First Impressions

Yesterday’s Top Three
Let’s switch things up and start with the runners up. Great migration to send bank revenues further south nailed down the third spot. The “R” word gathered enough attention for Recession fears are running rampant on Wall Street to land in second. And, drum roll please, EU, U.S. Race to Spare Banks $5 Billion Clearing Capital Hit got the gold.

Quote of the Day

“I consider myself moderately financially literate – yet I confess to not being able to make the remotest sense of pensions. Conversations with countless experts and independent financial advisers have confirmed for me only one thing – that they have no clue either. That is a desperately poor basis for sound financial planning.”

Andy Haldane, chief economist at the Bank of England, in the story, “Bank of England chief economist: Nobody understands pensions, including me”

Lead Stories

Fed Is Seriously Considering Raising Interest Rates in June, Meeting Minutes Say
NY Times
The Federal Reserve sent a sharp, simple message to financial markets on Wednesday: Pay attention. The Fed is thinking seriously about raising its benchmark interest rate at its next meeting, in June. The unusually frank bulletin was delivered in the official account of the Fed’s April meeting, which said explicitly that most officials thought “it likely would be appropriate” to raise rates in June if the economy had rebounded from a weak winter.

New Evidence That Traders Front Run Important Economic Data
If it sometimes seems as if traders are front running the public release of economic data, that’s because they probably are. A team of economists recently examined the movements in stocks and bonds ahead of the announcement of important economic indicators. The results, published as a European Central Bank working paper this month, strong suggest that some traders are able to obtain data before it is officially released.

Bank of England chief economist: Nobody understands pensions, including me
The Telegraph
Pensions are impossible to understand and are harming Britons’ efforts to save the right amount of cash for later life, the Bank of England’s chief economist admitted last night. Andy Haldane, one of Britain’s most senior banking officials, said consumer confidence in the financial industry had been damaged because even he cannot make “the remotest sense” of most pension deals. In a scathing appraisal, he added that banks should use less jargon and speak more clearly as the system has been mired by the loss of the personal touch on the high street.

****SD: I was taught that it is easier to understand something when you break it down. See, “pension” is made of “pen” and “shun,” so pensions must be all about utilizing alternative writing implements.

Hedge fund titans lament: Central banks stole our mojo!
The crystal balls that hedge funds used to make a fortune have cracked — and the policy wonks at the Fed in Washington and the ECB tower in Frankfurt have a lot to do with it. In reality, hedge fund traders were never financial clairvoyants. But the masters of the hedge fund universe are complaining that their hitherto superior vision of financial crosscurrents has been seriously clouded by the rise of central banks and their all-encompassing influence on economies and markets.

The U.S. Critique of Germany Is Misguided
Greg Ip – WSJ
The U.S. Treasury Department recently unveiled a new watch list of potential currency manipulators. That China and Japan were featured was hardly a surprise; both have used weaker currencies to help exports, and both are notoriously unfriendly to imports. Germany’s inclusion is, by contrast, perplexing. It can’t manipulate its currency since it doesn’t have one, having outsourced that to the European Central Bank. It can’t discriminate against imports because trade policy is the European Union’s job.

****SD: Plenty of other ‘guided’ critiques to make, but, you know, glass houses.

U.S. banks scrutinize SWIFT security after hacks: reports
Major U.S. banks are scrutinizing security of the SWIFT messaging network following cyber attacks in Bangladesh and Vietnam involving fraudulent transfer requests, according to media reports on Tuesday. JPMorgan Chase & Co (JPM.N) has limited SWIFT access to some employees amid questions about the breaches at two Asian banks, The Wall Street Journal reported, citing people familiar with the matter.

Morningstar waits on SEC to expand ratings unit
Crain’s Chicago Business
Morningstar wants to expand its credit ratings business, but the Securities and Exchange Commission is holding it back. The Chicago-based investment research and data company applied more than a year ago for licenses that would allow it to be an “official rater” of corporate debt, but the federal agency has yet to approve the request. Morningstar, led by Chicago billionaire Joe Mansueto, already rates certain mortgage-backed securities and has a staff primed to rate corporate bonds as well if it wins SEC approval.

****SD: But wasn’t the GFC fallout supposed to fix the credit ratings landscape? Hah.

Central Banks

US interest rates could rise next month, say Federal Reserve officials
The Telegraph
The majority of Federal Reserve policymakers now believe that US interest rates could rise next month because risks to the economic outlook have abated. Members of the Federal Open Market Committee (FOMC), which decides on US monetary policy, said that there was a “possibility of an increase” in the Fed’s interest rates at their June meeting.

****SD: Anybody still think we’ve got a shot at ZIRP?

The real problem with negative interest rates? They are a stealth tax
Central banks have slashed interest rates to nothing. They have printed money on a vast scale. Where that has not quite worked, and if we are being honest that is most places, they now have a new tool. Negative interest rates. Across a third of the global economy, money you put in the bank does not only generate nothing in the way of a return. You actually get charged for keeping it there.

ECB Officials Signal Policy Pause as Newest Stimulus Implemented
European Central Bank policy makers signaled the institution will refrain from announcing fresh stimulus while it gets its newest measures under way. The governors of the French and Lithuanian central banks said on Wednesday that the focus should be on implementing tools announced in March, including corporate-bond purchases and a new series of long-term loans to banks. Even so, Italy’s central-bank chief set a gloomy tone by saying he still sees a “concrete” risk of deflation in the euro area.

Where is China’s monetary policy headed?
South China Morning Post
The People’s Bank of China (PBOC), the country’s central bank, will slow its pace of interest rate cuts and is less likely than before to lower the amount of money banks must keep in their vaults, analysts said. Credit growth in the country slowed in April.

Poll: BOJ to expand stimulus by July, yen too strong for economy
The Bank of Japan will ease monetary policy even further by July as a strong yen and still-sluggish economy threaten its ability to meet its ambitious inflation target, a Reuters poll showed. Asked what steps it would take next, 80 percent of analysts surveyed May 11-17 picked a combination of cutting negative interest rates further and boosting its purchases of government bonds, exchange-traded funds and corporate bonds.

Regulatory News

Bank bail-in requirements to be case-by-case, no minimum level- EU draft law
There is no minimum level of banks’ assets that can be wiped out by regulators when a lender is wound down, the European Commission said in draft legislation which softens requirements for lenders. The regulation, seen by Reuters, sets the EU executive on collision course with the recently-established EU body in charge of winding down failing banks, the Single Resolution Board (SRB).

Big Banks Back Off From Attacks on Financial Reform
NY Times
Wall Street is putting its old Washington ways on ice. Big banks are infamous for lobbying against financial reform. Lately, though, they have cut back. Now they are pushing Representative Jeb Hensarling, a prominent congressional Republican, to drop a bill to repeal the Dodd-Frank Act. The latest efforts to upend the 2010 law ought to appeal to the likes of JPMorgan Chase, Bank of America and Goldman Sachs. They have, after all, complained about things as diverse as capital charges, mortgage reform and how watchdogs handle annual stress tests.

European banks fret over ‘living wills’
Financial Times
European banks are lobbying US regulators to extend a July 1 deadline to submit the next versions of their “living wills” that are designed to show how they could be wound up without sparking a crisis or bailout. The eight biggest US banks have already been given until July 2017 to file their next plans, though five banks whose 2015 submissions were rejected by regulators must file amendments by October or face sanctions.

Ex-Barclays trader tells court Libor rate promise was just banter
A former Barclays trader accused of conspiring to rig a global interest rate said a promise to name a colleague in a book and to invite him to his bar in return for help in setting Libor was “just banter”.

Fighting the Next Global Financial Crisis
Robert J. Shiller – Project Syndicate
What do people mean when they criticize generals for “fighting the last war”? It’s not that generals ever think they will face the same weapon systems and the same battlefields. They certainly know better. The error, to the extent that the generals make it, must operate at a more subtle level. Generals are sometimes slow to get around to developing plans and ordnance for those new weapon systems and battlefields. And just as important, they sometimes assume that the public psychology, and the narratives that influence the morale that is so important in achieving victory, is the same as in the last war. That is also true for regulators whose job is to prevent financial crises.

The leverage ratio myth
VOX, CEPR’s Policy Portal
An ongoing issue for banking regulation is the extent to which regulators should move away from risk-sensitive capital requirements towards simpler requirements, such as the leverage ratio. This column looks at the evidence that has influenced the debate and shows that none of the analyses to date has tested the risk-based credit requirements of Basel II against leverage. It also sets out two new tests that do test Basel II and produce a different result from the earlier analyses, highlighting the importance of risk sensitivity.


FX Trading – Don’t Write Off the Big Trading Centres Yet
TABB Forum
There’s always plenty of talk in the press of new technological developments and market movements shifting the balance of FX trading away from the traditional centres of New York, London, Singapore and Tokyo. So why, when many commentators are sounding the death knell, are these FX trading centres still thriving and actually growing?

Yuan’s 17% Devaluation Versus Yen Turns BOJ Pain Into China Gain
Haruhiko Kuroda’s pain is China’s gain. The Bank of Japan Governor’s efforts to bolster economic growth have been undermined by the yen’s surge, which outstripped all other Asian peers this year and spurred carmakers to project lower-than-estimated profits. That’s a tailwind for China after the yuan dropped this month to the lowest level versus the yen since 2014. The world’s biggest exporter posted a second straight month of rising overseas shipments in April.

China Fears Rumble Through Currency Markets
After a two-month stretch of calm, worries over China are seeping back into the foreign-exchange market. Global markets were roiled by volatility early this year and in August 2015 as investors feared that China’s economy was slowing and its tightly-controlled currency faced devaluation. Those concerns have died down over the last few months as the Chinese government used credit to fuel economic growth and capital controls helped stem the flow of money out of China.

Yen Bulls Beware Says RBS Analyst Who Sees BOJ Surprise in June
A Royal Bank of Scotland Group Plc strategist who called the yen’s rally back in October is now telling Japan’s biggest investors not to underestimate the central bank’s ability to weaken the currency.


The World’s Safest Bonds Are Actually Wild Risks
Desperate for yield, investors are buying government bonds that come due further and further in the future. If you lend your money to the government, you expect to get it back. It’s not for nothing that British government bonds are ‘gilt-edged,’ and the U.S. Treasury yield is considered ‘risk-free’ in financial models. What could possibly go wrong?

Goldman’s Jan Hatzius says US Treasury yield rethink necessary
Australian Financial review
Jan Hatzius, the chief economist at Goldman Sachs, warned bond investors aren’t prepared for the Federal Reserve to raise interest rates. Fed Bank of Atlanta president Dennis Lockhart and his San Francisco counterpart John Williams both said on Tuesday at least two rate increases may be warranted this year as the economy picks up. Their comments echo those of Bill Gross, the former manager of the world’s biggest bond fund, who said this month not to count the Fed out after a weaker-than-forecast jobs report.

Saudi Arabia Considers Paying Contractors With IOUs
Saudi Arabia is considering using IOUs to pay outstanding bills with contractors and conserve cash, according to people briefed on the discussions. As payment from the state, contractors would receive bond-like instruments which they could hold until maturity or sell on to banks, the people said, asking not to be identified because the information is private. Companies have received some payments in cash and the rest could come in the “I-owe-you” notes, the people said, adding that no decisions have been made on the measures.

San Francisco utility leads on certified green bond
FTSE Global Markets
In what looks to be another seminal month in the evolution of the green bond market, the San Francisco Public Utilities Commission (SFPUC) has reportedly issued the first certified green bond under the Water Climate Bonds Standard, an investor screening tool that specifies the criteria that must be met for bonds to be labelled as ‘green’ or earmarked for funding water-related, low carbon initiatives. May has also seen the first publicly sold green bond from CEEMEA and the Asian Infrastructure Development Bank has stated its intent to issue a green bond. At the same time KFW, the seasoned green bond issuer brought its longest dated issue to market last week.

Junky Chicago presents a mixed-message year to Wall Street
Crain’s Chicago Business
Since Chicago was cut to junk by Moody’s Investors Service in May 2015, the city has sold more than $3.3 billion of debt, allowing it to avoid potentially devastating bank penalties triggered by the downgrade, and pushed through a record property-tax increase.

Indexes & Index Products

This S&P 500 Death Cross Could Be The Real Deal
Not all “death crosses” are created equal. In a note to clients, Intermarket Strategy Ltd. Chief Executive and Strategist Ashraf Laidi points out that the S&P 500’s 50-week moving average is falling below its 100-week moving average.

Swing Traders Should Tread Carefully
Yahoo Finance
As the markets wade through heightened volatility, many have capitalized on the wild swings with leveraged and inverse exchange traded funds to juice returns.

Growth, Value and Apple
S&P Dow Jones Indices
The news that Berkshire Hathaway purchased a billion dollars of Apple stock sparked questions – Will S&P DJI re-classify Apple as a value stock? How are stocks divided between growth and value? Among growth and value, which is ahead year-to-date?

How Can ‘Smart Beta’ Go Horribly Wrong?
Seeking Alpha
Because active equity management has largely failed to deliver on investors’ expectations,1 investors have acquired a notable appetite for any ideas that seem likely to boost returns. In this environment, impressive past results for so-called smart beta strategies, even if only on paper, are attracting enormous inflows. Investors often choose these strategies, as they previously chose their active managers, based on recent performance. If the strong performance comes from structural alpha, terrific! If the performance is due to the strategy becoming more and more expensive relative to the market, watch out!


China’s gold vault purchase a vote of confidence in London
Financial Times
If a gold buyer in China wants to trade physical gold bars with someone thousands of miles away in Australia, they will often exchange ownership of a gold bar sitting in a vault within the M25. That reflects London’s position as the centre of gold clearing and settlement. “Anyone who picks up the phone anywhere in the world — between ICBC Shanghai and Australia for example — for a price, the deal location is London,” David Gornall, former head of metals trading at broker Natixis, said. “Until that changes, if you’ve got aspirations to grow in the gold market then you’re only left with London.”

Why some investors have taken a shine to gold
CBS News
A poll of investment banks conducted late last year by The Wall Street Journal predicted that the price of gold would “hover around” $1,100 per troy ounce in 2016. They felt the outlook for the precious metal wasn’t so shiny given that U.S. interest rates were expected to rise several times this year. When borrowing costs rise, gold loses its allure because it doesn’t offer a yield to investors like bonds and dividend-paying stocks do.

Glencore’s Best Start to Year Softens Blow From Losses Since IPO
Glencore Plc shareholders showing up for the miner’s annual meeting on Thursday can take comfort in the stock’s best ever start to a year. Less so the loss of about half the company’s value since they met 12 months ago and more than 70 percent since a $10 billion initial public offering in 2011.

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