First Impressions

The Top Three
The most read story yesterday was Donald Trump’s Week of Playing with Financial Fire. Playing with fire always gets clicks, but when the Donald is involved, it gets mega-clicks. Deutsche Bank’s Woes May Be ‘Insurmountable,’ Berenberg Says came in second — just about the only metric where Deutsche Bank currently comes in second I’d imagine. Finally, Carl Icahn’s fund moves to large bearish stance: Barron’s nabbed third.

 

Quote of the Day

“In 1998, Wall Street bailed out a hedge fund. In 2008 the Fed bailed out Wall Street. What’s going to happen in 2018? It’s going to be the IMF bailing out the central banks.”

Jim Rickards, West Shore Funds chief global strategist, in the story, “Make America Gold Again: Calls for Everyone’s Favorite Standard Are Back”

Lead Stories

EU, U.S. Race to Spare Banks $5 Billion Clearing Capital Hit
Bloomberg
European Union and U.S. financial regulators are racing to agree on a plan to prevent billions of dollars in capital requirements from hitting banks’ trades in stock options and other securities starting next month.
bloom.bg/1WBg6j6

As Brexit vote looms, U.S. banks review their European commitments
Reuters
If Britain votes to leave the European Union in June, some U.S. banks could give up parts of their business in the bloc altogether. The option is an extreme scenario under consideration by some Wall Street firms if the terms of an exit, currently a matter of speculation, leave financial services companies in Britain unable under their current set-ups to do business inside the EU, according to discussions Reuters had with several U.S. banks and their lawyers.
reut.rs/1R6JtRu

Great migration to send bank revenues further south
Financial News
Revenues will continue to flow out of the coffers of struggling investment banks towards the buyside, stock exchanges and fintech firms over the coming years – to the point where banks will soon be earning less than a third of all fees generated in the world’s wholesale financial markets.
goo.gl/rkIq8B

Euro zone banks face profitability shock, need to consolidate: ECB’s Praet
Reuters
Euro zone banks are facing a severe profitability shock, European Central Bank chief economist Peter Praet said on Tuesday, urging more consolidation in the sector to make it more competitive. Speaking at a conference in Brussels, Praet said that overcapacity, high costs, higher competition, an excess of bad loans in some countries and a lack of necessary consolidation are squeezing banks’ profits in the euro zone.
reut.rs/1R6JcOA

Recession fears are running rampant on Wall Street
New York Post
Wall Street is getting very close to saying the dreaded “r” word — recession. This year has been one of the most pessimistic times on the Street since the onset of the Great Recession in 2008, with analysts releasing a flurry of reports on Monday predicting that markets and economic growth will slow, but stopping short of calling it a recession.
nyp.st/1YzMgsA

Who knew what at Lending Club?
Financial Times
People are usually told that knowledge equals power, but in business, knowledge — and a failure to disclose that knowledge — can be a dangerous thing that leaves you unemployed. That seems to be the story of what went wrong for Renaud Laplanche, the former chief executive of Lending Club, America’s largest online lender. He was reportedly not as forthcoming as the board would have liked on what he knew about the missold loans to Jefferies. Combined with his failure to properly disclose an interest in a fund which the company decided to invest in, it made his position untenable.
on.ft.com/1YzK83W

ECB monetary policies face complaint before Germany Constitutional Court – again
euronews
Germany’s Constitutional Court has confirmed that it has received a complaint against the European Central Bank’s monetary policies. It is the latest such action from a group of university professors and business leaders who believe the ECB is not authorised to buy government bonds – and in the future corporate bonds – as part of its quantitative easing programme.
goo.gl/3g62UF

Commentary: Why the IMF must walk away from Greece
Reuters
The depth of distrust between Greece and its creditors grows increasingly clear as both sides resume negotiations for a new bailout program.
reut.rs/1NxhOic

Shadow Banks Make Diciest Loans While Wall Street Retains Risk
Bloomberg
Wall Street has cut its lending to the riskiest companies, shifting its financing to nonbanks that make the loans instead, according to a team of analysts at the Federal Reserve Bank of New York.
bloom.bg/1YzKvLZ

Central Banks

The Bank of England is right to intervene in the Brexit debate
The Economist
Brexiteers are livid about comments made at a press conference on May 12th by Mark Carney, the governor of the Bank of England. He presented the bank’s latest inflation report, and then went on to concede that a vote to leave the European Union could “possibly” tip Britain into a “technical recession” (defined as two consecutive quarters of negative growth) and destabilise financial markets. Jacob Rees-Mogg, a Conservative MP and prominent Brexit campaigner, said that Mr Carney “should be fired” for his comments.
econ.st/1NxfCqP

The Way Back for Monetary Policy
Lee Jong-Wha – Project Syndicate
The central banks of major advanced economies have been navigating uncharted territory in recent years. While their use of a range of unconventional monetary-policy tools has had benefits, it has also generated significant uncertainty, without fully stabilizing the world economy. Now the time has come to head back toward more familiar policy terrain.
/goo.gl/6fFwX2

ECB has ‘blurred the lines’ of acceptable stimulus, warns Germany’s Weidmann
The Telegraph
The European Central Bank’s aggressive economic stimulus has “blurred the lines” between what the central bank is and isn’t allowed to do, a leading policymaker has warned.
goo.gl/8rLjW2

Fed’s Williams: Raising Rates 2 or 3 Times This Year ‘Makes Sense’
WSJ
Federal Reserve Bank of San Francisco President John Williams said it still “makes sense” for the central bank to raise short-term interest rates two or three times this year given continued moderate U.S. economic growth and low unemployment.
on.wsj.com/1YzHxa4

As China Revamps Regulation, PBOC Gears Up for Central Role
Bloomberg
As China’s leaders consider ways to improve market oversight and avoid the kind of boom and bust in equities that shook investors around the world last year, the nation’s central bank is already extending its oversight to areas beyond its traditional focus.
bloom.bg/1R6IBMT

Brazil’s government taps Wall St. favorite to lead central bank
Reuters
Brazil’s interim government on Tuesday named the lead economist of the nation’s largest private bank to head the central bank, in a further shift away from interventionist policies that many blame for a deep recession and near double-digit inflation.
reut.rs/24XHKI0

Regulatory News

Finra to Join SEC, Treasury in Efforts to Collect Trading Data
Bloomberg
Wall Street’s self-regulator plans to join two government agencies in their efforts to survey the roughly $500 billion of daily transactions in the U.S. Treasuries market.
bloom.bg/1R6IQHL

Wanted: Treasury Tracker
WSJ
U.S. policy makers on Monday moved to boost oversight of the $13 trillion Treasury market, taking steps to better monitor a market that is the world’s most liquid, but also remains much more opaque than trading for stocks and other types of bonds. The Treasury Department and Securities and Exchange Commission said they are requesting a Wall Street watchdog create a data feed the government will be able to use to track Treasury trades. No such centralized reporting currently exists for Treasury trades, unlike those of corporate and municipal debt that brokers must report in near real-time.
goo.gl/5XIk22

Wall Street Faces New Front for Lawsuits After Top Court Ruling
Bloomberg
The U.S. Supreme Court dealt a blow to financial services firms trying to fend off allegations that they facilitate illegal short selling, affirming the rights of investors to make their case in plaintiff-friendly state courts.
bloom.bg/24XHoRP

U.K. Trader’s ‘Blind Ambition’ Led to Libor Fixing, SFO Says
Bloomberg
A former Barclays Plc trader helped fix Libor rates in an attempt to boost his career by currying favor with the swaps desk, where the “glamour boys” and “big dogs” worked, a prosecutor said Tuesday at a London trial. Jonathan Mathew said new employees often targeted the swaps desk as a career goal. He was willing to break the rules to get there, James Hines, a prosecutor for the U.K. Serious Fraud Office, said.
bloom.bg/1YzJMKK

ANZ traders joked about rigging headline interest rate
The Australian
ANZ traders joked about their ­rigging of the headline interest rate and mocked ­”mani­p­ulation ­within the ­financial system” and what “good blokes” they were for helping each other set rates.
goo.gl/xBBvkh

Slovenian bank was recipient named in failed Vietnam cyber-heist
Reuters
Cyber-criminals unsuccessfully tried to send money from a Vietnamese bank to a Slovenian one in December, but there have been no other cases of attempted fraudulent transfers identified in Vietnam, a top central bank official there said on Tuesday.
reut.rs/1R6Jfdb

Currencies

Elephant in the Room at This Week’s G-7 Is Sure to Be the Yen
Bloomberg
When finance chiefs and central bankers from the Group of Seven countries gather this week at a hot springs resort in northern Japan, the official agenda has them focusing on ways to revitalize global growth and crack down on cross-border tax evasion.
bloom.bg/1R6Iy3u

Daily currency trading volumes rise to $4.96 trillion in April – CLS
Reuters
Global currency trading volumes rose to just shy of $5 trillion a day in April as volatility picked up after the Bank of Japan surprised many by keeping monetary policy unchanged, data from settlement company CLS showed on Tuesday.
reut.rs/1R6IX6a

Pound Morphing Into Emerging-Market Currency Before Brexit Vote
Bloomberg
With just over a month until the U.K. vote on European Union membership, investors are increasing treating the pound like an emerging-market currency.
bloom.bg/1Nxic0e

Desperate for Dollars, Investors Line Up for a Sure-Fire Loser
Bloomberg
The hot trade in Egypt’s stock market is a sure thing — a guaranteed money-loser. Clients have been snapping up shares of Commercial International Bank Egypt on the Cairo market, paying in Egyptian pounds, only to turn around and sell them in London for dollars at a loss of as much as 30 percent, brokers say.
bloom.bg/1R6IxN2

Bear Bets on Nestle to UBS Show Swiss Franc Trauma Lingers
Bloomberg
Investors testing the waters in Switzerland have been saddled with some of the worst stock returns in the developed world. Going by the options market, traders expect it to get worse. The Swiss Market Index, down 10 percent this year, has trailed most benchmarks outside of emerging markets, and investors have boosted protection against further slides to the highest level since 2012. Foodmaker Nestle SA, agrochemical company Syngenta AG and lender UBS Group AG are the most expensive to hedge.
bloom.bg/1R6ITDr

Congo Targets Airtime Touts as Central Bank Props Franc
Bloomberg
Mobile-phone airtime touts on the streets of the Democratic Republic of Congo’s capital have become the latest target in the government’s attempt to stop the slide of the Congolese franc. The traders who peddle mobile credit to pedestrians in Kinshasa must stop speculating on the exchange rate and sell $1 airtime cards for no more than 1,000 Congolese francs ($1.05), according to a statement issued May 11 by the office of the Vice Prime Minister for Post, Telecommunications and New Technologies, Thomas Luhaka.
bloom.bg/1R6JpkL

Japan: More Monetary Easing And A Stronger Yen On The Horizon
Seeking Alpha
The Japanese Prime Minister has staked his legacy on Abenomics. Domestic political fortunes have become intertwined with delivering on the economic promises of Abenomics. The Japanese Upper House is holding elections in July, 2016. We anticipate the BoJ will pursue monetary easing measures accommodating to the Abe administration at the June BoJ policy meeting. The BoJ disappointed markets with no policy action following its negative interest rate decision. The BoJ will be reluctant to disappoint markets again, especially with political stakes high. Our Take: Unintended consequences of additional government monetary easing will likely result in the Japanese Yen strengthening relative to the USD.
goo.gl/Z7onTV

Bonds

Credit Suisse Takes Out Insurance on Itself
WSJ
Getting rid of unproductive assets is a good way to boost returns. Banks are still busily doing this eight years after the global financial crisis. But now Credit Suisse has a plan to shed something that isn’t really an asset at all: it wants investors to help fund its exposure to operational risks. The Switzerland-based bank has come up with a kind of catastrophe bond designed to put a cap on any really big losses it suffers—be that from rogue traders or systems failures for instance. From a shareholder perspective, the economics don’t immediately make sense: the bond looks more costly than the capital it saves. It also smacks of financial engineering and of bankers once again being too smart for their own good.
on.wsj.com/1YzKuaN

The Bond Boom: Don’t Buy Everything Companies Are Selling
WSJ
Europe’s corporate bond market is booming, buoyed by a recovery in risk appetite and the prospect of purchases by the European Central Bank starting in June. Conditions look much more comfortable for borrowers than for investors, though.
on.wsj.com/1Nxi9Br

J.P. Morgan Asset, Pimco Sweet on Company Debt as Treasuries Lag
Bloomberg
J.P. Morgan Asset Management says U.S. corporate bonds are attractive and Japanese investors are gobbling them up. The Pimco Total Return Fund is doubling the amount it’s allowed to invest in junk debt. Corporate securities are trouncing Treasuries in 2016 as investors seek higher yields than those available outside the biggest government debt markets. The greater payments on the securities will also serve as a cushion if the Federal Reserve raises interest rates. Reports due Tuesday on consumer prices, industrial production and housing starts will guide policy makers before their next meeting June 14-15.
bloom.bg/1R6ISzn

U.S. Treasury Yield Curve Is Flattest Since 2007
WSJ
The latest round of upbeat housing and inflation releases Tuesday drove investors to shed short-term U.S. government debt and migrate cash into long-term bonds as they raised some concerns over higher interest rates by the Federal Reserve. As a result, the yield premium investors demanded to hold the benchmark 10-year note relative to the two-year note hit the lowest level since December 2007. Yields on short-term notes are highly sensitive to expected changes in the Fed’s policy outlook.
on.wsj.com/1YzHefy

Saudi Arabia’s $117 Billion Treasuries Tally Poses Fresh Puzzle
Bloomberg
After the U.S. government’s first-ever release quantifying Saudi Arabia’s Treasuries holdings, a question echoed through Wall Street: That’s it? The kingdom held $116.8 billion of Treasuries as of March, according to data that the Treasury Department released Monday in response to a Freedom-of-Information Act request submitted by Bloomberg News. It’s the first time the U.S. disclosed a breakdown for the world’s biggest oil exporter, after lumping it in with a group of other oil producers since 1974.
bloom.bg/1R6Iscj

Indexes & Index Products

Why the ETF Acronym Can Be Misleading
Newsmax
Sometimes an ETF isn’t exactly an ETF. As investors, the media, and regulators put more focus on exchange-traded funds, it’s worth asking what exactly an ETF is. The term was coined in 1996 by Morgan Stanley, which needed a generic name to put into the prospectus for its new World Equity Benchmark Series (WEBS) products, which years later became iShares. Until 1996, that really was just the SPDR S&P 500 Trust (SPY). Little did the bank know how quickly the ETF acronym would catch on, eventually expanding to include an eclectic group of products—some of which aren’t technically funds and don’t always trade on an exchange, if they trade at all.
nws.mx/1R6HQU0

What’s Driving the Global ETF Industry?
Zack’s
Amid continued volatility in the oil price and the instability in the stock markets, assets invested under global ETFs/ETPs touched an all-time high of $3.138 trillion in April. While equities failed to impress the ETF space, fixed income led the way.
goo.gl/NEQqvZ

How Active Should Active Management Be?
Indexology: S&P Dow Jones Indices
Most active managers fail most of the time, at least if we take their underperformance of passive benchmarks as evidence of failure. The evidence of this failure is so widespread, and so consistent, that even dyed-in-the-wool active managers no longer deny it.
goo.gl/laKUh8

Finding the small cap premium in a multi-factor world
FTSE Russell
The small cap equity premium that results from the size factor of a company has long been a staple of equity investing. The notion that “smaller firms have had higher risk-adjusted returns, on average, than larger firms” was first reported in the early 1980s.[1] More recently however, confronted with a “factor zoo” — to use professor John Cochrane of Chicago University’s phrase[2] — skeptics are questioning whether the small cap premium still exists or ever existed at all.
/goo.gl/kXxwdi

Soros Increases Bet Against the S&P 500
WSJ
Billionaire investor George Soros, who made a fortune betting against the British pound in 1992, on Monday disclosed a big bet on gold during the first quarter and doubled the wager against the S&P 500, according to a regulatory filing.
on.wsj.com/1Nxg88n

Index Funds Are Good Corporate Governors: Who Knew?
Morningstar
Among index funds’ alleged sins, poor corporate governance is the most plausible. Accusations that index funds distort the stock market’s behavior do not convince, being merely the latest in a long line of excuses offered by lagging active managers. (Long before index funds prospered, active managers found ways to explain how the market erred in underpricing their holdings.)
goo.gl/d6Rk51

Gold

Gold miners’ rally outpaces metal and lures Soros
Financial Times
Shares of gold miners have more than doubled this year, crushing the 20 per cent gain in the precious metal and prompting investors such as billionaire George Soros to increase their bets on the sector. Soros Fund Management bought a 1.7 per cent stake in miner Barrick Gold in the first quarter, worth $263.7m, according to a filing on Monday. Shares in the Canadian-listed company have surged 139 per cent so far in 2016.
on.ft.com/1Nxftnr

Five Charts Show Why George Soros Is Investing in Gold Mining
Bloomberg
Gold mining equities have become the darlings of the market, luring billionaire George Soros to buy a $264 million stake in Barrick Gold Corp. Bloomberg’s index of 14 major bullion miners doubled this year after plunging 76 percent in the previous five years.
bloom.bg/1R6IRvr

Make America Gold Again: Calls for Everyone’s Favorite Standard Are Back
Bloomberg
When times are tough, new economic theories get a better hearing. Maybe some old ones, too. The gold standard is one of the oldest ideas about money, but the hardest of hard-money hawks sense an opening to breathe new life into it. Decades ago, the amount of cash circulating in a country was often limited by the stash of bullion held in its coffers. Especially since 2008, developed-world policy has headed in the exact opposite direction, expanding the powers of central banks to stoke growth. Helicopter drops of money, potentially the next new thing, would be a giant leap further.
bloom.bg/1YzHonb

Chinese state-controlled bank to buy London’s mini Fort Knox
CNBC
It is one of Europe’s largest and most-secure gold vaults — dubbed a mini Fort Knox — which lies at a secret location within London’s M25. Equipped with an electrified roof, blast doors that can withstand rocket-propelled grenades and fingerprint sensors that can detect the flow of blood (to prevent the use of severed digits), the facility was for four years owned by Barclays. But this summer the keys to the vault, which can house up to $80bn of bullion, will pass to an overseas arm of a Chinese state-controlled bank, following a deal to acquire the site from the British bank. The terms of the deal were not disclosed.
cnb.cx/1R6IAIN

Miscellaneous

The World Bank is eliminating the term “developing country” from its data vocabulary
Quartz
In the 2016 edition of its World Development Indicators, the World Bank has made a big choice: It’s no longer distinguishing between “developed” countries and “developing” ones in the presentation of its data.
goo.gl/Eb2LQa

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