First Impressions

Gold in the Attic
Jeremie Bacon – Orc Group
Precious metals trading is a tough game. Gold prices are coming off of a six-week rally, following a mix of short covering and some new long positions as seen in the Commodities Futures Trading Commission data and some ETF inflows. While geopolitical nervousness, such as the Russia-Ukraine situation or the tensions between Israel and Hamas, has helped gold retain a bid, one thing missing is physical demand from Asian buyers. This has some of Orc’s clients, who are long-time gold traders, wary on how high gold can rally.

While gold trades today at around $1300 an ounce, I want to take you back to a time when you could invest in the metals markets with less than $500 in your pockets.

Note: Bacon is acting this week as guest editor of the John Lothian Newsletter, where this commentary appeared on Tuesday, July 23. To read the entire commentary, click the link below.
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World Of Opportunity Chicago 2014: Ben Van Vliet (Promo)
JohnLothianNews.com
Our MarketsWiki World of Opportunity Summer Intern Education Series in Chicago is quickly approaching. Ben Van Vliet, assistant professor at the Illinois Institute of Technology Stuart School of Business, will be discussing the organizational structure of High Frequency Trading as well as what key components help give traders a competitive advantage. For more information on the event and how to register, click here.

Watch the video »

Quote of the Day

“We fear that systemic risk is being left unchecked in financial markets. What happens if policy changes and investors head for the exits? Low liquidity means the door is getting smaller.”

Alberto Gallo, head of European macro credit research at RBS in London in the story, “Bond Market Trading Drying Up Posing Stability Risk, RBS Says”.

Lead Stories

Full capital structure securitization makes tentative return to Europe
David Wigan – Euromoney Magazine
As the European securitization market slowly recovers, banks are printing full capital structure deals amid growing regulatory pressure and improving deal economics. However, some investors are not yet ready to buy.
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***DA: In the case of rebuilding the types of leverage that led to the crisis, maybe tentative is not such a bad thing.

The Long-Term Joblessness Battle Isn’t Over
Mohamed A. El-Erian – Bloomberg
So far this year, the U.S. has made great progress in reducing long-term unemployment. Hopefully, the success won’t undermine proper efforts to resolve what remains a serious threat to the country’s prosperity and social cohesion.
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***DA: A multi-faceted issue that will not be solved with political speeches or finger-pointing. Step one is admitting there is a problem, which some have refused to do.

Bond Market Trading Drying Up Posing Stability Risk, RBS Says
John Glover – Bloomberg
Credit market trading is drying up, posing a threat to the stability of the financial system that regulators are ignoring, according to strategists at Royal Bank of Scotland Group Plc (RBS) in London.
Liquidity has declined by about 70 percent since the financial crisis, a proprietary model used by the bank shows, and it’s still falling, the strategists said.
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***DA: Liquidity leads to stability. But stability also helps liquidity.

Watch what markets don’t do as world politics turns nasty
Reuters
Like so much in the investment world of late, it’s what financial markets are not doing right now that is most intriguing.
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***DA: No one wants to be the first to hit the panic button, especially considering the number of false alarms over the past few years.

Junk-Bond Indigestion Burns Buyers Gorged on Record Sales
Sridhar Natarajan and Katie Linsell – Bloomberg
Junk-bond buyers are showing signs of indigestion after snapping up a record $361 billion of the debt at the lowest yields on record.
Speculative-grade bonds from the U.S. to Europe and Asia are set to post losses this month for the first time since last August after high-yield debt funds suffered the biggest weekly withdrawal of 2014. Winoa SA, the French producer of abrasives for metalworking, scrapped a bond offering in Europe yesterday amid the turmoil.
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***DA: Canary in the coal mine? Last time it was subprime mortgages. This time it may be junk bonds.

BlackRock Tells Bond Buyers to Flee Canada’s New Normal
Ari Altstedter – Bloomberg
BlackRock Inc. (BLK), the world’s largest asset manager, recommends clients seeking to beat benchmark returns move money outside of Canada as the central bank enters an era of low interest rates amid stifled economic growth.
The Canadian economy will expand just enough to spark rate increases, which erode the value of existing bonds, but not enough to raise rates to levels where new bonds provide the kind of returns investors are used to, according to Aubrey Basdeo, head of BlackRock’s Canadian fixed-income business.
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Judge Orders Argentina and Funds to Negotiate
ALEXANDRA STEVENSON – Dealbook – NY Times
Under the looming cloud of a default, Argentina and a group of New York hedge funds that are engaged in a bitter fight over debt repayments have been ordered to meet with a court-appointed mediator “continuously” until the two sides can come to an agreement.
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***DA: Mom used to do this for my sister and me. The only agreement we came to was that we did not much care for some of Mom’s parenting tactics.

Debt deal is impossible, says Argentina
Benedict Mander in Buenos Aires and Vivianne Rodrigues in New York – Financial Times
A settlement between Argentina and holders of its defaulted debt by the end of the month was not possible, lawyers for the South American nation said on Tuesday.
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***DA: Same conclusion my sister and I usually came to.

Central Banks

Excerpts from New York Fed’s Letter to Deutsche Bank
MoneyBeat – WSJ
Late last year, the Federal Reserve Bank of New York wrote a letter to Deutsche Bank’s U.S. executives outlining their concerns about the financial data, governance, auditing and technology systems in the bank’s U.S. units.
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***DA: It’s better than airing one’s grievances on Facebook, but not by much.

5 Reasons the New York Fed Isn’t Happy With Deutsche Bank
WSJ
The Federal Reserve Bank of New York has given Deutsche Bank a talking-to – which went unreported until today – over a range of problems the regulator says compromise the bank’s ability to meet toughening reporting standards.
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***DA: I counted at least eight.

Draghi Faces German Hard Line on Avoiding Deflation
Simon Kennedy – Bloomberg
The deutsche mark is dead. Long live the deutsche mark. That’s the view from Germany’s central bank, which is resisting a weaker euro, introduced in 1999, and opposing the most aggressive strategies Mario Draghi could deploy to ignite growth in Europe, says Simon Derrick, chief market strategist at Bank of New York Mellon Corp.
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Food Fight Hidden From View Muddies BOE Rates Debate
Emma Charlton and Gabi Thesing – Bloomberg
U.K. supermarkets may be masking the true scale of price discounting, complicating the task facing policy makers as they debate how long to keep interest rates at a record low.
Under pressure from German discounters Aldi and Lidl, the so-called big four grocers are battling for business by cutting prices. What government statisticians fail to capture are special deals such as three-for-two offers and vouchers offering money off fuel if shoppers collect enough loyalty points.
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Bulgarian central bank governor ready to step down
Reuters
Bulgaria’s Central Bank Governor Ivan Iskrov told parliament on Tuesday he was ready to step down if it can agree on a successor first.
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Yellen Met With Fischer Soon After Her Nomination as Fed Chief
Craig Torres – Bloomberg
Just days after her nomination to lead the Federal Reserve, Janet Yellen got in touch with Stanley Fischer, the former Bank of Israel governor who later became her chief deputy.
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Currencies

Interest in Riskier Currency Bonds Stirred, Not Shaken
Fiona Law – WSJ
Investors are rushing into emerging-market debt denominated in local currencies amid signs of political and economic stability in some regions, even as tensions heat up in Ukraine and the Middle East. While investors have long been snapping up debt sold in dollars, which is considered safer, the move into local-currency debt shows some are taking bolder steps to obtain higher yields.
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Freeing the yuan could prove seismic, says RBA’s Lowe
Mitchell Neems – Business Spectator
THE internationalisation of the yuan and the accompanying process of capital account liberalisation in China could be a seismic event in global capital markets, Reserve Bank of Australia deputy governor Philip Lowe says.
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Emerging-Market Currencies Rally on Central Banks
John Detrixhe and Rachel Evans – Bloomberg
Emerging-market currencies from South Africa’s rand to the Turkish lira rose a fourth day on improving growth reports as global central banks keep the economy awash in cheap money.
Australia’s dollar climbed to the highest level in almost two weeks against its U.S. peer as traders pared bets on a cut in interest rates after a jump in inflation. Indonesia’s rupiah jumped the most in two weeks after Joko Widodo was named the nation’s next president. The euro was little changed against the greenback and yen. The pound declined as Bank of England Governor Mark Carney said interest-rate increases will be restrained relative to the past.
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Ex-Goldman Trader’s Bitcoin Exchange to Fill Mt. Gox Void
Pavel Alpeyev – Bloomberg
Yuzo Kano quit Goldman Sachs Group Inc. (GS) twice: once for a rival bank, the second time to open Japan’s first bitcoin exchange since the collapse of Mt. Gox.
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CCPs eager for first forex clearing mandate
Fiona Maxwell – Risk.net
Market participants claim a clearing mandate for non-deliverable forwards is written, but has been languishing while the Commodity Futures Trading Commission puts new leadership in place. With that now done, some say the rules could be issued within weeks.
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Cautious trading helps banks limit FICC losses
The Trade
Investment bank fixed income revenues have fallen by less than expected in the second quarter of 2014, with a shift towards more liquid products helping to improve their profitability.
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Gold

Gold Poised to Climb as Ukraine Tension Spurs Haven Buys
Debarati Roy and Nicholas Larkin – Bloomberg
Gold futures, trading little changed in New York, are poised to gain as concern that tensions between Ukraine and Russia will escalate boost demand for a haven asset.
Separatists shot down two Ukrainian fighter jets in the same region where Malaysian Air Flight MH17 was destroyed last week, the government said. Investors increased bullion holdings through exchange-traded funds for four straight weeks amid the violence in Eastern Europe and as Israel launched an offensive against Gaza.
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Gold steadies as buoyant equities balance Ukraine tensions
Jan Harvey – Reuters
Gold steadied on Wednesday after the previous day’s drop, supported by simmering conflict in Ukraine and the Middle East, but under pressure from buoyancy in stock markets after positive U.S. data and corporate earnings.
Sluggish physical demand in Asia in the seasonally quiet summer period is also weakening support for any price rally.
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