First Impressions

2016 Exchange CEO Series: Hong Kong’s Charles Li Looks To Keep Building Bridges To China

As Hong Kong Exchange & Clearing looks at extending its services as a bridge to mainland China, HKEx CEO Charles Li said that it’s now embarking on a new three-year plan to bring China’s market to the rest of the world.

HKEx posted record earnings in 2015 and has a current market cap of about US$28 billion, posted the first full fiscal year with the London Metal Exchange under its umbrella and launched the Hong Kong-Shanghai Stock Connect, which links the two equity and, potentially, derivatives markets. The exchange ranked 17th among global derivatives markets, with annual volumes up 12.4 percent to 359 million contracts in 2015, according to the FIA Annual Volume Survey.
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Quote of the Day

“The financial-services industry, in short, is a story of interdependence among banks of all sizes. Yes, all banks compete. But in banking, your competitor can also be your customer.”

Jamie Dimon, CEO of JPMorgan Chase, in the story, “Large Banks and Small Banks Are Allies, Not Enemies”

Lead Stories

Fed debated April rate hike but caution reigned due to global fears
Jason Lange and Lindsay Dunsmuir – Reuters
Federal Reserve policymakers debated last month whether an interest rate hike would be needed in April though a consensus emerged that risks from a global economic slowdown warranted a cautious approach. “Many participants expressed a view that the global economic and financial situation still posed appreciable downside risks,” according to the minutes from the Fed’s March 15-16 policy meeting released on Wednesday.

****SD: The following are the probabilities for a Fed rate hike in the coming months according to CME’s FedWatch: 3% for April, 18% for June, 32% for July, 40% for September, 44% for November, 54% for December and 58% for January 2017.

The global liquidity trap turns more treacherous
Scott Minerd – Financial Times
For the first time since the Great Depression, the world is in a global liquidity trap. The unintended consequence of many central banks pushing negative interest rate policy is conjuring deflationary headwinds, stronger currencies, and slower growth — the exact opposite of what struggling economies need. But when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors.

****JB: Sadly, the guy who said, “It’s a trap!” in Return of the Jedi (Erik Bauersfeld, who played Admiral Ackbar) passed away this week.

Failed Treasuries Trades Seen Spurring U.S. to Step Up Dialogue
Liz McCormick and Susanne Walker Barton – Bloomberg
The U.S. Treasury may need to step up its dialogue with primary dealers and investors on ways to combat uncompleted trades of government debt after unsettled transactions surged last month to the highest since 2008, strategists say. Such deals, known as fails, have subsided after a fresh round of debt auctions in March eased a shortage of benchmark notes. Yet market participants say the Treasury may query dealers and its borrowing-advisory committee on the episode as soon as this quarter as part of efforts to ensure the safety and ease of trading in the $13.3 trillion market for the government’s debt.

FIA Pledges To Continue Working With Basel Committee On Impact Of Capital Requirements
Press Release
FIA welcomed the Basel Committee’s consultation on proposed revisions to the leverage ratio today, but expressed disappointment that the new framework does not include an offset for initial margin. The Committee called for data to further evaluate this critical issue, and FIA pledged to continue working with regulators and industry members to address on the impact of the leverage ratio on clearing.

Large Banks and Small Banks Are Allies, Not Enemies
Jamie Dimon – WSJ
Not long ago, I read a commentary written by the CEO of a regional bank that excoriated big banks. The grievances weren’t new or surprising, but I recognized the bank as a client of J.P. Morgan Chase, the company I lead. I did some digging and found that our firms have a relationship that goes back many years and spans a broad range of essential services. There is a powerful temptation in the current economic climate to frame issues as simple stories of big versus small or Main Street versus Wall Street. But the financial-services industry does not conform to simple narratives.

****SD: A CEO of a major corporation never writes a piece for a major publication purely out of the kindness of his/her heart. Keep your reading (between the lines) glasses on.

Why Deutsche Bank’s Retail Arm Will Struggle For Buyers
Paul J. Davies – WSJ
Germany’s Postbank looks a hard sell. The retail arm of Deutsche Bank, which it only took over in 2010, is due to be sold as part of a strategic overhaul designed to slash the group’s balance sheet and boost returns. But Postbank made the biggest loss of all Deutsche Bank’s divisions in 2015 as revealed Wednesday when Deutsche reissued last year’s results under its new group structure. Postbank made a EUR2.6 billion pre-tax loss, even worse than the EUR2 billion loss in Deutsche’s huge global markets division.

Tradeweb European Credit Update – March 2016
The European Central Bank announced a series of fiscal measures aimed at reviving the eurozone economy on March 10. The latest ECB policy package includes: deeper interest rate cuts; a new series of four targeted longer-term refinancing operations with a four-year maturity; and expanded monthly asset purchases, which will now extend to investment grade euro-denominated bonds issued by non-bank corporations.

China’s debt explosion threatens financial stability, Fitch warns
The Telegraph
China’s huge debt levels will weigh on growth over the next five years and could threaten the country’s financial stability unless policymakers rein in credit, Fitch has warned. The rating agency said a “remarkable build-up in leverage across China’s economy” since the 2008 financial crisis meant Beijing’s ability to meet ambitious annual growth targets of 6.5pc to 7pc between 2016 and 2020 looked “extremely challenging”.

Central Banks

Federal Reserve alerts US to chance of imminent interest rate rise
The Telegraph
The Federal Reserve is preparing to raise US interest rates yet again, despite the financial turmoil that gripped global markets after the central bank increased its rates last December. Members of the Federal Open Market Committee (FOMC), which decides on US monetary policy, were split on raising rates as early as this month, minutes of the committee’s last meeting have revealed.

The Fed Minutes, Annotated: When Will Yellen Raise Rates?
Threats to global growth and turmoil in financial markets confront the U.S. central bank. Here’s how to read its thinking.

****SD: A deep dive, as they say at Bloomberg.

The IMF weighs in on Europe’s reforms v stimulus debate
The Economist
Ask a Greek government official what is ailing the economies of the European periphery, and he will almost certainly mention weak demand, before launching a tirade against austerity-obsessed politicians from northern Europe. Ask a German official, however, and the answer will be very different. In March, as the European Central Bank prepared a new salvo of stimulative measures, Jens Weidmann, the president of the Bundesbank, expressed his disapproval. Stimulus is no panacea, he warned, and “can’t replace urgently needed reforms”.

****SD: I interpret “ask a Greek government official” as “How about that Yanis Varoufakis fellow?”

Lessons from the Bangladesh Central Bank Heist
Patterson Belknap Webb & Tyler LLP – JDSupra
By now, you’ve probably heard about the massive cyber attack that hit Bangladesh’s central bank last month, resulting in the loss of $81 million through fraudulent transfers to accounts in the Philippines. Although the size and scale of this cyber heist was unprecedented, cybercrime targeting ACH (Automated Clearing House) financial transactions is nothing new. Financially motivated hackers regularly target ACH systems.

****SD: One lesson is that casinos in the Philippines are really opaque and need much more regulation.

Q. and A. With Esther George: A Fed Dissident, but a Modest One
Binyamin Appelbaum – NY Times
Esther George is a dissident, at least by the standards of the Federal Reserve. Since becoming president of the Kansas City Fed in 2011, she has repeatedly cautioned that the central bank is trying too hard to stimulate growth, and that its policies may cause lasting economic distortions instead. Last month, at the most recent meeting of the Fed’s policy-making committee, she cast the sole vote in favor of raising interest rates. It was her 10th time voting on policy, and the eighth time she has opposed the consensus of her colleagues.

John Mauldin: Congress needs to change Federal Reserve Act
John Mauldin – Mauldin Economics via Business Insider
When there is another recession, the Federal Reserve is going to cut rates back to 0% and will likely enter into another round of aggressive quantitative easing. They will do this even though their own economists don’t think quantitative easing works all that well as far as Main Street is concerned. QE is very good at propping up stock prices, but it didn’t do much for the economy and just made the rich richer—breeding a lot of resentment.

Swedish Central Bank Chief Changes Tack in Arguing for More Control
Charles Duxbury – WSJ
The governor of the Swedish central bank switched tactics in his long running efforts to secure more control over the Nordic country’s financial stability tool kit, saying in a speech on Wednesday that a merger between his institution and the Financial Supervisory Authority would be a good way to go.

Regulatory News

Biggest Banks to Face Tougher Debt Limits to End Too-Big-to Fail
Global regulators are considering how to raise capital requirements for the world’s biggest banks as they implement tougher debt-financing limits designed to rein in too-big-to fail lenders.

Prosecutors Are Not Amused by Hidden Trading Markups
Matt Levine – Bloomberg
The financial industry is largely an industry of middlemen, and some of its deepest and most creative thinking goes into finding ways to get paid for intermediating transactions.

It’s Difficult to Produce Good Policy in Thin Political Markets
Pro Market Blog: Stigler Center at the University of Chicago Booth School of Business
In the world of regulation and rule-making, there are issues that remain cloaked in obscurity. While presidential hopefuls like Hillary Clinton, Bernie Sanders, and Donald Trump argue over the future of Medicare or Social Security, it’s difficult to imagine politicians debating over issues like actuarial standards or bank capital ratios with the same kind of ferocity. In his book Political Standards: Corporate Interest, Ideology, and Leadership in the Shaping of Accounting Rules for the Market Economy (University Of Chicago Press, 2015), Harvard Business School associate professor Karthik Ramanna calls these esoteric areas of regulation “thin political markets”: processes where narrow commercial interests, due to their vast experiential expertise and a lack of public interest, are essentially able to shape the rules of the game.


Morgan Stanley: People Might Be Worried About Subprime Auto Bonds Because of the ‘Big Short’ Movie
Tracy Alloway – Bloomberg
Blame Brad Pitt? Auto loans made to risky borrowers and then bundled into bonds sold to investors have been making headlines for years, with some voicing concerns over an apparent resemblance between the so-called subprime auto market and the subprime housing market that sparked the 2008 financial crisis and ensuing recession. Indeed, the parallels may not have been lost on investors either. In a note published on Wednesday, Morgan Stanley analysts led by Jeen Ng wonder whether last year’s debut of The Big Short—the film version of the Michael Lewis book published in 2010—has played a role in sparking fresh worries over the asset class.

****SD: I’d blame Ryan Gosling, a more off-putting character in the film — Brad Pitt had a relatively small role.

Megadeals are monopolising bond liquidity
Eric Platt and Joe Rennison – Financial Times
The trend of blockbuster US corporate bond sales has, at least for now, a silver lining for investors. For a $6.7tn investment grade market in which complaints about a lack of liquidity — the ability to buy and sell bonds without moving market prices too far — have become a common refrain, the final trading day of the first quarter last week was arresting. More investment grade bonds exchanged hands on March 31 than on any day since the Financial Industry Regulatory Authority began tracking data in 2005. Nor is a single frenzied day’s trading the only evidence to emerge from a quarter to suggest the picture in a market that has ballooned in size since the financial crisis is far more complicated than one of vanishing liquidity.

The Coming Default Wave Is Shaping Up to Be Among Most Painful
Claire Boston and Carol Ko – Bloomberg
When the next corporate default wave comes, it could hurt investors more than they expect. Losses on bonds from defaulted companies are likely to be higher than in previous cycles, because U.S. issuers have more debt relative to their assets, according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates, the proceeds have to cover more liabilities.

Bond Trading Patchwork to Persist
In corporate bonds, liquidity sourcing can be likened to a patchwork quilt, with the fabric made up of traditional voice brokers interwoven with newer electronic platforms offering multiple diverse trading models. Years from now, the quilt may be neatened and folded with some extraneous edges snipped off, but the market’s intrinsic patchwork will remain.

Roll-up risk looms for investors via CLOs
Gavin Jackson and Joseph Cotterill – Financial Times
Investors holding securities backed by risky loans have significant exposure to a set of controversial “roll-up” companies, according to data from rating agency Moody’s. Loans made to Altice, Platform Speciality Products, Valeant and XPO Logistics represent 4 per cent of the EUR45bn of debt bundled up into European collateralised loan obligations.

Global Bond Yield Plunges to Record-Low 1.3% in Warning Sign
Global bond yields fell to a record, a warning sign for the worldwide economy. The yield on the Bank of America Corp. Global Broad Market Index plunged to 1.3 percent, the lowest in almost 20 years of data. Bonds in the gauge have returned 3.6 percent in 2016, while the MSCI All Country World Index of shares has slumped 1.5 percent, including reinvested dividends. Treasuries declined, with 10-year yields climbing for the first time in three days, before minutes of the Federal Reserve’s March meeting are published.

Direct Match Taps a Booster of High-Speed Trading
Aaron Lucchetti – WSJ
A startup hoping to transform the $13 trillion market for U.S. Treasurys has hired a stock-exchange veteran to help it get there. William O’Brien, who ran stock-trading platform Direct Edge Holdings LLC from 2007 to 2014, will join bond-trading platform Direct Match as executive chairman, the New York company is expected to announce as soon as Wednesday.


Why global ‘currency truce’ may not last
A weaker dollar accompanied by a strikingly more dovish Federal Reserve is feeding the notion that global policy makers reached some sort of soft agreement to at least call a truce in the “currency wars” that saw the world’s central banks competing to weaken their respective currencies in a bid to steal export business from each other.

Sorry, Trump, but Chinese Currency Is Actually Way Overvalued
Randall W. Forsyth – Barron’s
Leave aside the bizarre episodes of a tweet insulting an opponent’s wife; the assault charges against his campaign manager for allegedly manhandling a reporter; the notion of cutting off remittances to Mexico to force that nation to pay for his vaunted border wall; or that of a woman’s culpability in an abortion, to name just the most recent ones. The main focus here is economics and finance, and that includes commentary on the policy proposals from the Republican front-runner for the White House. And where he’s concerned, far more pernicious than any of his much publicized foibles and faux pas is his insistence that China is systematically manipulating its currency, cheapening it to gain an unfair advantage in trade.

Pound’s Top Forecaster Sees Drop to $1.35 Before EU Vote
Stefania Spezzati and Eshe Nelson – Bloomberg
The pound is likely to fall to about $1.35 in the run-up to Britain’s referendum on European Union membership, according to the currency’s top forecaster. Validus Risk Management Ltd., which led Bloomberg’s first-quarter rankings for predicting the sterling-dollar rate, foresees a slide to as low as $1.20 if the U.K. votes to leave the world’s largest single market on June 23. The pound fell for a second day versus the dollar on Wednesday and slid to the weakest level against the euro since June 2014.

Chinese companies’ foreign exchange losses soared last year
South China Morning Post
China’s yuan is depreciating and brought huge volatility to weigh on companies’ books. Firms reported increased foreign exchange losses during 2015 and analysts warn more risks lay ahead. About 980 listed Chinese companies reported combined foreign-exchange losses of 48.7 billion yuan (HK$58.29 billion) for last year, almost 13 times higher than 2014, Bloomberg-compiled data shows.

Abe rules out intervention to weaken resurgent yen
The Japan Times
Prime Minister Shinzo Abe has ruled out intervening in currency markets to halt a surge in the yen, even though it sat near a 1½-year high against the dollar Wednesday. Huge volatility on equity markets driven by worries about the slowdown in global growth have sent traders scurrying for the Japanese currency, which is considered a safe bet in times of turmoil.

Barclays becomes the first big UK bank to back a digital currency firm
Reuters via Business Insider
Barclays has become the first big British bank to form a partnership with a digital currency firm, social payments app Circle, which runs partly on bitcoin’s blockchain network and launched in the UK on Wednesday. In what Britain’s Treasury called a “major milestone” in its push to make the UK the world’s capital for financial technology, or fintech, Circle was granted an e-money license by the Financial Conduct Authority, the UK watchdog – another first for a digital currency company.

Swiss to stick with 1,000-franc bill -central bank
Switzerland’s central bank has no plans to take the 1,000-Swiss franc bill — one of the world’s most valuable banknotes and now worth around $1,041 — out of circulation, Swiss National Bank Chairman Thomas Jordan said on Wednesday.

Indexes & Index Products

Stability and style: two traits, one benchmark
Catherine Yoshimoto – FTSE Russell
As the indexing landscape continues to evolve, new index launches abound. But how does an index provider know whether a new index will be of value to investment professionals? As demonstrated with FTSE Russell’s Stability combined style indexes, assessing how new indexes would have performed in various market environments can indicate whether they represent distinct new styles—thus making them useful for investors looking to further segment the opportunity set.

European Parliament – Benchmarks: Restoring Confidence In The Financial Markets
Press Release
Benchmarks are widely used to track market developments. As many financial transactions are linked to them, they can determine who benefits from investing in a particular financial product. However, financial scandals involving benchmarks such as Libor and Eurobibor have shown that they are susceptible to manipulation.On 7 April the economic affairs committee votes on new rules to ensure the full transparency of all benchmarks used in the EU.

The $1 Trillion Short Underlying Stocks’ Spring Awakening
Dani Burger – Bloomberg
Skepticism is one thing this rally hasn’t lacked. Amid its biggest about-face in nine decades, a funny thing has happened in the U.S. stock market, where rather than loosen their grip bears have grown ever-more impassioned. They’ve sent short interest to an eight-year high and above $1 trillion, by one analyst’s math. Position reports from the Commodity Futures Trading Commission show mutual fund managers are more skeptical now than any time since at least 2010. In short, disbelief is running rampant after $2 trillion was restored to share values in six months. A chorus of Wall Street prognosticators says that’s a big reason the rally can keep going.

What is Wrong With the Nikkei? – April 5, 2016
While the S&P 500 was hitting 2016 highs on low volume last week, the Nikkei futures were not following the American markets lead, something was wrong. When the Tankan economic survey came out as a disappointment the Nikkei plunged over 4% and we found out exactly why Japanese markets where lagging: poor sentiment and economic conditions are scaring investors. Given that the Nikkei was such a drag on global markets earlier in the year, this index should be watched by traders as gauge for market sentiment.

Great Performance by High Yield, One Time or Early Signs?
Indexology – S&P Dow Jones Indices
As with the weather for the northern hemisphere, the U.S. high-yield market seems to be making a comeback. The 0.54% return in February for the S&P U.S. Issued High Yield Corporate Bond Index appears to be the green shoot of return for high-yield bonds. March 2016 followed the prior month’s gain with a blossom of its own. The index returned 4.5% for the month, which was the largest monthly return since October 2011’s return of 5.07%. Year-to-date, the index returned 3.36%, which is refreshing to high-yield investors, who, before this month, had not seen a positive year-to-date return since November 2015.


London Metal Exchange Starts Talks Over Warehouse Rent Rates
The London Metal Exchange issued a discussion paper about rate reforms at its listed warehouses, saying a cap on charges may be one way to reduce fees.

Two traders fined over gold spoofing
Financial Times
A US financial regulator has slapped two more traders with fines in a widening crackdown on “spoofing,” a form of market trickery.The traders, Heet Khara and Nasim Salim of the United Arab Emirates, were each ordered to pay more than $1.3m in civil penalties to settle charges that they spoofed New York gold and and silver futures markets, the Commodity Futures Trading Commission said.

NYU Graduates Seeking $11 Billion of Gold in Ransacked Mine
Kevin Crowley – Bloomberg
At Blyvooruitzicht, a 77-year-old gold mine southwest of Johannesburg, almost everything had been stolen except gold-bearing ore in the looting after the operation was closed in 2013. Now, New York University graduates Bastiat Viljoen, 31, and his brother Dane, who was an intern at Goldman Sachs Group Inc., want to revive the ailing mine, which they say may contain 9 million ounces of gold, worth almost $11 billion at current prices. They are partly financed by South African mining entrepreneur Peter Skeat.


Andy Fastow says companies doing same thing as Enron
Business Insider
Andrew “Andy” Fastow, former CFO of Enron, warned a group of business execs that many companies are doing the exact same things he did at the now defunct energy giant. Fastow, who spent six years in prison, spoke on Tuesday afternoon to a group of 200 people in a private room upstairs at STK in New York’s Meatpacking District.

****SD: “…As/Like Enron” has to be one of the worst similes in corporate finance.

Leissner Letter That Led to Goldman Exit Written for Jho Low
The unauthorized reference letter that led Goldman Sachs Group Inc. to suspend star banker Tim Leissner was written on behalf of a Malaysian financier tied to an investment fund at the center of an international inquiry, three people familiar with the matter said.

Panama Papers: Why Aren’t There More American Names?
John Cassidy – The New Yorker
Who is the odd person out from this list: Ayad Allawi, King Salman bin Abdulaziz, Bashar al-Assad, David Cameron, Sigmundur Davíð Gunnlaugsson, Mauricio Macri, Lionel Messi, Sheikh Khalifa bin Zayed al-Nahyan, Marianna Olszewski, Petro Poroshenko, Vladimir Putin? If you picked Olszewski, you’re right. In the initial wave of stories about Mossack Fonseca, the Panamanian law firm whose internal documents—2.6 terabytes’ worth—were leaked by an anonymous source to the German newspaper Süddeutsche Zeitung, she was about the only American citizen I saw mentioned.

****SD: The Guardian has a potential answer, Forget Panama: it’s easier to hide your money in the US than almost anywhere

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