First Impressions

Blue Horseshoe Loves this White Paper
Doug Ashburn, John Lothian News

Steven Schoenfeld had been an “index guy” for three decades. As a young man he was one of the guys who went to Singapore from the U.S. to trade the Nikkei on the SIMEX. Later, he was part of the team that designed the first investable emerging market index. He has held senior equity index management positions at Barclays and Northern Trust. Oh yeah, and he has also written and edited books on index investing.

His new firm, Blue Star Indexes, specializes in Israeli capital markets. Their flagship product, the Blue Star Israel Global Index (BIGI), is a broad-based benchmark for Israel’s booming market. The firm’s latest research paper, Asset Allocation to Israel, is subtitled “Strengthening your Portfolio by Including Israeli Global Equities.” It looks not just at the merits of the BIGI, but rather at how an allocation to BIGI would look in the context of an individual’s portfolio.

According to Schoenfeld, “Over the course of the past few years we have been educating investors on the merits of investing in Israeli equities and the exciting world-class companies that call Israel home or are deeply connected to Israel. But we have come to the realization that making a single-country equity allocation is complicated and sometimes even scary.”

The paper should remove some of that fear. In fact, I think it should be the blueprint for how alternative asset providers approach investors.

Read the White Paper (PDF) =>

Quote of the Day

Who wants an index fund that yields 2%? Investors want exposure to these high-yield and distressed securities and they’ve become comfortable with what we’re doing.

Jeffrey Gundlach, manager of DoubleLine Capital’s Total Return Bond Fund, in the WSJ story “New Fund Stars Ride Junk Bonds to the Top”

Lead Stories

New Fund Stars Ride Junk Bonds to the Top
A handful of managers have elbowed their way to the top of the bond-fund world by loading up on riskier debt. Among the 10 largest U.S. bond funds at the end of 2013, the four with the fastest growth in assets since 2008 held an average 20% of their investments in bonds rated below investment grade, also known as junk bonds, according to an analysis by The Wall Street Journal of data from Morningstar Inc. At the remaining six funds,…

***DA: And premium sellers have risen to the top of the heap in the managed funds world. One day these chickens will come home to roost.

Can Mr. Draghi Actually Do Anything About Inflation?
Alen Mattich – MoneyBeat – WSJ
Euro zone inflation has been on a relentless downward course. It’s got to the point where the European Central Bank’s policymakers, long dismissive of the notion that the single currency region could slip into Japan-style deflation, are worried enough to talk about what they’d intend to do to stop it happening on their patch.

***DA: Short term? Yes. Long term? Not so much.

Treasury yields will not stay low for long
Jamie Chisholm – Financial Times
Regular readers will be aware of the debate raging over why Treasury yields are so low while economic growth improves and stocks sit at new highs.

Disarm our doomsday machine
Martin Wolf – Financial Times
Are financial crises an inevitable feature of capitalism? Must the government rescue the system when huge crises occur? In his book Stress Test, Timothy Geithner, president of the Federal Reserve Bank of New York and US Treasury secretary during the 2007-09 crisis, answers “yes” to both questions. Yet these answers also harm the legitimacy of a market economy.

***DA: Martin Wolf is making razzberry noises at Geithner during his victory lap.

SEC reveals ‘two-pronged’ approach to policing notes
Yakob Peterseil –
A special unit of the SEC is using big data and industry experts to help it bring enforcement actions in the $50 billion registered structured notes market

***DA: So be good for goodness sake.

Pimco’s Bill Benz eyes UK pensions push
Andy Pearce – Financial News
Bill Benz, the new man in charge of Pimco’s London office, has insisted the “big picture” at the world’s largest bond manager is healthy as he prepares for an aggressive tilt at the UK pensions market.

The odds favour European QE, says Pimco’s Andrew Balls
Mike Foster – Financial News
Andrew Balls, deputy chief investment officer at bond manager Pimco, believes the odds are in favour of the European Central Bank introducing a quantitative easing programme similar to the bond purchases by central banks in the US and Japan.

McCulley Returns to Pimco as Gross Seeks to Restore Shine
Mary Childs – Bloomberg
In his previous incarnation as a money manager at Pacific Investment Management Co., Paul McCulley was known for a whimsical style in his commentaries that included imaginary question-and-answer sessions with his pet rabbit Morgan le Fay.

Nasdaq Goes to Light Speed With Treasuries Trading
Matthew Leising – Bloomberg
Nasdaq OMX Group Inc. is revving the engine of its ESpeed U.S. Treasuries platform.
Bond dealers that use ESpeed are gaining access to a microwave network connecting Nasdaq’s data center near New York City to a CME Group Inc. (CME) facility just outside Chicago, permitting almost light-speed buying and selling of U.S.debt. Nasdaq will also acknowledge receipt of traders’ orders more than 25 percent faster, and the exchange operator will speed up delivery of market data by more than 100 microseconds, or 100 millionths of a second, according to a statement today.

***DA: For background on the story, see my article from a few weeks back.

Economic Inclusion And Financial Integrity – An Address To The Conference On Inclusive Capitalism, By Christine Lagarde, Managing Director, International Monetary Fund, London, May 27, 2014

Central Banks

At ECB Conference, Krugman Attacks Inflation Target
Brian Blackstone – MoneyBeat – WSJ
Princeton economist Paul Krugman thinks that’s far too low. And he took his case Tuesday to the central bank where keeping inflation just under 2% is sacrosanct: the European Central Bank.

***DA: We are not doing enough to punish savers, apparently.

Draghi: ECB aware of risks from persistently low inflation
European Central Bank President Mario Draghi said on Tuesday the bank was aware of the risks from prices remaining too low for too long and the ECB was equipped to get inflation back to its target again.

ECB Says Search for Yield May Harm Financial Stability in Europe
Alessandro Speciale – Bloomberg
The European Central Bank said that financial stability in the euro area is at risk as investors step up their search for higher returns and weak economic growth weighs on banks’ balance sheets.
While “legacy” risks from the global financial crisis persist for both banks and sovereigns, new threats are emerging from “a continued global search for yield, which has left the financial system more vulnerable to an abrupt reversal of risk premia,” the ECB said in its semi-annual Financial Stability Review published today. Even so, “financial stress indicators have remained low and stable” over the past half year, it said.

RBC Plots Parallel Universe as Economists Hold On: Canada Credit
Cecile Gutscher and Catarina Saraiva – Bloomberg
Royal Bank of Canada (RY) credit analysts are contemplating an alternative reality to the interest-rate estimates of the nation’s biggest bond underwriter with yields lingering below official forecasts.
The lower-for-longer scenario was presented in a May 23 note to clients side by side with the bank’s higher-rate view, detailing how lower yields would help pipeline developers and hurt bonds of banks, life insurers and phone companies with large pension plans.

Minutes Of The Federal Reserve Board’s Discount Rates Meetings From April 14 Through April 28, 2014

Inclusive Capitalism: Creating A Sense Of The Systemic – Speech By Mark Carney, Governor Of The Bank Of England


FX trading shifts to disclosed platforms as volume falls
Joel Clark – Euromoney Magazine
Record low volatility in G10 currencies has driven down volume on large FX trading platforms, but a structural market shift is also pushing liquidity providers to quote prices to disclosed rather than anonymous platforms.

Pragma Pushes into Spot FX with New Platform Launch
Profit & Loss
Pragma, an independent specialist in algorithmic trading technology and analytical services, has announced its launch into the spot FX market with the release of its Pragma360 platform

Pragma Launches Spot FX Trading Tools
Jake Thomases – WatersTechnology
Pragma, a New York-based algo technology specialist, has released Pragma360, a suite of spot FX trading tools. Pragma360 includes algorithms, transaction cost analysis (TCA), smart order routing, risk controls, and an EMS front end.

Euro Looks Beyond Skeptics to Draghi: Chart of the Day
David Goodman and Anchalee Worrachate – Bloomberg
The success of euroskeptic parties in the weekend’s European Parliament elections has barely registered as a blip on the shared currency’s radar.
The CHART OF THE DAY shows that in the two days following the May 25 announcement of the voting results, the euro traded in a range that’s narrower than its six-month average, a sign that politics is less significant to the market than European Central Bank monetary policy. ECB officials meet next on June 5.

Fed effect vs Modi effect: the rupee-appreciation story
Garima Chitkara – Euromoney Magazine
After the rupee’s spirited rally in line with the ascent of newly installed Indian prime minister Narendra Modi, analysts say rising US yields could undercut the currency, while others claim strong equity inflows and an improvement in the current account suggest appreciation for the rest of the year.

Bitcoins to Survive Lull, Shake Industries, Wedbush Says
Olga Kharif – Bloomberg
Bitcoins, the virtual currency that fell by more than half after surging past $1,100 last year, are probably one to three years away from broader adoption that will challenge industries, Wedbush Securities Inc. analysts wrote.

Mt. Gox Operator Looks to Sell Bitcoin Trademarks
Takashi Mochizuki – MoneyBeat – WSJ
The holding company of collapsed virtual currency exchange Mt. Gox is looking to sell the trademarked word bitcoin, a company executive said.

China’s Yuan Hits Four-Week Low Against the Dollar
China’s yuan is resuming its slide, hitting a four-week low Wednesday against the dollar and sparking fears that the surprising slump this year that has taken it to levels last seen in 2012 may have further to go.

Silicon Valley’s rush to back Bitcoin services rouses concerns
Richard Waters in San Francisco – Financial Times
Silicon Valley is in danger of promoting a new wave of Bitcoin services for consumers and merchants before the digital currency is secure or stable enough for the mass market, according to some entrepreneurs and financiers working in the field.

Indexes & Index Products

Asia volatility indexes mirror pre-crisis market conditions
Justin Lee –
A lack of leverage in the system means the market correction should be less severe than during the financial crisis with central bank intervention the key factor


What’s Going On With Gold?
Brendan Conway – Barron’s
Gold’s price fell to a nearly four-month low Tuesday, but good luck getting strategists to agree on why. They just can’t.
To Deutsche Bank’s Jim Reid, the Tuesday gold selloff — which sent the most actively traded futures contract in New York down 2% — is about improving U.S. economic data. It’s also, per Reid, about less investor fear over Ukraine, even though reports of more than 50 rebels killed this week would seem downright fearful:

***DA: More motivated sellers than buyers. Case closed.

Ominous break in gold raises more questions
Nigam Arora – MarketWatch
Gold broke technical supports, shown on the chart, Tuesday, which could have important implications for the short term.
The break is ominous because the support that is now broken was a strong support characterized by a triple bottom.This triple bottom was formed at the end of a down trend that started in March.

***DA: Getting low enough to sell, apparently.

China Looking To Dominate Gold Market With International Shanghai Gold Exchange
Kitco News
Not only is China the world’s top gold-producing and consumer nation but according to media reports, the country now has plans to become a major player in market pricing.

Gold falls to 15-week low as US rebounds, tensions ease
Dow Jones
GOLD has fallen to its lowest level in 15 weeks as signs of improvement in the US economy and hopes of a more politically stable Ukraine dimmed investor appetite for the haven asset.

Gold Sinking as ETP Assets Drop to 2009 Low: Commodities
Debarati Roy – Bloomberg
After two months of treading water, gold prices are starting to sink. Futures in New York reached a 15-week low today after investors sent U.S. equities to a record high.

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