First Impressions

Bill Herder Needs Help to Meet His Goal; Herder Hurdle Hinders Hopeful Help
By John J. Lothian

Bill Herder is going to need some last minute help for him to meet his online goal of £10K for his Kilt Challenge. The proceeds of the Kilt Challenge go to Futures for Kids, a worthy cause.

Tonight at the Gala Dinner for IDX, Bill will be in his kilt and will pass on the challenge to a new person. Rumors are the first female kilt challenger will be named. While I am all for inclusiveness, a female kilt wearer ruins the punchline of most of my kilt jokes. I guess I will have to find some new ones.

You can contribute to Bill’s Kilt Challenge here

The IDX conference got off to a good start yesterday with a well attended exchange leader panel. Carsten Kengeter was the star as he made his first appearance on a conference panel that I have seen at least. LME CEO Garry Jones was the dissenter on the DB/LSE deal, offering up a European view on open markets that has prevented previous mergers from taking place. Other exchange leaders seemed resigned, or even supportive of the deal going through.

**Doug’s exchange leader add-on: Perhaps the most salient comment of the morning, and the one I used as a conversation starter the rest of the day, was from Jeff Sprecher on open access and clearing interoperability. He said the exchanges will be further incentivized to list each other’s products, with execution eventually becoming a loss leader for exchanges. Actually, he said “take the economics out of execution, then make it back elsewhere,” meaning data, clearing, connectivity and other add-ons. My question to readers is the same question I have asked many times since – “what would that mean for your organization?” The answers were all over the map, and will be used as fodder for an upcoming column.

Walt Lukken highlighted three key themes for the conference in a private press briefing. He said the leverage ratio issue for capital is number one, Mifid II is two and automated trading rules is number three. Of course, without proper capital, the last two issues are moot.

I asked him as a former Republican appointee to the CFTC how he will handle the Donald Trump GOP Presidential candidacy, and he said it was a private matter. I think a lot of Republicans will struggle with the same challenge. Politico has a good story about “How an Outsider Killed a Party,” describing the influence of the election of Zachary Taylor as a Whig candidate on the party.

Thunderstorms and a logistical challenge stalled some of our outside video interviews, but you can’t keep a good newsman down. We will get them done yet.

Don’t miss our series on futures commission merchants on, titled FCM Outlook 2016: Brokers Finding New Fields Of Green

Quote of the Day

“Commerzbank’s plans show that the financial markets are in a complete mess. I’d prefer the bank to put the money in a vault rather than giving bad loans or … paying penalty interest rates to the ECB.”

Gerhard Schick, a German lawmaker from the Green party, in the story, “Exclusive: Commerzbank considers hoarding billions to avoid ECB charges”

Lead Stories

Ending ‘Doom Loop’ Could Cost European Banks Billions in Capital
Changes to the capital treatment of sovereign bonds discussed in Brussels and Basel may force European banks to raise as much as 171 billion euros ($195 billion) in new capital or sell 492 billion euros of the securities, according to research published on Wednesday. European banks own about 2.3 trillion euros of sovereign debt, of which about 1.5 trillion euros, or 65 percent, was issued by their home country, according to a report from Fitch Ratings. These are mostly treated as risk-free and don’t attract capital charges, an assessment that was called into question when the euro debt crisis exposed possible contagion between countries and their banks, sometimes dubbed the “doom loop.”

CSPP: The bull in the corporate china shop
Euromoney Magazine
News of the ECB’s corporate-sector purchasing programme shocked the market in March and has already prompted a stampede for paper among desperate investors before the central bank has purchased a single bond. Bankers and investors are already complaining that the programme will not have its desired effect. The road to hell is paved with good intentions. In March, when Mario Draghi decided to expand the ECB’s asset purchases to include investment-grade corporate bonds his aim was to stimulate investment in Europe. Instead he has precipitated a frenzied chain reaction that could end up completely destabilizing this market.

Indicator of the Week: The Lowest Yield Spread Since 2007
Schaeffer’s Research
There has been a lot of talk lately about the yield curve and what it is telling us. Specifically, the yield curve is flattening and this supposedly indicates troubles ahead. This week, I’ll take a look at how stocks have behaved depending on the shape of the yield curve and see if the worries are justified.

Commerzbank considers hoarding billions to avoid ECB charges – sources
Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank, according to sources familiar with the matter.

Why the ECB’s Impact On Corporate Bonds Has Been Smaller Than It Seems
Yields on bonds issued by companies in the eurozone have been falling ahead of the European Central Bank entering the market from Wednesday, but the bond-buying program has so far made less of a splash than it might seem.

May 2016 Swaps Review – Volume Down, SEF Compression & AUD OIS Up
Continuing with our monthly review series, let’s take a look at Interest Rate Swap volumes in May 2016.

Dark Days at the Folly as Nomura Traders Join Europe’s Jobless
Hundreds gather in pubs after bank shuts London equities unit
Fights over pay, documents show human cost of cutting jobs
They made their way in dribs and drabs. Hundreds of displaced bankers, shuffling up Suffolk Lane to All Bar One and along Upper Thames Street toward the Folly, the only pubs in the City of London open that early on an overcast Tuesday morning.

Let’s Get Fiscal
Bill Emmott – Project Syndicate
Everyone knows there is no gain without pain. But there can be pain without gain – a lesson that Western populations have been learning the hard way since at least 2012. With years of fiscal austerity in the United States, Europe, and Japan having achieved nothing, it is time for governments to start spending again. The proposal will be met with outrage from many governments, especially, but not exclusively, Germany’s, and will be dismissed by the many political candidates who treat sovereign debt, built up by the incumbents they are seeking to depose, as the devil’s work. But beyond ideology and self-interest lies a simple and unavoidable truth: austerity is not working.

Central Banks

Central banks playing dice with world markets
George R.R. Martin’s Game of Thrones is an epic tale of war and intrigue among seven kingdoms, each vying for supremacy over one another. In the G10, however, we have seemingly embarked on a “game of throws” in which central bankers cast dice to determine policy actions. This, it appears, will proceed until they crap out; at this point, we all lose but they get to keep playing.

Janet Yellen and the Four Big Uncertainties
When Federal Reserve Chair Janet Yellen spoke in Philadelphia on Monday, a lot of people listened for clues on when the Fed would next raise interest rates. (She didn’t give many, though nothing she said changed the view, now widespread, that the Fed won’t raise rates next week.) Less attention was paid to a section of Ms. Yellen’s speech highlighting “four areas of uncertainty [that] seem particularly salient at present.” It’s a list worth pondering because answers to the simple questions she posed will determine whether this year and next prove to be good ones for the U.S. economy.

Central Banks Fear Trouble Ahead as Brexit Stress Goes Global
From Washington to Mumbai, central bankers are finding their policy decisions gummed up by a potential British exit from the European union. Federal Reserve Chair Janet Yellen became the highest-profile monetary policy maker to speak out this week, when she warned a so-called Brexit would have “significant economic repercussions,” a concern echoed by counterparts including Reserve Bank of India Governor Raghuram Rajan.

China central bank holds line on growth forecast but sees more pain to come
China’s central bank slashed its forecast for exports on Wednesday, predicting a second straight annual fall in shipments, but said the economy will still grow 6.8 percent this year.

Fund managers fear central banks will create next ‘Lehman’ moment
Negative interest rates, ultracheap loans and aggressive quantitative easing—central banks are doing everything they can to prevent another financial crisis, but their unconventional measures are instead creating a massive risk to the global economy, top money managers say.

Regulatory News

Jeb Hensarling Plan Rekindles Debate as Republicans Aim to Dismantle Dodd-Frank
NY Times
A proposal by a senior House Republican to dismantle portions of the 2010 Wall Street reforms known as the Dodd-Frank Act has rekindled a partisan debate over the state of banking regulation eight years after the financial crisis. Representative Jeb Hensarling of Texas, who is chairman of the House Financial Services Committee, outlined the main parts of his plan on Tuesday during a speech in New York. He plans to introduce the legislation this month. The debate shows how divided Washington remains over how to supervise the financial industry, from the big banks to the small community institutions.

Morgan Stanley pays $1 million U.S. SEC fine over stolen customer data
Morgan Stanley has agreed to pay a $1 million fine to settle U.S. Securities and Exchange Commission civil charges that security lapses at the Wall Street bank enabled a former financial adviser to tap into its computers and take client data home, the regulator said on Wednesday.

Regulators Allow Large Foreign Banks More Time on Next ‘Living Wills’
U.S. regulators said they will give four large foreign-owned banks an additional year to file revised “living wills” showing how their U.S. units could go through bankruptcy without a taxpayer bailout.

The Next President Can Change Banking with One Pick
American Banker
The next president could significantly reshape the regulation of financial services with a single appointment: the Federal Reserve’s vice chairman for supervision.

A French court says a rogue trader shouldn’t have been fired—and deserves his vacation days
If you want to understand the real power of labor in France, look beyond the railroad strikes paralyzing the country this week and consider the judgment rendered against Société Générale yesterday (June 7) in a case brought by a rogue trader it fired. Jerome Kerviel’s $7 billion in losses in 2008 nearly brought down the investment bank. But a Paris employment tribunal said he was dismissed “without real or serious cause” and ordered the bank to pay him $517,000 in damages for unfair dismissal and back pay. That includes Kerviel’s unused vacation pay and a bonus he was awarded in 2007.

Oppenheimer to pay nearly $3 million for improper ETF sales: regulator
Oppenheimer & Co agreed to pay nearly $3 million in fines and restitution to settle U.S. regulatory charges that it improperly sold risky exchange-traded funds to risk-averse elderly customers and other retail investors.

Document 82 and slapping down China’s shadow loan market
Financial Times
The whack-a-mole game that is China’s shadow loans market just gotten some new rules. Or, as UBS put it, regulators are closing the shadow loan loophole. A whole new Document is out that could see China’s banks having to raise over Rmb1tn in new capital. Specifically, it’s the recently released Document 82 which is aimed at curbing excesses in those shadow loans, particularly in banks’ trust beneficiary rights products (TBRs) and directional asset management plans (DAMPs).


The international role of the euro
European Central Bank
Developments in the international role of the euro in 2015 and early 2016
The developments seen over this period took place in an environment of heightened uncertainty around global economic prospects and changing market expectations as to the path of monetary policy across major economies. The main drivers of international use of the euro were the additional unconventional monetary policy measures implemented by the ECB, the slower-than-expected pace of normalisation of the Federal Reserve’s monetary policy, and concerns about developments in China and EMEs more generally. In addition to these cyclical factors, there is also evidence that medium-term trends for greater multipolarity in the international monetary system, which have been observed since the start of the global financial crisis, continued over the review period.

The petrodollar drawdown quantified
Financial Times
To what degree is the collapse in oil prices responsible for the contraction in cross-border financial activity and over-the-counter derivatives? According to the BIS’ latest quarterly review, the slowdown — which began in earnest in early 2015, coinciding with the oil drop — broadened in the last quarter of 2015 to a $651bn contraction.

China’s currency: The middle way – Part 3 of 3
FTSE Russell
In this three-part series on China’s currency, we have introduced the notion of the “impossible trinity” – an economic theory which says a country cannot simultaneously control its exchange rate and its monetary policy while allowing unrestricted cross-border capital flows. We want to determine if China can defy this theory by finding a balance among the three pieces of the trinity – a policy flexible enough that it could solve the conundrum by bending without breaking.

Russia Doesn’t Want Stronger Ruble, Seeks to Avoid ‘Sharp’ Gains
Russia’s finance minister said the country isn’t “interested” in a stronger exchange rate after the ruble rallied the most globally since touching a record low against the dollar in January.


Rock-Bottom Bond Yields in Europe Hit All-Time Lows
Yields on the 10-year government debt of Germany and the U.K. fell to all-time lows, a stark demonstration of the modern era of scant inflation, weak growth and outsize monetary policy. Government-bond yields have been slumping for a year across the developed world. Tuesday’s decline came after tepid U.S. jobs data on Friday spurred concerns that the global economy would remain weaker for longer.

Foreign buyers fuel blazing high-grade bond market
The red-hot US investment-grade bond market is on pace for a record quarter of issuance, boosted by an influx of foreign investors hunting for yield they cannot find elsewhere.

Connectivity issues a major barrier for bonds
The Trade
Despite vendors building solutions for bond market connectivity, technology budgets are stopping the buy-side from linking to other firms to trade bonds, a panel has agreed.

****SD: Also, Bad bond data significantly delaying execution

BlackRock: Not All Bond Funds Are Alike
BlackRock wants to debunk claims that periods of system-wide stress could lead to a mass investor exodus from bond funds. Regulators and researchers – including economists at the Federal Reserve Bank of New York and the International Monetary Fund – have suggested over the last year that a period of severe market stress could lead to mutual-fund fire sales.

China’s New Dollar Bonds Give HSBC a Sense of Deja Vu
“China’s ITICs flourished in the 1980s and 1990s as a vehicle for central agencies and local and provincial governments to channel foreign investment into the mainland while skirting strict controls on capital flows,” the Wall Street Journal wrote some 16 years ago. Few now seem to remember the more than 200 or so international trust and investment corporations — ITICs — created in the final two decades of the last century. There may be a reason for this case of capital markets amnesia. Few ITICs remain standing today, after the Chinese government backed away from the sector and the vast majority defaulted on their debt in the late 1990s and early 2000s. But memories might be jogged soon enough, according to analysts at HSBC Holdings Plc.

Indexes & Index Products

High-Priced Stocks Torturing Bears as S&P 500 Record Looms
Profits are falling, valuations are the highest in a decade and the U.S. just reported the worst hiring since September 2010. Despite it all, stocks have strung together a series of up days that pushed the S&P 500 Index closer to a record than any time since July. How?

A BlackRock Bond ETF Heralds New World Order in Emerging Markets
It’s official: exchange-traded funds now stand atop the developing world. Last month, assets of BlackRock Inc.’s flagship ETF for emerging-market debt surged to $6.5 billion, eclipsing the largest mutual fund in the category. For the first time, ETFs are the most-popular options for both bonds and stocks from developing nations.

2016’s Biggest ETF Launches To Date
The first five months of 2016 are really an example of extremes when it comes to ETF launches, with two funds in particular attracting assets of more than $200 million. No other funds that have launched this year have even begun to approach those levels.

MSCI and China: the A-shares decision looms
Next week, MSCI, the index provider, will announce whether it has decided to include China in its emerging markets indices. Coming almost a year to the day since mainland markets peaked, inclusion would mark something of an international rehabilitation for mainland stocks. A decision to delay again will probably be greeted with a shrug since China still has a lot of work do to align its market practices with international norms.

The Rally, Graded on Two Breadth Measures
The Reformed Broker
The S&P 500 is now within 1% of a new record high. We haven’t made one in 265 days, and the swings between last May and now have not been terribly enjoyable for investors (although, a paradise for good traders).

****SD: The other Reformed Broker piece from today is also relevant: S&P Financials Down 30% Over the Last Decade

Muni Bond ETFs Are Still a Crowd Favorite
ETF Trends
In an extended low-yield environment, municipal bonds and related exchange traded funds have continued to perform, attracting billions in new inflows this year. According to Lipper data, muni bond funds had over $632 billion in assets as of June 1, a record high, after investors funneled a net $22.5 billion into muni-related funds in 2016, the best start to a year since 2009, the Wall Street Journal reports. In contrast, investors yanked $40 billion from equity funds this year.


After five lean years, gold miners gear up for growth
For the first time in five years, Barrick Gold and other bullion miners are getting ready to expand, breaking from their monologue on cutting costs and debt because of tumbling gold prices. Backed by healthier balance sheets, a 17 percent rise in the price of gold since January to $1,244 an ounce and new investors, miners from Canada to Australia and South Africa are studying ways to raise production.

Actually, Gold Can Provide Income: Here’s the Trade
Gold, which defies traditional valuation metrics, keeps attracting buyers in anticipation of further gains. This is incredible because stocks, which can be valued based on cash flow, are dancing around record highs and it’s hard to find anyone who is confident about the near-term future.

Pharaohs’ shadow an omen in Egypt gold search
Careering around Egypt’s rocky Eastern Desert, Alexander Nubia (AAN.V) CEO Mark Campbell peers from his jeep and sees hills so rich with gold they could lure billions in investments and jumpstart the ailing economy. His company just has to find it. Egypt’s gold mining industry has for years been long on potential and short on investment — the result of a jarring mismatch between spectacular geology and an unattractive commercial framework for mining.

ECB ‘Monetary Amphetamine’ Propels Gold to Best Start Since ’79
Once again, gold is getting a boost from a central banker, only this time it’s not Janet Yellen. The European Central Bank, led by Mario Draghi, plunged into the corporate bond market on Wednesday, buying the debt of some of the continent’s biggest companies. ECB buying of government bonds has pushed yields down to records, with more than 40 percent of securities in the Bloomberg Eurozone Sovereign Bond Index offering negative yields. Gold has rallied 19 percent this year, the best start since 1979, as low interest rates boost the appeal of the metal, which offers returns only through price gains.

ETF Investors Want Gold, Gold and More Gold
Gold futures jumped 1.3% to $1,263 an ounce in recent trading, the highest price since May 18 — the very day that dovish FOMC minutes torpedoed precious metals and other interest-rate sensitive assets. Since then, of course, a dismal reading on jobs growth in May from the Department of Labor reduced the odds of a rate hike in June or July.

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