First Impressions

Handicapping the Fed Moves
Doug Ashburn – JLN

First off, I would like to wish a happy Fed Day to all readers of JLN Financials, accompanied by a small gift. This gift is in the form of a tip of which you may or may not be aware.

A few years ago, our friends at CME Group put together the FedWatch, a handy little tool that offers graphical and charted illustrations of expected changes to the 30-day Fed Funds rate, using prices of CME Group Fed Funds futures.

View the Fed Funds Tool

If you have read my contributions to JLN over the past few years, you know that in a previous life I was an options market maker in FX. Early in my career I traded for a small proprietary trading group. Though we specialized in options, we also employed two futures traders who traded the yield curve, but really focused on the front end and, specifically, Fed Funds. (One of the traders, Jimmy-something-or-other, in his spare time, was working on a side project on this new internet thingie – an online knowledge base called Wikipedia, but that is a story for another day).

When I asked why our options firm was also backing these two futures traders, it was explained to me that Fed Funds is more of an options contract than a futures contract, as prices are based on probabilities, contingent probabilities and the arbitrage among these probabilities – exactly the same thing we options traders do with volatility. It was quite an Aha! moment for me.

These guys had an excel spreadsheet that, for all intents and purposes, was a crude version of CME’s FedWatch tool. Now, CME Group has made this available to all. If you have a few moments today, have a look at the FedWatch tool, and see the expectations of future rate hikes and the expected timeline of Fed moves. Then, have another look tomorrow, after today’s FOMC meeting.

Quote of the Day

What happens if low-for-long policy reverts and investors head for the exit? As regulators focus on banks, we fear that systemic risk is being left unchecked in financial markets.

A new study by RBS, as quoted in the Investment Week article “RBS: ‘Maginot line’ in bond market leaves investors exposed to sell-off”

Lead Stories

Europe’s investment banks fight back
Daniel Schäfer, Alice Ross and Camilla Hall – Financial Times
European investment banks are back. After a long period in which they lost market share to their US rivals in the crucial business of debt sales and trading, they are finally regaining some ground.
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***DA: Back in black, as AC/DC would say.

Gross Says Investors Should Say ‘Good Evening’ to Asset Gains
Susanne Walker – Bloomberg
Pacific Investment Management Co.’s Bill Gross said investors should say “good evening” to the prospect of future capital gains in asset markets as interest rates are set to rise while the economy grows at a slow pace.
“The global economy is left to depend on economic growth for further advances and it is growth that is now and has recently been historically deficient,” the manager of the world’s biggest bond fund wrote in a commentary on Newport Beach, California-based Pimco’s website. “As yields have bottomed and are now expected by the markets to gradually rise, it’s down to growth, and growth is a question mark.”
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Argentine Debt Talks to Resume as Default Deadline Looms
Katia Porzecanski, Daniel Cancel and Jenna M. Dagenhart – Bloomberg
Argentina said it will resume talks aimed at avoiding a default today after 12 hours of meetings at the office of a court-appointed mediator failed to produce a deal that would allow it to make interest payments.
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***DA: No hurry – there’s still a few hours left. At least they are speaking to one another again.

If Argentina Defaults, Then What?
Mike Cherney – MoneyBeat – WSJ
Argentina faces a Wednesday deadline for more than $500 million in debt payments. It appears unlikely that bondholders will receive their money, bringing to a head a standoff with a separate group of creditors, the so-called “holdout” hedge funds that have refused the country’s two debt-restructuring offers over the past decade.
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Putin Jeopardizes Russian Firms’ Access to $600 Billion
Boris Korby and Lyubov Pronina – Bloomberg
Escalating European Union and U.S. sanctions jeopardize access to funding for Russian companies, threatening to cut them off from international capital markets that have provided at least $600 billion in debt and equity financing since the country emerged from its 1998 default.
Russian businesses have about $165 billion in dollar- and European-currency denominated bonds and more than $100 billion in offshore syndicated loans currently outstanding, according to data compiled by Bloomberg. They’ve also raised more than $40 billion selling American and global depositary receipts abroad over the past 15 years. Banks based in China, which remains friendly with President Vladimir Putin’s government, won’t be able to fill the breach, said Ian Hague, founding partner of New York-based Firebird Management LLC.
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Treasury yields: the only way is up
David Bowers – Financial Times
Have we seen the low point for US 10-year yields in this cycle? At the start of this year, the reply to this question would have been a resounding “yes” from the investment community. Now, people are not so sure.
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***DA: Not true, at least in the short term, but when this market does turn it could get ugly.

RBS: ‘Maginot line’ in bond market leaves investors exposed to sell-off
Julia Rampen – www.investmentweek.co.uk
Bond fund investors should beware a crowded market where there is a growing risk of being caught out by a sharp sell-off in fixed income, analysts at RBS have warned.
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***DA: Bond market liquidity is rumored to be drying up. Everyone thinks they can hit the sell button at the same time and get out within a few pips.

UK ‘linker’ bond attracts record demand
Elaine Moore and Robin Wigglesworth – Financial Times
The UK’s ageing population has helped the country attract a record level of investor demand for government bonds linked to long-term inflation.
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Banks in Euro Zone Ease Credit Standards on Business Loans
Brian Blackstone – WSJ
Banks in the euro zone eased the standards they apply on loans to companies for the first time since before the global financial crisis, a European Central Bank survey showed, suggesting the bank-credit squeeze that has hobbled the euro zone’s economic recovery may be coming to an end.
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Bond Shake-Up Could Send 10-Year Yield to 4% by Thanksgiving
Paul Vigna – MoneyBeat – WSJ
The bond market has not done the thing most expected this year, in other words, yields have not gone up. Indeed, European yields continue to strike fresh multiyear lows – in Spain’s case, a 200-year multiyear low.
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Sweden Set to Disclose Bank Risks Most Investors Can’t Discern
Frances Schwartzkopff – Bloomberg
Sweden will start publishing banks’ individual capital requirements in a step designed to reveal risks investors have so far been unable to measure based on reported buffers. The Swedish Financial Supervisory Authority is planning to follow its Danish counterpart and disclose so-called Pillar 2 requirements as Scandinavia leads Europe in stepping up efforts to improve transparency.
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BofA Names Ex-Mitsubishi UFJ Tie-Up Chief Tokyo Branch Head
Finbarr Flynn and Shingo Kawamoto – Bloomberg
Bank of America Corp. named Miwa Ohmori, the former chief executive officer of Merrill Lynch & Co.’s private banking joint venture with Mitsubishi UFJ Financial Group Inc. (8306), as its Tokyo branch manager.
Ohmori, 50, is currently vice chairman at Merrill Lynch Japan Securities Co. and will start her new role effective Aug. 1, according to a statement from the U.S. lender. She joined Merrill Lynch Japan in 1995 and served as chief executive of Mitsubishi UFJ Merrill Lynch PB Securities Co. for three and a half years before the tie-up was disbanded.
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Central Banks

Fed Decision-Day Guide: QE Tapering to Inflation Debate
Steve Matthews – Bloomberg
Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. today in Washington. Federal Reserve officials won’t provide new economic projections, and Chair Janet Yellen isn’t scheduled to give a post-meeting press conference.
— Steady tapering: The FOMC will probably trim monthly bond purchases for a sixth straight meeting, to $25 billion, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. That would keep the Fed on pace to announce an end to purchases in October, he said.
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New Bank of England Deputy Is a Potential Guide on Rates
Jason Douglas – WSJ
Investors trying to pin down exactly when the Bank of England is going to raise interest rates in the U.K. should keep an eye on Ben Broadbent, Gov. Mark Carney’s newest deputy.
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JPMorgan Says Don’t Fight PBOC as Stimulus Lifts Stocks
Bloomberg
Don’t fight the People’s Bank of China. That’s the advice to investors from Adrian Mowat, the Hong Kong-based chief Asia and emerging-market strategist at JPMorgan Chase & Co. who raised his rating on Chinese stocks to neutral from underweight in a report dated yesterday.
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Fed seen trimming bond buys, could offer vague rate clues
Michael Flaherty – Reuters
The U.S. Federal Reserve on Wednesday looks certain to press forward with its plan to wind down its bond-buying stimulus, and could offer some vague clues on how much nearer it might be to finally raising interest rates.
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August too early for rate cut by central bank
Business Standard News
Despite the consumer price index-based inflation rate having fallen to its lowest level since the launch of the new series in January 2011, the Reserve Bank of India (RBI) is likely to go for the status quo on repo rate in its monetary policy review on August 5, shows a poll conducted by Business Standard among 10 market participants.
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Currencies

Lawsky Said to Seek Forex Monitors at Deutsche, Barclays
Greg Farrell – Bloomberg
New York’s banking regulator is pressing to put monitors in place at Deutsche Bank AG (DBK) and Barclays Plc (BARC) as part of an investigation into whether traders manipulated benchmark currency rates, a person briefed on the matter said.
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FX: Hungary rumbles on
Euromoney Magazine
The Fidesz government has the mandate to convert Hungary’s entire stock of FX retail loans. But that might not be the end of the battle for bankers.
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JP Morgan’s Emea swaps head to lead new compliance team
Anish Puaar – Financial News
JP Morgan has created a team to look specifically at regulatory requirements for the FX and rates markets, promoting a senior derivatives executive to run the new outfit.
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UBS picks Barclays man for FX e-trading role
Tim Cave – Financial News
UBS has hired an algorithmic trading specialist from Barclays into its FX, rates and credit division, filling a vacancy left by a senior departure to Bank of America Merrill Lynch earlier this year.
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Bitcoin Tax-Free Transactions Face Test at Top EU Court
Aoife White – Bloomberg
Tax-free trading of bitcoin faces a legal test at the European Union’s top court after Swedish authorities sought to extend existing levies to virtual currencies.
The EU Court of Justice must decide if transactions between virtual and traditional currencies can be classed as a service under EU value-added tax rules, and if so, whether such trades are tax-exempt, according to a court filing.
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Indexes & Index Products

Invesco investors wiped out after Property Income Trust closure
Joe McGrath – Financial News
Investors in a listed Invesco property fund have had their entire investment wiped out after the company confirmed the fund is to be liquidated.
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Another Fund Giant Plays Footsie With ETFs – Total Return
Karen Damato – WSJ
The company behind the giant American Funds mutual-fund family is seeking regulatory approval to offer actively managed exchange-traded funds. But ETFs resembling funds such American Funds Growth Fund of America and American Funds EuroPacific Growth aren’t likely to appear any time soon.
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Gold

London Gold Fixing Set for New Administrator by Year-End
Nicholas Larkin – Bloomberg
The banks that conduct the century-old gold fixing and the London Bullion Market Association will seek proposals next month for a new administrator to run a revamped process for the benchmark by year-end.
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Russia beginning to hoard gold
Mark O’Byrne – Resource Investor
Russia continues to aggressively accumulate gold reserves. Its gold holdings increased again in June as the crisis in the Ukraine and relations with the West deteriorated.
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