial Consulting
Carl Gilmore There has been a lot of ink spilled lately about bitcoin and the underlying technology, blockchain, that makes digital currencies (if that is what they are) possible. At the risk of spilling a bit more, I would like to end my week as guest editor talking about the possibilities and challenges of this new and potentially disruptive technology. Since I do not profess to understand a lot of the math underlying the concepts, and since I believe there are people out there in the world that do understand it, I’ll limit my comments to those of a practitioner.

What is blockchain exactly? A blockchain is a public or private ledger within a network that records all of the transactions that have ever been executed with respect to an exchange of value. Bitcoin is a type of blockchain technology and blockchain could also be something else. The blockchain constantly grows as more transactions, or blocks, are added. The blocks get added to the chain in a linear, chronological order. Each computer, known as a node, in a network gets a copy of the blockchain, which allows for distributed validation of the transaction (block). Everyone gets a copy of the transaction so the complete record is known by all. When a new computer/node joins the network it gets a complete historical copy of the entire chain and thus is instantly up to speed. Since blocks are extremely difficult to generate mathematically, and since a blockchain is linear, in order to change one, you would have to change each and every previous block, which makes the system very resistant to tampering.

One interesting aspect of this technology is the ability to form “smart” assets or “smart” contracts. A smart contract comprises an IF THEN statement and an accessible data source. For example, IF June e-mini S&P futures trade over 1980.50 for eight minutes THEN sell three June Treasury Bonds. Other applications are also possible. The power of this technology is that it is completely programmable and limited only by our imagination.

To read the rest of the commentary click here

Quote of the Day

“The accounting has gone wrong. I know this sounds strange, but it’s taken people a long time to get this. The model is irrefutable. If you follow the math you can’t reach any other conclusion.”

Darrell Duffie, a research associate at the National Bureau of Economic Research, in the story, “Professor to Wall Street: You’re Doing Swaps Accounting Wrong”

Lead Stories

Deutsche Bank Sees 2016 Industrywide Trading Revenue Drop
Nicholas Comfort and Ambereen Choudhury – Bloomberg
Deutsche Bank AG, which runs Europe’s biggest investment bank, said it expects the industry’s revenue to decline this year as clients consider pulling back from trading some fixed-income securities and refrain from doing deals. Securities firms will see debt trading revenue fall “slightly” from a year earlier as “an increase in macro revenues due to monetary policy divergence will be more than offset by lower credit revenues,” Deutsche Bank said in a statement from Frankfurt on Friday. Income from equity trading will probably be “moderately lower” in 2016, while corporate finance industry fee pools will fall due to a decline in deals to advise on, it said.

Betting on central banks, investors buy junk debt and emerging assets
Investors betting on policy easing from global central banks committed money to emerging equity funds for the first time in five months this week and also bought more junk-rated bonds, Bank of America Merrill Lynch said on Friday. Central bank policies have spurred “risk-on”, BAML’s weekly flows report said, noting $4.5 billion had flowed to global equity funds – a 10-week high – while junk bonds took $2.9 billion, the biggest three-week inflow streak in three years.

How the ECB Woke Up to Banks’ Profits Nightmare
Paul J. Davies – Wall Street Journal
Mario Draghi is worried about eurozone bank profits after all. The European Central Bank president said in January that it wasn’t his job to protect banks and on Thursday insisted that loose policy had so far helped not hindered their profits. But the ECB’s big policy moves contained special tricks designed to protect banks against the debilitating effects of negative interest rates. Investors were initially confused: bank shares rallied then fell back on Thursday. But bank stocks then rose sharply Friday, especially those of southern European banks. Negative rates are a nightmare for banks: they have to pay to leave money on deposit at the central bank and can end up paying to own government bonds. At the same time, banks can’t pass negative rates to retail depositors either because they fear the money will leave, or in some countries because they aren’t allowed to by law.

Will the Blockchain Replace Swift
Traders Magazine
I made a provocative comment, as it turned out, during my keynote at a recent conference. The comment was picked up in a press article that reported I said “the coding behind virtual currency bitcoin could also prove to be enormously transformational, potentially even replacing the Swift network for interbank payments.” This remark created a lot of debate as Swift is the backbone of the banking industry worldwide. Built in the 1970s to replace telex machines with electronic transfers, Swift is a co-operatively funded network by the global banking system to let them send funds with confidence. Its very name shows its cooperative nature: the Society for Worldwide Interbank Financial Telecommunication.

****SD: You know it is legacy tech when it replaced the telex network.

Some bond funds bet on longer-lasting rally in energy debt
Many bond investors who benefited from the recent rally in battered energy debt prices are maintaining or seeking to add to their holdings, viewing the rally as the start of a longer-lasting uptrend rather than a blip.

****SD: Are they buying solar energy debt?

High-yield primary starts to heal, but still early days
A dramatic tightening in US high-yield bond spreads opened the primary for a few well-known issuers this week – but market players are not expecting the issuance floodgates to open, at least in the near term. Supply is due to come in at around a decent US$4bn this week – the second straight week of big inflows into the asset class. Lipper reported US$1.796bn of cash pouring into high-yield funds for the week ended March 10 following almost US$5bn the week before – the biggest weekly inflow on record.

Professor to Wall Street: You’re Doing Swaps Accounting Wrong
Matt Leising – Bloomberg
The world’s largest banks are incorrectly accounting for their swaps trades, locking up money that could otherwise be paid out as dividends to their shareholders, according to a bold new academic paper.

Where Ratings Profits Never Fully Rebounded: Mortgage-Bond Deals
Timothy W. Martin – WSJ
The credit-ratings world is bigger and stronger than ever with one big exception: complex mortgage-bond deals. Despite calls by regulators and lawmakers to overhaul the industry, the three largest firms still issue more than 95% of global ratings, a total virtually unchanged from before the financial crisis, The Wall Street Journal reported Friday. But how they’re amassing their profits is different than the pre-crisis boom days. At their peak in 2007, these mortgage deals represented 44% of S&P’s ratings revenue and 52% at Moody’s. Now they represent just 11% of business at S&P and 21% at Moody’s. What’s ascending? Corporate debt. S&P now derives more than half of its revenue from corporate debt versus about a quarter in 2007. Moody’s generates about 45% of its revenues from grading corporate debt versus 28% in 2007. Corporate debt issuance has remained at historically-high levels because of low interest rates.

Central Banks

There’s a Potential Problem with the ECB’s Plan to Buy Corporate Debt
Tracy Alloway – Bloomberg
Analysts at Bank of America Merrill Lynch argue that despite years of low interest rates and asset purchases, the European Central Bank’s monetary policy measures failed to produce a discernible effect on credit in recent months. With interest rates on government bonds drifting ever lower, spreads on investment-grade paper had actually gone up—a trend which could be attributed to continued concern over the impact of negative interest rates on eurozone banks. With that in mind, the ECB on Thursday unleashed a tidal wave of stimulus measures including cuts in all three policy rates, targeted longer-term financing operations (TLTROs) to bolster banks and boost lending, as well as a surprising expansion of its asset purchase program to include European corporate bonds.

In defence of Monetary Policy
Vítor Constâncio, Vice-President of the ECB
This week the ECB adopted new measures to reinforce its monetary policy in the face of recent headwinds. That decision was taken against a backdrop of vocal scepticism in the media and markets. The sceptics’ reasoning is two-pronged. First, that monetary policy is not sufficient to address the present low growth trend; and second, that monetary policy is increasingly ineffective in any case.

****SD: Some strong words from Vitor.

Bond Traders Clear a Path for Fed to Lift Interest Rates in June
Alexandra Scaggs and Anooja Debnath – Bloomberg
The bond market is boosting its bets on a Federal Reserve interest-rate increase in June as stocks and oil rally. As Treasuries head toward a third straight weekly decline, traders now see the probability of a June rate hike as slightly better than a coin flip, according to futures data compiled by Bloomberg. That’s up from a 45 percent chance assigned Thursday and odds below 10 percent seen a month ago. Since 1994, the Fed hasn’t raised rates unless the futures market had priced in at least 60 percent of the move the day before, Bank of America interest-rate strategist Mark Cabana wrote in a March 11 note.

Central Bank bonanza from Washington to Tokyo
Central banks take center stage in the coming week as policymakers from Washington to London and Tokyo battle slowing global growth, heightened market volatility and deflationary pressures. Coming after the European Central Bank’s massive stimulus package, the U.S. Federal Reserve must resolve conflicting economic drivers while the Bank of England will take a cautious line ahead of a defining vote on European Union membership.

As monetary policy reaches its limits, it’s time for governments to spend
Barry Eichengreen – The Guardian
The world economy is visibly sinking, and the policymakers who are supposed to be its stewards are tying themselves in knots. Or so suggest the results of the G-0 summit held in Shanghai at the end of last month. The International Monetary Fund, having just downgraded its forecast for global growth, warned the assembled G20 attendees that yet another downgrade was pending. Despite this, all that emerged from the meeting was an anodyne statement about pursuing structural reforms and avoiding beggar-thy-neighbour policies.

ECB Dust Settles to Reveal Unshaken Policies in East Europe
Dorota Bartyzel and Krystof Chamonikolas – Bloomberg
While tremors shook Europe’s emerging markets after Mario Draghi announced new monetary stimulus on Thursday, the region’s central banks remain unmoved on how they’ll tackle policy this year. Investors increased bets on more monetary easing from Warsaw to Budapest after the European Central Bank cut borrowing costs and extended its asset-buying program. They quickly reversed, however, after Draghi said he didn’t see a need to lower interest rates further, decoupling the region’s assets from other emerging markets.

QE tinkering could disrupt public sector bond market
Bankers expect the European Central Bank’s surprise announcement of an extra 20bn asset purchases to cause further disruptions in the sovereign, supranational and agency (SSA) market, especially as the central bank has also tinkered with the programme’s parameters.

Forget central banks—use THIS tool: S&P’s Blitzer
With the financial world continuing to hang on every word from global central banks, there’s another lever that’s being overlooked that could help spur economic growth, said David Blitzer, chairman of the S&P Dow Jones index committee. “Virtually the entire world has abandoned fiscal policy, period. Sooner or later they’re going to figure out that they left half the toolbox behind, and at least they ought to open it up and look into it,” Blitzer, an economist at his core, told CNBC’s “Squawk Box” on Friday, a day after the European Central Bank unveiled additional, aggressive stimulus moves. But ECB President Mario Draghi also said he did not anticipate a need for further interest rate cuts.

ECB Alchemy Makes Italian Bonds AAA for This Money Manager
Lucy Meakin – Bloomberg
Mario Draghi’s latest easing measures mean, for one investor, Italian and Spanish bonds are now no different to Germany’s. Eric Vanraes, who helps manage $2.6 billion of assets at EI Sturdza Investment Funds, says that the European Central Bank president’s stimulus measures on Thursday made the government bonds of Italy and Spain effectively as credit-worthy as top-rated German debt, meaning investors should buy the higher-yielding securities of Europe’s so-called periphery.

****SD: I guess this could go in our gold section…


Forecasts torn up after euro’s whipsaw run
Roger Blitz – Financial Times
Currency forecasters are pulling back on 2016 expectations of a weaker euro following its whipsaw move in the aftermath of the European Central Bank’s new stimulus drive. In one of the most volatile days in euro history the currency fell nearly 1.5 per cent as the ECB unveiled a wide-ranging package of monetary easing measures, on Thursday, only to reverse course and soar close to 2 per cent higher above $1.12. The trigger for the reverse appeared to be Mario Draghi’s press conference after Thursday’s announcement in which the ECB president drew a line under further negative interest rates.

Giving Up On The Currency Channel Might Cause More Pain Than Draghi Expects
Luke Kawa – Bloomberg
There are two big takeaways from Thursday’s ECB announcement: The imposition of a negative rate regime does not necessarily have to be unduly punitive to banks profits; and Central bankers might have less confidence in their ability to boost economic activity via the currency channel. Putting the pair together, one inference that could be made from the design of this stimulus is that the European Central Bank “decided to favor the bank credit channel over foreign exchange,” as Pictet Wealth Management Senior Economist Frederik Ducrozet asserted. Put simply, Draghi & Co. appear to have prioritized credit creation over using a weaker currency to capture a bigger slice of foreign demand as a means of rejuvenating economic activity.

****SD: Other things that can hurt Mario: the Koopa Troopa, Paragoomba, Shy Guy and, of course, Bowser.

The dollar is no longer an excuse for the Fed not to raise rates
Business Insider
The strong dollar is no longer an excuse not to raise rates. Shortly before the Federal Reserve raised interest rates in December, Fed governor Lael Brainard gave a speech about why it should proceed cautiously. Brainard’s reasons included the strong dollar, which had seen a 15% rally over the previous year and a half. This argument noted that the strong dollar was putting downward pressure on the neutral rate — or the interest rate at which inflation would accelerate — requiring the Fed to keep its official Fed Funds rate low.

CME Group Announces Record FX Futures and Options Volume
Press Release
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it reached a trading volume record for total FX futures and options yesterday, March 10, of 2,517,334 contracts, surpassing the previous record of 2,371,202 by 6 percent set on May 6, 2010. FX futures also set a new record of 2,350,478 surpassing the previous record of 2,208,417 on May 6, 2010.

****SD: Who says FX action is weak?

Yuan trades at three-month high after European Central Bank eases currency war fears
Enoch Yiu – South China Morning Post
The yuan hit a three-month-high on Friday, wiping out all its losses against the US dollar this year, after mainland China’s central bank set the mid-price higher following European Central Bank moves on Thursday to avert a currency war.

RBS Analyst Who Got Yen Right Tells Split Investors It’s Peaked
Netty Idayu Ismail – Bloomberg
The Royal Bank of Scotland Group Plc strategist who correctly predicted the yen would strengthen is telling investors betting on further gains that the rally has run out of steam. The lender’s clients in Europe are now divided on the outlook for the yen as the currency struggles to extend February’s 7.5 percent advance, according to Mansoor Mohi-uddin, RBS’s Singapore-based senior markets strategist, who said in October the Bank of Japan’s pledge to expand the monetary base would boost the currency. The yen has weakened 0.7 percent versus the dollar in March following its best month since the financial crisis in 2008 after the central bank shocked markets with its negative interest-rate policy.

Bank Regulator Wades Into Fintech
Rachel Witkowski – WSJ
The national bank regulator is taking steps into the emerging world of financial technology, weighing its first-ever charter request from a virtual-currency firm and preparing to release a report that will shed light on its views of the fintech sector. The Office of the Comptroller of the Currency has been quietly gathering information from banks and fintech firms for the past year to prepare a so-called white paper on new companies as well as their developing relationships with banks. The white paper is expected to come out soon, the agency’s chief counsel, Amy Friend, said Thursday during a fintech conference in Washington.

****SD: News from the other OCC.

Indexes & Index Products

Welcome to the Chop Shop
The Reformed Broker
Talk to some traders right now and you’ll hear the smartest ones talking about fading each edge of the range – the market-wide breakouts and breakdowns are all false. Only amateurs are making high-conviction moves these days. They get bearish at SPX 1970 and bullish as we approach 2000. The market is chopping them up.

Why This ‘Open Letter’ To SEC Matters
Dave Nadig –
This morning a rather unprecedented thing happened. The ETF industry, as best as you can define it, got together and agreed on something important: that the SEC needs to seriously overhaul some of the market microstructure to fend off future trading problems in ETFs (and, for that matter, stocks).

Why Are Equities Moving In Tandem With Oil?
Erik Norland – CME Group
The S&P 500 has been 70% correlated with day-to-day movements in West Texas Intermediate Crude Oil (WTI) so far this year. This is the highest correlation over any rolling 30-day period since 2012 (Figure 1). The one-year rolling correlation has risen sharply to its highest level since 2013.

Volatility, Short- and Long-term
S&P Dow Jones Indices
This morning’s Financial Times highlighted a study of market volatility suggesting that return and volatility are inversely related — that “the correct response to an increase in volatility…is to exit the market.” This is certainly true in the short run, as the table below confirms.

New ETFs Focus on Dividends, Smart-Beta and More
ETF issuers continue to add new twists to old themes with respect to their fresh product launches. ETF leader Vanguard, “vampire squid” investment bank Goldman Sachs and ETF creator State Street all released new funds in the past few weeks. These new funds all use smart-beta ideals to re-dice and re-index previously common themes. In this case, it’s developed-market stocks from around the world.


Gold back in vogue with investors amid uncertain economic outlook
James Wilson – Financial Times
The shoppers thronging Harrods department store in London love a bargain as much as anyone, but in one corner of the second floor the prices have already risen 19 per cent this year. This is where the upmarket store sells its gold bullion, giving people the chance to buy the precious metal as an investment during uncertain economic times. A gold sliver resembling a mobile phone SIM card costs about £40, while a kilo, similar in size to a small chocolate bar, is available for £29,000. Shoppers can purchase bars embossed with the store’s famous logo, while Chinese buyers may like the Year of the Monkey image. Even a Jean Paul Gaultier motif is available for a small premium.

Gold funds have become the ‘gorilla’ of the ETF market
Investors can’t seem to get enough of gold this year. As gold has seen its best start to the year since 1974, exchange-traded funds that track the metal have surged in popularity. According to Stacey Gilbert of Susquehanna, long unlevered gold ETFs have already seen $7.3 billion in inflows this year.


Dear Lloyd Blankfein: We Found Some of Your Money
John Carney – Wall Street Journal
When Goldman Sachs Group chief Lloyd Blankfein moved out of a five-bedroom duplex at 941 Park Avenue several years ago, trading up for an even swankier place at 15 Central Park West, he may have unwittingly left money behind. A search of the New York State Comptroller’s unclaimed funds database recently revealed that the state is holding on to funds from the insurance company Aetna due to Mr. Blankfein, or possibly his wife Laura. The owner is listed as “L Blankfein” with the address 941 Park Avenue. The amount isn’t specified but is described as “amts due under policies other than life.” The office of the New York State Comptroller holds around about $12.5 billion in unclaimed funds. The state operates a searchable website for the lost accounts. The database doesn’t list the amount of the funds. Goldman Sachs itself has unclaimed funds in hundreds of accounts.

****SD: And here I get excited when I find an old fiver in a pants pocket.

Why this big bank has okayed jeans, scooters and Foosball at work
USA Today
As more banking activities move online, JPMorgan Chase & Co. is shedding its pinstriped suits and stodgy offices in a bid to win over coders and engineers. JPMorgan, the nation’s largest bank by assets, opened a digital hub in Manhattan’s Hudson Yards neighborhood in December to house 700 tech workers. Unlike its more traditional Park Ave., headquarters, the digital team is allowed to wear jeans, ride around the office on scooters, and play Foosball and XBOX at work. If that sounds a lot like tech giant Google, it’s because it is. Executives with the digital team talked to executives at Google, Amazon and other tech companies about how to best design the space to spur innovation, said James Young, the chief information officer for the bank’s digital unit.

****SD: John Lothian has Foosball skills.

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