First Impressions

Yesterday’s Top Three, Really Four
Numero uno from yesterday was the WSJ’s New Evidence That Traders Front Run Important Economic Data. (There is a solid piece from the Financial Times on the FCA’s investigations into “illicit trading” under Regulation today. Not that I’m trying to skew tomorrow’s top three…)

A bit of an oddity: we have a three-way tie for second place. Bloomberg’s EU, U.S. Race to Spare Banks $5 Billion Clearing Capital Hit is a multi-day winner after first running Tuesday and making Wednesday’s Top Three. It is no surprise that a Fed story made the list — the New York Times’ Fed Is Seriously Considering Raising Interest Rates in June, Meeting Minutes Say — given the central bank’s newly hawkish tone. Finally, our third second-place entry was the real downer of the lot: Great migration to send bank revenues further south.

Quote of the Day

“We need to look beyond the opportunistic insider dealers who have been perhaps the subject of cases in the past. We need to look at the potential for our markets to be undermined by systemic and organised crime — people who organise themselves to commit this kind of crime. And we are doing exactly that.”

Mark Steward, head of enforcement at the Financial Conduct Authority, in the story, “Watching the ‘insiders’: the FCA’s fight against illicit traders in the City”

Lead Stories

Five banks sued in U.S. for rigging $9 trillion agency bond market
Five major banks and four traders were sued on Wednesday in a private U.S. lawsuit claiming they conspired to rig prices worldwide in a more than $9 trillion market for bonds issued by government-linked organizations and agencies. Bank of America Corp (BAC.N), Credit Agricole SA (CAGR.PA), Credit Suisse Group AG (CSGN.S), Deutsche Bank AG (DBKGn.DE) and Nomura Holdings Inc (8604.T) were accused of secretly agreeing to widen the “bid-ask” spreads they quoted customers of supranational, sub-sovereign and agency (SSA) bonds.

LPC: U.S. banks grapple with negative Libor
Lenders are guarding against low interest rates in the US and negative rates in Europe and Asia by introducing zero Libor limits to investment-grade loans for their clients. With three-month Libor at around 63bp and the forward Libor curve trending upwards, a negative US Dollar Libor rate is unlikely at this point. However, given the precedent of negative interest rates in other regions, bankers remain concerned that the rate at which banks lend to each other in US dollars could turn negative, eroding margins and, in a remote scenario, costing them money to lend.

Lack of trading activity set to hurt bank revenues in Q2
The Trade
A lack of activity on trading floors is likely to see investment bank revenues take a significant hit in the second quarter, according to JP Morgan analysts. Equities are set to take the biggest hit, with revenues expected to fall around 28% compared to Q2 2015. Overall investment bank revenues are expected to take a 24% hit.

Is the End of Economics 101 Nigh? Nordic Bankers May Know Answer
Is the link between monetary policy and inflation broken? The central bank governor of Denmark, where nominal rates have been negative longer than anywhere else in the world, says there may be signs that the link has grown weaker.

How Wall Street Led LendingClub Into Crisis
John Mack, a crisp, red windbreaker over his business suit, climbed the dais at the New York Stock Exchange to hail the coming revolution. It was December 2014, and, like Mack, the Big Board’s colonnaded facade wore the signature red of LendingClub Corp., the precocious company determined to upend the status quo on Wall Street. That Mack, the elder statesman of Morgan Stanley, applauded as this arriviste went public might have seemed like an act of class betrayal. After all, the opening bell tolled a victory for the leader of a hot new industry bent on cutting banks out of banking. What was Mack up to? That question burns as Mack, 71, finds himself in the center of the storm at San Francisco-based LendingClub, the avatar of “peer-to-peer” lending.

Supply Side, Demand Side, or Innovation Side?
Edmund S. Phelps – Project Syndicate
It has become impossible to deny the so-called secular stagnation gripping the world’s most developed economies: Wealth is piling up, but real wages are barely rising and labor force participation has been on a downward trend. Worse yet, policymakers have no plausible idea about what can be done about it. Behind this stagnation is the slowdown in productivity growth since 1970. The wellspring of such productivity gains – indigenous innovation – has been badly clogged since the late 1960s (mostly in established industries) and was even more so by 2005.

The case for cutting some big banks down to size
CBS News
While Wall Street critics such as Democratic presidential candidate Bernie Sanders have long called for a breakup of the nation’s largest banks, most stock analysts have generally argued that bigger is better when it comes to financial institutions. However, now challenging that view are two prominent Wall Street analysts, Fred Cannon of Keefe Bruyette & Woods and Mike Mayo of CLSA.

Euro Area Weighs Greek Loan Buyout, as IMF Demands Concessions
Euro-area officials are weighing a proposal to purchase loans that member states made to Greece, as the International Monetary Fund reiterated calls today to ease the nation’s debt burden.

Banking Risk in the Digital Age
Parker Fitzgerald
I’m delighted to introduce Parker Fitzgerald’s Quarterly Outlook. This is the first in a regular series of forward-looking reports, examining some of the key challenges that the financial services sector faces as it continues to evolve in a world of rapid technological, operational and regulatory change.

Pendo Data Platform Sifts Through Bank Records At Speed
While banks talk about developing a 360-degree view of their customers, they often can’t comprehensively identify even a single individual’s relationship with the bank, according to Pamela Pecs Cytron, founder and CEO of Pendo Systems. The information may be held in different systems; it may be stored under variations in a person’s name, and given the inevitable errors in manual data entry it might simply be spelled incorrectly or entered in the wrong field. In addition, data captured today may not even have the right fields to be stored in the legacy systems.

A brutal remark from a high-speed trader tells you everything you need to know about where Wall Street is headed
Business Insider
A trade body set up by high-frequency-trading firms just released a video meant to highlight the benefits that these kinds of firms bring to financial markets. The video, from Modern Markets Initiative, also inadvertently spelled out some of the negative side effects, too.

Central Banks

BOJ’s ETF Position Risks Becoming Too Big to Exit, Lawmaker Says
The Bank of Japan must drastically lower its presence in the nation’s stock market if it wants to preserve the ability to one day unwind its massive position, according to the Democratic Party’s Tsutomu Okubo, a former vice finance minister.

Fed puts investors on notice over rates
Financial Times
After treading water since December, the Federal Reserve has taken a big step towards restarting its rate-raising campaign. The central bank this week formally put markets on notice via the minutes of its April meeting that an increase in short-term interest rates is a real possibility this summer. Bill Dudley, the New York Fed chief, hammered that message home on Thursday, saying that if the economy continued to evolve in line with his own forecasts then it would be reasonable to expect a tightening in June or July.

Fed Policy Makers Raise Concerns About Their Policy Tools
Federal Reserve policy makers expressed concern about whether they have policy tools that could prick a budding financial bubble and avert a financial crisis. The Federal Open Market Committee, which decides the central bank’s interest rate policy, disclosed Wednesday it had spent a chunk of its April meeting discussing so-called macroprudential tools that could promote financial stability by reaching across the entire economy. “It was noted that relatively few macroprudential tools are available to financial regulators in the United States and that, for the most part, such tools are untested,” the committee said in the minutes of the April meeting.

Dudley joins chorus of Fed officials seeing rate hikes soon
The U.S. economy could be strong enough to warrant an interest rate increase in June or July, New York Federal Reserve President William Dudley said on Thursday, cementing Wall Street’s view that the Fed will tighten policy soon.

What if central banks were no longer independent?
Here’s a secular question for you: What if central banks weren’t independent? At Pimco we have just wrapped up our annual Secular Forum, where we discuss the forces driving the global economy and formulate our outlook for the three- to five-year horizon, along with risks to that baseline view. (Click here for more information about the forum, including an essay by Rich Clarida and a list of speakers.) Inspired by the free-thinking, forward-looking debate at the forum, I would like to address the status of what has been a given: central bank independence.

ECB closed ranks against critics in April meeting, minutes show
European Central Bank rate setters agreed in April that they need to defend the bank against a growing number of critics, as its ultra-easy policy came under fire in Germany and elsewhere, minutes of their meeting showed on Thursday. German banks and savers have complained the ECB’s ultra-low interest rates and money-printing were hitting their profits. Finance Minister Wolfgang Schaeuble even argued they were partly to blame for the rise of the right-wing anti-immigration party, Alternative for Germany (AfD).

BOE Stimulus May Be Needed Even Without Brexit, Vlieghe Says
The U.K. economy has slowed and may require additional stimulus if it doesn’t rebound quickly in the event of Britons opting to stay in the European Union, according to Bank of England policy maker Gertjan Vlieghe.

He can, Carney — The governor is right to intervene in the debate over Europe
The Economist
Brexiteers are livid about comments made at a press conference on May 12th by Mark Carney, the governor of the Bank of England. He presented the bank’s latest inflation report, and then went on to concede that a vote to leave the European Union could “possibly” tip Britain into a “technical recession” (defined as two consecutive quarters of negative growth) and destabilise financial markets. Jacob Rees-Mogg, a Conservative MP and prominent Brexit campaigner, said that the governor “should be fired” for his comments.

2 things everybody missed in the Fed’s latest release
Yahoo Finance
Investors squealed when the Federal Reserve suggested recently that it might raise interest rates in June, after all. They shouldn’t have. The minutes from the latest meeting of the Fed’s policy-making committee contained some unusually aggressive language (for the Fed), suggesting investors have become too complacent about the Fed maintaining super-easy monetary policy.

Central banking is a tough gig, says Riksbank
Financial Times
It’s not easy being a central banker, you know. The cohort of rate setters from a decade ago don’t know how good they had it.

Regulatory News

Barclays criminal probe to last until at least early 2017
Financial Times
Barclays will not learn for at least seven more months whether it will face criminal charges over its financial arrangements with Qatar at the height of the financial crisis, a London court heard. The UK Serious Fraud Office hopes to make a charging decision about the bank in “early 2017”, a barrister for Barclays told the High Court on Thursday as part of a £1bn lawsuit against the bank.

Europe’s quest for bank ‘bail-ins’ poses risks to retail investors
Financial Times
When Ignazio Visco, governor of the Bank of Italy, spoke in Florence this month, his focus turned to regulation. At a sensitive moment for Italian lenders, whose shares had collapsed over recent months, the governor chose to address what he called “regulatory uncertainty” in the wake of new European-wide rules for failing banks.

Wall Street bearish on Trump’s call to scrap financial reform law
U.S. banking lobbyists said on Wednesday they disagree with presidential candidate Donald Trump’s call for a wholesale repeal of President Barack Obama’s financial reform law, even though they share his view that it is overly burdensome. U.S. banks do want changes to the 2010 Dodd-Frank law but after spending millions of dollars to bring themselves into compliance with it, they are wary of Trump’s call for it to be essentially scrapped.

Watching the ‘insiders’: the FCA’s fight against illicit traders in the City
Financial Times
It was a dank March morning in 2010. Before the sun had risen through London’s ­grey skies, 140 investigators from the Financial Services Authority had raided 16 ­different premises across the capital and the Home Counties. One of the men they arrested, hedge-fund trader Julian Rifat, was about to wake up to his 41st birthday when officers stormed his £1.2m Oxford home, seizing every electronic device they could find — including his child’s iPod. Sixty miles away, in the affluent London neighbourhood of Hampstead, Martyn Dodgson, a corporate broker at Deutsche Bank, was sleeping off the effects of a late night drinking with colleagues. He too was woken up by the investigators.

Fixing rule clashes on derivatives and capital is EU priority
Financial News
Reducing conflicts between new derivatives and capital requirement rules – as well as lowering reporting burdens for asset managers – are among the issues the European Commission wants to address as part of its sweeping review of post-crisis reforms. Jonathan Hill, the EU’s commissioner for financial services and Capital Markets Union, began in 2015 what he termed a “comprehensive review” of the cumulative impact of post-crisis reforms, such as the European Market Infrastructure Regulation, which is overhauling Europe’s derivatives markets. The Commission has already received written responses to its review, and held a public hearing in Brussels on May 17.

Kerviel Sues SocGen for 5.7 Billion Euros Over 2008 Firing
Jerome Kerviel, who was convicted of causing a record trading loss of 4.9 billion euros ($5.5 billion) at Societe Generale SA, is suing the French bank for even more in a Paris employment lawsuit that claims he was unfairly dismissed in 2008.


FX technology spend falls
Euromoney Magazine
Overall investment in FX technology has declined in line with the wider financial services sector over the last 12 to 18 months as banks focus on specific markets and business objectives. But there’s no shortage of innovation in banks’ proprietary or off-the-shelf platforms.

Fed Communication Shift ‘Is a Recipe for the Dollar to Go Up Against Everything’
The market reaction to the minutes from the Federal Reserve’s April meeting shows monetary policymakers engineered an ideal environment for the U.S. dollar to thrive, according to Société Générale SA global strategist Kit Juckes.

BOJ’s Kuroda vows to ease more if yen moves hurt price target
Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank would not hesitate easing monetary policy further if market moves, including a spike in the yen, threatened prospects for achieving its 2 percent inflation target.

Why Brexit will give the currency market a pounding headache
The Spectator
‘In this world, nothing can be certain except death and taxes,’ said Benjamin Franklin, one of America’s founding fathers. And that’s good advice for anyone investing and trading. There’s no such thing as a ‘sure winner’ even if your broker or favoured share tipster promises you there is. Financial markets will rob you of that illusion both rapidly and expensively. But if there is a sure thing, then I’d bet that sterling will be exceptionally volatile around 23 June —referendum day.

What Can Be Learned From China’s Monetary Past
China’s decline as a great power in the 19th century wasn’t the fault of imperialism and opium. It was bad monetary policy, after all. So says Werner Burger, a numismatic historian and Sinologist who has published a detailed history of money in the Qing Dynasty, entitled “Ch’ing Cash.” Mr. Burger has spent his professional life tracking down details of nearly every coin minted in China over three centuries. After three decades of making official requests, it wasn’t until 1996 that Beijing granted him access to the previous century’s imperial mint reports, the modern equivalent to central bank money supply statistics.


Yield-Starved Foreign Investors Are Flooding The U.S. Muni Market
Seeking Alpha
Why American munis are attracting foreign investment, validating their “safe haven” status. Muni bond funds are already seeing a sustained run of weekly inflows that began in October. Municipal bonds, as well as gold, have traditionally satisfied investors’ need for a store of value when other options seem too volatile or risky.

Treasury 10-Year Term Premium Reaches Lowest Since 1962: Chart
The term premium for 10-year Treasuries, or the extra compensation investors
demand to hold them instead of a series of shorter-dated notes that
incorporates added risks such as inflation over time, tumbled to negative 0.38 percent Tuesday, reaching its lowest level since the early 1960s. The Federal Reserve Bank of New York’s measure has been negative for most of 2016 as global demand for relatively higher yielding U.S. debt outweighs concern over unexpected inflation, economic growth or monetary-policy actions.

Indexes & Index Products

The S&P 500 is the World’s Largest Momentum Strategy
A Wealth of Common Sense
In many ways the stock market makes no sense. You would assume that half of all stocks would outperform a market index while the other half would underperform. Then all you would have to do is pick from the top half and avoid the bottom half, make massive amounts of money and go buy an island somewhere.

Dividend growth stocks: A bird in the hand….
FTSE Russell
“A bird in hand is worth two in the bush” could be the mantra for value investors who seek out dividend paying stocks. The idea is that receiving a dividend payment today is more valuable than taking a chance on potential future stock price appreciation – especially in times of increasing uncertainty. With stock market volatility returning to higher levels and fixed income yields at record lows, there has been a resurgence of interest in dividend paying stocks. Some investors may seek higher stock dividend yields as both a source of income and as downside protection against an uncertain equity market.

MSCI fields sceptics and enthusiasts as China “A” share decision looms
The world’s biggest investors are divided over whether MSCI will decide next month to include China-listed shares in a key global benchmark, with many harboring concerns over the country’s handling of last summer’s rout and lack of full-market access.

“Give ’em what they want”
The Reformed Broker
One year ago this week, the S&P 500 touched an all-time record high of 2134. Here’s what has happened to US stocks in the 12 months since.

A Year Later, Record Eludes Dow
Thursday is the anniversary of the Dow Jones Industrial Average’s all-time closing high, reinforcing for stockholders just how long a new record has eluded them.


Column: How gold and art auctions can gauge stock market confidence
PBS NewsHour
It may surprise you to learn that one of the world’s best indicators of overconfidence is the performance of a single stock: Sotheby’s. As I’ve previously written, peaks in the auction house’s stock price have historically coincided with financial and economic exuberance. So what’s it telling us today? Sotheby’s stock is currently down 48 percent from its December 2013 peak, even after rising from its February lows. Bottom line: The art markets are pointing to very muted confidence. Greed is no longer the flavor of the day.

Gold tiaras are getting pricier
The problem is that investors who buy gold as a safe haven are gobbling up big amounts. Demand for investment gold has surged 21% in the first quarter, driving prices higher, according to the World Gold Council. Investors dominate the market for gold. So the more they buy, the more prices jump. The dynamic is putting the squeeze on jewelry makers, who are jacking up the price of gold rings, watches, tiaras and other items.


The wealthy ‘make mistakes’, the poor go to jail
The Guardian
I knew him as “Mr one-glove”. The origins of his nickname were cloudy, but had to do with his legendary stinginess. He had just lost his company close to $1bn betting on mortgages. That company, facing massive losses from him and other traders, had only staved off bankruptcy because of the grace of the government.

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