First Impressions

FCM Outlook 2016: Brokers Finding New Fields Of Green
JLN Staff
Futures Commission Merchants have not had an easy time of it in the years since the 2008 Financial Crisis and the subsequent regulatory and interest rate avalanche. For many firms, it’s been a perfect storm of financial crisis, low to no interest rates and volatility, and an ongoing crush of new rules and regulations from U.S. and European regulators. For some firms, the combination has been stifling, while others have shut down or sold out to other, stronger players. In January, the number of FCMs stood at around 60, down from 139 in 2008, according to data from the National Futures Association, one barometer of just how hard it is to make it in the harsh environment.

In case you missed it, below are the other parts of our FCM series:
Singularity: G. H. Financials’ Mark Ibbotson on FCM Efficiency
We Can Rebuild It: SocGen Prime Services Group Reengineered And Growing
Full house: OptionsHouse Set To Grow Futures Business
Bite Sized: TD Ameritrade’s FCM Looks for Bigger Slice of Retail Pie
Shipbuilding: RJ O’Brien Building Business in Tough Times


Quote of the Day

“It will be cruel for me to spoil the fun the press is having with all this speculation. I’m personally intrigued by all the letters I’m supposed to have written.”

Raghuram Rajan, governor of the Reserve Bank of India, in the story, “India’s central bank gov Rajan: Will he stay or will he go?”

Lead Stories

European credit markets on edge as ECB poised to buy
Financial Times
For three months there have been warnings to all in Europe’s corporate bond market that sluice gates will soon open to flood it with money from the central bank. Ahead of Wednesday’s launch of the European Central Bank’s corporate bond-buying programme, however, the investors and strategists who swim in these financial waters remain uncertain and wary about the turbulence ahead. After the ECB announced in March it would add bonds issued by companies to the securities it buys each month in an attempt to stimulate economic activity, prices for such bonds rose, borrowing costs plummeted and bond issuance surged.

Captain Yellen and Her Klingon Conundrum
In Star Trek, top cadets at Starfleet Academy face a terrible training scenario: Do they abandon a civilian vessel to annihilation in the Neutral Zone or risk war with the Klingons—and their own demise—by embarking upon a rescue mission? In her quest to save the U.S. economy from deflation, Federal Reserve Chair Janet Yellen faces a similar challenge to that faced by then-cadet James T. Kirk, according to RBC Dominion Securities Inc. Strategist Matthew Barasch.

U.S. regulators, FBI warn banks on cyber threat after Bangladesh heist
U.S. regulators on Tuesday told banks to review the cyber security they have in place to protect against fraudulent money transfers and other threats to a global payments network, months after hackers stole $81 million from the Bangladesh central bank’s account at the Federal Reserve Bank of New York.

Money, Jobs and Sovereignty: Myth vs. Reality Ahead of ‘Brexit’ Vote
New York Times
British voters will go to the polls this month to decide whether their country should remain in the European Union. As the date, June 23, approaches, the “leave” and “remain” campaigns are dialing up the volume, with claims and counterclaims flying, many with only a tenuous relationship to facts.

What if Greece got massive debt relief but no one admitted it? (Part 1.5)
Financial Times
After years of failed attempts to stabilise the Greek economy, the Greek government finally got debt relief in 2012. As we explained in our previous post, interest payments fell by more than half between 2011 and 2013. Since the 2012 modifications, Greece’s sovereign debt service costs have been significantly smaller as a share of total output than in Italy or Portugal.

Japan asks banks if willing to lend to government at negative rates: sources
Japan’s ministry of finance is gauging the appetite of the country’s major banks to lend to the government at negative interest rates, people with direct knowledge of the matter said. The government is asking lenders about the possibility of submitting tender offers with negative rates at the ministry’s short-term special accounts borrowing program auctions, according to the sources, who were not authorized to discuss the matter publicly.

Ripple Simplifies Blockchain Integration
Business Insider
Blockchain technology is becoming increasingly important, but that doesn’t make it easy to use or understand. And now one company is trying to change that. Ripple, a blockchain cross-border transfer and currency exchange firm, has partnered with fintech firm Expertus to begin a blockchain pilot program, according to Finextra.

Long Shadow Hangs Over China’s Banks
Chinese banks collectively have an enormous balance sheet, enough of a worry for investors on its own. Then there is the off-the-books shadow of a balance sheet, which is looming increasingly large.

Central Banks

Goldman Puts July Rate-Boost Odds at Twice What Bond Market Sees
Economist Hatzius says Fed will keep rates unchanged in June
Futures show 61% chance of rate increase by year-end
Goldman Sachs Group Inc. says there’s a 40 percent chance the Federal Reserve will raise interest rates in July — almost double what the bond market projects — as Chair Janet Yellen kept prospects for a move this year alive.

Fed’s Yellen warns of Brexit impact on US economy
Investment Week
A Brexit is one of the factors the central bank would consider when deciding whether to raise interest rates, Yellen said in a speech on Monday, according to the BBC. She warned investors’ “appetite for risk” could change suddenly and market sentiment would be hit if the UK were to leave the EU.

India’s central bank gov Rajan: Will he stay or will he go?
Asia Times
Cue the Clash song: Will he stay or will he go? With central banks in the US, China and the European Union capturing all the headlines recently, it looks like Raghuram Rajan, India’s central bank governor, is a little desperate for attention. Last week, one of India’s largest newspapers reported that Rajan had met with Prime Minister Narendra Modi and ruled out extending his term at the bank beyond Sept. 4. The news sparked a decline in India’s currency. But on Tuesday, during his customary press briefing after monetary policy decisions, Rajan refused to give a definitive answer, and instead gave a brief and humorous statement on his future.

India central bank chief wary of banks taking majority in stressed-debt funds
India’s central bank is opposed to banks taking a majority stake in planned stressed-asset funds, and would rather have external investors provide their expertise in managing soured loans, Governor Raghuram Rajan said on Tuesday.

Regulatory News

GOP unveils Dodd-Frank alternative
The Hill
A leading House Republican has unveiled the GOP plan to regulate Wall Street and replace the Dodd-Frank financial reform law. A new bill introduced by House Financial Services Committee Chairman Jeb Hensarling (R-Texas) would fundamentally remake the financial regulation landscape, and eradicate major pieces of President Obama’s Wall Street reform law.

Goldman Sachs under investigation by US over troubled Malaysia Fund 1MDB
U.S. investigators are examining whether Goldman Sachs violated the Bank Secrecy Act when it didn’t inform regulators about a potentially suspicious transaction involving Malaysia’s embattled state fund 1MDB, the Wall Street Journal reported Tuesday.

Former trader Jérôme Kerviel wins unfair dismissal case
The Guardian
A French tribunal has ordered Société Générale to pay EUR450,000 in damages for unfairly firing the rogue trader Jerome Kerviel, whose unauthorised trades spiralled into massive losses in 2007 and 2008 and almost bankrupted one of Europe’s biggest banks. Kerviel, 39, whose deals lost the bank EUR4.9bn (£3.82bn), sued for wrongful dismissal and the tribunal agreed. It ruled he was fired “without real or serious cause” and that the bank had full knowledge of his shady dealings long before he was fired in 2008.

Australia regulator charges NAB over alleged rate-rigging
Australia’s securities regulator on Tuesday said it had laid charges against National Australia Bank (NAB) for allegedly manipulating benchmark interest rates used to price financial products, an allegation the bank said it disputes.

Bankers Linked to Tax Evasion Face Tougher Penalties in Denmark
Tax ministry can now force banks to hand over client lists
Biggest party in parliament wants jail sentences to be option
The two biggest political parties in Denmark’s parliament say the country may need to tighten punishments for bankers on the wrong side of the law as the Panama leaks continue to reveal practices that politicians say are unacceptable.

Why Trump, the ‘King of Debt,’ Hates Dodd-Frank
Populism—standing up for the little guy against the powers that be—seems to be the theme of the 2016 presidential campaign. Yet Donald Trump, a faux populist if there ever was one, said in a May 17 interview that he wants to eviscerate the Dodd-Frank Act. In his words, “it will be close to a dismantling of Dodd-Frank.” But destroying Dodd-Frank certainly would not be good for the little guy.


Spot FX volumes drop in May as Brexit vote looms
Daily spot trading volumes on the biggest currency trading platforms run by Thomson Reuters and ICAP continued to fall in May, extending a downward trend seen in recent months, according to figures the companies published.

British pound’s wild ride: ‘Fat finger’ or Brexit freakout?
Whodunit? That’s what traders want to know after the British pound went on a rampage against the dollar in early European trading hours, though if you blinked you would have missed it. “The GBPUSD shortly rallied to 1.4660 on what is believed to be a fat finger,” was how Ipek Ozkardeskaya, market analyst at London Capital Group, described it. The pound crested, then dropped back in quick fashion to the $1.45 region. Sterling then moved sideways before temporarily pushing back toward the upper half of the day’s stretched trading range.

Britain Threatens to Destroy 18 Months of Swiss Toil in a Stroke
Once again, someone else’s crisis is threatening to make life more difficult for the Swiss. Ever since it abandoned an exchange-rate cap in January 2015, the Swiss National Bank has battled against the franc’s appeal as a haven, guiding the currency lower with intervention and interest-rate cuts in an effort to keep the economy competitive. The strategy is finally paying off, with the franc just posting its weakest month versus the euro since the currency limit was scrapped.

China’s Currency Is Set to Win From Pound’s ‘Brexit’ Volatility
The British pound has regained some of the ground lost in the previous session on heightened fears that the U.K. people will vote to leave the European Union in the June 23 referendum. But even without that volatility, its place as the world’s third reserve currency is threatened over the long term. China has been nurturing the ambition to propel its currency, the renminbi (RMB) or yuan, to the third spot as a global reserve currency as it is gradually opening up its capital account toward full convertibility. And, according to Debra Lodge, head of RMB business development, North America, at HSBC Bank USA, the country is well on its way to achieving that goal.

Investors pulled £65bn cash out of the UK in March and April as Brexit fears grow
The Telegraph
Investors have pulled money out of UK assets at the fastest rate since the financial crisis as they brace for the potential shock of a Brexit vote. Some £65bn of cash was taken out of the country or converted into other currencies in the two months to April, according to Bank of England figures. Experts said that the pullback confirmed that money managers were taking the June 23 referendum seriously, and were prepared to take funds out of the UK entirely.


The Alchemist Who Turned Toxic Assets Into Gold at Citigroup
Mark Tsesarsky, who fled the Soviet Union with $90, has made the bank billions by doubling down on the same subprime mortgage bonds that nearly sank the global financial system.

The period of maximum danger for bond investors is yet to come
Financial Times
Does the Federal Reserve have a credibility problem? That certainly is the view of Narayana Kocherlakota, former president of the Minneapolis Fed, who argues that investors have lost faith in the Fed’s ability to hit its 2 per cent inflation target and that the time has come to reverse course and ease policy. Other critics highlight the Fed’s poor record in forecasting economic growth and inflation since the financial crisis. Futures markets, meantime, have determinedly refused to price in interest rate hikes that the Fed has promised.

World’s Safest Market Beset by Most Volatility Since 2008
The $1.5 trillion market for U.S. Treasury bills, known as an oasis of stability for investors worldwide, is experiencing the most volatility since the financial crisis. Daily swings in the government’s shortest-maturity obligations are widening as debate over the Federal Reserve’s path collides with rising demand for the securities before the implementation of regulations intended to make money-market funds safer.

Swiss, German bond yields set fresh record lows
Financial Times
Switzerland and Germany set new records in debt markets on Tuesday, as central banks extended easy-money policies in a bid to strengthen global growth and avert deflation. Benchmark 10-year German bond yields are now skirting close to zero, falling to a fresh low of 0.046 per cent, as the European Central Bank starts extending its quantitative easing programme on Wednesday with the first purchases of corporate bonds.

Indexes & Index Products

Why Chinese Stocks Aren’t Ready for MSCI Inclusion
The most important thing to consider about the epic Chinese stock rout that began 12 months ago is that it’s not over. For one thing, the Shanghai Composite Index remains too high even after a 40% correction. Every other major market is three times cheaper than domestic A shares. In fact, at roughly 60, China’s median price-to-earnings ratio is more irrationally exuberant than U.S. tech stocks were at the top tick in 2000. For another, shares are at last tracking Beijing’s slowing economy, and that means more downside. But Shanghai’s real problem is that little is afoot in Beijing to stabilize the fundamentals that underpin markets. And that’s why the decision makers at MSCI should resist the urge to embrace China’s stock market.

In the battle of stocks versus bonds, equities come out on top: Technician
Stocks and bonds have been neck and neck this year, trading at or near 2016 highs. According to one technician there will be on clear winner, and that’s stocks.


Gold appetite in May was the strongest in over 3 years
Buyers took advantage of gold’s price volatility to boost their holdings in May, according to data from BullionVault. The increase in buying lifted a key measure of gold investment to its highest level in roughly three years, BullionVault’s report, released on Tuesday, shows.

China Paused Monthly Gold Purchases in May After Prices Surged
China, the world’s biggest producer and consumer of gold, took a break from adding bullion to reserves in May after prices soared 22 percent in the first four months of the year. The People’s Bank of China kept assets unchanged after boosting them for 10 straight months through April following the disclosure of a 57 percent increase since 2009. Holdings had expanded 9 percent since the start of July to 58.14 million ounces or about 1,808 metric tons, according to central bank data.


SoFi’s Cagney – The Donald Trump of fintech?
Cheerleaders for marketplace lending took comfort from two events in late May that seemed to signal a potential recovery in a sector that had been rocked by the near failure of Lending Club, the leading listed specialist in online lending. Lending Club’s shares collapsed when its founder and CEO Renaud Laplanche was forced to resign in the wake of revelations that loan documents had been falsified. The firm suspended its planned securitization of debt, threatening the ability of competing online lenders to package and sell their own loans to investors. The disclosure of a stake purchase of 11.7% of Lending Club by an Asian investment firm in the last week of May helped to arrest the fall in its shares, however.

Investors ignore the weather
Business Insider
Investors typically do their best to price in as many factors and risks into their evaluation of an asset as possible. Miss anything and your return could be ruined. According to John Tierney at Deutsche Bank, however, investors are consistently missing one huge factor when deciding where to put their money. “All the available historical evidence strongly suggests that investors do not start to price in evolving weather patterns until things are fairly far along,” wrote Tierney, a strategist for the firm, in Deutsch’s latest Konzept magazine.

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