First Impressions

Supply and Demand Equilibrium Overruns a Picket
John Lothian – John Lothian News

Let’s step back for a moment from the debate about high frequency trading (“HFT”) and consider some basic economics and trading strategies.

Every economics class I have ever taken has always used a supply/demand chart to reflect a quantity willing to be supplied and demanded at every possible price, with the crossover point representing the current market equilibrium.

What is this “market equilibrium?”

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Quote of the Day

Right now it feels like we’re starting to maybe see the beginnings of some marginal benefit of competitors exiting parts of our business that otherwise, quite frankly, they had charged in with excess. The firms that are announcing exits from commodities, for example, they weren’t in those businesses in the ’90s. We got into commodities in 1981.

Goldman Sachs CFO Harvey Schwartz, as quoted in the Bloomberg story “Goldman Sachs Stands Firm as Banks Exit Commodity Trading”

Lead Stories

Goldman buys Westpeak in drive for ‘smart beta’ assets
Lauren Tara LaCapra – Bloomberg
Goldman Sachs Group Inc’s asset-management business has agreed to buy Westpeak Global Advisors, a firm that aims to beat market indexes by using factors other than company size to pick stock investments.
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***DA: What asset management firm does not aim to beat market indexes?

Wall Street Raids RBS for Debt Traders as McEwan Shrinks Lender
Lisa Abramowicz and Jody Shenn – Bloomberg
Royal Bank of Scotland Group Plc has lost at least six senior debt traders and salesmen in the past month to rival firms as the British lender shrinks its investment bank and faces political pressure to reduce bonuses.
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***DA: The backdoor way of separating commercial and investment banking activities.

Goldman Sachs Stands Firm as Banks Exit Commodity Trading
Ambereen Choudhury – Bloomberg
Goldman Sachs Group Inc. (GS), whose three top executives began their careers at the firm in the commodity-trading unit, is poised to gain market share as pressure from regulators drives competitors to scale back.
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***DA: Some regulations foster competition. Some drive it away.

It’s spring time
The Economist
TODAY’S batch of business surveys paint a reassuring picture of the euro-zone recovery. Though better than nothing this was pretty sluggish last year, starting with growth of just 0.3% in the second quarter, which slipped to 0.1% in the third and 0.2% in the fourth; annualised, these rates were 1.3%, 0.6% and 0.9%. But the upturn seems to have gained momentum in early 2014, with Germany in particular having made a strong start to the year.
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Krugman Slamming Riksbank Fuels Deflation Anxiety: Nordic Credit
Veronica Ek – Bloomberg
The Riksbank, the world’s oldest central bank, has become a sadist in its use of monetary policy, according to Nobel Laureate Paul Krugman.
He says the Stockholm-based central bank’s bias toward tight policy during the financial crisis was a “terrible mistake” that now risks creating a Japan-style deflationary spiral. The criticism has the potential to weaken the exchange rate as international investors “question the Swedish economic development,” according to SEB AB, the Nordic region’s biggest currency trader.
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BOJ Beat: Banks Becoming More Insulated Against Rate Jump
Tatsuo Ito – The Wall Street Journal
Japanese banks are becoming more insulated against losses that could emerge from a sudden rise in interest rates, a Bank of Japan report showed Wednesday.
Based on their portfolios as of December, the central bank estimates that the country’s major and regional banks could suffer a combined Y5.6 trillion ($54.5 billion) in losses if interest rates broadly surge by one percentage point.
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***What happens if rates suddenly fail to surge?

Bond Dearth Defied With Illinois’s Third 2014 Offer: Muni Credit
Brian Chappatta – Bloomberg
The smallest wave of municipal borrowing in three years is proving a boon for Illinois. The lowest-rated U.S. state is selling debt for the third time since February after winning the lowest bond costs since 2009.
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***JB: While technically good news for Illinois as a resident of that fine state I find this depressing.

Fidelity Reaps Rewards as Banks Lose Bond Muscle: Credit Markets
Lisa Abramowicz and Margaret Collins – Bloomberg
Paul Volcker hasn’t endeared himself to Wall Street bond dealers. That’s just fine with Fidelity Investments.
While the U.S. Dodd-Frank Act’s Volcker Rule has curtailed the ability of banks to use their own money for trading, the biggest money managers have stepped in, using their growing buying power to absorb at a discount large amounts of bonds that get put up for sale. Those are opportunities that smaller buyers may never see.
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***DA: Except those buyers who invest in Fidelity’s bond funds.

CoCo Default Swaps Seen Fueling Bets Against Riskiest Bank Debt
Abigail Moses – Bloomberg
The creation of credit-default swaps insuring contingent capital securities may spur bets against the riskiest bank debt.
“CDS changes everything because it allows you to short CoCos in a very efficient way,” said Jochen Felsenheimer, the Munich-based founder of XAIA Investment GmbH, which operates three credit funds. “I’m looking forward to having an instrument like this.”
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***DA What the financial system needs is this kind of innovation – derivatives of derivatives of derivatives.

Pimco’s Love Affair With Brazil Rekindled After Rejection
Boris Korby and Julia Leite – Bloomberg
It didn’t take long for Pacific Investment Management Co. to be lured back to Brazil.
Three months after co-founder Bill Gross said the country was no longer a preferred market, Deputy Chief Investment Officer Mark Kiesel wrote last week that a plunge in Brazil’s government and corporate bonds has made them attractive again.
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***DA: Pimco has had a knack recently for doing 180 degree turns.

Barclays May Cut 7,500 at Investment Bank, Bernstein Says
Ambereen Choudhury – Bloomberg
Barclays Plc (BARC), the U.K.’s second-largest bank by assets, could eliminate 7,500 jobs at its investment bank to improve returns at its securities unit, according to a report by Sanford C. Bernstein.
The European fixed-income, currencies and commodities business, or FICC, may be the hardest hit, with about 5,000 job losses, analysts led by Chirantan Barua said in a note yesterday.
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***DA: Cutting your way to profitability.

Central Banks

Fed Looks Likely to Stick to Policy Path
Jon Hilsenrath – The Wall Street Journal
Federal Reserve officials are on track to reduce their monthly bond buying to $45 billion at their policy meeting next week and stick with a communications approach that leaves investors guessing about when the central bank will start raising short-term interest rates.
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ECB’s Nowotny says would not rule out QE, but don’t need it yet
Reuters
European Central Bank policymaker Ewald Nowotny said he would not rule out a quantitative easing (QE) – or money printing – programme to buy sovereign bonds, but the time for such a step has not yet come.
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ECB Threatens Negative Interest Rates – Banks Threaten to Charge for Euro Deposits
Mike Shedlock – TownhallFinance.com
ECB president Mario Draghi has been making lots of noise recently about cutting interest rates because the euro is too strong and banks aren’t lending enough.
Realistically, there’s not much room to cut with rates already at a rock-bottom .25 percent.
Some suggest negative interest rates are just the ticket to spur lending. Should that happen, the Bank of New York Mellon Eyes Charging Clients for Euro Deposits.
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Injecting cash to stimulate economy would be complex for ECB, Hansson says
David Mardiste – Reuters (via Chicago Tribune)
Quantitative easing would be operationally complex for the European Central Bank, policymaker Ardo Hansson said, casting doubt on whether the bank could implement such a plan to ward off the threat of deflation.
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Fed’s low-interest-rate policies cost savers $758 billion, study says
Jim Puzzanghera – Los Angeles Times
The Federal Reserve’s low interest rate policies, designed to stimulate the economy, have cost savers about $758 billion since the end of the Great Recession, according to a study released Tuesday.
Inflation and low returns on deposits have led bank customers to lose more than $100 billion in purchasing power in each of the last five years, said MoneyRates.com, which provides consumers with information about bank rates, investing and personal finance.
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How the Fed Could Say What It Means
Mark Gilbert – Bloomberg View
Forward guidance, a technique whereby central banks try to steer the expectations of consumers and investors about where interest rates are headed, isn’t working as well as it might in either the U.S. or the U.K. The solution is pretty simple, and has already been successfully road tested in Norway and Sweden.
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Currencies

Currency Volatility Falls to Lowest Since 2007; Dollar Declines
John Detrixhe and Andrea Wong – BloombergBusinessweek
Volatility among major currencies fell to the lowest since 2007 as global central-bank balance sheets continue growing, driving more liquidity into financial markets, even as the economy worldwide recovers.
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Fake FX Trader Spent Client Cash at Casinos, Clubs, FCA Says
Lindsay Fortado – Bloomberg
A 25-year-old man from London cheated investors out of 5.6 million pounds ($9.4 million) in a fraudulent currency-trading scheme, spending the money at casinos and nightclubs, the U.K. markets regulator said.
Alex Hope used investors’ money “as his own personal piggy bank,” Sarah Clarke, a lawyer for the Financial Conduct Authority, said at the first day of trial in London today. Hope, formerly a part-time catering assistant, is charged with fraud.
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Is the euro the new funding currency?
IFA Magazine
Recent strength in the euro against other major global currencies is compounding the declining inflation trend in the single currency area and has in ways encouraged investors to pile into the riskier bond markets of the peripheral countries.
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Why Don’t Currencies Move as Expected? [VIDEO]
Bloomberg
FXPro Chief Economist Simon Smith discusses the why the U.S. dollar isn’t as strong as it should be and what today’s PMI data out of the Euro Zone means for the Euro. He speaks to Anna Edwards and Mark Barton on Bloomberg television’s “Countdown.”
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Digital Currency Deep Dive: So What Makes Bitcoin So Special?
David S. Evans – Pymnts.com
There are many ways to turn currency into digits and move it electronically. Most countries have electronic systems, such as the ACH system in the US or the Giro system in Germany, for moving money between bank accounts. Some countries have mobile money platforms, such as mPesa in Kenya, that enable people and businesses to move money between each other using their mobile phones without bank accounts.
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Indexes & Index Products

Stock indexes climb to key levels
Chris McKhann – optionMONSTER
Equity indexes extended their winning streak to six sessions yesterday, bringing them to key technical levels while pushing the CBOE Volatility Index lower.
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Gold

Gold Advances From a 10-Week Low on Ukrainian Tensions
Nicholas Larkin and Glenys Sim – Bloomberg
Gold rose from a 10-week low in New York, climbing for the first time in four sessions, as the crisis in Ukraine spurred demand for a haven.
Bullion futures reached $1,275.80 an ounce yesterday, the lowest since Feb. 11, as a report showed manufacturing in the region covered by the Federal Reserve Bank of Richmond in Virginia expanded in April. Data due today may show U.S. new home sales increased.
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Will China drop gold next?
Craig Stephen – MarketWatch
Investors have done well in the past with a simple strategy of buying what China was buying. So earlier this year, things were looking up for gold when it was revealed that China had swept past India to become the world’s biggest buyer in 2013.
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