First Impressions

The Euro: German or Italian?
Today’s lead story sums up the age-old question – what is the euro and what does it stand for? Getting a solid answer is critical to determining the direction of the common currency.

The Wall Street Journal’s Simon Nixon asks, “will the euro be a strong currency underpinned by credible rules and self-reliant states with any burden-sharing subject to strict conditions and pooling of sovereignty? Or will it be a weak currency, reliant on periodic episodes of devaluation and inflation to restore competitiveness and sustained by fiscal transfers whether introduced formally or by stealth?”

In other words, does the euro wish to be a reserve currency like the dollar, or an emerging market currency like those of South America?

Quote of the Day

Fear is back. Today’s ZEW sends a worrying signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend.

Carsten Brzeski, economist at ING, as quoted in the FT story “Data reveal further chinks in eurozone’s recovery”

Lead Stories

Italy’s Problem Is Europe’s Problem
Wall Street Journal
The euro crisis was never really about the survival of the single currency. Once the costs and consequences of a break-up were properly understood, a collapse was never likely. Instead, the real question has always been whether the euro survives on German or Italian terms.
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EXCLUSIVE-Life after Pimco: how bond manager Seidner beat his old boss Gross
Jennifer Ablan – Reuters
Marc Seidner, who left Pimco earlier this year just as the fixed income powerhouse was about to be roiled by internal strife, is beating his old boss Bill Gross at a game Gross used to dominate: calling the bond market.
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***DA: When I left you I was but the learner, now I am the master.

Banks Retreat From Market That Keeps Cash Flowing
Ryan Tracy – WSJ
A critical part of the plumbing that keeps money flowing through the financial system is experiencing turmoil as new regulations prompt banks to step back from the multitrillion-dollar “repo” market. The large and opaque market for repurchase agreements helps keep finance and trading moving, allowing hedge funds, investment banks and other financial firms to borrow and lend short-term funds, often overnight.
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***DA: Is this a game of “regulatory chicken” or is it a sign of the fear creeping into the financial system?

Junk Bonds Gain Favor as Europe’s Banks Reduce Lending
JENNY ANDERSON – Dealbook – NY Times
Bruce Mackenzie and Toby Ali were young bankers in the late 1990s, traversing Europe to pitch the merits of high-yield securities, otherwise known as junk bonds, to chief executives. The corporate chieftains mostly said no.
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Data reveal further chinks in eurozone’s recovery
Claire Jones in Frankfurt – Financial Times
Further chinks in the eurozone’s recovery emerged on Tuesday, as official figures showed Portugal sank into a deeper deflation last month and a closely watched poll of German economic sentiment fell by the most in more than two years.
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Japan GDP plunges 7% after sales tax hike
Alasdair Pal – Investment Week
Japan’s GDP shrunk by 6.8% on an annualised basis in the second quarter following a hike in the country’s sales tax.
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***DA: Ouch.

Central Banks

Grand Central: Fed’s Fischer Keeping Options on the Table for Next Bubble – Real Time Economics
WSJ
The Federal Reserve isn’t worried about financial bubbles disturbing the economy right now. If it becomes worried about bubbles, then its new vice chairman, Stanley Fischer, sounds like an individual who will want to keep his options open in a search for tools to deal with the problem. Interest rates hikes, in some circumstances, might be needed to tame a boom, he says.
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***DA: Might?!?

Japan’s Quantitative Confusion
Aaron Back – MoneyBeat – WSJ
Japan’s dreadful second-quarter GDP raises the specter of additional central-bank action. Yet the Bank of Japan says its already massive monetary stimulus is open-ended. Then why do analysts think the bank needs to clarify its intentions soon? One reason might be a BOJ table that forecasts the size of its balance sheet. It only goes to the end of this year.
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Bank of England Signals Rate Hike in Early 2015 if Wage Growth Picks Up
Jason Douglas And Paul Hannon – WSJ
The Bank of England signaled Wednesday that it remains on course to raise interest rates early next year, provided wage growth in the U.K. picks up.
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***DA: If wage growth does not pick up, the London property market will need to readjust.

Currencies

Banking Lobby Backs Stricter Codes of Conduct for Currency Traders
Katie Martin – WSJ
A lobby group for the biggest banks in the foreign-exchange market is backing tougher codes of conduct for traders, while seeking a cautious approach to tweaking currency benchmarks that are at the center of a yearlong regulatory investigation.
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The U.S. Should Help Lower the Euro
Bloomberg View
Europe is in a dilemma, caught between its geopolitical obligation to impose meaningful economic sanctions against Russia and its domestic obligation to counter low inflation and slack economic activity. The first duty should put upward pressure on the euro, while the second requires the currency to fall in the foreign exchanges. Meanwhile, Russian President Vladimir Putin is hoping that Europe’s current domestic economic difficulties will cause it to back off sanctions.
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BitBeat: Ratings Firm Coinist Tackles Trust Problem with Bitcoin 2.0 Projects
MoneyBeat – WSJ
So-called Bitcoin 2.0 technologies – those bitcoin-inspired software applications that bypass financial middlemen and allow almost any asset to be digitized and traded over a decentralized computer network – are encouraging an explosion in new digital currencies, tokens and crypto-securities. The problem for investors is that this proliferation of “alt-coins” raises a dilemma that bitcoin and its imitators were supposed to overcome: who do you trust?
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Caution regarding on-line trading platforms
The Autorité des marchés financiers (the “AMF”) is cautioning Québec investors about the use of Internet-based trading platforms, primarily in the currency markets (also known as FOREX), and the use of binary options.
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Ukraine currency at record low to dollar
Thomas Hale in London – Financial Times
Ukraine’s currency hit its weakest level against the dollar on Tuesday after Moscow said 280 Russian relief trucks would enter the country.
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With Euro Bears This Rabid, Pimco Says Shorts a Risk
Anchalee Worrachate – Bloomberg
Sentiment in the foreign-exchange market is so bearish toward the euro that it’s bullish.
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***DA: Flush out the weak hands, then head lower?

Indexes & Index Products

BOJ Steps Up ETF Purchases as Shares Slump
Megumi Fujikawa – WSJ
As Tokyo shares fall back from their recent highs, the Bank of Japan has been significantly stepping up its purchases of domestic exchange traded funds.
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SEC Has Launched Examination of Alternative Mutual Funds
Juliet Chung and Kirsten Grind – WSJ
The Securities and Exchange Commission has launched a broad examination of alternative mutual funds, according to people familiar with the matter, kicking off regulatory scrutiny of one of the hottest and most controversial investment products to be offered to small investors.
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Rimes Adds Dow Jones Commodity Index
Max Bowie – WatersTechnology
Benchmark index and economic data provider Rimes Technologies has added Dow Jones’ Commodity Index series to its Benchmark Data Service, providing buy-side clients with processed and validated access to the data.
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Gold

LME Clear passes key legal hurdle to launch
Luke Jeffs – Futures & Options World
The London Metal Exchange has cleared the penultimate regulatory hurdle ahead of the planned launch of its first clearing house next month.
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Banks wait on sidelines of new silver benchmark
Neil Hume, Commodities Editor – Financial Times
Build it and they will come. Or that is what participants in London’s $1.6tn-a-year silver market will be hoping. There are just three trading days before the new, electronic replacement for the 117-year old silver fix goes live and there is still considerable uncertainty over who will be participating on Friday.
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