First Impressions

2016 Exchange CEO Series: LME’s Garry Jones Looking At More Metals, More Clearing and More China

Last year represented the first full year in which London Metal Exchange was under the Hong Kong Exchanges & Clearing umbrella. Now the exchange is looking forward to expanding through new products, users and via its relatively new clearing house, LME Clear.

The LME battled some major commodity headwinds in 2015, with metals prices falling anywhere from 25 to 45 percent, and many firms pulling out of the market due to risk concerns, mine closures and various mining and banking staff reductions. LME’s volumes dipped 4.3 percent in 2015 to 169 million, down from 177 million a year earlier.

“Against that background, we ended up doing pretty well,” said LME CEO Garry Jones, who spoke with JLN at the FIA Boca conference. “We changed our pricing schedule to a more commercial level, fully in-sourced all the technology, and had a full year of LME Clear.” Watch the video »
***DA: In case you missed any of this year’s CEO Series from Boca, here they are: CME’s Gill Looking For Customer Efficiencies, Part One and Part Two, Jeff Sprecher Talks Data, Clearing and Growth for ICE, LSE’s David Weisbrod Talks Clearing And Openness, Hong Kong’s Charles Li Looks To Keep Building Bridges To China, SGX’s Boon Chye Expanding With New Products, New Platform in 2016

Quote of the Day

“They appear to have grossly inflated the settlement amount for P.R. purposes to mislead the public, while in the fine print, enabling Goldman Sachs to pay 50 to 75 percent less. The problem all along, with all of these settlements — and this one highlights it even more — is that they are carefully crafted more to conceal than reveal to the American public what really happened here — and what the so-called penalty is.”

Dennis Kelleher, the founder of the advocacy organization Better Markets, in the story, “In Settlement’s Fine Print, Goldman May Save $1 Billion”

Lead Stories

IMF Warns of Global Stagnation as Growth Outlook Cut Again
Andrew Mayeda – Bloomberg
Fund sees world GDP expanding 3.2% in 2016, 3.5% in 2017
`There is no longer much room for error,’ chief economist says
A prolonged period of slow growth has left the global economy more exposed to negative shocks and raised the risk that the world will slide into stagnation, the IMF warned.

***SD: Two related stories from The Telegraph: The dire state of the global economy in six charts and There’s no room for mistakes if the global economy is in as much trouble as the IMF thinks. More on the IMF under “Central Banks.”

Documents Undercut U.S. Case for Taking Mortgage Giant Fannie Mae’s Profits
Gretchen Morgenson – NY Times
On a Friday in August 2012, the federal government changed the terms of its bailout of Fannie Mae and Freddie Mac, sending all the mortgage finance giants’ profits to the Treasury. The surprise decision prompted a lawsuit from shareholders, who argued that the collection of profits was an improper taking of private property without compensation. As the lawsuit proceeds through Federal Claims Court, documents unsealed in the case on Monday undermine an important defense made by the United States government. Lawyers for the Justice Department maintained early on in the litigation that Fannie and Freddie were in a death spiral and financially weak. Funneling all their profits to the Treasury was a way to protect taxpayers from future losses at the government-sponsored enterprises, the Justice Department said.

In Settlement’s Fine Print, Goldman May Save $1 Billion
Nathaniel Popper – NY Times
State and federal officials said on Monday that Goldman Sachs would pay $5.1 billion to settle accusations of wrongdoing before the financial crisis. But that is just on paper. Buried in the fine print are provisions that allow Goldman to pay hundreds of millions of dollars less — perhaps as much as $1 billion less — than that headline figure. And that is before the tax benefits of the deal are included.

****SD: Here’s a story about the settlement itself from Reuters: Goldman Sachs to pay $5 billion in U.S. Justice Dept mortgage bond pact. In some other Goldman news, Who Loses the Most From ‘Brexit’? Try Goldman Sachs

Clearing banks crushed by regulation – panel
Luke Jeffs – Futures & Options World
Some of Asia’s top clearing firms have echoed concerns in the US and Europe that bank regulation is making mandatory clearing commercially difficult for banks and forcing them to re-assess their clients’ businesses. A panel at the FOW Derivatives World Asia Hong Kong 2016 event on Tuesday said regulation such as the supplementary leverage ratio backed by the Basel Committee on Banking Regulation is making regional swaps clearing mandates hard to swallow.

J.P. Morgan Looks Into Cutting the Cord for Traders
Sarah Krouse and Emily Glazer – WSJ
After decades of transmitting trades by phone line, J.P. Morgan Chase & Co. is close to cutting the cord. The largest U.S. bank by assets said it is in discussions to move its worldwide trading systems to an Internet-based cloud computing service maintained by startup Cloud9 Technologies LLC. The New York bank lent money to Cloud9 last year, said Rick Smith, head of private investments at J.P. Morgan.

Wells Fargo Misjudged the Risks of Energy Financing
At its annual investor conference in San Francisco in May 2014, with oil trading at $102 a barrel, Wells Fargo & Co. boasted that in just two years it had almost doubled its energy exposure and seized the title of Wall Street’s top oil and gas banker. The timing couldn’t have been worse. Crude prices peaked a month later and have since plummeted to $40. Wells Fargo has downgraded 38 percent of its energy loans and set aside $1.2 billion to cover potential losses, according to company filings. The loans are coming under increasing scrutiny from regulators and investors, even though they make up only 2 percent of the bank’s portfolio.

****SD: Wells Fargo isn’t the only bank to do so; good thing misery loves company.

Comment: Time to reform deficient market structures
Rosa M. Abrantes-Metz – Financial Times
Regulators around the world have been investigating the manipulation of financial benchmarks for years now. While they will continue, we should also ask what can be done to deter and detect such conduct. It all started with Libor in 2008, followed by investigations into the rigging in foreign exchange, gold, silver, and swaps, among others. Whether manipulation of a financial benchmark, rate or price will occur depends on whether someone is willing and able to in effect move prices. The question of willingness is generally outside the control of authorities; it is just human nature. Where authorities and benchmark administrators can, however, influence the likelihood of manipulation and collusion is in the design and oversight of organisational structures, which reduce the possibilities for abuse.

Technology companies raise $1bn to challenge banks
Emma Dunkley – Financial Times
Technology companies raised almost $1bn of investment last year to compete with British banks, according to a new report. More than 90 per cent of the investment was going into financial technology companies that were direct challengers to traditional lenders, said Accenture, the consultancy firm.

****SD: And banks are shifting their fintech strategy

Central Banks

IMF Offers Latest Red Flag for Investors Concerned About the Global Economy
Min Zeng – WSJ
Investors beware. The International Monetary Fund just slashed its global growth forecast for the fourth time in a year, underscoring just how much policymakers around the world are struggling to get the economy back to a stronger footing, and offering another red flag for investors, who have shown signs of caution even as U.S. stocks have rebounded from February lows.

****SD: The Guardian provides some context: From boom to doom – the IMF paints a vastly different picture from 2006. Other risks talked about are, what do you know, Greece (from Reuters) and the potential for Brexit (from the Financial Times).

Two Fed bank presidents backed rate hike ahead of last meeting
The heads of two regional Federal Reserve banks supported a rate hike ahead of the Fed’s March meeting as an improving economy added to sentiment to tighten monetary policy. The heads of the Richmond and Kansas City Fed branches supported a quarter point hike in the main lending rates for banks “in light of continued improvements in labor market conditions and expectations that inflation would rise,” according to minutes of the Fed’s March discount rate meeting.

Negative rates are not the fault of central banks
Martin Wolf – Financial Times
Almost nine years after the west’s financial crisis started, interest rates remain ultra-low. Indeed, a quarter of the world economy now suffers negative interest rates. This condition is as worrying as the policies themselves are unpopular. Larry Fink, chief executive of BlackRock, the asset manager, argues that low rates prevent savers from getting the returns they need for retirement. As a result, they are forced to divert money from current spending into savings. Wolfgang Schäuble, Germany’s finance minister, has even put much of the blame for the rise of Alternative für Deutschland, a new nationalist party, on policies introduced by the European Central Bank.

German Angst Over ECB on Show as Schaeuble, Weidmann Disagree
Germany’s finance minister renewed his criticism of the European Central Bank as his country’s own monetary chief defended the institution’s independence, in the latest escalation of tensions over low interest rates in the region’s largest economy.

****SD: The Financial Times’ take: Bundesbank’s Weidmann rebukes Draghi critics in Berlin

Just Released: Introducing the FRBNY Nowcast
Liberty Street Economics
What is the weather today? You don’t need to be a meteorologist to answer this question. Just take a look outside the window. Macroeconomists do not have this luxury. The first official estimate of GDP this quarter will not be published until the end of July. In fact, we don’t even know what GDP was last quarter yet! But while we wait for these crucial data, we float in a sea of information on all aspects of the economy: employment, production, sales, inventories, you name it.

****SD: Reuters has the context: N.Y. Fed joins U.S. GDP forecasting game

Negative interest rates: battle lines drawn before IMF meetings
Financial Times
In less than two short years, negative interest rates have gone from being a subject for fireside speculation to a reality for nearly a quarter of the global economy. But as the world’s central bankers gather in Washington against a backdrop of lacklustre growth, there is a developing consensus that what until recently was a highly unconventional policy has been a qualified success, but is already reaching its limit. In a blog on Sunday, one of the International Monetary Fund’s top officials concluded that while negative rates have been helpful, “there are limits on how far and for how long negative policy rates can go”.

****SD: What else influencing the gathering? Check out Political Turmoil Leaves World Finance Heads in Policy Limbo from Bloomberg

Regional Fed banks should be public, says Yellen’s ex-advisor
A former top Federal Reserve policy advisor called Monday for the Fed’s 12 regional outposts to be made government entities, rather than owned, as they have been since their inception more than a century ago, by the banks they regulate.

Regulatory News

Ex-RBS Libor trader banned from the City
Tim Wallace – The Telegraph
A former banker at the Royal Bank of Scotland (RBS) has been banned from working in financial services after the City regulator said he manipulated Libor. Paul White fiddled the bank’s Japanese yen and Swiss franc Libor submissions to benefit colleagues’ trading positions, rather than reflecting the true rate at which RBS could borrow money, the Financial Conduct Authority (FCA) said.

Beijing trains gun on underground banks to check cash exodus
South China Morning Post
Beijing will intensify its crackdown on the country’s underground banking system to stem illegal capital outflows, as part of its efforts to keep the financial sector in order. State-level law-enforcement authorities and financial regulators are determined to root out illegal money transfers abroad that not only threaten China’s financial stability but also fuel criminal activities such as drug trafficking, terrorism and corruption, Zhang Shenghui, chief of inspection department at the State Administration of Foreign Exchange (SAFE), told state-owned Economic Information Daily.

CFTC Commissioner hails potential of distributed ledger tech for regulators
Policymakers and regulators should adopt a ‘do no harm’ approach to the use of blockchain technology in financial services, according to Commodity Futures Trading Commission (CFTC) Commissioner J Christopher Giancarlo, who also argues that the distributed ledger could be a boon for watchdogs by improving transparency.


Did the G20 agree a currency accord and does it matter?
David Keohane – Financial Times
The first question is whether there was a lovely new, but secret, currency accord agreed at the G20 in Shanghai in February. The answer is: Probably not.

Yen’s rise may mark limit for monetary policy
James Saft – Reuters
he sudden strength of the Japanese yen isn’t just a headache for Japan, it is an illustration that we may be reaching the limits of what monetary policy can accomplish. The yen has rocketed higher against the dollar in recent weeks, touching 17-month highs and having gained 11 percent since the Bank of Japan introduced negative interest rates in January.

****SD: Also, Bloomberg’s Strengthening Yen Leaves Kuroda Facing More Radical Options

Hedge Funds Abandoning Dollar’s Biggest Bull Run in a Generation
Lananh Nguyen and Rachel Evans – Bloomberg
Hedge funds are close to calling it quits on the dollar’s best run in a generation. Large speculators cut net bullish positions on the greenback to the lowest in almost two years last week. If they keep trimming at the current pace, those bets will be wiped out entirely by the end of the month. Currency options are signaling a less than one-in-four chance the greenback will extend its two-year, 25 percent surge against the euro in 2016, while against the yen the likelihood is less than one in 10.

What Is Driving the Mexican Peso?
S&P Dow Jones Indices
A few weeks ago, Dennis Badlyans wrote about Mexico’s Fixed Income Markets and made a performance comparison of the different currencies of emerging markets, which illustrated how the Mexican peso has been the worst performer among its peers in 2016. The question is, what is driving the depreciation of the currency?

Thomson Reuters spot FX volumes fall 21 pct in March
Daily spot trading volumes on currency trading platforms run by Thomson Reuters fell sharply in March, continuing the downward trend of recent months, according to figures the company published late on Monday.

ALGO UPDATE: Pragma Launches New SmartFix Algorithm
Traders News
Pragma Securities, a provider of algorithmic trading tools, has launched Pragma SmartFix. This is a new execution algorithm designed to improve average execution performance against the daily 4pm WM/Reuters foreign exchange benchmark fixing.

ECB Counts 500-Euro Cost Even as Cash Death Seen Exaggerated
Jill Ward – Bloomberg
The European Central Bank is studying the mechanics of scrapping the euro area’s largest denomination note, though it hasn’t yet made a decision. President Mario Draghi said in February that policy makers are examining the controversial 500-euro ($571) bill amid concern it aids criminal activity and terrorist financing.


Why do investors buy negative yield bonds?
Thomas Hale and Dan McCrum – Financial Times
Negative yielding debt is the most striking consequence of aggressive central bank policy. The amount of bonds with negative market interest rates is near $7tn and appears set to grow. Buying a bond with a negative yield, and holding it to maturity is a guaranteed way to lose money. So why would anyone do so?

ECB’s expanded QE ignites eurozone corporate debt market
Gavin Jackson – Financial Times
Figuring out how to spend EUR80bn a month is exactly the sort of problem most people would like to have, even if they would quickly run out of things they really wanted. The European Central Bank has made this problem a bit easier for itself. At the same time as the central bank announced an expansion in the size of the quantitative easing programme from EUR60bn to EUR80bn, it also increased the range of assets that it plans buying, including corporate bonds alongside government bonds, asset-backed securities and covered bonds.

As Muni-Bond Crises Build, Pensioner Wins Show Investors’ Peril
Romy Varghese – Bloomberg
Puerto Rico, Atlantic City and Chicago school district bondholders have reason to fear a fight in court if the ailing governments collapse financially: recent cases show that when municipalities go broke, investors lose when pitted against municipal retirees.

BlackRock Says Long-Term Treasuries Entice Amid Low Global Rates
Treasuries’ higher yields relative to debt of other developed nations make them more appealing at a time when low and negative global rates are forcing investors to buy longer-dated securities, according to BlackRock Inc.

Losses mount at fixed-income startup Algomi
Financial News
The London-headquartered company incurred losses of £8.8m in the 12 months to the end of June 2015. Since it was founded in 2012, the company’s total losses amount to £13.6 million, according to its latest accounts filed with Companies House. As of the end of June 2015, it had received capital of £23 million. Algomi, which won a Financial News award in 2014 for the most innovative trading product or service and was a joint winner of the same award the following year, is one of London’s most high-profile capital markets fintech startups. Backed by well-known venture capital firm Lakestar, in March it announced it had recruited the former chief executive of Thomson Reuters, Tom Glocer, as a strategic adviser and investor.

Indexes & Index Products

Is Index-Fund Investing Fueling Oil-Stock Woes?
John Kimelman – Barron’s
Though index funds have allowed many investors to access stock and bond markets on the cheap, they may also be generating some unintended negative consequences. I have touched upon this topic in previous columns. Many active investors have argued that index investing has created a large class of mindless capital that helps drive up values of assets that are not deserving of all those dollars.

Investors Return to Stock ETFs for Sixth Week
ETF Trends
Investors have stepped back into the U.S. market, picking up broad stock exchange traded funds for the sixth straight week. U.S. stock ETFs attracted $3.5 billion last week and saw their sixth straight week of net cash inflows, reports Trevor Hunnicutt for Reuters. “ETF investors have fueled the bull market since the end of February,” Jeff Tjornehoj, Lipper’s head of Americas research, told Reuters.

This Week’s ETF Launches: All About Hedging
One of cool things about ETFs is how they have evolved over the years. At first they were all about basic indexing. Now, issuers are adding all sorts of complex strategies and “extras” into their funds. One of the more popular strategies, thanks to the dollar’s continued rise, has been the area of currency hedging. The idea is to take the dollar, or whatever currency, out of the equation and provide “pure” returns absent of currency fluctuations. This week’s four launches take a look at currency hedging, providing a smart-beta twist.

Goldman Sachs and the ETF fee with an annual escape clause
Goldman Sachs made a big debut in the exchange-traded fund market with its recent introduction of smart beta portfolios. Goldman came in at such a low fee level that it put the existing fund managers on notice: Goldman was prepared to undercut the market to win in the intensely competitive ETF space.

New Hong Kong ETF will track the 35 largest companies with least exposure to China risk
South China Morning Post
French asset manager Amundi launched an exchange-traded fund (ETF) in Hong Kong on Tuesday, featuring low correlation to the mainland market. The Amundi Hang Seng HK 35 Index ETF is the first ETF product introduced by Amundi to the Hong Kong market, and is also the first ETF to track the Hang Seng HK 35 Index.


ICE Benchmark Administration Adds Industrial and Commercial Bank of China as a Direct Participant to IBA’s Gold Auction
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that the Industrial and Commercial Bank of China (ICBC) has been approved by ICE Benchmark Administration (IBA) to participate in the gold auction, which is used to determine the LBMA Gold Price, from May 16, 2016.

Gold investment demand in China spurs ETF inflows, new products
Ruby Lian and A. Ananthalakshmi – Reuters
Growing confidence in gold’s price rally is underpinning investment demand for the metal in top consumer China, driving inflows into bullion-backed funds and prompting financial institutions to launch new products in the country.

Biggest Gold Buyer In The World Is Back Again
For nearly six weeks, the global gold market has been missing its largest buyer. With gold purchases across the nation of India being paralyzed by a strike from national jewellers’ associations. But yesterday, local reports suggest that a return may now be at hand. India’s papers reported that many gold sellers reopened their doors on Monday. With as many as half of jewellery stores now back in action across the country. That comes after jewellers appear to have been waited out by the government — which has refused to back down on a proposed 1% sales tax on gold jewellery.

****SD: India might have a domestic means of addressing demand for gold if they can revive the Kolar mines (story from Quartz)

HSBC: Buy Gold!
Business Insider
HSBC technical analysts are bullish on gold. “The US dollar price of Gold is in an uptrend with a bullish Elliott Wave structure,” said Murray Gunn, HSBC’s head of technical analysis.


Deutsche Bank is latest business to protest North Carolina anti-LGBT law
The Guardian
Deutsche Bank became the latest business to scale back its plans in North Carolina on Tuesday, citing the state’s decision to invalidate existing protections of the rights of its lesbian, gay, bisexual and transgender citizens. The bank announced it will freeze plans to create 250 new jobs at its Cary, North Carolina location. The decision follows an announcement from PayPal that it has dropped plans to expand in the state, creating 400 new jobs.

Swiss banker whistleblower: CIA behind Panama Papers
Bradley Birkenfeld is the most significant financial whistleblower of all time, so you might think he’d be cheering on the disclosures in the new Panama Papers leaks. But today, Birkenfeld is raising questions about the source of the information that is shaking political regimes around the world.

****SD: Conspiracy theories!

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