First Impressions

Ethan Kahn, Principal, Wolverine Trading, LLC – Exploring ETF’s

“It’s a very competitive market out there. Constantly innovating and constantly adapting is what makes opportunities occur.”

Ethan Kahn, principal at Wolverine Trading, gives an explanation of ETF’s and shows why the product has become popular over the years. Kahn discusses the differences between ETF’s and mutual funds, breaking down how much lower the costs of ETF’s are and how there is more buying and selling flexibility compared to mutual funds. Finally, Kahn explains the importance of innovation and adapting in the financial industry, telling his audience that constantly changing with the industry is key to staying competitive.

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Quote of the Day

“The ECB is likely to begin its purchase program in the covered bond space as it is unlikely to be able to do meaningful size in the ABS market. If the ECB wants a strong sentiment change by making large purchases it’s hard to do that in the secondary or new-issue ABS markets as there quite simply aren’t enough bonds.”

Gareth Davies, JP Morgan analyst in the story, “JPMorgan Sees Covered Bond Purchases as ECB’s First Port of Call”.

Lead Stories

JPMorgan Sees Covered Bond Purchases as ECB’s First Port of Call
Alastair Marsh – Bloomberg
The European Central Bank will start its asset-purchase program with covered bonds because large trades in the debt are easier than for asset-backed securities, according to JPMorgan Chase & Co. (JPM)
The new-issue market for covered notes is more active than for asset-backed debt and investors typically hold larger amounts than ABS buyers, JPMorgan analysts led by Gareth Davies wrote in a note to clients. With 791 billion euros ($1 trillion) of covered bonds outstanding, compared with 251 billion euros of ABS, the central bank will also find it easier to expand its balance sheet, Davies said.

PIMCO names Ivascyn as Gross successor
Dan Jones – Investment Week
PIMCO’s Dan Ivascyn has been named as Bill Gross’ successor following the legendary bond investor’s resignation, but three other managers will take over the $221bn Total Return Bond fund.

***DA: Soon to be the most powerful man you have never heard of.

Pimco’s Blunt Statement on Bill Gross: ‘Fundamental Differences’
Steven Russolillo – MoneyBeat – WSJ
Pacific Investment Management Co. minced few words in its explanation of co-founder Bill Gross’s departure, saying Mr. Gross and the firm had “fundamental differences” about Pimco’s future.

Global Junk Bonds Under Pressure as Investors Avoid Risk
Junk bond buyers around the world are getting anxious, with geopolitical risks and the threat of a U.S. interest-rate increase pushing them toward safer assets.
The average premium demanded to hold high-yield notes instead of investment-grade bonds soared to the most since July 2013, according to Bank of America Merrill Lynch index data. The difference widened 68 basis points in the past month to 3.56 percent, the data show.

***DA: It’s about time.

Pimco Employees React: ‘We Didn’t See It Coming’
Alexandra Berzon – MoneyBeat – WSJ
In the hours after Bill Gross announced he was leaving Pacific Investment Management Co., employees outside the company’s headquarters in this seaside city said they were shocked by the sudden departure of their company’s co-founder.

***DA: And we are supposed to believe they will see the turn of the interest rate market when it happens?

After a life of trend spotting, Bill Gross missed the big shift
Gillian Tett – Financial Times
The power of the bond market has long frustrated the ambitions of politicians, a resentment famously captured by James Carville in the early 1990s. The Clinton adviser’s remark that he would like to be reincarnated as the bond market so “you can intimidate everyone” – especially governments – resonated for years.

Questions About Bill Gross’ Big Holdings in Pimco Closed-End Funds
Chris Dieterich – MoneyBeat – WSJ
Bill Gross is leaving Pacific Investment Management Co., but will he sever all ties to the fund manager? Not only did Mr. Gross run the world’s biggest bond fund, he was also the largest shareholder of Pimco’s closed-end funds.

A Who’s Who of Pimco’s CIO Shuffle – MoneyBeat
Sarah Krouse, Andy Pearce and Joe McGrath – MoneyBeat – WSJ
The wait is over – Pacific Investment Management Co. has named a successor to Bill Gross, promoting firm veteran Daniel Ivascyn to group chief investment officer. And in case there haven’t been enough CIO titles flying around Pimco this year, the firm has also made additional changes to its top bench of talent. Five leaders who previously held deputy CIO titles are now CIOs of specific business lines.

“Do we need to fire Pimco?”
Joshua M Brown – The Reformed Broker
This weekend, thousands of institutional investors, financial advisors and wealth managers are faced with one of the most uncomfortable questions imaginable: Do we need to fire Pimco?

Pimco sees $10 billion in withdrawals after Gross exit: WSJ
Bill Gross’s exit from the investment firm Pimco had an immediate impact on the company, with investors withdrawing about $10 billion following the announcement, the Wall Street Journal reported, citing a person familiar with the matter.

CoCo Reliance Soars as Nordic Banks Flock to Riskiest Bonds
Charles Daly and Frances Schwartzkopff – Bloomberg
The riskiest bank debt is becoming a mainstay among Europe’s safest lenders. Svenska Handelsbanken AB last week became the latest Scandinavian bank to add additional Tier 1 capital — a form of loss-absorbing debt — to its issuance plan.

Credit-linked notes return to Asia, with added CDSs
Richard Jory –
Private banks in Singapore and Hong Kong are offering their investors credit-linked structured notes issued by special purpose vehicles that include credit default swaps. Issuers and private bankers suggest they are not complex, as long as they are sold properly

Judge Grants Temporary Stay in Argentina Default Case
Alexandra Stevenson – Dealbook – NY Times
A group of New York hedge funds that sued Argentina is now asking a New York court to lower the temperature a little on the long-running and acrimonious dispute.

Putin Ready to Borrow Above 9% Amid Bonds’ Worst Quarter
Vladimir Kuznetsov – Bloomberg
After shunning bond auctions for nine weeks amid the worst quarter for ruble debt since 2011, Russia indicated it’s prepared to borrow at more than 9 percent for the first time in almost five years.
In its first auction since July 16, the Finance Ministry sold all 10 billion rubles ($262 million) of August 2023 notes on offer to a single bidder on Sept. 24 at an average yield of 9.37 percent. Current yields are “acceptable” and the finance ministry plans to fulfill this year’s bond sale plan, it said in an e-mailed response to questions on Sept. 26.

***DA: If this keeps up, Putin will have to resort to borrowing from the Russian mafia loan sharks.

Central Banks

New York Fed rejects claims of being too soft on Goldman Sachs
Gina Chon in Washington and Tom Braithwaite in New York – Financial Times
The Federal Reserve Bank of New York strongly rejected allegations that it was too soft on Goldman Sachs in a transaction involving Banco Santander, after secret recordings of officials at the agency discussing the deal were made public on Friday.

***DA: What about when the firm was made whole on their AIG exposure a few years back? It doesn’t get much softer than that.

Rewriting History Seen Emboldening BOE Rate Hawks
Scott Hamilton – Bloomberg
A rewriting of U.K. economic history this week may strengthen the case for Bank of England policy makers to begin raising interest rates from a record low.
The Office for National Statistics will publish revised growth data since 2007 alongside its third estimate of second-quarter gross domestic product tomorrow. Previously published changes up to 2012 indicated Britain had a shallower recession and recovered more strongly than initially estimated.

While ECB struggles, Fed sees recovery
William Schomberg – Reuters
On one side of the Atlantic they’re trying to refill the punchbowl. On the other they’re getting ready to take it away. This week, investors may get a clearer idea why.

It’s Mario Draghi’s Next Big Show
MoneyBeat – WSJ
It’s all eyes to Frankfurt. Next Thursday, European Central Bank President Mario Draghi gets his next big gig in the spotlight, and in light of Europe’s continuing weakness, everyone will be watching.

Draghi Devaluing Euro Cheers ECB as Inflation Seen Fading
Stefan Riecher and Alessandro Speciale – Bloomberg
Mario Draghi’s strategy for reviving the euro area looks like devaluation.
While the European Central Bank president says the exchange rate isn’t a policy target, officials aren’t secretive about their approval of the currency’s almost 10 percent slide. The depreciation increases the cost of imports and boosts exporters’ competitiveness, aiding the effort to revive inflation that data tomorrow will probably show is the weakest since 2009. A gauge of economic confidence published today slipped to the lowest since November.


Yuan-Euro Direct Trading Permitted by China Central Bank
China’s central bank said Monday that it will allow direct trading between the yuan and the euro in the interbank market for the first time, a major step in increasing trade and investment ties between the country and the European Union.

RPT GLOBAL MARKETS-Dollar currency of choice; Hong Kong unrest hits stocks
Marius Zaharia – Reuters
The dollar hit its highest in almost two years against the euro, with German inflation data expected to keep pressure on the ECB to ease monetary policy. Unrest in Hong Kong hurt Asian-exposed European shares.

Clobbering the Kiwi
Katie Martin – MoneyBeat – WSJ
The decline and fall of the New Zealand dollar is picking up speed by the day. Monday, the currency lurched to its lowest point in over a year after it turned out that the central bank had been selling it in large amounts in August.

Interactive: Track China’s currency
Emily Cadman, Steve Bernard, and Martin Stabe – Financial Times
This interactive graphic explores how China’s real and nominal exchange rates against its main trading partners have fluctuated over time using data constructed by Eswar Prasad, professor at Cornell University and a senior fellow at the Brookings Institution.

Trade body established to represent FX market
Jon Watkins – The Trade
A new foreign exchange trade association has been set up to tackle global regulations set to transform the market in the coming years. Based in Washington DC, the Foreign Exchange Professionals Association (FXPA) will be led by Adam Cooper, senior managing director and chief legal officer of Citadel.

Indexes & Index Products

Can the Major Indices Hold Above This Critical Line?
Sam Collins – InvestorPlace
The major indices rallied sharply Friday but registered losses for the week, which is common on the week following Q3 triple witching options expiration. Volatility was very high.
Dow component Nike (NKE) jumped 12.2% after reporting better-than-expected earnings. Micron Technology (MU) rose 6.7% after beating revenue expectations, and Apple (AAPL) gained 2.9% following a sharp loss on Thursday.


London Gold, Silver And Other Benchmarks To Get Libor Style Regulation
Tim Worstall – Forbes
The British government has announced that various of the London price benchmarks are to get the same sort o0f regulatory treatment that Libor has recently received. On the grounds that as one or more of these benchmark prices seem to have been manipulated, as Libor was, then the same sort of protections should be offered:

Gold prices sneak higher ahead of busy week of economic data
Shawn Langlois – MarketWatch
Gold bugs on Monday enjoyed a slight respite from all the declines, but they could be in for another rough week if the next batch of economic numbers, notably the jobs report at the end of the week, shows further improvement.

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