First Impressions

Yesterday’s Top Three
Despite being a longform article, Bloomberg’s The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret won yesterday’s click count — too alluring a mystery I suppose. In second, we had a tie. Predictably, the headline Nuns With Guns: The Strange Day-to-Day Struggles Between Bankers and Regulators attracted readers, despite there being a decided lack of both nuns and guns in the article. The shifting gender tides in FX, Boys’ Club Image Overturned by Rise of Women Currency Traders, rounded out yesterday’s favorites.

Quote of the Day

“I can’t ever remember a situation when we’ve seen anything like this before. When I was at the IMF there was only one global business cycle. In the late 1990s and early 2000s it would have been impossible to imagine the kind of decoupling we have today.”

Torsten Slok, chief international economist at Deutsche Bank in New York and a former International Monetary Fund economist, in the story, “Fed swimming against global tide of easier rates”

Lead Stories

Fed records show dozens of cybersecurity breaches
Reuters
The U.S. Federal Reserve detected more than 50 cyber breaches between 2011 and 2015, with several incidents described internally as “espionage,” according to Fed records. The central bank’s staff suspected hackers or spies in many of the incidents, the records show. The Fed’s computer systems play a critical role in global banking and hold confidential information on discussions about monetary policy that drives financial markets. The cybersecurity reports, obtained by Reuters through a Freedom of Information Act request, were heavily redacted by Fed officials to keep secret the central bank’s security procedures.
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Fed’s snail-like tightening cycle leaves bigger questions
Mohamed El-Erian – Financial Times
Traders and investors will be paying close attention to the US monthly jobs report to be released on Friday, particularly for what it implies for Federal Reserve policy and for the economy’s ability to withstand economic weakness abroad. In confirming a continued improvement in the labour market, the data will probably signal a green light for an orderly summer rate hike; but it will not resolve the longer term policy challenges facing the Fed, markets and the economy as whole. Consensus is looking for the US to have created an additional 162,000 jobs in May. While this is the number that will attract the most headlines, it is far from the only important insight in the report. Two indicators pertaining to earnings and labour participation are equally important.
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The Day After Brexit
Columbia Threadneedle Investments – Advisor Perspectives
Instead of arguing for or against British withdrawal from the European Union, we look at the likely outcomes if Brexit were to happen. Picture the scene: The votes have come in showing that the British have not believed the strapline that “Britain is stronger in Europe” and the great debate about Brexit is over. Today is the first day of the next two years that will determine just how “Great” an independent Britain really is.
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Tom Watson: ban hedge funds from cashing in on EU referendum
The Guardian
David Cameron should ban hedge funds from trying to cash in on the EU referendum by commissioning private exit polls to speculate on sterling before the official result, Labour’s deputy leader has said. Tom Watson, the party’s second-most-senior politician, said it was not right that financial institutions are looking to make quick money out of betting on the UK’s currency, as British voters make their most significant political choice in a generation.
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The financial reserve vs real-world inventory discrepancy
Financial Times
Financial institutions don’t like idle capital. Idle capital depreciates. Idle capital doesn’t make anyone any return. Idle capital is an opportunity cost for the system. Scores of financial panics have over time, however, taught financial institutions that sometimes keeping idle capital in reserve (ideally in the form of highly liquid assets guaranteed by an authority with the capacity to tax the system on demand) is a good idea, mainly because externalities can hit and because, try as we might, everything in the real world doesn’t always square up perfectly with expectations. People deemed sturdy long-term liquidity providers can, when panicked, turn into ravenous liquidity consumers. And so forth.
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Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics
WSJ
Last decade’s financial crisis left many losers in banking. One winner is the jumbo. The biggest U.S. banks are tilting toward these high-dollar mortgages as they overhaul loan operations. And jumbo loans, which were less important during the subprime-loan boom, are helping banks take on less risk, as mandated by regulators in the postcrisis era. These loans, however, could put banks at odds with another federal regulatory mandate—one that says lenders should serve a racially diverse set of customers. As they approve relatively more jumbos, major banks are granting fewer mortgages to African-Americans and Hispanics than just before the crisis, a Wall Street Journal analysis found
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UBS tells bankers ‘take two’ in bid to get the balance right
Reuters
Investment bankers at UBS (UBSG.S) can now take at least two hours of “personal time” a week in the latest attempt by a bank to retain staff with a better work-life balance. In a profession known for its grueling schedules, banks around the world are trying to lighten workloads to lower stress levels, especially among junior bankers.
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How cheap debt is keeping the economy from recovering
MarketWatch
In 2009, a small group of analysts dared to question whether emergency stimulus measures were the beginning of the “Japanization” of Europe and the U.S. Ultralow interest rates, large budget deficits and then quantitative easing were all meant to be temporary. Seven years later, only the most optimistic could see these measures being put away soon.
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Bank of America targets wealthiest clients with more advisers
Reuters
Bank of America Corp’s U.S. Trust business plans to add more than 100 financial advisers who cater to the super-rich as part of its strategy to grow wealth-management revenue, a U.S. Trust executive said on Tuesday.
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Central Banks

Fed swimming against global tide of easier rates
Reuters
Rarely has the world’s most important and powerful central bank been so isolated. As the Federal Reserve prepares the ground for another interest rate hike, most other central banks are moving in the opposite direction. And the divergence is widening. No fewer than 53 central banks have eased monetary policy since the start of last year, almost all by lowering rates. Indeed, the pace of policy easing nearly everywhere is accelerating even as the Fed nears its second hike of the cycle.
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There Goes the Fed’s Credibility
Bloomberg
Back in January 2012, the Federal Reserve promised to keep its preferred measure of inflation close to 2 percent over the longer run. More than three years later, that promise remains unfulfilled, casting doubt on the central bank’s willingness to deliver.
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Pimco warns ‘material risk globally’ of monetary policy exhaustion
Reuters
U.S. asset manager Pacific Investment Management Co on Wednesday warned of a risk that zero interest rates and other unconventional monetary policies in place will be insufficient to maintain global growth, close output gaps and raise inflation to target. In its annual Secular Forum report, Pimco said that with growth slow and debt levels higher than during the pre-crisis experience, “there are no obvious ‘spare tires’ available globally if and when monetary policy exhaustion threatens global stability.”
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Uncertainty at the Fed
J. Bradford DeLong – Project Syndicate
The US Federal Reserve is increasingly at risk of losing credibility – and for good reason. As Narayana Kocherlakota, former President of the Federal Reserve Bank of Minneapolis, recently argued, Fed officials seem be balancing their stated aim of keeping inflation near 2% over the long term with a host of other, inexplicit, considerations.
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How the Feds Pulled Off the Biggest Insider-Trading Investigation in U.S. History
Bloomberg
For more than seven years, the U.S. government has relentlessly prosecuted Wall Street traders who used inside information to rake in hundreds of millions of dollars in profits. Federal prosecutors in New York have racked up 91 convictions and collected almost $2 billion in fines. In the latest action on May 19, the government looked beyond Wall Street, accusing a legendary Las Vegas gambler of profiting from insider tips.
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Japan is Taking Ben Bernanke’s Stimulus Advice 13 Years Late
WSJ
The Japanese government is scrapping its flagship effort to close the country’s yawning budget deficit, and instead seems to be following 13-year old advice offered by former Fed governor Ben Bernanke. Japanese Prime Minister Shinzo Abe announced plans to delay a sales tax hike on Wednesday and said that a new fiscal stimulus package would be revealed in the fall. That is advice that Mr. Bernanke tried to give 13 years ago, when he visited Japan as a governor at the Federal Reserve.
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The ECB’s Illusory Independence
Yanis Varoufakis – Project Syndicate
A commitment to the independence of central banks is a vital part of the creed that “serious” policymakers are expected to uphold (privatization, labor-market “flexibility,” and so on). But what are central banks meant to be independent of? The answer seems obvious: governments. In this sense, the European Central Bank is the quintessentially independent central bank: No single government stands behind it, and it is expressly prohibited from standing behind any of the national governments whose central bank it is. And yet the ECB is the least independent central bank in the developed world.
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Why the ECB Faces a June Conundrum
WSJ
The European Central Bank faces a conundrum in Thursday’s policy meeting: Signaling interest rates can go lower may put banks off from flocking into its new lending facilities, but not mentioning them could bring about unwanted financial tightening. In March, the ECB announced a new round of cheaper long-term funding for banks, in a bid to encourage them to lend. From June 24, eurozone banks will be able to borrow funds from the ECB for four years as a second phase in the Targeted Longer-Term Refinancing Operation program that was launched in late-2014. Three other rounds of TLTROs will be conducted in September, December and March of next year.
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As Japan delays sales tax levy, what now for its monetary policy?
FTSE Global Markets
Four considerations have underlain markets this year. The US Fed’s interest rate trajectory, Brexit, China’s growth outlook and Japan’s monetary policy. The means by which the government intends to revitalise the flagging Japanese economy was brought into new focus earlier today as Japan’s prime minister Shinzho Abe announced earlier today that he will delay the imposition of a consumption tax hike from 2017 to 2019. The tax, he suggested threatened the country’s fragile economy. The move signals a further loosening in Japan’s monetary strategy as the government is now also expected to embark on a $90bn investment program intended to finally kick start the country’s flagging economy.
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Fed report points to slight rise in inflation, tight job market
Reuters
Inflation pressures grew slightly across most of the United States from April to mid-May, the Federal Reserve said on Wednesday in a report that also pointed to rising labor costs for American companies. The Fed’s Beige Book, a collection of anecdotal information from business contacts nationwide, found that labor markets appeared to be tightening despite “modest” job growth.
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Possibility and probability
TradingFloor
As we limped towards the close on Friday, ahead of the long weekend in the UK and US, Fed chief Janet Yellen gave what could be her most hawkish commentary of the current cycle, when she uttered that “growth looks to be picking up in the recent data” and so a Fed “rate hike in coming months may be appropriate”.
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Fed Chief Janet Yellen to Deliver Monetary Policy Report to Congress June 21-22
WSJ
Federal Reserve Chairwoman Janet Yellen will head to Capitol Hill later this month to deliver her semiannual monetary policy report to Congress, just a week after the central bank’s highly anticipated June policy meeting. Ms. Yellen will testify before the Senate Banking Committee on June 21 at 10 a.m., the committee said in a notice posted to its website Wednesday. She will testify before the House Financial Services Committee on June 22, a panel spokeswoman confirmed.
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Will Raghuram Rajan give PM Modi’s economic agenda a boost by cutting rates?
The Financial Express
What’s going on in RBI governor Raghuram Rajan’s mind? Well, besides the recent buzz on whether Prime Minister Narendra Modi-led government will give him a second term as RBI governor, the big question has to be – to cut or not to cut rates in the central bank’s monetary policy review on June 7?
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Regulatory News

Rappers Based Lyrics on Their Credit Card Fraud, Prosecutors Say
NY Times
Pop Out Boyz, a rap collective from Bedford-Stuyvesant, Brooklyn, took their lyrics from real life when they released a single this spring all about the material rewards of a crime not often mentioned in urban pop music — credit card fraud, prosecutors said. The song, titled “For a Scammer,” was rooted in experience, the prosecutors said. Members of the group and their associates have been indicted in Manhattan on grand larceny charges, accused of stealing more than $250,000 worth of luxury goods from Barneys and Saks Fifth Avenue over the last year.
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Europe Rules on Bank Research Seen Biting U.S. Fund Managers
Bloomberg
U.S. money managers are bracing for the fallout of looming financial regulation in Europe. That’s according to a report by research firm Tabb Group LLC, which found that 66 out of 100 hedge fund and asset managers surveyed expect Europe’s vast regulatory overhaul to change their American business, too, even if similar rules never make it to the U.S. That’s up that’s up from 38 percent last year, according to the report, which was released Wednesday.
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Bank Stress Tests: The Bar Keeps Getting Higher
WSJ
anks are better positioned than ever to withstand the Federal Reserve’s annual stress tests. But investors still shouldn’t count on smooth passage. Sometime this month, the Fed will unveil the latest results of this exercise under which banks have to show how they would contend with myriad challenges including a financial shock and global recession. This is crucial to investors in bank stocks: The tests determine how much banks can pay out in dividends and share buybacks.
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Congress probes NY Fed’s handling of Bangladesh Bank heist: letter
Reuters
A U.S. congressional committee has launched a probe into the Federal Reserve Bank of New York’s handling of the cyber theft of $81 million from one of its accounts held by the central bank of Bangladesh, according to a letter seen by Reuters.
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US Treasury Calls For Large Position Reports
Press Release
The Treasury is calling for Large Position Reports from those entities whose positions in the 1-5/8% Treasury Notes of May 2026 equaled or exceeded $2.3 billion as of close of business Monday, May 16, 2016. This call for Large Position Reports is a test. Entities with positions in this note equal to or exceeding the $2.3 billion threshold must report these positions to the Federal Reserve Bank of New York. Entities with positions in this note below $2.3 billion are not required to file Large Position Reports.
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Currencies

JPMorgan sheds light on currency trade practice
Financial Times
JPMorgan has released new guidelines to provide clarity on why it rejects some currency trades in the latest effort by the world’s biggest banks to improve a public image muddied by scandals. The bank has explained why it sometimes rejects trade requests at the very last moment, shining a light on the controversial practice known as “last look”.
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Technological Advancements to Drive the Global Foreign Exchange Market Through 2020, Says Technavio
Press Release
According to the latest market study released by Technavio, the global foreign exchange market is expected to grow at a CAGR of close to 7% during the forecast period.
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China’s currency: Bending without breaking – Part 2 of 3
FTSE Russell
In part one of our blog series on China’s currency we introduced the notion of the “impossible trinity”, an economic theory which says a country cannot simultaneously control its exchange rate and its monetary policy while allowing unrestricted cross-border capital flows. We then explored the first component, China’s approach to managing the Renminbi (CNY)/USD exchange rate. In this post we will see the “Trilemma” come further into view as we explore the second piece of the impossible trinity – China’s monetary policy.
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China has a terrible new problem
Business Insider
China has a terrifying new problem. Instead of the usual problem of too much money leaving the country, there is now too little money flowing in. “Beijing is clamping down hard on outflows,” said professor Christopher Balding, an economist at Peking University. “The problem now is that inflows into China are collapsing. Probably down almost 40% this year. That is placing maybe even more pressure on the RMB [yuan] than the outflows. To run a fixed exchange rate you have to balance those things.”
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Sterling volatility rockets after tighter Brexit poll
Financial Times
The cost of protecting against swings in the value of the pound jumped to the highest level since just after the financial crisis, as a new opinion poll reignited investors’ concern that UK voters will choose to leave the EU. The level of one-month implied sterling volatility, or the price of insuring against swings in the pound against the dollar, surged beyond 20 on Wednesday for the first time since February 2009 after two Guardian/ICM polls gave the Leave campaign a 52-48 lead.
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Yen’s Climb Paused in May
WSJ
The yen’s climb against the dollar got sidetracked last month. The Japanese currency closed Tuesday at 110.68 to the U.S. dollar, down 4.1% for May—its biggest monthly drop since November 2014, right after Bank of Japan Gov. Haruhiko Kuroda surprised the markets with aggressive easing.
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Bonds

Weekly Bond Update: Buckle up for intense activity ahead
TradingFloor
The summer period is traditionally one of calm holiday atmosphere in financial markets, due to the slow news flow and investors prioritizing sunbeds over stock charts. This year you might want to postpone your holiday plans though, as June could present some historic and (at least in the financial world) earth shattering events.
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It’s Brexit Politics, Not Economics, Threatening European Bonds
Bloomberg
Who potentially loses if the pollsters and bookmakers are wrong on Brexit? Add bondholders from Finland to Italy to the list. Brexit could fuel the rise of “extreme political movements” and tap into simmering resentment toward the European project, according to Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. In Italy, the extra yield on 10-year government bonds compared with German equivalents was 120 basis points on Tuesday. It would rise above 175 basis points after a Brexit vote, analysts at UBS Group AG said.
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Inflation Trade Loses Some Air Amid Concern Fed Could Act Too Soon
WSJ
The inflation trade is suffering a setback as investors grapple with the possibility of an interest rate increase this summer. The 10-year breakeven rate, the yield spread between the benchmark 10-year Treasury note and similar-maturity Treasury inflation protected bond, fell to 1.56 percentage point Wednesday. That marked the lowest level since mid-April. The rate has fallen after hitting this year’s peak of 1.72 percentage point on April 28.
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Wall Street Turns to ETFs to Sidestep Illiquidity in Bond Market
Bloomberg
Investors are putting record amounts of money into exchange-traded funds as bonds become increasingly difficult to buy and sell. Global fixed-income ETFs, which track bond indexes and trade like stocks, attracted $60 billion of inflows this year through May 25, according to data compiled by BlackRock Inc. That’s the most for the period since the funds were created 14 years ago and on pace to top last year’s record total of $93.5 billion.
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Indexes & Index Products

Boomers Fueling a Boom In Low-Volatility ETFs
Bloomberg
Baby boomers worrying about whether they’ll have enough cash to bankroll their retirements are one reason low-volatility ETFs are, well, booming, according to Dan Draper, head of Invesco PowerShares, which runs one of the biggest such funds.
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Institutional Smart-Beta ETF Adoption is Quickly Rising
ETF Trends
Exchange traded funds that track smart beta strategies or alternative indexing methodologies are quickly gaining traction among institutional investors. According to a recent FTSE Russell smart beta survey, global institutional asset owners currently evaluating smart beta has doubled to 36% in 2016 from 15% at the first survey in 2014, and 62% of asset owners with an existing smart beta position are now considering additional allocations.
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S&P Dow Jones Indices Market Attributes: Correlation & Dispersion Index Dashboard – New Features
Press Release
We are pleased to introduce an updated dispersion and correlation dashboard, now including a broader set of indices as well as volatility statistics for major indices.
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Thomson Reuters launches FX benchmark service as ECB leaves ‘gap’ for reference rates
The Trade
Thomson Reuters is to launch a new FX benchmark service for market participants looking to value, hedge and settle cross-border transactions. The 2pm CET benchmark is an alternative to the European Central Bank (ECB) 2.15pm CET reference rates, which has delayed publishing its euro foreign exchange reference rates.
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New China heft on MSCI list could squeeze India, others
Business Standard News
Global index provider MSCI is expected to add mainland China-traded shares (called China A-shares) to its emerging market (EM) index, at its annual review on June 15. MSCI is Morgan Stanley Capital International. The move to include the world’s second biggest region in terms of market capitalisation is likely to squeeze others, including India, in the 21-nation index.
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Bats Launches Liquidity Management Provider Program, Further Incentivizing Liquidity Providers Trading ETPs on Bats
Press Release
Bats Global Markets, Inc. (Bats: BATS), the #1 U.S. market for the trading of exchange-traded products (“ETPs”), today launches the Liquidity Management Provider (“LMP”) Program on The Bats ETF Marketplace, further incentivizing liquidity providers trading ETPs on Bats.
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Commodities Return Best 3-Months Since 2009
S&P Dow Jones Indices
Commodities are starting summer hot and early. Ending May, the Dow Jones Commodity Index (DJCI) was flat, but the S&P GSCI gained a total return of 2.2%, making it the third consecutive positive month for the index. This is the first time commodities have gained three months in a row since the period ending in Apr. 2014, and this is the biggest three month gain, 18.1%, for commodities since the period ending in July 2009 when they returned 20.9%.
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Gold

Ghana sees slight dip in gold production this year
Reuters
Ghana expects to produce 2.7 million ounces of gold in 2016, down only marginally from last year as new production offsets a decline in output due to lower global prices and ageing mines, the Chamber of Mines said on Wednesday. Gold is the single biggest revenue earner for Ghana, which is following a three-year aid deal with the International Monetary Fund.
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Gold Slips on U.S. Manufacturing Data
WSJ
Gold edged lower Wednesday as investors weighed new U.S. manufacturing data and assessed the likelihood the Federal Reserve would raise interest rates soon.
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