First Impressions

Stars Of The Next Generation
Jim Kharouf

John and Doug are in New York today drumming up support for our MarketsWiki Education series in the Big Apple on July 19.

If you have not signed up your interns, or know of someone who would benefit from hearing the likes of Adena Friedman of Nasdaq, Jenny Knott of ICAP, Steve Gibson of Euclid Opportunities, Gary DeWaal of Katten, Bill Harts of the MMI, Kevin Wolf of Eris and Kenny Polcari of O’Neil Securities, then register here.

Chicago’s series runs July 12, 14 & 15.


Quote of the Day

“As of this evening, I see no way back from the Brexit vote. This is no time for wishful thinking, but rather to grasp reality.”

German Chancellor Angela Merkel in the story, “Merkel Says No Way Back From Brexit as Cameron Regrets Loss”

Lead Stories

Forget December. Forget Next Year. The Fed’s Done Hiking Until 2018
Liz McCormick and Matthew Boesler – Bloomberg
Dollar rebound, volatility derail efforts to normalize policy
Derivative markets see rate cut more likely than hike in 2016
Circle Jan. 31, 2018, on the calendar. That’s the soonest the Federal Reserve hikes next.

Hard-to-Sell Assets Complicate European Banks’ ‘Brexit’ Risks
Landon Thomas Jr. – NY Times
Even before Britain voted to cut ties with the rest of Europe, large European banks with global ambitions and sprawling operations in London were struggling. Now, as banks scramble to assess the impact of a British exit from the European Union, Deutsche Bank, Credit Suisse, Barclays and others face increased pressure from investors. While they recovered some ground on Tuesday, the stock prices of these banks have fallen sharply after the British vote, on increased fears that they will be unable to sell the billions of dollars of derivatives, securitized mortgages and other hard-to-value and sell securities that they so desperately need to get rid of.

Fed flags Morgan Stanley, Deutsche Bank, Santander, in stress testing
The Federal Reserve objects to capital distribution plans proposed at the U.S. units of Deutsche Bank and Santander, meaning that the banks cannot issue dividends or make share buybacks until they establish a new plan, the central bank said Wednesday.

Banks on edge over UK passporting options
Steve Slater – Reuters
Investment banks are scrambling to establish how post-Brexit changes in the UK’s “passporting” rights for financial services will impact their businesses, putting thousands of jobs in London in the balance. Passporting is considered the most significant feature of the EU single market for banks and other financial companies, allowing firms in one EU country to provide services to clients elsewhere in the single market.

Brexit: When the Facts Change
Bluford Putnam – CME Group
Britain’s Brexit decision on Thursday, 23 June 2016, appeared to catch the financial markets by surprise even though the opinion polls had been warning of a very close vote. On Friday, 24 June 2016, the British pound fell sharply, over 7%. The S&P 500 fell over 3%, while U.K. stocks, European exchanges, and Japanese stocks fell much more. As Japanese and global equities declined, non-Japanese sellers of Japanese equities covered their FX hedges, and the Japanese yen briefly strengthened below 100 versus the dollar, before rebounding based in part on Bank of Japan intervention. The VIX had its biggest one-day rise since the Chinese-induced sell-off in August 2015. Bank stocks in the European Union took a beating, down 10% to 20%. On the flight-to-quality side of the ledger, U.S. Treasuries rallied big and gold surged. On Monday morning, 27 June 2016, the hangover was still severe, with the pound falling further, global equities moving down, and the “flight-to-quality” U.S. Treasuries rallying. The dust is not settling several days after the event, so it is time to take stock.

Brexit-Related Selling Might Already Be Over in the U.S.
Brexit? Boooooooring. There have been only three trading sessions in North America since the U.K. voted in favor of leaving the European Union. But according to some strategists, that story’s already stale.

U.S. banks and Brexit: ‘keep calm and carry on’ while planning for contingencies
Henry Engler – Reuters Blog
The venerable English phrase, “keep calm and carry on,” might be appropriate for U.S. financial institutions as they grapple with unfolding drama of Britain’s separation from the European Union. With uncertainty clouding the timing, the broad shape and the ultimate fine print of the divorce proceedings, U.S. firms will need to consider a series of contingency options regarding their future operations in Europe. However, the greatest immediate test for compliance and risk management across all firms will be the likelihood of continued market volatility and possibility of improper conduct.

EU referendum: London’s financial industry relies on foreigners, which is a big problem after Brexit
New York is a cosmopolitan place. London is of another order. Consider the financial services sector, which accounts for more than 11% of the UK government’s tax receipts: the Bank of England is run by a Canadian, a Frenchman is head of the London Stock Exchange, executives from Portugal and New Zealand run two of the country’s state-run banks, and Barclays, one of the few big British banks left with global aspirations, recently replaced a Brit with an American at the helm.

Do Sovereign Credit Downgrades Tell Us Very Much? Surprisingly Not
Adam Creighton – WSJ
Standard & Poor’s decision to strip the United Kingdom of its AAA credit rating in the wake of the country’s vote to leave the European Union has highlighted once again the limited value of sovereign credit ratings.

Groups say Fannie and Freddie are gouging home buyers with add-on fees
Washington Post
Think of them as backroom surcharges that increase what you pay when you get a conventional home mortgage. They can also kill your loan application and make purchasing a house or condo much more difficult. Although you’ve probably never heard of LLPAs or G-fees — they’ve got eye-glazing names and aren’t always explained by loan officers — they are important. They can raise your interest rate, costing you thousands of dollars extra because of the size of your down payment, the type of property you’re buying and your credit score. And you had no idea.

Merkel Says No Way Back From Brexit as Cameron Regrets Loss
European Union leaders said there could be no turning back for the U.K. after Prime Minister David Cameron used his last EU summit to express disappointment at his failure to win the referendum he called on Britain’s membership.

Central Banks

Brexit’s Market Punch Tests New Fed Playbook on Business Cycles
Matthew Boesler and Craig Torres – Bloomberg
The Federal Reserve has been testing out a new playbook for monetary policy this year that’s helping officials understand how Brexit-inspired shock waves across financial markets will affect the U.S. economy. Their innovation, which incorporates the biggest lesson they learned in the financial crisis, may sound like common sense: Monetary policy needs to respond to investor anxiety triggered by events such as China’s currency devaluation and the U.K. vote to leave the European Union. That’s because market instability can have important economic effects which were previously under-appreciated.

Brexit shows central banks can’t go it alone – governments have to step up
The UK vote to leave the EU is already causing market volatility. Central banks are immediately reassuring markets that they will do their job. Their job used to be just managing monetary policy, aimed at an inflation and/or full employment target. Now central banks are expected to maintain financial stability when the instability is caused by events far beyond their control.

Brexit — how will central banks respond?
Financial Times
Brexit poses another problem for central banks struggling to combat low productivity and high debt levels on the path to growth and armed with narrow policy options. How does Brexit affect them, how might they respond and what are they likely to do?

The Unfinished Agenda of Raghuram Rajan
Business Today
Think increasingly the job of (a central bank) governor in a modern economy requires somebody with, if not training in economics, but a very good understanding of economics and finance and banking. They (governors) have to have a sense of the whole thing. If you are a macro economist, but don’t understand finance and banking, you could be out of your depth very soon on the regulatory front.” Raghuram Rajan, 23rd governor of the Reserve Bank of India (RBI), was explaining what was required to head a central bank to Business Today.

Regulatory News

Stress test inc.: Billions of dollars and bank consultants to manage other consultants
Ryan Tracy – WSJ via Financial News
After Citigroup unexpectedly failed the Federal Reserve’s annual stress tests in March 2014, the bank opened its checkbook and called in the consultants. The firm had to address several of the regulator’s concerns in a short time frame, and no single consulting firm could do the job, according to people familiar with the matter. The bank hired multiple firms and said it spent about $180 million on stress tests during the second half of 2014. The next year, it passed.

****SD: Bloomberg: European Banks Spend Billions to Get U.S. Units Fit for Fed

European Banking Authority’s Location in Question After Brexit Vote
Todd Buell – WSJ
Britain’s pending exit from the European Union raises questions about the future location of the EU’s London-based European Banking Authority. It could also raise questions about the future of the agency itself. That is because the EU has a second banking overseer—but only for banks from countries that use the euro—tucked inside the European Central Bank. The ECB’s banking supervisor, the Single Supervisory Mechanism, is based in Frankfurt, which is among several cities vying to snag the EBA when it leaves the U.K.

Libya wealth fund boss screamed, cursed at Goldman bankers -witness
The Libyan wealth fund’s former deputy chief screamed and cursed at Goldman Sachs bankers in a stormy meeting over derivatives trades made on the bank’s advice that ultimately turned out to be worthless, a witness told a court on Tuesday. In a trial at London’s High Court, the Libyan Investment Authority (LIA) is trying to claw back $1.2 billion from Goldman Sachs related to nine disputed trades carried out in 2008.

Brexit Update: What’s Next for the Global Marketplace
The United Kingdom’s vote to leave the European Union is expected to have complex legal implications for the United Kingdom, the European Union and the global marketplace in the near and long term. McDermott has an experienced team of lawyers who have been evaluating the potential legal ramifications of the June 23 referendum and are ready to answer questions and assist clients in navigating the consequences of the United Kingdom’s exit.


Citadel Quadruples Currency Trading as Brexit Spurs Volume Surge
Citadel Securities LLC says it traded record currency volume last week after the U.K.’s Brexit vote sent shock waves through financial markets. The company expects more volatility to come. The market-making arm of money manager and securities firm Citadel LLC said its foreign-exchange activity on June 24 surged to more than four and a half times the firm’s daily average this year. The Chicago-based company declined to provide a dollar figure. The U.K. vote to leave the European Union also led to a surge in volume across trading venues run by Thomson Reuters Corp., Bats Global Markets Inc. and FastMatch Inc. as the pound tumbled to a three-decade low.

FX Update: Post-Brexit risk rally slow to impact FX
While opinions have swirled in the headlines that the UK referendum may not end in a real Brexit, the events in Brussels have certainly taken a firm tone of finality. Resigning UK prime minister David Cameron has said that there is no way back and German chancellor Angela Merkel stated that “this is no time for wishful thinking, but rather to grasp reality.” Meanwhile, market action was inconsistent: our risk barometer of the S&P 500 future ripped higher to the first Fibonacci retracement – a remarkable 50-plus points from the lows, but of course that came after a drop of over 130 points, so we’re still in dead cat territory for now.

Yuan internationalisation likely delayed by euro and pound volatility, says BOCHK economist
South China Morning Post
The process of yuan internationalisation may face a setback as volatility in the world’s two largest reserve currencies – the British pound and the euro – are pushing the very foundation of the global monetary order into question, warned Bank of China Hong Kong (BOCHK) on Wednesday.

Dollar Poised for First-Half Drop as Fed Hike Prospects Dwindle
The dollar dropped for a second day, extending its loss for the first half of this year, as traders wager the Federal Reserve is more likely to cut interest rates than raise them in upcoming meetings.

China shows commitment to renminbi stability with currency fix
Financial Times
China fixed the renminbi’s exchange rate at a level stronger than many expected on Wednesday in a sign that stability for the currency remained Beijing’s paramount objective. Dollar strength since Friday’s Brexit vote had led the People’s Bank of China to fix the midpoint, around which it allows the onshore currency to trade 2 per cent, at far weaker levels against the surging US currency.

BSO To Build Financial Cloud Aimed at FX Market Needs
Traders News
BSO, a global Ethernet network, cloud and hosting provider, announced that it is adding Financial Cloud to its service portfolio to provide a low latency network and cloud offering specifically engineered for the global financial community.

Hollande Takes Aim at City of London in Euro Clearing Threat
Helene Fouquet and John Detrixhe – Bloomberg
The City of London is facing the first direct threat to its role as Europe’s dominant financial center as French President Francois Hollande takes aim at a key pillar of the U.K. industry.
“The City, which could handle clearing operations in euros thanks to the U.K.’s presence in the EU, won’t be able to do them any more,” Hollande said after the first day of a European Union summit in Brussels.

Investors might be excited by Nigeria’s new free floating naira but president Buhari isn’t
After months of strict currency controls, Nigeria’s new currency policy which saw the naira floated and valued by market forces kicked in last week.

You Just Stole $50 Million In Cryptocurrency — Now How The Hell Do You Spend It?
Imagine that you are a master thief, a real Danny Ocean. In your latest caper, you discover a way into the vault of a brand-new bank, one thought to be pretty much uncrackable. And then, using the bank’s own state-of-the-art systems against it, you steal about $60 million dollars. Finally, you escape — and no one knows who you are.


Trading Tech: Markit Launches Real-Time Bond Pricing
Traders News
Markit, a provider of financial information services, launched the live pricing for bonds, a streaming pricing service for investment grade and high yield corporate, sovereign and agency bonds. Markit’s new live bond pricing service covers more than 35,000 bonds across 40 currencies and delivers more than 250,000 pricing updates per minute. Customers will benefit from improved pre-trade price transparency, timely intraday asset valuation calculations and superior best execution analysis.

Weekly Bond Update: Brexit blues
In an historic and sensational referendum vote, the British electorate upset the political establishment and opted to leave the European Union last week. The surprise decision has left the political system on both sides of the aisle in chaos, and caused panic in financial markets.

Brexit Uncertainty Ensures Bond Rally’s Survival
As European Union leaders are gathered in a summit without the U.K. in Brussels on Wednesday, investors can be sure of one thing in all this Brexit-related drama: the bond rally looks set to continue. The president of the European Central Bank (ECB) Mario Draghi said ahead of the EU summit that Brexit could shrink the GDP of the eurozone by around 0.5% over the next three years, according to a document seen by Bloomberg reporters. As investors already know, there’s nothing like the threat of recession to push bond prices up because markets flee to the safety of bonds at the same time as central banks purchase them as part of their quantitative easing efforts.

Puerto Rico Says It Will Default Even With Congressional Aid
Two days before a potential historical default, Puerto Rico Governor Alejandro Garcia Padilla made it clear that the commonwealth won’t pay bondholders even as Congress votes on a bill allowing the island to restructure its $70 billion in debt.

Singapore’s Millionaires Humbled in Local Bond Restructurings
Denise Wee and David Yong – Bloomberg
Singapore’s wealthy investors are discovering they lack clout in negotiations when high-yield bond investments blow up. PT Trikomsel Oke became the first company to default on Singapore dollar debt since 2009 when it failed to repay a bond coupon in November last year, followed shortly afterwards by Pacific Andes Resources Development Ltd. The market faces more tests with Swiber Holdings Ltd.’s July 6 maturity among S$2 billion ($1.5 billion) of notes coming due by year-end.

Indexes & Index Products

U.K. Stocks Are Staying in Europe
Aleksandra Gjorgievska – Bloomberg
The U.K. voted to leave. Its stocks will remain. So say the biggest index providers, who have no plans to alter the composition of their benchmarks after Britain chose to exit the European Union. The nation’s shares will stay in the MSCI Europe Index as membership in the trading bloc has no bearing on the gauge’s make-up, said Remy Briand, MSCI Inc.’s global head of research. They’ll also continue to be eligible for global and regional measures at Stoxx Ltd., overseer of the Stoxx Europe 600 Index, according to a company spokeswoman.

ETFs Gain Ground as Advisors Look to Passive Beta-Index Strategies
Exchange traded funds have been a huge hit in the investment community, with financial advisors increasingly turning to the index-based tool as their go-to investment option for clients.

If Warren Buffett Recommends Index Funds, Why Would Anyone Invest in Other Areas?
The Motley Fool
A little over eight years ago, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) CEO Warren Buffett bet hedge fund manager Tom Seides that an investment in a low-cost S&P 500 index fund would outperform a basket of hedge funds chosen by Seides over a 10-year period. So far, Buffett’s index fund has more than tripled the performance of Seides’ hedge funds.

An Index of Uncertainty Surges After ‘Brexit’
NY Times
This morning, my 3-year-old son asked what was going to happen after breakfast. I misheard, and launched into a disquisition on the political disturbances in Britain, the challenge of maintaining an integrated Europe and threats to the world economy in the wake of “Brexit.” Judging by the tenor of recent commentary, it was an understandable mistake.


Precious metals see continued demand
Gold and silver remain two of the “winners” in the aftermath of the Brexit vote last Thursday. Support from negative bond yields and an increasingly dovish Federal Open Market Committee was already firm before the vote.

Faber Says Own Gold, Prepare for QE4 as Easing Follows Brexit
Gold’s investment case has been strengthened by the U.K.’s vote to quit the European Union as the fallout may spur the world’s central banks to step up easing, hurting currencies and favoring bullion, according to Marc Faber, publisher of the Gloom, Boom & Doom Report.

Gold smuggling on the rise
Business Standard News
Since February, import of gold for domestic consumption (as opposed to that done for export, after value addition) has taken a big hit. That is, through official channels; ‘unofficial’ imports have increased significantly.


Here’s how Europeans feel about their dismal economic situations
Business Insider
Europe’s economy as a whole and individual European economies have been sort of not good since the global financial crisis. So we decided to take a deeper look at how Europeans feel about this.

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