First Impressions

Yesterday’s Most Clicked
The state of European bond yields garnered the most interest in the form of yesterday’s story from the WSJ, Why the European Bond Market Is on the Brink. Since then, the German 10-year did go sub-zero. The feeling that somebody is indeed watching you — yes, that’s a shout-out to the artist Rockwell, and no, not Norman — tied for second most clicks. That Financial News story, Banks open a new front in trading floor surveillance, noted that banks are increasingly using different tactics to monitor employees, from taking note of their mood in emails to hiring former military personnel. Its second-place cohort was the Financial Times’ Goldman Sachs set for revealing Libya trial, which laid out the various missteps that led to the legal battle that could result in some… discomfort for Goldman.

Quote of the Day

“QE and Basel III have euthanized interbank money markets.”

Zoltan Pozsar, director of U.S. economics at Credit Suisse, in the story, “There’s a Seismic Change Coming to Money Markets”

Lead Stories

ECB would pledge to backstop markets after a Brexit – sources
The European Central Bank would publicly pledge to backstop financial markets in tandem with the Bank of England should Britain vote to leave the European Union, officials with knowledge of the matter told Reuters. The preparations illustrate the heightened state of alert ahead of the June 23 referendum, which will help determine Britain’s future in trade and world affairs and also shape the EU. The pound and euro have lost value on fears a Brexit could tip the 28-member bloc into recession.

****SD: A look at the polls from Bloomberg today: Brexit Camp Is Ahead in Fifth U.K. Opinion Poll in 24 Hours. And here’s a different angle on the whole Brexit issue from the NY Times: Britain’s ‘Brexit’ Debate Inflamed by Worries That Turkey Will Join E.U.

Zero Yields, the Fed and ‘Brexit,’ Oh My!
Plunging government-bond yields, the looming threat of “Brexit” and the twists and turns of central banks in the U.S. and elsewhere are testing investors. They are also showing how strangely connected and reflexive global markets have become. Yields on German 10-year bonds went negative for the first time Tuesday as investors grew increasingly nervous that the U.K. will vote to leave the European Union at its June 23 referendum. That is one of several reasons why the U.S. Federal Reserve is unlikely to announce a rate increase on Wednesday. The lack of action by the Fed in turn is a reason why the Bank of Japan and the European Central Bank have had to step up their stimulus. That in turn has driven down bond yields in Europe and Japan.

****SD: All of this makes the “Grexit” news cycle feel like an eternity ago.

Investors hold biggest cash pile since 2001 as world gloom deepens: BAML
Investors have amassed their largest cash pile since 2001 and cut equity holdings to a four-year low, rattled by worries over Brexit and policymakers’ ability to bolster a fragile global economy, a Bank of America Merrill Lynch survey said on Tuesday.

There’s a Seismic Change Coming to Money Markets
Bankers seeking to manipulate the London Interbank Offered Rate with a flurry of tactless messages probably had little idea that the impact of their actions would be felt all the way to the Federal Reserve target rate. But—like bubbles from a bottle of Bollinger champagne—the effects of the Libor scandal are still emanating across money markets many years later.

Your banker will see you now: The changing face of broking
Financial News
It should be the perfect corporate broking client. It is the largest company in the FTSE 100 by market capitalisation and has bought and sold around £190 billion of assets over the past decade, according to data provider Dealogic. Last year it acquired BG Group in a $50 billion deal. The problem is Royal Dutch Shell does not “see the need for a corporate broker”.

Public pension funds seek infrastructure as market heats up
The California Public Employees’ Retirement System recently bought a stake in a private Indiana toll road with a troubled history, one sign of how popular infrastructure investments have become among U.S. pension funds. In May, CalPERS bought a 10 percent stake of the road’s concession, representing the first U.S. transportation investment for the nation’s largest public pension fund. The Indiana Toll Road had been acquired out of bankruptcy in 2015 for about 50 percent more than its original 2006 price by a fund made up of more than 70 U.S. pension plans.

Risk-off, Brexit on?
This morning, the 10 year German Bund yield fell below 0.00% for the first time. The concept of lending the German government money for 10 years…for nothing, was until recently an absurd concept – particularly when we consider the wide debate during the global financial crisis fallout (ironically largely by the Germans) about what should constitute the risk-free rate, the cornerstone for global credit markets. A negative risk-free rate makes little conceptual sense.

Morgan Stanley’s Gorman says bank eyeing $1 billion in FICC trading per quarter
Morgan Stanley (MS.N) is eyeing quarterly revenue of around $1 billion for its fixed income, currencies and commodities trading unit, Chief Executive James Gorman said on Tuesday. The Wall Street bank is seeing revenues grow in its bond trading business, or FICC, even with reduced headcount, Gorman said, speaking at the bank’s U.S. Financials Conference in New York. Morgan Stanley is targeting $4 billion or more in FICC revenue annually, he added.

Investment banks could start to struggle to retain talent
Business Insider
Wall Street banking careers have for decades followed a common pattern. Historically, you would join a firm as an analyst right out of college – if not earlier as an intern – and you’d work your way up through the ranks of associate, vice president, managing director, and, at some banks, partner

Citadel mulls connection to Eris Exchange
The Trade
Citadel Securities is considering connecting with swap futures operator Eris Exchange as a market maker, following discussions looking into how the two firms can work together. Head of fixed income, currencies and commodities at Citadel Securities Paul Hamill told delegates at the Fixed Income Leaders Summit in Boston that the firm was ‘hooking up’ to Eris Exchange.

Who can destroy value the fastest?
The Reformed Broker
Are European bankers creating or destroying value for shareholders? The chart below shows percentage gains, including dividends, for some of the largest money center banks in Europe since the summer of Lehman eight years ago. Many of these stocks are revisiting levels not seen since the crisis. Whose fault is it, the macro or the micro?

Review Of Risk Transfer Efforts By Freddie And Fannie, And A New Approach
Seeking Alpha
The role of Government Sponsored Enterprises (GSEs) in US housing finance is bigger now than it was in 2008, when the FHFA placed Fannie Mae (OTCQB:FNMA) and Freddie Mac (FHLMC) (OTCQB:FMCC) under conservatorship during the great crisis caused by the decline in U.S. house prices, as the chart below shows. Almost everyone agrees that the housing finance system needs to attract more private capital to protect taxpayers from being on the hook for most of the credit risk being taken in the mortgage market. However, private-label securities market for residential mortgages has not fully revived due to several reasons.

Central Banks

Global central banks prepare swap facilities for Brexit vote
Central banks around the globe are preparing financial backstops to mitigate market turmoil in case Britons vote next week to leave the European Union, hoping to buffer the real economy from any short-term impact. Operating with so-called swap lines, the world’s biggest central banks stand ready to temporarily exchange currencies in potentially unlimited quantities if financial market disruption leaves banks and exporters short of foreign currency.

Fed, BoJ, SNB, BoE meet this week — and it’s mostly about Brexit
Financial Times
As four of the world’s biggest central banks prepare this week to set out their latest musings, market attention is drawn less towards what they say about themselves and more to what they say about each other. Looming over their comments — and already wielding a powerful influence over currency markets — is Brexit, the prospect of the UK voting to leave the EU next week.

Yellen Faces Rate Dilemma as U.S. Economy Runs Short of Workers
Labor shortages spreading to those with lesser skills
Atlanta restaurateur says ‘I have never seen it this tight’
Kelly Services Inc. executive George Corona started noticing the change about six months ago. The $5.5 billion staffing company was finding it tougher to come up with workers to fill beginner positions at warehouses and call centers run by its clients. “It’s becoming harder and harder to attract people to do these entry-level jobs unless you raise the wages,” said Corona, chief operating officer for the Troy, Michigan-based Kelly.

Fed faces battle to escape world’s low interest rate grip
Evidence that the U.S. neutral rate of interest remains stalled near zero may slow Federal Reserve rate hikes even more than expected, tying the hands of policymakers until a rebound in global demand or other forces raise that key measure of the economy’s underlying strength. Though difficult to estimate precisely, the neutral rate is the point at which monetary policy neither encourages nor discourages spending and investment, and is thus a key measure of whether a given federal funds rate is stimulating or restricting the economy.

Bizarre reason Fed statements are easier to read
Business Insider
Occasionally, a seemingly bizarre question has a simple answer. In an email to clients Tuesday, Torsten Sløk, chief international economist at Deutsche Bank, presented a chart of the Flesch-Kincaid readability level of the Federal Reserve’s monetary policy statements.

5 Things to Watch at the June Fed Meeting
Federal Reserve officials are widely expected to leave short-term interest rates unchanged at their meeting this week, following a dismal May jobs report.

Yen, Brexit, inflation keep BOJ on edge, but policy seen steady for now
A renewed spike in the yen is adding to headaches for Bank of Japan policymakers meeting for a rate review this week, but many of them still appear to prefer to hold off on expanding stimulus despite signs of weakening inflation.

Greece central bank chief calls for bailout overhaul
Greece’s central bank governor has urged the country’s creditors to rework a core element of Athens’ new bailout, saying ambitious budget surplus targets agreed with the leftwing Syriza government are “unrealistic and socially unattainable.”

Everything You Need to Know About Negative Rates
The Bank of Japan, the European Central Bank and several smaller European authorities have ventured into the once-uncharted territory of negative interest rates. So sharp has been the reaction that a 10-year German government bond now yields less than zero: An investor who lends to the German government for a decade will lose money. But what are negative rates, and how do they come about? Here are some questions and answers.

****SD: Just in case you pulled a Rip Van Winkle and need a primer on NIRP, here you go.

Regulatory News

Regulator’s Plan to Rein In Trading Risks Raises Concerns
NY Times
The Commodity Futures Trading Commission is overreaching in its quest for market safety and soundness. The agency wants the power to obtain access to the source codes of trading companies without a subpoena. Record retention is a worthy goal, but it is unclear whether the strapped regulator can protect such intellectual property. Worse, it may open the door for other officials to ask for the same unusual gateway. Market participants are justified in their concerns about the agency’s proposal. As part of its plan to rein in the risks of automated trading, the regulator, which mainly looks after commodities markets, wants companies to store their source code in a repository, which would be easily accessible to its officials. The Justice Department would also be granted access.

Panama Changes the Stakes: The Complexities and Challenges of AML/KYC
TABB Forum
The fallout from the release of the Panama Papers was massive and highlights a no-win situation for banks: They either can help their largest clients move money and possibly evade taxes while risking multibillion-dollar fines, lose high-value accounts, or turn over high-net-wealth and/or politically sensitive individuals to the authorities. Welcome to the complex world of Anti-Money Laundering and Know Your Client regulations.

Goldman banker ‘procured’ prostitutes to build links with Libya
Financial Times
A Goldman Sachs banker “procured” the services of two prostitutes as part of concerted efforts by him to cement close ties with officials at the Libyan sovereign wealth fund, as the US investment bank sought to win lucrative new business, the High Court has heard.

****SD: See my comment in the recap of yesterday’s top three.

Supreme Court Rejects Puerto Rico Law in Debt Restructuring Case
NY Times
The Supreme Court on Monday rejected an effort in Puerto Rico to allow public utilities there to restructure $20 billion in debt, striking down a 2014 Puerto Rico law. Justice Clarence Thomas, writing for the majority in the 5-to-2 decision, said the law was at odds with the federal bankruptcy code, which bars states and lower units of government from enacting their own versions of bankruptcy law.


Hedge funds are flocking back to the dollar
Select hedge funds are once again adding to bets that the U.S. dollar will strengthen, after the greenback’s sharp drop at the beginning of the year left many funds wrong-footed and forced them to sharply pare those positions.

Virtual Currencies Still Dogged by Tax Issues, CPAs Say
Bloomberg BNA
Bitcoin and other virtual currencies still pose tax problems for those attempting to stay in compliance and more IRS guidance is needed, a group of accounting professionals said. In a June 10 letter to the Internal Revenue Service, an American Institute of CPAs technical advisory panel said clarifications are needed, in particular on the exchange rates taxpayers should use to determine the fair market value of virtual currency in U.S. dollars.

Bats Hotspot to Launch Outright Forwards for FX Market
Press Release
Bats Hotspot today announced plans to offer global trading of outright deliverable forwards contracts, with a launch planned for fall 2016.

As Wall Street Frets Over Trump, a Sure-Fire Short Trade Emerges
Citigroup and Barclays say shorting the peso would be a hedge
Mexican peso volatility has increased as short interest climbs
How do you hedge against a Donald Trump presidency? It’s a question Wall Street traders are increasingly asking. Citigroup Inc. and Barclays Plc say they have figured out at least one part of the answer: Short the Mexican peso. For any number of reasons, the currency would fall and fall quickly following a Trump victory in November, analysts at the banks say.

The ‘Achilles heel’ of emerging markets could suffocate their currencies
Business Insider
Emerging market currencies have had a strong year so far. Since January, the ruble is up 20% against the dollar, the South African rand is up about 9% against the dollar, and the Brazilian real is up about 16% against the dollar. But further gains among EM currencies will basically depend on one thing: growth.


German Benchmark Bond Yield Dips Below Zero
Yields on the 10-year government debt of Germany dipped below zero on Tuesday for the first time on record, in a dramatic sign of the outsize effect of central-bank policy and investors’ search for safe havens.

The problems of zero and negative yields
Across the Eurozone nominal yields on government debt in several countries have fallen close to their zero lower bound (ZLB). Indeed, parts of the yield curve are carrying a negative yield. A serious issue has arisen as to how bond analysts can construct sensible models to capture the term structure of bond yields when some of those yields are zero or lower. It is a serious issue for bond portfolio pricing and risk management as well as for macroeconomic and monetary policy analysis.

Bond Market Bets On Beating the Fed. Again.
Bond investors are violating one of Wall Street’s cardinal rules: Don’t fight the Fed. The decline in yields on long-term U.S. Treasury as well as options and federal funds futures prices, suggest that investors do not subscribe to the Federal Reserve’s view of the path of interest rates—and are willing to bet against it. One likely reason investors are emboldened to move against the Fed: in the last couple of years fighting the Fed worked. Indeed, investors probably should have fought harder.

Indexes & Index Products

15% of Global GDP is in Negative Yielding Bonds
S&P Dow Jones Indices
As of June 10, 2016, there is USD 10.6 trillion in negative yielding assets throughout the world—that’s more than 15% of global GDP. The increase in assets with sub-zero yields is evident when looking at the S&P Global Developed Sovereign Bond Index. On a market value basis, sovereign bonds with negative yields now account for 51% of the index (up from 27% at year-end 2015).

Sector Surfing
The Reformed Broker
Here’s a game I stopped playing a while ago and it’s been a very good development in my investment philosophy. Sector bets, as a trader, are a good way to categorize and exploit where the momentum is. But as an investor, worrying a lot about this sort of thing is probably a mistake. Because there’s very little rhyme or reason from year to year why one sector does better than another.

Fleeting ETF Seed Money Could Be Healthy Sign
Last week, Trevor Hunnicutt of Reuters wrote an interesting story, “New ETFs face more skepticism from financiers,” that examined something new going on in the ETF industry: fleeting seed money for new ETFs. For small ETF issuers, in particular, this should be a reason for pause.

Elusive S&P record looms as investors weigh data, Fed
With the S&P 500 again coming close to a record this week before falling back, investors will turn next week to a full slate of economic data and a Federal Reserve meeting in hope of fresh reasons whether to drive stocks to new highs.

ETFs Are a Hit Among Financial Advisors
ETF Trends
Exchange traded funds are among the go-to investment picks among financial advisors seeking to build a cheap, tax-efficient and diversified portfolio for clients. According to a recent survey conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, a survey of financial advisors revealed that 83% of respondents indicated that they are currently using ETFs or are recommending them to clients, reports Michelle Zhou for Financial Planning.


Hong Kong exchange aims to launch gold contract in Sept
Hong Kong Exchanges and Clearing Ltd is aiming to launch its planned physically-delivered gold futures contract in September, its head said on Tuesday. Asia, the top bullion-buying region, has seen several gold contracts launched in the last few years as it clamours to gain pricing power over the metal.

Brexit gold rush to generate £10m in a single day for online bullion dealer
The Telegraph
A gold dealer has predicted that a decision to leave the European Union would prompt an online gold rush, generating sales of around £10m in a single day for his company, as investors seek to protect their wealth. BullionByPost, Britain’s biggest online gold dealer, is forecasting its biggest ever trading day if voters decide on a Brexit. “We have a number of large clients waiting to place orders,” claimed founder Rob Halliday-Stein. “Everyone is waiting for the referendum outcome.

LME chief says possible link between higher fees, lower volumes
The head of the London Metal Exchange on Tuesday said the bourse’s falling trade volumes could be linked to a fee-hike introduced early last year, but added that the main reason for the decline was a downturn in the global economy. Hong Kong Exchanges and Clearing Ltd bought the LME for $2.2 billion four years ago, before raising trading fees by an average 31 percent in early 2015 as it aimed to wring profit from its investment.

Royal Mint gold bars in your pension? It’s harder than it sounds
The Telegraph
The Royal Mint captured headlines this week when it announced that investors could buy its bullion to hold within their pensions. But many of Britain’s biggest pension providers will not make the service available to their savers – and for those who do wish to gain exposure to gold, other options are far cheaper and simpler.


CEO pay in 2015 tamed by bond yields, Fed expectations
Chief executives of the biggest U.S. corporations saw their pay rise in 2015 at the slowest rate in seven years, but it’s not because their boards were suddenly getting tough. The main cause was something far more arcane: bond yields and interest rates. The nominal amounts set aside by companies to cover pensions fell substantially last year, a result of rising bond yields and anticipation of the U.S. Federal Reserve’s first interest-rate hike in nearly a decade.

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