First Impressions

A Tail Risk No More
Doug Ashburn – JLN
On September 18, Scottish voters head to the polls to vote on a referendum that would break Scotland free from the U.K. While the notion has seemed unlikely all summer, recent polls, including one conducted by YouGov for the Sun newspaper shows those favoring independence as having gained significant momentum, and within striking distance of passage.

This does not seem like a tail risk to me. As an options trader, I always considered a tail risk to be one with a less than three percent chance of occurrence; the rough equivalent of rolling snake eyes on any given roll of a pair of dice. According to the poll, Scottish independence now looks to be, probability-wise, within a standard deviation of reality, and arguably within a standard margin of error for being a coin flip. It should be noted, however, that the binary markets have not moved in lockstep with the Sun/YouGov poll – according to Betfair, an online betting site that lists such events, the market is about 72 percent against/28 percent for Scottish independence.

Even still, it has clearly moved beyond the tail, so it is now time to think about what independence would really mean.

Here is a hint: the pound has had a nasty September thus far, falling over five big figures in as many sessions. It was down big again today, and saw a 1.60 handle (briefly before rebounding a few pips) for the first time in 2014. While the equity market has not reacted as strongly to the new poll, any added conviction toward a “yes” vote should increase pressure there as well.

Perhaps more frightening would be if Scotland’s move were to increase sentiment toward secession elsewhere. Remember, it was just last year that we were facing a very real possibility of a EU breakup.

Now THAT is a tail risk. But you never know; Scottish independence was a tail risk a couple weeks ago.

Watch out for ‘tail risk’ in Scotland
Andrew Bolger and Delphine Strauss – Financial Times
The prospect of Scots voting for independence in less than two weeks is a classic “tail risk” for investors and traders – an event thought to be of low probability but one that would have a big impact should it happen.

Quote of the Day

Because the outcome of these negotiations is unclear, one general consequence of a surprise Yes vote is that it would result in a prolonged period of uncertainty. This, in itself, is likely to have adverse economic consequences for Scotland and the UK.

Goldman Sachs analyst Kevin Daly, on Scottish independence, from the FT article

Lead Stories

ICMA tackles activist sovereign holdouts
Louise Bowman – Euromoney Magazine
Argentina and Greece heighten official focus; new clauses address Elliott Management strategy.

***DA: Changing boilerplate language is a tricky business. You want to protect borrowers from undue influence by activist shareholders, but the activists are often the only source of discipline and if you take that away, you take away pricing certainty.

Scottish-Law Bonds: A Thorny Question
Ben Edwards – MoneyBeat – WSJ
Time to check the small print? U.K. bank debt issued under Scottish law could be in for a tough ride if Scotland votes for independence next week, according to BNP Paribas

***DA: Speaking of fine print in bond language.

This time’s different as Asian markets warm up for Fed rate rises
Vidya Ranganathan – Reuters
Faced once again with the prospect of rate rises in the United States, investors in Asia are no longer selling and running as in the past, choosing instead to stay in markets like India and South Korea, that are relatively sheltered from global forces.

***DA: When emerging markets become safe havens.

Pimco: Don’t worry, help is on its way
Chris Newlands – Financial Times
Don’t worry; help is on its way.” Those were the words I found scribbled on a piece of paper while waiting for my meeting with Virginie Maisonneuve, Pimco’s head of equities, to start.

Argentina Trumpeting Demand for Swap That May Not Exist
Camila Russo – Bloomberg
Argentina’s Cabinet Chief Jorge Capitanich said today that “many” bondholders have publicly expressed their willingness to receive payments outside of the U.S. as a means to circumvent a legal dispute that’s disrupted debt servicing. Only one investor, though, could be found in a search for people who’ve made public statements backing the debt exchange proposal: Fintech Advisory Inc.’s David Martinez.

Fernández likely to see out term with battle cry for ‘fatherland’
Benedict Mander in Buenos Aires – Financial Times
A photograph of Palestinian militants brandishing posters of Cristina Fernández alongside images of Hizbollah leader Hassan Nasrallah that circulated in local media last week provoked a curious reaction from the Argentine president.

European repo usage increases, tri-party share breaks 10%
The Trade
A snapshot survey by the European Repo Council (ERC) and International Capital Market Association (ICMA) shows that the European repo market has expanded since the end of 2013, indicating a “gradual trend back to normality as banks reduce their reliance on central bank liquidity”.

Central Banks

How much do we need central banks?
Merryn Somerset Webb – Financial Times
They intervene so much, they can never stop

***DA: Central bank intervention is like my morning coffee. I like to think I would be better off without it.

Plosser, Fed’s lone dissenter, warns again on risks of waiting to hike U.S. rates
Howard Schneider – Reuters
Philadelphia Federal Reserve Bank President Charles Plosser, the loan dissenter at the Fed’s July policy meeting, on Saturday continued his push for the U.S. central bank to change its language on monetary policy to reflect an improving economy and pave the way for a sooner-than-expected interest rate hike.

***DA: Better hurry if you want to hike rates – those signs of an improving economy are fading fast.

You Missed $1 Trillion Return Agreeing With Fed Naysayers
Cordell Eddings – Bloomberg
If you agreed with all the academics, billionaires and politicians who denounced Federal Reserve monetary policy since the financial crisis, you missed $1 trillion of investment returns from buying and holding U.S. Treasuries.

***DA: The naysayers were not saying monetary intervention would be bad for the stock market; they were saying it is bad policy to bail out risk takers by stealing returns from savers. And they were right. Besides, today’s valuations are simply a snapshot in time. Who knows what will happen when we try to wean the market from all this stimulus.


All about the eurodollars, China edition
Izabella Kaminska – Financial Times
There’s an abundance of dollars in the Eurosystem with nowhere useful to go. We think, as we argued earlier, this is down, at least in part, to the Fed busting apart the money-market arbitrage for non-FDIC insured foreign entities.

Euro’s ‘Violent’ Move Forces Chart-Watcher Rethink
Josie Cox – MoneyBeat – WSJ
The rapid decline in the euro this week has animated the market’s legions of chart-watching technical analysts, who try to spot patterns to guess at future moves.

Pound Takes A Tumble On Scotland Jitters
Rebecca Howard – MoneyBeat – WSJ
The pound opened sharply weaker against the U.S. dollar in New Zealand after a weekend opinion poll showed a surprising surge in support for Scottish independence and traders say the pressure is unlikely to ease.

Indexes & Index Products

Leveraged ETFs, lovers of market waves, lose favor amid the calm
Ryan Vlastelica – Reuters
Leveraged exchange-traded funds, designed to magnify short-term returns, have fallen out of favor this year as investors who had embraced them are finding costs excessive in a calm market that is not rewarding bets on wild daily swings.

MSCI removes Russia from the equation
Charlotte Moore – Financial Times
At the end of July, MSCI launched new composite indices that exclude Russia, including new versions of its all-country index and its emerging market index.

RMC Presentation on Tail Hedge Management
Matt Moran –
Mr. Angel Serrat, Partner and Chief Investment Strategist of Capula Investment Management, delivered a presentation on Tail Hedging at the CBOE Risk Management Conference Europe on Sept. 5th in Ireland.

NASDAQ OMX to List PowerShares LadderRite 0-5 Year Corporate Bond Portfolio
CNN Money
NASDAQ OMX today announced that Invesco PowerShares is preparing to launch a new exchange-traded fund (ETF), the PowerShares LadderRite 0-5 Year Corporate Bond Portfolio (Symbol:LDRI), which will be listed on The NASDAQ Stock Market. LDRI will begin trading on NASDAQ on Wednesday, September 10, 2014.


CME, Thomson Reuters Seen as Favorites to Manage London Gold Fix
Ese Erheriene – Reuters
CME Group Inc. and Thomson Reuters Corp. which recently snagged the rights to manage the daily silver fix, are widely tipped to take over responsibility for setting the daily price of gold price.

Gold Bulls Retreat as $1.6 Billion Erased From ETPs: Commodities
Megan Durisin and Lydia Mulvany – Bloomberg
Money managers trimmed bullish gold wagers for a third week, mirroring the retreat in prices that helped erase $1.6 billion from the value of bullion funds.

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