First Impressions

MarketsWiki Education World of Opportunity Dates for 2016
Save the dates of July 12, 14 & 15 for the kickoff of the Chicago MarketsWiki Education World of Opportunity Summer Intern Series. We will be following up Chicago with a trip to New York on July 19, where we will host two sessions at the Nasdaq Marketsite.

Our events for Europe will be in Paris, Frankfurt and London this year. We are especially pleased to announce CME Group as our Global Premier Sponsor of the series for the next three years. With this enhanced partnership, we plan to offer even more to our participants – more networking opportunities, more giveaways, more fun.

Our Chicago events will be at the CME Auditorium on July 12 and 14. We will return to the offices of Trading Technologies on July 15 for the conclusion of the series and some social time at the TT Tap. Trading Technologies has also returned as a sponsor for 2016.

Don’t just save the dates; help spread the word to your human resources people, hiring managers, intern coordinators, academic partners, and any young folks you know who might be interested in a career in the financial markets. You can direct questions to me at

We will be announcing other sponsors soon.

Quote of the Day

“It is not difficult to understand what happened to Goldman Sachs in the past decade. The industry it services was dramatically restructured. The company was not.”

Dick Bove, analyst at Rafferty Capital, in the story, “Lloyd Blankfein blamed for Goldman Sachs’ ‘lost decade'”

Lead Stories

Fed to Keep Options Open for June Rate Hike
Steve Matthews – Bloomberg
Federal Reserve Chair Janet Yellen and her colleagues will have a chance this week to signal whether they want to raise rates as soon as June. The message is likely to be it’s still an option, but far from a certainty. Here’s what to expect when the Federal Open Market Committee releases its post-meeting statement at 2 p.m. Wednesday following a two-day meeting in Washington (no Yellen press conference is scheduled, nor are revised economic projections being released)

Cyber thieves target bank systems after Bangladesh heist
Victor Mallet and Claire Jones – Financial Times
Cyber thieves who pulled off one of the biggest robberies in history when they raided the Bangladesh central bank in February are now targeting other financial institutions, according to the main group providing interbank transfer messages and a cyber security company investigating the crime. Swift, the financial transaction system that has about 11,000 banks worldwide as its customers, said on Tuesday it had ordered clients using its Alliance Access interface software to install a mandatory upgrade after attackers “successfully compromised the banks’ own environments” in order to send messages.

****SD: BAE Systems said in a blog about finding the custom malware that, “the key file, just 65 kilobytes in size, is named evtiag.exe.” I find it amazing a 65 kilobyte application helped facilitate one of the biggest heists in human history, while a run-of-the-mill song on my hard drive hogs four megabytes.

Why Banks Don’t Play It Safe, Even When It Costs Them
James Surowiecki – New Yorker
Better late than never. That’s one way of looking at the proposed new restrictions on banker compensation that U.S. regulators released last week. The rules will require top earners at big financial institutions to wait four years to receive a substantial portion of their incentive-based pay, and will force companies to claw back bonuses from employees whose decisions turn out to be responsible for big losses.

Why Pensions Should Be Pensive over Rate Normalization
Peter Weiner – Institutional Investor
All eyes are on the Federal Reserve to see whether chair Janet Yellen and her colleagues will continue a gradual tightening of monetary policy. Recent rhetoric from members of the Federal Open Market Committee has convinced us that the U.S. is prepared for some degree of interest rate normalization. In the current environment of plunging markets and negative interest rates at the European Central Bank, the Swiss National Bank and the Bank of Japan, however, rate hikes are no longer a guarantee. So, what does this mean from a pension fund perspective? In the short term, interest rate changes may not have a significant impact on plans. Two years out, however, it’s imperative we get back to rate normalization to stabilize plan valuations.

How to Finance Global Reflation
Andrew Sheng and Xiao Geng – Project Syndicate
There is a growing awareness that, in today’s globalized world, financial markets are beyond the control of national policymakers. While a few economies do have the scale to shape interconnected global markets, they face serious constraints, political and economic. As a result, the global economy is stuck in a pro-cyclical financial cycle, with few options for escape.

For Bill Gross, Besting Pimco Is the Best Revenge
Jr. Landon Thomas Jr. – NY Times
Sitting in the conference room of his empty office suite, with its floor-to-ceiling wall of windows, William H. Gross cannot help noticing the sleek office tower that the bond giant Pimco moved into in early 2014. Just a short walk up the road, the 20-story building looms large in the Southern California sun — a potent symbol of the riches and might that Pimco came to represent during Mr. Gross’s long reign there as the bond king.

****SD: I am not at all surprised that Gross majored in psychology in college.

China’s debt-shrinking machine loses its magical power
Tom Mitchell – Financial Times
One research group, Gavekal Dragonomics, calls it “the magical debt-shrinking machine”. When the Chinese government first confronted a mountain of non-performing loans in the state-owned banking sector it came up with a seemingly ingenious solution. Rather than write-off NPLs totalling Rmb1.4tn ($216bn), or almost 20 per cent of gross domestic product in 1999, specially created asset management companies bought them off the country’s “big four” state banks at full face value, paying with government-backed 10-year bonds.

****SD: “Nothing is more sad than the death of an illusion.” – Arthur Koestler

Why Goldman Sachs Is Launching an Online Bank
Goldman Sachs Group Inc.’s new online bank, acquired from General Electric Co. last week, caps a decade-long shift by the firm and Morgan Stanley to lean more on deposits for funding — efforts that will help them comply with a U.S. rule unveiled Tuesday. Goldman Sachs took over $16 billion of deposits from the online business it bought from GE Capital. It merged the platform with its GS Bank USA unit and is offering 1.05 percent interest on savings accounts opened online. That’s adding to a deposit base that’s already grown almost seven-fold since 2007.

Lloyd Blankfein blamed for Goldman Sachs’ ‘lost decade’
New York Post
Has anybody seen Lloyd Blankfein? About 15 months after Goldman Sachs called for a break-up of its chief rival JPMorgan Chase, a prominent bank analyst has taken Blankfein’s bank to task, saying the chief executive has presided over a “lost decade,” piling money into money-losing operations and trailing the broader market.

Sentiment is the New Fundamentals
The Reformed Broker
One of my favorite analogies about the difference between the economy and the stock market centers around a man and his dog, walking through the park. The man’s course is steady, for the most part, as he strolls from one end of the park to the other. His hand clutches a leash which is attached to a dog, whose course is anything but steady. The dog darts left and right, hither and yon – lunging at a pigeon, scurrying backward in fear of a speeding bicycle, leaping up at his master spontaneously and stopping repeatedly to pee, bark or scratch himself.

Central Banks

Central Bankers Stimulate Nuclear End That Evaded Activists
Jonathan Tirone – Bloomberg
Interest rates near record lows cut funds for decommissioning
Industry faces $1 trillion of liabilities from retiring plants
Central banks may accomplish what a generation of anti-nuclear activists have failed to do: Force operators to finally decommission almost 150 reactors now sitting in limbo across the globe. The plants have been shut down, either because they’re too expensive to run or because of concerns about their safety or age. They can’t send electricity to the grid, and they’ll need the special funds saved over decades for formal decommissioning and clean-up of radioactive waste.

Why Are Central Banks on Trial Again?
Howard Davies – Project Syndicate
Central banks have been on a roller-coaster ride in the last decade, from heroes to zeroes and back again. Is another downswing in their fortunes and reputations now starting? In 2006, when Alan Greenspan retired after his 18-year reign as Chair of the US Federal Reserve Board, his reputation could hardly have been higher. He had steered the US economy through the dot-com boom and bust, had carefully navigated the potential threat to growth from the terror attacks of September 11, 2001, and presided over a period of rapid GDP and productivity growth. At his final Board meeting, Timothy Geithner, then-President of the New York Fed, delivered what now seems an embarrassing encomium, saying that Greenspan’s stellar reputation was likely to grow, rather than diminish, in the future.

Japan’s negative rate experiment is an alarm bell for the US
Henny Sender – Financial Times
Hirano Nobuyuki may be the bravest man in Japan. The chief executive of Mitsubishi UFJ earlier this month used a speech at the International Swaps and Derivatives Association annual general meeting in Tokyo to deliver a stinging rebuke to the Bank of Japan for the policy of negative interest rates the central bank adopted at the end of January. Mr Hirano was voicing what others only dare whisper. It helps, of course, that Mr Hirano runs by far the strongest bank in Japan and is thus less susceptible to official pressure.

How vacancies are changing the Federal Reserve
The Economist
One of the notable things about this week’s meeting of the Federal Reserve’s rate-setting committee is how sparsely attended it will be. The health of the economy hangs in the balance, but only 10 of the 12 seats on the Federal Open Market Committee (FOMC), as it is known, will be occupied. There are two vacancies on the Fed’s seven-member board of governors, all of whom are members of the FOMC. Indeed, the Fed has not had its full complement of governors since 2013; there has been at least one vacancy for 85% of the past decade.

Credit Spreads Are Driving Monetary Policy
Seeking Alpha
Janet Yellen’s new, dovish inclination is best explained by credit spreads. Expect new rounds of monetary accommodation whenever credit spreads test their post-crash extremes. Credit rebounds from deeply oversold territory are historically constructive for common stocks.

Stiglitz Says Misdirected Monetary Policies Increased Inequality
Nobel-prize winner Joseph Stiglitz said monetary policies have exacerbated inequality and need to be redirected to better target getting money flowing into economies and helping small and medium-size businesses.

These markets remind me of this one Grateful Dead song
Keith Bliss – Yahoo
I am often reminded of those immortal words penned by lyricist Robert Hunter for The Grateful Dead every time we get an FOMC meeting on the calendar. Unlike the classic Dead song “Truckin’,” however, I don’t think this long, strange trip will be ending anytime soon. When the FOMC undoubtedly announces this Wednesday that they will hold the federal funds target rate steady at 0.50%, it will prolong one of the longest low interest rate periods in our country’s financial history. The fed funds futures now show a 0% chance of the Fed moving at the meeting this week.

Regulatory News

Ex-Barclays boss tells court he knew nothing of ‘improper’ emails
Jane Croft – Financial Times
A former co-head of Barclays investment bank told a London court he knew nothing of “improper” emails between traders about setting a key interest rate. Eric Bommensath, a senior Barclays executive who was also in charge of the UK lender’s non-core bank until he left last year, was giving evidence at the trial of five ex-Barclays bankers who are accused of conspiracy to defraud in connection with the London Interbank Offered Rate (Libor). The five all deny the charges.

BTG Pactual founder Esteves freed by Brazil’s Supreme Court
Samantha Pearson – Financial Times
Brazil’s star banker André Esteves, who was jailed in November over corruption allegations, has been freed by the Supreme Court in a move that is set to delight investors but heap criticism on the country’s landmark graft investigation.

Credit Suisse struck by administrative action in Japan
The Trade
The Financial Services Agency (FSA) in Japan has issued Credit Suisse with administrative action after the Securities and Exchange Surveillance Commission (SESC) in Japan carried out an investigation in its information controls. The FSA’s action follows an investigation into Credit Suisse allegedly leaking non-public information within its Japanese brokerage unit.

Europe overhauls market definitions
Philip Stafford – Financial Times
Europe has moved a step closer to finalising an overhaul of its flagship markets legislation by publishing details on how it will define critical daily market hallmarks, including high-frequency trading, “reasonable” market data prices and foreign exchange swaps.


Stronger Pound Causes Pain for Some Hedge Funds
Laurence Fletcher – WSJ
Some hedge funds have been caught out by an unexpected strengthening of the British pound as the U.K.’s vote on its future in the European Union approaches. Betting against the U.K. pound has been a popular trade among hedge funds in recent months on the basis that a vote in June for Britain’s exit—so-called “Brexit”—from the 28-country bloc, or even fear of such an outcome, will push the currency lower. But after falling sharply at the end of last year and the start of this year, the pound has recently started strengthening. This has wrong-footed some funds, industry sources say.

The Bank of Japan is about to unveil a new tactic in the currency war
Neal Kimberley – South China Morning Post
Japan might not have got the reception it had hoped for when it raised its concerns about the impact of a rising yen on the Japanese economy, at the mid April G20 gathering held in Washington, but that doesn’t mean Tokyo is all out of options, especially with the Bank of Japan (BOJ) set to meet during its two-day meeting which kicks off Wednesday. Nevertheless, apparent international, and specifically US, objections to overt market activity by the Tokyo authorities to weaken the Japanese currency has significantly raised the bar for Japan’s Ministry of Finance (MOF) if it was contemplating ordering the BOJ to intervene to sell the yen on the currency markets.

The Euro’s Next Existential Crisis
Mark Gilbert – Bloomberg View
The euro’s future still looks far from secure. The European Central Bank is defending its independence amid an attack on its negative interest-rate policies by Germany. European Commission President Jean-Claude Juncker admitted last week that “the European project has lost parts of its attractiveness.” Greece is still wrangling over the terms of its next bailout payment. And at the end of this week, a geeky decision in a corner of the bond market could send the bloc back into crisis mode.

Pound Shows How Brexit Concerns Are Starting to Look Overdone
It’s as if a weight is lifting from the shoulders of pound traders. A measure of risks to sterling fell Tuesday by the most since 2008, surpassing the drop in the aftermath of last year’s general election, when the political turmoil of a hung parliament was narrowly avoided. And though the June 23 vote on Britain’s membership of the European Union has made the pound the developed world’s worst-performing currency in 2016, during the past week it’s been the biggest gainer

Cryptsy Victims’ Lawyer Calls on Big Vern to Come Out of Hiding
Finance Magnates
Yesterday we reported that the website of US-based Bitcoin exchange Cryptsy went offline without notice after its server physical location was surrendered to its court appointed receivership.

LCH promotes Maguire to global head of rates and FX
Joe Parsons – The Trade
LCH has named Daniel Maguire as its new global head of rates and FX derivatives, with the clearing house continuing its global push in the interest rate swaps clearing market.


Bond Traders Have Got It All Figured Out as Fed Meets on Rates
Eliza Ronalds-Hannon – Bloomberg
For bond traders, there’s little doubt about the path the Federal Reserve will take on interest rates. They aren’t fully pricing in another increase until February, while driving a gauge of expected volatility in Treasuries to the lowest since 2014 this month. That’s the sort of hubris that can get them burned, according to Jerome Schneider, a money manager at Pacific Investment Management Co. and Morningstar Inc.’s 2015 fixed-income fund manager of the year.

High-frequency traders are dominating another huge market
Business Insider
High-speed traders now dominate the market for US government bonds, and it is freaking some people out.

Norway $3 Billion Manager Bets on Bonds ECB Effect Missed
Jonas Cho Walsgard – Bloomberg
The European Central Bank’s bazooka doesn’t hit them all. The ECB’s announcement in March to include corporate bonds in its quantitative easing program has sent borrowing costs toward record lows for issuers in the region. That has investors, such as Daniel Berg, head of global fixed income and currency at the asset management unit of Norway’s biggest bank, looking beyond senior debt to find bonds that may have been overlooked.

TABB Group Research Recognizes Network Effects and Buy-side Participation as Keys to Unlocking Liquidity in the Corporate Bond Market
Press Release
Liquidity in the U.S. corporate bond market is deteriorating and a paradigm shift is underway in credit trading and other fixed income businesses. This evolution was spurred by the increasing operational difficulties banks are having in their efforts to provision liquidity and transfer risk through traditional means. TABB Group’s research, “Unlocking Liquidity: Leveraging the Network Effect in OTC Bond Trading,” uncovers how this environment transformation may play out, taking into consideration the roles that banks, the buy-side and trading platforms will play.

FT explainer: Phone-backed bonds set for US debut
Joe Rennison – Financial Times
Securitisation markets in the US look set to get a new poster product — mobile phone contracts. Changes in the way US operators sell handsets and mobile contracts to consumers is leaving companies with heftier costs up front, prompting them to look for new sources of funding. Fran Shammo, chief financial officer of mobile operator Verizon, said this month that the company was looking at securitisation — a process in which the company would issue bonds backed by customers’ contract payments. Verizon is close to issuing such debt, Bloomberg reported last week.

Performance Analysis of Unconstrained Bond Funds
S&P Dow Jones Indices
Most unconstrained bond funds claim to offer the following potential benefits: Low correlation to core fixed income; Attractive risk-adjusted returns; and Actively managed downside risk mitigation. We examined each of these claims for the average performance of unconstrained bond funds since 2011 and noted that fund performance varied among them.

****SD: Seemed fitting with the Gross v. Pimco story up top.

Indexes & Index Products

An index architect’s perspective on China’s expansion of QFII program
Jonathan Horton – FTSE Russell
Despite a volatile start to 2016, the desire on the part of international investors for greater access to China remains high and it continues to raise its profile on the global stage as a market of central importance. The FTSE China A50 Index has fallen 21% over the last year (as of March 31st) and a growth slow down for the world’s second largest economy has tested investors’ resolve, yet the strategic importance of China and how to access it is one of the most frequently discussed topics when we meet with our clients.

A Simple Explanation Of Momentum
Ben Lavine –
A few years ago, I attended an iShares gathering right when “strategic beta” (no, I don’t call it “smart beta”) emerged as an increasing focal point for ETF product innovation. The speaker walked through the series of single-factor ETFs based on MSCI Factor Indices and why several institutions, such as the Arizona State Retirement System, were adopting strategic-beta strategies. When the topic came to momentum, the speaker immediately confessed a certain level of confusion on why the momentum anomaly exists when, from an efficient market hypothesis (“EMH”) standpoint, prices should follow a random walk rather than a trend line—or just because the price of an asset was higher yesterday doesn’t mean it should be higher tomorrow.

Will These ETFs Suck The Life Out Of Actively Managed Mutual Funds?
Lawrence Carrel – Investor’s Business Daily
It’s not a great time to be running an actively managed mutual fund. And the exchange traded fund industry is looking for ways to make it worse. At the 12th Annual Global ETF Awards on Thursday, about 130 industry insiders met in New York to listen to a panel of ETF experts discuss the best ways to attract investors to their side of the tracks. Active management is taking it on the chin these days. Most actively managed mutual funds failed to outperform their passive peers over the trailing 10-year period, according to Morningstar’s Active/Passive Barometer released this month. The report also said actively managed funds experience a high mortality rate through either mergers or closure.

U.S. Consumer-Confidence Index Fell in April
A gauge of U.S. consumer confidence declined in April, a sign of caution that potentially could restrain household spending and the broader economy.

A Conversation With S&P 500 Equal Weight Fund Manager, Michael Willis
Seeking Alpha
Michael Willis is the President of the Index Funds Group and portfolio manager of the S&P 500 Equal Weight Fund. In our discussion, he talks about why he believes an equal weight strategy of the S&P 500 makes more sense than a market cap weighted one. An equal weighted S&P 500 index has outperformed the market cap weighted index in 9 of the last 13 years.


Gold demand from Asia plummets in first quarter – GFMS
Gold prices that hit a 13-month high last month are likely to fall back in the short term because of a slump in demand from key Asian consumers, GFMS analysts at Thomson Reuters said in a report on Tuesday. Global gold demand tumbled by 24 percent year on year to 781 tonnes in the first three months of the year, its weakest quarter in seven years, as buying from leading consumers India and China plummeted, GFMS said in the first-quarter update to its Gold Survey 2016.

China’s Gold Imports Jump on Investment Demand as Price Falters
China, the world’s biggest gold consumer, increased bullion imports from Hong Kong in March as a global price rally stalled and local investment demand showed signs of recovery.

Gold Flip-Flops as Rosier China Leaves Investors Guessing on Fed
The first quarter’s best-performing metal has run out of juice. Gold’s barely changed this month, flipping between gains and losses, after surging 16 percent in the quarter, the biggest such advance in three decades. That’s down to signs of improvement in China’s economy and as investors wait for signals from the U.S. on the outlook for interest rates. Cash flowing into exchange-traded funds back by the metal has hit the buffers after pouring in at the fastest pace in seven years in the first three months.

The Human Cost of Columbian Gold
New York Times
Gold. The word beckons with promises of beauty, elegance and wealth. Empires were built on its trade, reshaping regions where generations of people were displaced, uprooted or caught up in the fever. “Mining is one of the main reasons why lots of parts of Latin America even exist,” said Elizabeth Ferry, an anthropologist who has studied mining in Latin America. “One of the main forces of colonialism was the search for precious metals.”

****SD: Check out this slideshow from the Globe and Mail today about “The lust for gold in the Amazon”


A majority of millennials now reject capitalism, poll shows
The Washington Post
In an apparent rejection of the basic principles of the U.S. economy, a new poll shows that most young people do not support capitalism. The Harvard University survey, which polled young adults between ages 18 and 29, found that 51 percent of respondents do not support capitalism. Just 42 percent said they support it.

****SD: As a so-called millennial, I feel confident in saying that a significant number of these respondents don’t have a clue what they actually mean by “rejecting capitalism.”

Leicester City: Dirty Dozen or Harvard Case Study?
This column should begin with a financial disclosure — of the writer’s own ineptitude. For around 20 years, every August I have bet 20 pounds on Leicester City to win their league. The wall of my office at The Economist in London was festooned with the resulting betting stubs, to be mocked by my colleagues who followed more successful teams. True, Leicester did once finish second — but that was back in the 1928-29 season; their main battle in my lifetime has been to avoid relegation, a struggle they have lost seven times. Last summer, having moved to New York to work for Bloomberg, I missed making my routine bet; the odds being offered on Leicester winning the title were 5,000-1, but, somewhere deep down, I assumed it was 20 pounds ($29) saved.

****SD: Too bad the potential clincher this Sunday starts at 8 a.m. Central. (And for entertainment value, I’d pick Lee Marvin in “The Dirty Dozen” over most Harvard case studies.)

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