First Impressions

Fresh Data and Fresh Words
Doug Ashburn – JLN

This could be a big week for the financial markets. Or, it could be a bust. But at least the potential is there. The week’s big news, of course, is the two-day meeting of the FOMC set for Tuesday and Wednesday. We also get fresh readings on GDP on Wednesday and nonfarm payrolls Friday. Additional releases on manufacturing, housing and consumer confidence will make this a busy week for financial writers, if not for traders.

From the Fed, I expect no real fireworks. The taper will continue on schedule and, will likely be completely wound down by October, barring any unforeseen circumstances, and there will be no movement in Fed funds from the current 0-0.25 rate target. Since there will be no post-meeting press conference, the script is all we will get, and the script will say the Fed is monitoring job growth and prices, and will hike rates when appropriate (meaning not this year).

On Friday, we will likely see a continuation of last month’s healthy job growth, but the participation rate will probably continue to deteriorate from last month’s 62.8 percent, a rate not seen since 1978.

In other words, there will be enough of a mix of good and bad news that npo policy changes are forthcoming. The only chance for fireworks will come later, if and when the current equities rally collapses of its own weight, prompting fresh calls for new stimulus.

For now, though, the fresh words and fresh data are simply the final barrier separating traders from a peaceful August holiday.

Quote of the Day

I am finding myself increasingly at odds with some of my respected colleagues at the policy table.

Dallas Fed president Richard Fisher, as quoted in the WSJ story “Fed’s Rate Debate Looks Set to Heat Up”

Lead Stories

Greece eyes SME minibonds to bypass bank lending
Christopher Whittall and Anil Mayre – Reuters
The first batch of issuance under a “minibond” programme that the Athens Exchange Group (Athex) has been promoting to finance Greek SMEs is set for launch after the summer break.

***DA: Since most mini contracts are half the size, would a mini Bond be Agent 003 ½.

China Hides Treasury Buys in Belgium: Chart of the Day
Kyoungwha Kim – Bloomberg
China is driving a jump in Belgian holdings of Treasuries and is a key reason for a plunge in yields even as the Federal Reserve trims its stimulus to support growth, according to Bank of America Merrill Lynch.
The CHART OF THE DAY tracks a 41 percent surge in Belgian ownership of U.S. bonds in the five months through May to $362.4 billion. This came at a time when China, the largest foreign holder of Treasuries, kept its official stockpile around $1.27 trillion.

India’s Rupee Bond Market Booms on Economic Optimism
Shefali Anand – MoneyBeat – WSJ
Foreign investors are loading up on rupee bonds again. After being net-sellers of nearly $8 billion of rupee debt last year, foreign investors have bought more than $13 billion of the bonds this year, according to data from National Securities Depository Ltd.

***DA: Risk on.

Euronext chief Cerutti cites France as weak spot to EU recovery
Philip Stafford and Peggy Hollinger – Financial Times
The head of the eurozone’s largest stock exchange has cautioned that France remains a risk for the recovery of the economic bloc.

***DA: I concur.

Levine on Wall Street: Sovereign Immunities
Matt Levine – Bloomberg
Argentina will probably default this week. I mean, who knows I guess, maybe there’ll be a last-minute compromise in the next couple of days. But unless Argentina reaches a settlement with its holdout creditors (unlikely), or convinces New York federal judge Thomas Griesa just to give it some extra time (even less likely), it’s going to be in default on its exchange bonds this week.

Argentine default looms as time runs out for debt deal
Argentina looks set to default on its debt for the second time in 12 years next Thursday as negotiations with “holdout” investors seemingly go nowhere and neither side shows signs of blinking first, though a last minute deal can’t be discounted.

***DA: According to Reuters, no meeting is scheduled for Monday. This one is going the full 15 rounds.

Bond heavyweight sets pace for rivals on agency trading
Tim Cave and Matt Turner – Financial News
The creation of a dedicated electronic agency trading unit by bond heavyweight JP Morgan looks set to accelerate similar plans by rivals, as tighter capital rules continue to make banks rethink their trading operations.

Lloyds Reaches $370 Million Deal With U.S., U.K. on Libor
Richard Partington – Bloomberg
Lloyds Banking Group Plc (LLOY), bailed out by British taxpayers during the financial crisis, will pay 218 million pounds ($370 million) in fines to U.K. and U.S. regulators after manipulating benchmark interest rates.
The lender will pay $105 million to the Commodity Futures Trading Commission, $86 million to the Department of Justice and 105 million pounds to Britain’s Financial Conduct Authority, according to a statement today. Lloyds has also paid a further 7.8 million pounds in compensation to the Bank of England after the actions of its traders reduced the fees the central bank received from one of its emergency-rescue packages.

How not to introduce official e-money?
Izabella Kaminska
We’ve argued enthusiastically for the introduction of state e-money before. But we overlooked the likelihood that it might first be adopted by countries like Ecuador as a means of getting out of their dollar bind (via Bloomberg)

***DA: There are plusses and minuses to any currency system. Because of its use of USD as its currency, it has less flexibility in monetary stimulus, but also avoids the hyperinflation problem. A dual currency system with an e-money system for payments from the state could work, but it puts a lot of trust in the hands of insiders.

Distressed-Debt Investors Flock to Italy for Bad Loans
Luca Casiraghi – Bloomberg
Distressed-debt investors are flocking to Italy as lenders begin offloading the nation’s biggest stockpile of bad loans on record.
An unprecedented 166 billion euros ($224 billion) of non-performing loans are on bank balance sheets, according to the latest data from the Italian Banking Association, up from 42 billion euros in 2008. Global private-equity firms including Anacap Financial Partners LLP and Fortress Investment Group LLC have started acquiring at least 7 billion euros of the debt, according to data from PriceWaterHouseCoopers LLP.

Stanley Ross, Eurobond Activist Who Changed Pricing, Dies at 83
John Glover – Bloomberg
Stanley Ross, the London-based Eurobond trader who revolutionized the system that priced debt securities in the 1970s, has died. He was 83.
Ross died at his home in Dunfold, England, on July 23, according to his friend Valerie Thompson. The cause of death is not yet known, she said.

Central Banks

Fed’s Rate Debate Looks Set to Heat Up
Wall Street Journal
Federal Reserve officials will likely move closer to ending their purchases of mortgage and Treasury bonds at a policy meeting this coming week and discuss when and how to raise interest rates.

Don’t Be Fooled by the Fed’s Facade
Mohamed A. El-Erian – Bloomberg
One of the unwritten rules of modern central banking is that, unless compelled by events on the ground, officials should refrain from making big policy changes during the summer. With many traders on holiday, any sudden moves risk destabilizing markets.

New York Federal Reserve steps up pressure on bank ethics
Gina Chon in Washington – Financial Times
The Federal Reserve Bank of New York is stepping up pressure on the biggest banks to improve their ethics and culture, after investigations into the alleged rigging of benchmark rates led officials to conclude bankers had not learnt lessons from the financial crisis.

***DA: There is one sure-fire way – read below.

Beheading bankers – and other ways to restore public trust
Margareta Pagano – Financial News
In medieval Catalonia the good behaviour of bankers was deemed so important that if they went bankrupt, they were publicly disgraced by town criers, and given nothing but bread and water to eat until creditors were paid off. If, after a year, the bankers had not paid the depositors, they would be beheaded and their property sold off locally to pay them off.

Yellen Watching What She Eats Would Help Track Prices: Economy
Michelle Jamrisko and Rich Miller – Bloomberg
The next time Federal Reserve Chair Janet Yellen grabs dinner at her favorite eatery, she might want to take a longer look at the cost of her entrée.
That’s because menu prices don’t change as often as those for many other goods and services. When they do increase, the move has to count, and it’s a sign restaurant owners see inflation bubbling, according to Michael Bryan, a senior economist at the Federal Reserve Bank of Atlanta.

Buyers Dream of Draghi as Fed-ECB Divide Bolsters Treasuries
Daniel Kruger, Lukanyo Mnyanda and Wes Goodman – Bloomberg
As the Federal Reserve moves to end its debt purchases, U.S. bond-market bulls are discovering a new ally: European Central Bank President Mario Draghi.
For the first time since 2007, Treasuries offer higher yields than government debt in Europe. That’s largely due to Draghi, who pushed the region’s borrowing costs to record lows after announcing an unprecedented set of stimulus measures last month including negative interest rates to prevent deflation.

Musical Chairs at ECB Leaves Germany on Guard for Doves’ Attack
When the European Central Bank policy makers first convened in June 1998, Bundesbank President Hans Tietmeyer didn’t like what he saw. The sign in the front of every seat shouldn’t carry the name of each nation’s central bank, but that of the ECB, he said. That would underscore how officials set monetary policy for the whole euro area and not represent their homelands.


SGX says cross-margining key in battle for RMB futures market
Justin Lee –
The ability to cross-margin contracts across asset classes will give SGX a competitive advantage with up to 30% margin savings, according to the exchange, although some market players are doubtful this can be achieved

Tiny Luxembourg Wants a Piece of China’s Offshore Currency Market
MoneyBeat – WSJ
The small nation of Luxembourg already boasts a financial sector that has benefited from the Grand Duchy’s proximity to some of Europe’s largest economies. Now, the country of just half a million people wants to be at the heart of a new trend in global finance: the rising use of China’s currency outside its home market.

***DA: This is getting to be a crowded field.

U.K. Currency Trading Drops Amid Volatility Slump, Market Probe
Neal Armstrong – Bloomberg
U.K. foreign-exchange volumes fell 6 percent in April from the same period last year as subdued price swings and a probe into trading activity buffeted the market.
Average daily currency turnover in the U.K. was $2.4 trillion in April, the Bank of England’s Foreign Exchange Joint Standing Committee said today in a statement on its website, citing a survey. While trading rose 7 percent from October, boosted by record turnover in foreign-exchange swaps, spot volumes were 21 percent below April 2013 levels, it said.

Get Set For Higher FX Costs, Says Deutsche Bank
Chiara Albanese – MoneyBeat – WSJ
Manipulation investigation? Check! Tediously low volatility? Check! Now the currencies industry has a third challenge to deal with: regulation.

ITG brings forex TCA product to Asia
The Trade
ITG has brought a foreign exchange TCA product to Asia that aims to help the buy-side analyse and manage FX transaction costs.


Gold Bugs Meet Bitcoin Believers to Supplant the Dollar
Isaac Arnsdorf – Bloomberg
Call it bitgold. It’s what you get when you combine bitcoin, one of the world’s newest would-be currencies, and gold, one of the oldest.

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