First Impressions

Chris Ferreri, Eight Point Strategies – Market Structure, Regulations and Tying it All Together

“I want you to think differently, all the time, when thinking about things, and look for parallels, because parallels help you understand things. We often speak in stories because people understand stories.”

Chris Ferreri, former head of e-commerce for ICAP and founder of Eight Point Strategies, is a master at taking complicated issues and breaking them down into pieces that can be readily understood. When at ICAP, Ferreri was tasked with explaining market structure to legislators and regulators as they crafted the rules related to the Dodd-Frank Act. In this MarketsWiki Education presentation, he explains the different modes of execution in fixed income markets in terms we can all understand – Zillow, Craigslist, Kelley Blue Book, and the used car salesman down the street.

Watch the video »

Quote of the Day

“The resolution of Ukraine’s debt saga looks like a great success for all parties involved. The IMF has changed the rules of the game as it desired. The bondholders will still do well. Ukraine got the necessary debt relief.”

Anders Aslund, an expert on Ukraine’s economy at the Atlantic Council think-tank in Washington, in the story, “Ukraine secures debt deal for war-ravaged economy”

Lead Stories

Margin Calls Bite Investors, Banks
Michael Wursthorn and AnnaMaria Andriotis – WSJ
Loans backed by investment portfolios have become a booming business for Wall Street brokerages. Now the bill is coming due—for both the banks and their clients.
Some lenders, including Bank of America Corp. , are issuing margin calls to clients after the global market drubbing of the past week, forcing investors to choose between either putting up more money or selling some of the securities underlying the loans.

BNY Mellon Is Still Having NAV Pricing Problems With Hundreds of Funds
Chris Dieterich – Barron’s
BNY Mellon (BK) continues to experience pricing problems with calculating net asset values for what appears to be hundreds of mutual and exchange-traded funds.
The issue cropped up over the weekend and impacted a “limited” but as yet unknown number of funds. The Wall Street Journal notes that 796 funds didn’t post NAVs on Wednesday. The problem relates to the SunGard, a financial software provider that works with BNY, a leading back-office services provider for the funds industry. BNY’s role is, in part, to do accounting for fund companies. Here are Reuters and WSJ stories on the subject.

Wall Street is for sale – but is it cheap?
Rodrigo Campos – Reuters
During more than a week of stock market sell-offs, investors have been exhorted to use declines to pick up bargains – and with a 7.7 percent drop on the S&P 500 since August 17, stocks have certainly gotten less expensive.
To determine how cheap they are, investment pros look at yields, earnings and more. By several of those metrics, the bottom line is this: U.S. stocks are not wildly expensive, but they are not the screaming bargains that might pull value-minded investors back into the market.

Money Pours Out of Emerging Markets at Rate Unseen Since Lehman
Elena Popina – Bloomberg Business
This week, investors relived a nightmare.
As markets from China to South Africa tumbled, they pulled $2.7 billion out of developing economies on Aug. 24. That matches a Sept. 17, 2008 exodus during the week Lehman Brothers went under. The collapse of the U.S. investment bank was a seminal moment in the timeline of the global financial crisis.

China market chaos blamed on exodus of regulatory ‘turtles’
Samuel Shen and Engen Tham – Reuters
At the height of the 2008 financial crisis, as Wall Street slashed jobs, Beijing took advantage of the disarray to poach top Chinese financial talent from overseas to help reform its stock markets.
By summer 2015, China’s Securities Regulatory Commission (CSRC) needed them more than ever; a year-long market boom had imploded in a few weeks, and the government was desperate to keep the crisis from widening.
But the best and brightest returnees, known in China as “sea turtles”, had already left for the private sector, disillusioned and disappointed.

China Doesn’t Look That Bad Compared With Past Market Meltdowns
Ye Xie and Belinda Cao – Bloomberg Business
Losing $5 trillion in China’s equity-market rout in just two months is bad. But measured by the intensity of the price swings, the selloff still fails to stand out among past market meltdowns.

Concern over waning use of covenants in debt markets
Kadhim Shubber – Financial Times
Just two or three beers will give most drinkers enough Dutch courage to take risks they would avoid sober. But after seven years at the Federal Reserve’s open bar, a lingering thirst for yield among lenders has stoked concern they are not taking out enough protection on the loans they make.
Covenants, which give lenders a level of control over corporate borrowers, have steadily weakened since the financial crisis, with certain investment grade loan protections at their weakest since 2006, according to Thomson Reuters LPC, when risky lending was at its height. Restraints on high yield bonds are loosening to an extent not seen in at least four years.

Malaysia’s Economy Faces Severe Strain
Joshua Kurlantzick – Council on Foreign Relations
Like any Southeast Asian economy whose trade with China is a major foundation of growth, Malaysia was bound to suffer as the Chinese economy staggered and Chinese stock markets plunged. Malaysia is China’s largest trading partner in Southeast Asia, and Malaysia-China two-way trade topped $100 billion in 2014.
But Malaysia now faces economic challenges far beyond the impact of the slowdown in the Chinese economy, as well as international investors’ apparent growing fear of emerging markets. Malaysia’s own stock market has plummeted this summer, and the Malaysian ringgit is reaching lows against the dollar not seen in nearly two decades—since the time of the Asian financial crisis.

Oil Industry Needs Half a Trillion Dollars to Endure Price Slump
Luca Casiraghi and Rakteem Katakey – Bloomberg
At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it.

China slowdown is latest threat to Abenomics
Robin Harding – Financial Times
As recently as 10 years ago, an economic slowdown in China would have caused barely a ripple in Japan.
At that time, most of Japan’s exports to China were components such as liquid crystal displays. They would be assembled into televisions at Japanese-owned factories and then re-exported. What mattered was demand in the final markets for consumer goods — in particular the US.

One of the Most Popular Doom Scenarios for the U.S. Economy Is Fizzling Out
Joe Weisenthal – Bloomberg Business
For years, politicians, gloomy newsletter writers, and even some economists have been warning that the U.S. is at the mercy of China, because China owns so much Treasury debt.
In 2010, a group called Citizens Against Government Waste made an infamous commercial called the Chinese Professor, in which a professor in Beijing in the year 2030 teaches his class about the demise of the U.S. because its government spent so much money and mortgaged the country’s future to the Chinese.

GDP Numbers Reveal Underlying Momentum, Possible Headwinds for U.S. Economy
Jeffrey Sparshott – WSJ
Consumer, business and government spending helped propel better-than-expected U.S. growth in the second quarter of the year, a hopeful sign for an economy buffeted by overseas turmoil and sharp gyrations in equity markets.
Gross domestic product, the broadest sum of goods and services produced across the economy, expanded at a 3.7% seasonally adjusted annual rate in the second quarter of 2015, the Commerce Department said Thursday, up from the initial estimate of 2.3% growth.

Bank Regulators Considering Concessions on Key Capital Rule
Silla Brush and Jesse Hamilton – Bloomberg Business
Wall Street is making headway in a campaign to persuade regulators to soften a key rule that has forced banks to boost capital since the financial crisis.

Everything you’ve heard about China’s stock market crash is wrong
Gwynn Guilford – Quartz
This week’s Chinese stock market implosion has been widely viewed as a reaction to the Chinese government’s devaluing the yuan on Aug. 11—a move many presume was a frenzied bid to lower export prices and strengthen the economy.
This interpretation doesn’t stand up to scrutiny. First, Chinese investors haven’t been investing based on how the economy is doing, but rather, based on what they think the government will do to prop up the market. The crash, termed “Black Monday,” was more likely a reaction to the central bank’s failure over the weekend to announce a widely expected cut to the bank reserve requirement since previous cuts in February and April had boosted stock prices. The government eventually caved and announced a cut on Tuesday (Aug. 25).

Ukraine secures debt deal for war-ravaged economy
Elaine Moore and Neil Buckley – Financial Times
Ukraine has secured an agreement to avert default and restructure billions of dollars of government debt as the war-ravaged country seeks to repair the damage wrought by the loss of Crimea and ongoing war against Russian-backed separatists.
A group of the country’s largest creditors, including US asset manager Franklin Templeton, have accepted an immediate 20 per cent write-off on $18bn of the embattled country’s bonds at a time when market turmoil triggered by fears for China’s economy has already wiped billions of dollars from emerging markets funds.

Central Banks

Bruising sell-off tests market faith in central banks
Lionel Laurent – Reuters
A bruising 48-hour sell-off in global stocks driven by fears of slowing growth has rocked market confidence in central bankers’ ability to fight deflation, restore economic health and keep a six-year-old bull run going.
With the market mood still fragile, central banks appeared on Wednesday to be singing from the same soothing hymn sheet: U.S. Federal Reserve official William Dudley said hiking interest rates next month seemed less appropriate, while a European Central Bank executive board member said the ECB was ready to act if needed.

ECB’s Coeure Says Monetary Policy Alone Won’t Bring Strong Growth
Todd Buell – WSJ
Europe cannot sit back and expect that cheap energy and an accommodative monetary policy alone will bring strong growth and low unemployment back to the currency bloc, said European Central Bank executive board member Benoit Coeure in remarks published Thursday.

Sweden’s monetary drama could turn noir
Julia Bradshaw – The Telegraph
Scandinavian countries are often held up as beacons of prosperity, shining examples of what modern, market-oriented economies should look like. But on the monetary policy front, Britain would do well not to follow Sweden’s lead.
Beneath the veneer of a calm, clean and fair society, Sweden follows a macroeconomic strategy that could potentially lead the country to disaster – yet the people in charge appear loath to do anything about it.
In April, Sweden’s central bank, the Riksbank, moved the base rate, known as the repo rate, into negative territory. At the same time, it announced its own version of quantitative easing.

First Ruhle: The Fed Blew Its Opportunity
Stephanie Ruhle – Bloomberg Business
The Federal Reserve has had many opportunities to raise rates over the last several years and—whether it was because of too many snowstorms, too few jobs, or not enough consumers hitting the malls—the Fed didn’t raise. Why? Because it didn’t have to. When the unemployment rate dropped to 7 percent in 2013 and 6.5 percent in 2014, many said this was enough cause to finally raise rates off the extraordinary zero bound. The Fed kept moving the goalposts and said: not just yet.

Too good to be true: What do economists really think of Corbynomics?
The Economist
With his promises to introduce a “maximum wage”, nationalise energy companies and even reopen coal mines, one might not expect Jeremy Corbyn to enjoy much support among economists, at least this side of Moscow. But the socialist MP, who looks likely to be elected leader of the Labour Party on September 12th, has been shoring up his economic credentials. His team has produced a letter from “leading economists” (including a former member of the Bank of England’s monetary-policy committee) backing his anti-austerity stance. Some of his less bombastic policies—including reforming the tax system and printing money to boost investment—sound plausible. Should people take Corbynomics more seriously?

Bonds Show Draghi’s Inflation Dilemma a Year After Jackson Hole
Lukanyo Mnyanda – Bloomberg Business
Mario Draghi’s speech at Jackson Hole last year was meant to be a turning point in the European Central Bank’s battle to boost inflation.
What the central bank chief didn’t count on was a collapse in commodity prices that has since pushed bond investors’ longer-term inflation expectations even lower than when he signaled a move toward quantitative easing.

China’s Central Bank Won’t Do Beijing’s Dirty Work
William Pesek – Bloomberg View
China’s Zhou Xiaochuan is either the smartest or most reckless central banker in the world.
Even after its fifth rate cut in nine months on Tuesday, the People’s Bank of China is running a monetary policy that’s too tight for an economy on the brink. The PBOC is grappling with weakening growth, excessive debt and a plunging equity market that’s wreaking havoc on household wealth, corporate profits and business confidence.
So why is Zhou still only offering monetary-baby steps over the shock-and-awe recently favored by Bank of Japan Governor Haruhiko Kuroda? It’s partly because he wants to prevent China’s central bank autonomy from being reduced to a hollow cliché. Zhou’s team — well aware that he has a control-obsessed Communist Party looking over his shoulder — wants to make sure President Xi Jinping does his part to restore China’s economy.

Core concern: Life keeps getting harder for Japan’s central bankers
The Economist
After two years of remission, Japan seems likely to sink back into the “chronic disease” of deflation, as Haruhiko Kuroda, the governor of the Bank of Japan (BoJ), calls it. New data are expected to show on August 28th that core CPI, the central bank’s preferred indicator of inflation, turned negative in July for the first time since the bank launched a big programme of quantitative easing (printing money to buy bonds) in April 2013 (see chart). At the time, it pledged to lift inflation to 2% in two years.

Three Ways Yellen Could Better Speak Her Mind on the Next Rate Hike
Craig Torres – Bloomberg Business
Monetary policy makers in the U.S. face some tough choices over the next few weeks as they consider the implications of slower Chinese growth that has convulsed financial markets. Investors are wondering how the Federal Open Market Committee is weighing options.

‘Inflation Dynamics’ With the Fed as Ringmaster
Seth Lipsky – WSJ
Step right up, folks. A three-ring circus on monetary policy is getting under way on Thursday at Jackson Hole, Wyo. Three conferences will be convening at the same time in the resort town, through Saturday, as the world waits for signs of whether the Federal Reserve will finally hike interest rates.


China devaluation stirs deflation fears
Laurence Mutkin – Financial Times
What is behind global financial markets’ extreme moves since China’s decision to allow its currency to move to a managed float? One explanation is that investors increasingly fear global disinflation is not a dragon that has been slain by muscular central bank measures, but a phoenix that is rising from the ashes.
Certainly, the direct impact of the renminbi fall on US and European inflation and economic activity — even if it extends to 10 per cent — is too small to justify the large falls seen in bond yields and inflation gauges.

Malaysia Turns to 1998 Currency Peg Architect as Markets Bleed
Y-Sing Liau and En Han Choong – Bloomberg Business
Prime Minister Najib Razak is taking a page out of the playbook of mentor-turned-nemesis, former premier Mahathir Mohamad. To stem a decline in confidence in Malaysia, he’s even tapping the expertise of Mahathir’s ringgit peg architect.

The bull case for EM FX
Farah Khalique – Euromoney magazine
China’s desperate response to its plunging stock market – devaluing its currency, slashing interest rates and pumping $100 billion of extra liquidity into the economy – has alarmed investors into pulling out of EM currencies and retreating to the US dollar.

Stiffer Capital Rules for Retail Currency Dealers Backed by CFTC
Silla Brush – Bloomberg Business
U.S. regulators moved to crack down on retail currency markets by endorsing rules that will boost capital requirements after Swiss franc losses left a leading brokerage needing a $300 million rescue earlier this year.
The Commodity Futures Trading Commission on Thursday backed steps meant to improve transparency and bolster resources of currency dealers when they face risks from overseas transactions. Two commission members said they would consider taking additional steps to rein in the market.

Bitcoin comes to Cuba. Could it help end the country’s crazy two-currency system?
Tim Fernholz – Quartz
The first reported bitcoin transactions between the US and Cuba mark the latest innovation brought to the island’s complicated economy, as the two countries normalize relations.
Fernando Villar, the Cuban-American founder of a group called BitcoinCuba, told Crypto-Currency News that he made the transaction this week using public wi-fi networks that Cuba’s socialist government has started installing in public parks.

Indexes & Index Products

Investors Threw $5 Billion at S&P 500 ETF in Wednesday’s Rally
Lu Wang – Bloomberg Business
Sensing a floor in equities or at least a bounce, clients of exchange-traded funds poured more than $5 billion into the largest stock ETF Wednesday, a sum equal to all the money they pulled out as shares plunged the previous week.

A New Computer Glitch is Rocking the Mutual Fund Industry; Outage is preventing dozens of mutual funds, ETFs from promptly pricing their securities
Kirsten Grind and Bradley Hope – WSJ
A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments.

China Doing What Greece Didn’t as Traders Give Up on Europe ETFs
Camila Russo – Bloomberg Business
All through the equity plunge that culminated in a bloodbath on Monday, exchange-traded funds tracking European equities held on to investments. That might be changing now.
The WisdomTree Europe Hedged Equity Fund and Vanguard FTSE Europe ETF both had their first withdrawals in months. Investors are capitulating as they start to question their bets that Europe’s stocks would rally with an economic recovery, according to Nicola Marinelli of Pentalpha Capital Ltd.

Forget Oil Glut and War. Water is Real Threat for Mideast
Sangwon Yoon – Bloomberg Business
It’s not talked about nearly as much as oil or Islamic State, yet lack of water is driving conflict and strife in the Middle East and North Africa.
The World Resources Institute released this week a water-stress index measuring competition and depletion of surface water. It shows which countries are most vulnerable to scarcity in 2040. Nearly half of the 33 countries that fall in the extremely high risk category are in the Middle East.

Stock-market rally still leaves S&P 500 $1.4 trillion in the red
William Watts – MarketWatch
Turnaround Tuesday came a day late for U.S. stocks. After a rally in Tuesday’s session fell apart in demoralizing fashion for bottom seekers, Wednesday’s late surge, propelling the S&P 500 and the Dow industrials to their biggest one-day percentage gains in nearly four years, changed the tune.

Peru Stock Tax Exemption to Help Keep MSCI Ranking, Segura Says
John Quigley – Bloomberg Business
Peru is taking steps to exempt more liquid stocks from capital gains tax to boost trading and avoid being reclassified as a frontier market by MSCI Inc., Finance Minister Alonso Segura said. The tax has affected trading volumes in a stock market hurt by a commodities slump and reduced appetite emerging market assets since 2012, Segura told lawmakers Wednesday.


Gold’s Chance of Acting as a Haven Is No Better Than a Coin Flip
Luzi-Ann Javier – Bloomberg Business
When markets melted down this week and volatility in equities surged, gold did exactly what it’s not supposed to do: it moved along with everything else, betraying its role as a haven.
To see how the metal failed to live up to its reputation as a safety asset, take a look at this chart. This shows an increasing correlation between the measure of U.S. equity market turbulence, the Chicago Board Options Exchange Volatility Index, or VIX, and the Gold VIX, which measures swings for bullion.

EPA Narrowly Avoided Fatalities in Gold King Mine Spill Blowout, Internal Review Finds
Zoe Schlanger – Newsweek
An internal review of the U.S. Environmental Protection Agency’s actions found that the agency failed to estimate the potential volume of toxic wastewater stored in the abandoned Gold King mine before beginning the work that eventually led to a 3 million gallon spill earlier this month. In a report released Wednesday, the EPA’s review team (made up of EPA personnel from across the agency) writes that the agency failed to test for pressure buildup at the mine and narrowly avoided the death of crew members during the event.
In addition, the review team was unable to find any existing guidelines or procedures for assessing highly pressurized buildup of waste inside mines such as Gold King.


Everyone Who Started Watching ‘Mad Money’ In 2005 Now Billionaires
The Onion – America’s Finest News Source
According to a report released this week by Forbes magazine, every person who has regularly watched CNBC’s financial program Mad Money since its 2005 premiere is now a multibillionaire.

How the Hell Is This JPG of Han Solo Worth $225?
Germain Lussier – io9
Would you spend almost $225 for a single digital image of Han Solo from the original Star Wars? For most people, the answer is obviously “No.” But many of us who are using the app Star Wars: Card Trader, from Topps, would kill to have that singular image in our collections. And some people will pay dearly for it.

Heard of China’s Fake Rolexes? Now There’s a Fake Goldman Sachs
Shai Oster – Bloomberg
China has been accused of pirating movies, handbags, Rolexes — even cars. Add Goldman Sachs to the list.

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