First Impressions

Update: Unchained – How Blockchain and Bitcoin Are Going Mainstream
John Lothian News Special Report
Earlier the month we issued a special report on digital currencies and the blockchain technology that underpins it. We used Sway, a platform for content publication that incorporates and infuses multiple media channels. Think of it as a magazine, except that the pictures are short, there are supplemental videos and the story can be tweaked and updated as needed.

In this report, JLN editor-in-chief Jim Kharouf looks at why industry experts are calling the technology “the key to the industry.”

As blockchain is back in the news this week, we have updated the report to incorporate some fresh content.
Read the report on Sway

Quote of the Day

“Europe is unwilling to allow Syriza a face-saving compromise, even if that means Greece collapses and the rest of Europe suffers.”

David Einhorn, founder of Greenlight Capital in the story, ” Einhorn Says Europe Letting Greece Collapse to Stop Populism”

Lead Stories

Greece needs debt relief far beyond EU plans – Secret IMF report
Greece will need far bigger debt relief than euro zone partners have been prepared to envisage so far due to the devastation of its economy and banks in the last two weeks, a confidential study by the International Monetary Fund seen by Reuters shows.
The updated debt sustainability analysis (DSA) was sent to euro zone governments late on Monday, hours after Athens and its 18 partners agreed in principle to open negotiations on a third bailout program of up to 86 billion euros in return for tougher austerity measures and structural reforms.

Hillary’s credibility questioned after HSBC takedown
By Kevin Dugan and Marisa Schultz, NY Post
If Wall Street wants to get out of Hillary Clinton’s crosshairs, it may have to pay up. In her first major economic policy address, Clinton said that she would “offer plans to rein in excessive risks on Wall Street and ensure that stock markets work for everyday investors, not just high frequency traders and those with the best — or fastest — connections.”

College Kid’s Secret Stock Trade Shows China’s Moral Hazard
Lu Tao can’t sleep. He gets bouts of panic at night. And he’s too afraid to tell his parents why. The 23-year-old university student in Hangzhou, a city on China’s eastern seaboard, has a stock-market problem. He borrowed 200,000 yuan ($32,215) from mom and dad, piled the money into mainland shares without their permission, and got caught in the biggest sell-off in two decades.

Fund Managers Holding Highest Cash Percentage Since Lehman
Michael Hartnett is out with his latest Fund Manager Survey for Bank of America Merrill Lynch and it’s, well, something else.
According to the survey, conducted among 149 participants with $399 billion in AUM from July 2nd through July 9th, cash levels in fund manager survey (FMS) portfolios have hit 5.5%.
So does this mean everyone is bearish? It’s not that simple.

Moody’s correct on swaps bail-in risk – poll
Almost 90% of respondents to a poll believe ratings agencies are right to assume derivatives counterparties will be safe from a bail-in under new bank resolution rules.Moody’s counterparty risk assessment (CRA), launched in March, captures the probability that a bank will default on its derivatives obligations. So far the CRAs for US and European banks have assumed derivatives counterparties to a stricken bank are less likely to lose money than their senior unsecured debt holders, based on assumptions that bonds will be subordinated to derivatives under new resolution frameworks, and that regulators are unlikely to bail-in derivatives anyway.

Wall Street’s Top Cop Takes Harder Line; SEC has more than doubled the typical fine against individuals over the past decade
The Securities and Exchange Commission has ratcheted up its punishment of individuals, more than doubling the typical fine over the past decade amid pressure to prove the agency is tough on Wall Street.

Einhorn Says Europe Letting Greece Collapse to Stop Populism
by Simone Foxman, Joshua Fineman, Bloomberg
David Einhorn, founder of Greenlight Capital, said Europe’s leaders are prepared to let Greece fail to discourage other countries from electing populists.

BlackRock Sees 40% Haircut in Puerto Rico Debt Restructuring
Puerto Rico bondholders may receive an average of just 60 cents on the dollar if the commonwealth wins the ability to restructure its $72 billion in obligations, according to BlackRock Inc.’s head of municipal debt.
The Caribbean island and its agencies need to cut their debt to $40 billion, Peter Hayes, who helps oversee about $116 billion of munis at the world’s biggest money manager, said in an interview on Bloomberg Television. That would mean an average recovery of about 60 percent on its securities, which include general-obligation bonds, sales-tax debt and those from its electric utility, he said.

Too Much Debt + Too Little Cash = Most Distressed Pain Since ’08
If a company has too much debt and too little income, it’s going to struggle to pay its bills, regardless of when its bonds come due.
This is a lesson that investors are learning as distressed U.S. bonds suffer their worst performance since 2008. The notes have plunged 7.5 percent so far this year and 3.2 percent this month alone, with some of the biggest losers being the debt of Lightstream Resources Ltd., Peabody Energy Corp. and Cliffs Natural Resources Inc., according to Bank of America Merill Lynch index data.

Trader tells court of his ‘rage’ over transatlantic Libor probe
Lindsay Fortado, FT
Tom Hayes, the first trader to go on trial for Libor manipulation, told a court that he reversed his intent to plead guilty because he felt “intense rage” over the transatlantic investigation into his conduct and wanted to be judged by a jury rather than become a “political football”.

Eurex approved to clear inflation swaps
Jon Watkins – The Trade News
Eurex Clearing has been authorised by German regulator BaFin to clear inflation swaps, squaring up with rival LCH.Clearnet which has also been permitted to clear the products. While inflation swaps are not subject to mandatory clearing, buy-side firms will want to clear them alongside their interest rate swaps in order to avoid bifurcation of their books. This will be especially important to pension funds as they have a large amount of liability which are inflation linked.

Bond King Gundlach Feuds With Morningstar; Years of perceived slights and missteps preceded clash
Jeffrey Gundlach is locked in a protracted stare-down with an unlikely foe: Morningstar Inc.

JPMorgan’s Profit Rises 5% as Its Expenses Fall
Dealbook – NY Times
JPMorgan Chase said on Tuesday that second-quarter earnings rose 5 percent from a year ago as the bank grew its loan portfolio and reduced expenses.
JPMorgan, the nation’s largest bank, earned $6.3 billion, or $1.54 a share, up from $6 billion, or $1.46 cents a share a year ago. Wall Street analysts had expected earnings of $1.44 a share, according to a survey by Thomson Reuters.

BB&T’s Deal for Susquehanna Resulted in Big Payout to Executives
Dealbook – NY Times
The top executives at the American bank BB&T seem to have become greedy. The Federal Reserve last week approved the company’s $2.5 billion purchase of Susquehanna Bancshares, one of the banking industry’s biggest transactions in years.
Other lenders may be relieved to see the deal pipeline flowing again. BB&T’s top officials, however, will share an undeserved $2.5 million bonus, staining what should otherwise be good news for the company.

Central Banks

China Opens Interbank Bond Market Wider to Foreign Buyers
China issued new rules making it easier for big international investors to access its $5.7 trillion interbank bond market, a step forward toward opening its capital market as it seeks to promote the yuan as a reserve currency.
Foreign central banks, sovereign wealth funds and global financial organizations will no longer need pre-approval to trade bonds, interest-rate swaps and conduct repurchase agreements, the People’s Bank of China said in a statement Tuesday. Instead, they must only fill in a one-page registration form and can decide how much they can invest, the PBOC said.

Big banks may not follow Bank of Canada if central bank cuts rate
Canada’s big banks may resist the urge to pass on to borrowers the full benefit if the Bank of Canada decides to reduce its key interest rate on Wednesday, a reluctance that could anger borrowers.
CIBC analyst Robert Sedran suggested a 25-basis-point cut in the central bank’s overnight rate could be followed by only a 10-basis-point reduction in the prime rate by the big banks.

Preserving the independence of the Federal Reserve
Brookings Institution
The premise of this hearing appears to be that there is something mysteriously opaque about the Federal Reserve’s conduct of monetary policy; that some threat to our economy might unfold out of view of the public and Congress; that if another group of experts, say, a team from the Government Accountability Office (GAO) “audited” the Fed’s deliberations on monetary policy, we would learn something important and we would all be better off.
My views are quite different and I will make three basic points.


Participants must help fix global forex market: Federal Reserve Bank of New York official
Those who trade in the global foreign-exchange market must step up and help regulators restore fairness and public trust after a string of investigations and settlements related to rigging, a top Federal Reserve Bank of New York official said on Tuesday.
Simon Potter, head of market operations at the New York Fed, also said the emergence over the years of high-frequency electronic trading raises questions over fairness, liquidity, and the quality of prices in the currency market.

Forex-rigging banks threatened with multimillion-pound lawsuit
The Guardian
A US law firm is preparing a multimillion-pound lawsuit against banks found guilty of manipulating the foreign exchange market.
The action is being led by Connecticut-based Scott + Scott and is aimed at banks including HSBC, the Royal Bank of Scotland, Barclays and US banks JP Morgan and Citigroup.

Indexes & Index Products

China’s trading freeze can undermine MSCI inclusion
Portfolio Adviser
The recent suspension of trading in 1300 A-share stocks could delay their much-awaited inclusion in MSCI’s emerging market index, fund houses said.

China ETF Switches Its Strategy After Stock Trading Halts
Bloomberg Business
China’s use of trading restrictions amid its worst market rout in more than two decades has prompted a rare strategic change at one of three U.S. exchange-traded funds with access to the Shanghai and Shenzhen stock markets.

The Impact of Currency Exposure: Evidence From the Performance of Actively Managed Global Equity and Bond Funds
S&P Dow Jones Indices
In the past 18 months, currency hedging has become one of the hottest topics in the investment community. As the U.S. economy strengthens and decouples from the rest of the developed and emerging economies, and as there is unprecedented quantitative easing by the Bank of Japan and the European Central Bank, it is nearly inevitable that the U.S. dollar will rally strongly against other major currencies. The movement into currency-hedged, passive investment products has been strong, as investors seem to be looking at their non-USD exposure.

Greece and China Battle for Most Dangerous ETF
Bloomberg Business
The Global X FTSE Greece 20 ETF (GREK) and the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR) appear to be vying for riskiest ETF1. Both have seen their volatility more than triple in the past 10 days, to levels that surpass even the most hard-core leveraged funds.


Greeks Can’t Tap Cash, Gold, Silver In Bank Safety Deposit Boxes
Capital controls have been in place in Greece since the start of the month to protect the banks from mass withdrawals by nervous Greeks. They have rightly been concerned about their savings, the collapse of the banking system and the loss of their savings in deposit confiscations or bail-ins.

Time To Get Back Into Metals
It’s time to get back into the precious metals market. Look at the current headlines of late: Greek default hovering overhead, mystery glitch closes NYSE, airline company ceases all flights due to computer problems, Chinese stock market crashes 28%, and the U.S. mint just ran out of silver.

Gold ETFs Fail The Volatility Test
In my experience as an investment advisor, gold bullion and other precious metals are often times a very polarizing asset class to own. You either love it because you are worried about inflation, currency manipulation and market volatility, or hate it because you have no idea when it actually works to hedge those themes.


Hillary Clinton Offers Her Vision of a ‘Fairness Economy’ to Close the Income Gap
NY Times
In the most comprehensive policy speech of her presidential campaign, Hillary Rodham Clinton on Monday presented her vision of a “growth and fairness economy,” an economic agenda intended to lift middle-class wages, expand social services, and increase taxes on the wealthiest Americans to combat a widening gap between rich and poor.

What a Mystery Company Can Teach You About Stock Charts
Let’s play peekaboo.
Let’s take a mystery company, one I call Amalgamated Cupertino, and run four quick charts.
What the pros know that is one of the great traps of investing is to look at a longer-term chart; try to make an analysis of a time frame in the middle of the chart; and then fail to block out the future price path. You have to play peekaboo. You put your hand up to the computer screen or down on the graph paper and block the future out with your hand. Always, in every case, the chart looks different.

Why the bond market went bananas one day
By Steve Goldstein, MarketWatch
It was the day that shook the bond market’s world — Oct. 15, 2014.

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