First Impressions

Risk On/Risk Off
Are we in a risk-on period, or are we risk-off? More to the point – can we be both at the same time?

What strange times are these. For proof, look no further than today’s first two stories. The first highlights the lengths to which some will go to avoid risk. When a crisis (or at least a downturn) is imminent, return OF principal is more important than return ON principal.

There is clearly fear spreading across Europe that a period of contraction is on its way. Prices and employment growth are stagnant, and the peripheral debt crisis was arguably not solved but merely kicked down the road a bit. Thus, a stable nation like Germany can sell bonds paying zero interest and find a stream of steady buyers.

On the other side of the coin we have story number two, which highlights the return to prominence of credit derivatives, the asset class many point to as ground zero in the last financial meltdown. Though much of the action is now on cleared platforms, we could still see an ugly unwinding the next time credit spreads widen. Until such time, amid the quest for extra yield, risks are again piling up within the system.

Quote of the Day

We’ve reformed nothing. We have more leverage and more derivatives risk than we’ve ever had.

Janet Tavakoli, president of Tavakoli Structured Finance, quoted in the FT article “Investors dine on fresh menu of credit derivatives”

Lead Stories

Germany Set to Issue Bonds at 0% as Investors Seek Refuge
Emese Bartha – MoneyBeat – WSJ
Here we go again. Germany’s set to launch a new series of short-term government bonds at an auction on Wednesday, and, with investors flocking to safe havens, it won’t have to pay a single euro cent in fixed annual interest to get the deal away.
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***DA: Still a better deal than the ECB, who has moved to a negative rate.

Investors dine on fresh menu of credit derivatives
Tracy Alloway and Michael Mackenzie in New York – Financial Times
In March of last year, Kyle Bass, founder of the hedge fund Hayman Capital Management, made a startling proclamation: aggressive young bankers in Japan were pushing complex over-the-counter derivatives similar to those that rapidly soured during the financial crisis of 2008. Mr Bass warned of the return of the spectre of AIG, the giant insurer that required a huge bailout during the depths of the crisis, after selling billions worth of credit default swaps (CDS) that offered payouts to investors in defaulted mortgage bonds.
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***DA: The greatest risk is to risk nothing at all. – Leo Buscaglia

Swaps Panel Delays Payout Auction on Argentine Bonds
PETER EAVIS – Dealbook – NY Times
Some investors were expecting to collect their winnings soon on a bet they made against Argentina’s bonds using financial instruments called credit default swaps. But a rare challenge to the swaps’ payout process could delay the collection of those profits – and possibly shrink them.
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***DA: The story that refuses to die.

The “vulture funds” are tired of being portrayed as the bad guys in Argentina’s debt crisis
Tim Fernholz – Quartz
The video above has the look and feel of a political ad for the US elections this fall, but it’s just another tactic in the war over Argentina’s debt. The country defaulted at the beginning of August after facing a choice between paying all of its creditors, including hold-out funds who refused previous attempts to restructure Argentina’s debt, or none of them—and choosing the latter option.
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***DA: As someone who has waited an exhorbitantly long time for the streets and sanitation department to clean up roadkill, I am thankful for vultures.

The Economic Implications of an End to 30 Years of Falling Bond Yields
Michael J. Casey – MoneyBeat – WSJ
With 10-year Treasury yields at 2.4%, just above 16-month lows, the bond market is predicting that any rate hikes by the Federal Reserve will be gradual, and that any monetary tightening will settle in at much lower rates than in previous upturns in the policy cycle.
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***DA: They may be so gradual that they will need to be interrupted at times in favor of easing.

Taiwan insurers turn to foreign bonds after rule change
Xiao Wang – Risk.net
Taiwan insurers have fuelled a fivefold increase in the purchase of onshore-issued foreign bonds, following a May regulatory change which means these are no longer considered overseas investments, according to figures from GreTai Securities Market (GTSM), the over-the-counter securities exchange.
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Central Banks

MPC minutes reveal two members voted for August rate hike
Anna Fedorova – Investment Week
Two members of the Bank of England’s Monetary Policy Committee voted for a 25bps rate hike this month, latest minutes show – the first call for hikes in over three years.
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Bank Of England: Minutes Of The Monetary Policy Committee Meeting Held On 6 And 7 August 2014
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ECB in policy limbo, boxed in by its own plans
International New York Times
The European Central Bank is in a policy no man’s land, bombarded by news of a stagnating euro zone economy but hesitant to move forward with new stimulus until measures it loaded in June have ignited.
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Abenomics Skepticism Grows as Price Gauge Retreats: Japan Credit
Bloomberg
The 10-year break-even rate, a gauge of expectations for consumer-price gains in inflation-linked bonds, dropped to 1.16 percent yesterday, the lowest close since March 17. It’s down from 1.4 percent in June, the highest since the government resumed sales of the securities in October. The equivalent gauge in the U.S. was at 2.19 percent.
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RBI says easing trading rules for infra bonds will not deepen markets
Economic Times
Allowing the trading of bonds issued for infrastructure lending will not help deepen debt markets, newly appointed Reserve Bank of India Deputy Governor S S Mundra said on Wednesday.
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Currencies

HKMA intervention once again prompts debate on US dollar peg
Garima Chitkara – Euromoney Magazine
Bets of a re-peg of the Hong Kong dollar has resurfaced in the currency markets as the Hong Kong Monetary Authority (HKMA) intervened to inject dollar liquidity to the tune of $9.86 billion several times since July 1 on the back of large inflows into Hong Kong during the past few months.
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Recommendations Roll In For Fixing The FX Fix
Chiara Albanese – MoneyBeat – WSJ
More than 30 asset managers, currency dealing banks and industry associations have taken the opportunity to have their say on the future of a foreign exchange benchmark at the center of a yearlong regulatory probe.
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Sterling gains after BoE vote breakdown
Michael Hunter – Financial Times
Sterling rose on Wednesday, defying a broad trend for a stronger dollar, after the surprise news that two members of the Bank of England’s nine-strong Monetary Policy Committee voted for a rate rise in August.
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HK Monetary Authority Loses Sleep Over NY Regulator
Ned Levin – MoneyBeat – WSJ
The midnight oil was burning Wednesday at the Hong Kong Monetary Authority–courtesy of its colleagues at the New York State Department of Financial Services, which announced a $300 million fine and new anti-money-laundering controls on UK bank Standard Chartered PLC.
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Japan Fund Revamp Seen Aiding Frustrated Yen Bears: Currencies
Kristine Aquino, Mariko Ishikawa and Kazumi Miura – Bloomberg
Yen bears frustrated by the Bank of Japan’s failure to extend its stimulus program are counting on the world’s largest pension fund to drive the currency lower.
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Indexes & Index Products

Exchange-traded fund accentuates merger arbitrage highs, and lows
Ashley Lau – Reuters
For merger arbitrage funds playing this year’s hot deal-making market, one exchange-traded fund has pulled ahead – on the upside and the downside.
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S&P Dow Jones Indices to Calculate New Custom Hybrid Index for Tiedemann Wealth Management
MarketWatch
Tiedemann Wealth Management, an independent wealth advisor, has selected S&P Dow Jones Indices (S&P DJI) to be the custom calculation agent for the TWM Deep Value Index, a custom hybrid index. Custom hybrid indices are client-owned, white label custom indices that use an S&P Dow Jones Indices index to screen for constituents and/or as an actual constituent of their index.
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Gold

Investors are flocking to gold–but that could be a mistake
CNBC via Yahoo! Finance
Investors have been flocking to gold, but that doesn’t mean everyone is taking a shine to the precious metal. Gold ETFs saw almost 16 tons worth of inflows in July on geopolitical concerns. That’s the highest amount since November 2012. That all sounds good for gold until one reads the World Gold Council’s recent report on gold in the second quarter of 2014. Its data show that total demand for gold—physical, jewelry and ETFs, too—was down nearly 185 tons compared to the same time last year.
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Diversification and Discipline Are Key to Investing in Gold
GoldSeek
Like training for a marathon, investing in gold isn’t for the apathetic or indifferent. It requires strong-willed discipline.
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Fighting gold fever in the Amazon
The Washington Post
A gold rush in Peru’s Amazon is turning forests into desert. Can a crackdown stop the miners? See the story in pictures.
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