First Impressions

There are Strings Attached – Push on Them
Doug Ashburn – JLN

“Pushing on a string.” I forget where I first heard the phrase, but is has now become cliche in economic circles in describing central bank monetary policy. But, really, there is no better way to illustrate the futility of cheap money in an age of deleveraging.

In other words, the financial crisis was all about excess leverage. How can leverage be both the problem and the solution?

Today’s top story sums up the quandary quite nicely. The European Central Bank is offering a blank check to member banks at a mere 25 basis points for up to four years. Why are they not lining up to snatch the deal? Because apparently there is a catch – banks must lend out the money to the general economy. “But,” you say, “Isn’t that what banks are SUPPOSED to do – lend money?”

Under normal circumstances, yes, but we are not living in normal times. When a lender lends money, he or she is making a long-term bet on the ability of the borrower to repay with interest and/or the ability of the collateral to hold its value. Both are in doubt, especially in the European periphery, with stubbornly high unemployment and default rates well into double-digit territory.

If the economy is truly on the verge of contraction, even 25 basis points is not enough of an incentive to lend.

Pushing on a string, indeed.

Quote of the Day

This financial fragility of nonfinancial firms is an issue. The demand for credit is not good-quality demand.

Giovanni Sabatini, director general of the Italian Bankers Association, quoted in the NY Times article “European Banks Balk at Cheap Loans, Worried About Strings Attached”

Lead Stories

European Banks Balk at Cheap Loans, Worried About Strings Attached
JACK EWING – NY Times
It sounds like an offer too good to refuse: nearly unlimited loans at an annual interest rate of only 0.25 percent. Borrow $1 million for four years, and the interest per year would be barely a rounding error: $2,500.
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US and eurozone inflation expectations diverge
Michael Mackenzie in New York – Financial Times
The divergence between US and eurozone market expectations of inflation has reached a new peak, with investors betting on sharply differing outlooks for consumer prices on both sides of the Atlantic.
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***DA: We will see. The cure for high prices is high prices.

Yankees doing dandy in European surge
Sarah Krouse – Financial News
As European companies seek to issue more high-yield debt, they are increasingly crossing the Atlantic to do so. The three largest high-yield deals marketed in the US this year were by European issuers, according to Dealogic.
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***Yankees doing dandy do or die.

China expands plans for World Bank rival
Jamil Anderlini in Beijing – Financial Times
China is expanding plans to establish a global financial institution to rival the World Bank and the Asian Development Bank, which Beijing fears are too influenced by the US and its allies.
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***DA: Sounds like a capital idea.

Macro Horizons: What Will Wake Markets Out of Their Sleepy State?
Michael J. Casey and Alen Mattich – MoneyBeat – WSJ
It says something about how sleepy markets have been that a 0.6% drop in S&P 500 on Tuesday was considered something to worry about. Some folks are arguing that this is the beginning of an inevitable correction following a long period of low volatility. The VIX “fear gauge” options volatility picked up too, but it is still extremely low by historical standards.
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Save the Bank That Shouldn’t Exist
Bloomberg
When the House Financial Services Committee holds its hearing tomorrow on the Export-Import Bank, some of its members might legitimately ask: Why should the U.S. even have an export-import bank?
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Draghi and the Art of the Feasible
Mohamed A. El-Erian – Bloomberg
European Central Bank President Mario Draghi has already surprised many with bold policy moves to buttress the European economy, but you can expect him to lead the ECB toward an additional set of innovative measures. This will probably happen in the autumn, and Draghi’s success will continue to hinge on factors outside his, and his central bank colleagues’, control.
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‘Crowdfunding’ muscles in on the bond market
Thomas Hale in London – Financial Times
Crowdfunding is coming for the bond market. Two UK restaurant chains have raised fixed-income debt in the past week through Crowdcube, a crowdfunding platform with 75,000 registered users.
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Defend Argentina from the vultures
Martin Wolf – Financial Times
A creditor paid more to take on the risk of a default cannot then be surprised by it
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Here is How You Should Think About Inflation
Jeff Miller – The Reformed Broker
Writing about inflation is a thankless task. Readers begin by thinking they know all of the answers. We all shop, right? It is the most popular subject for bamboozling people, since it is easy to find examples of rapidly rising prices. It is by far the most deceptive trap for those who might confuse politics with investing.
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$4,750 Plus Three Years Is Price of Debt-Free Life: Euro Credit
Dara Doyle – Bloomberg
Bankruptcy is increasingly becoming the route of choice for some Irish individuals trying to cope with the legacy of the worst real-estate crash in Western Europe. Under new laws that made the process easier, borrowers can exit bankruptcy after three years with a clean financial bill of health instead of 12 years previously.
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***DA: Does that mean we can default four times as often as before?

Central Banks

Yellen may be poised to rewrite Fed’s rule book on wages, inflation
Reuters
Federal Reserve Chair Janet Yellen wants to see U.S. wages climb at a much brisker clip to boost consumer spending and help workers recoup ground they lost in the last recession, but she’ll have to fend off policymakers who fear that could cause inflation to surge.
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***DA: (1+Real) = (1+Nominal)/(1+Inflation). Same as it ever was.

Bank of England Sows Fresh Confusion
Alen Mattich – MoneyBeat – WSJ
The Bank of England is making an art of sending mixed messages. Only last week, its governor, Mark Carney, warned that investors had become too complacent about interest rate prospects, hinting that the central bank could start hiking later this year. Tuesday he emphasized all the reasons the U.K. won’t need an interest rate hike anytime soon.
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The central bank vol control game
David Keohane – Financial Times
If this is all getting confusing…here’s Citi’s Steven Englander wondering again if instead of being muddled themselves central bankers are actually just messing with us deliberately in order to exert some control on behaviour
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Fed’s Dudley sees mid-2015 rate hike as ‘reasonable’
Reuters
The U.S. Federal Reserve can reasonably wait to raise interest rates until mid-2015 without risking an undesirable rise in inflation, an influential Fed policymaker said on Tuesday.
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Turkey’s central bank cuts rates to 8.75%
Daniel Dombey in Istanbul – Financial Times
Turkey’s central bank has cut benchmark interest rates well below inflation, in a move that follows sustained pressure from the government of Recep Tayyip Erdogan, prime minister.
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Currencies

Corporates take cautious stance on RMB adoption
Paul Golden – Euromoney Magazine
While renminbi trade flows between mainland China and emerging markets continue to grow, many domestic and western corporates remain reluctant to trade in the Chinese currency.
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***DA: Using RMB as a reserve currency is a great idea. You go first.

EM FX volatility sparks move to regional treasury centres
Paul Golden – Euromoney Magazine
The volatility of emerging market (EM) currencies this year, in current-account deficit nations, in particular, has reinforced the allure – and challenge – of FX management for corporations.
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The euro macro trade?
David Keohane – Financial Times
Click Citi’s charts to enlarge. They show that the euro’s correlation with stocks has turned negative following the ECB’s swarm attack earlier this month. If you’re feeling optimistic, it could be the signal for a Japan-style period of asset outperformance and currency underperformance — even if that blip downwards on the right-hand chart does not a trend make.
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U.S. Shouldn’t Weaponize the Mighty Dollar
Leonid Bershidsky – Bloomberg
It’s not the projected size of the fine — $8 billion to $9 billion. It’s not even the demand to fire specific employees. No, as BNP Paribas prepares to settle claims by U.S. authorities that it has transacted some $30 billion worth of business in violation of U.S. international sanctions, the part of the settlement most likely to stick in Gallic throats (and cause a bit of choking elsewhere) is a ban on clearing dollar transactions.
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Indexes & Index Products

McGraw-Hill, CME Said to Weigh Joint Bid for Barclays Index Arm
Matthew Monks – Bloomberg
McGraw-Hill Financial Inc. and CME Group Inc. are interested in acquiring Barclays Plc (BARC)’s index business and merging it with S&P Dow Jones Indices LLC — manager of the benchmark S&P 500 Index (SPX) and Dow Jones Industrial Average, according to people familiar with the matter.
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NASDAQ OMX Launches REIT Benchmark Index Family
MarketWatch
The NASDAQ OMX Group, Inc. and ETRE Financial, LLC announced a new partnership in the Real Estate Investment Trust (REIT) benchmark index space, with the launch of 12 co-branded indexes. The new indexes, available now, include a composite index and sector indexes such as healthcare, hospitality, office, residential and retail REITs.
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The Pros and Cons of Buying Buyback ETFs
Eric Balchunas – Bloomberg
Companies splurged on share buybacks in 2014’s first quarter, and investors splurged on buyback funds.
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Gold

Singapore to launch gold contract
Jeremy Grant in Singapore – Financial Times
ISingapore has unveiled plans for an exchange-traded gold contract, boosting its ambitions to become Southeast Asia’s gold trading hub, and adding to calls for gold pricing to be influenced more by Asian trade.
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America Needs The Gold Standard More Than Ever
Forbes
The godfather of modern economics, John Maynard Keynes, dismissed the concept of gold as money—the gold standard—as a “barbarous relic.” Another economics titan, Nobel Prize-winner Milton Friedman, conceded that gold is good in theory, but opposed gold in practice, arguing that a return to a gold standard is “neither desirable nor feasible.” Both Keynes on the left and Friedman on the right got it really, horribly wrong.
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***DA: In the words of Homer Simpson – “Eggheads – what do they know?”

Singapore Kilobar Gold First In The World To Trade On Exchange Platform
At the annual London Bullion Market Association (LBMA) Bullion Market Forum held for the first time in Singapore today, Mr Lim Hng Kiang, Minister for Trade and Industry, announced a new exchange-traded Singapore Kilobar Gold Contract . This is the first wholesale 25 kilobar gold contract to be offered globally.
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