First Impressions

Throwing Good Schillings after Bad
Doug Ashburn – John Lothian News

Perhaps the most interesting story of the day comes from tiny Rhode Island, where a case of a good opportunity-gone-bad provides a cautionary tale of investment risk and the cost of default. And, to add an additional level of interest, former major League Baseball great Curt Schilling is thrown in.

In 2010, Rhode Island floated $75 million in bonds to attract Schilling’s video game company, 38 Studios, Inc., into relocating to Rhode Island from Massachusetts. #8 Studios folded soon after the release of its first game in 2012, but the bonds and bond payments linger, and have become a political sore spot for Rhode Island. According to a Wall Street Journal story, this puts the state between a rock and a hard place, as it must either continue to pull together the funds to pay the bondholders, or risk a credit event that could pull the state’s credit rating into junk territory.

I plan to watch this story closely as it unfolds. Not because Schilling dominated both Chicago baseball franchises during his career, but because it is a story that touches both sides of a critical issue among states – funding and investment. States employ all sorts of tactics in order to lure companies to relocate, with the understanding that the resultant job and tax revenue growth will be greater than the cost of the incentives. In many cases, the math simply does not work out, but the costs must still be paid. But in the cutthroat world of firm-poaching by states, as Rhode Island digs deeper to pay these legacy costs, it becomes vulnerable to having its firms seek incentives elsewhere.

While I have no idea how this situation will work itself out, if Rhode Island should choose the default route, other states and municipalities will be watching to see just how punitive the market will be. Play ball!

Quote of the Day

A decision to walk away will be seen as reneging on the state’s commitments, and therefore will affect the market’s view of the state’s willingness to pay all of its obligations, including general obligation bonds.

From a report by Minneapolis-based SJ Advisors, as quoted in the WSJ story “Rhode Island Faces Curt Schilling Conundrum on Bonds”

Lead Stories

Once Europe’s lead preacher of budget prudence, Finland loses righteousness
Vesa Vihavainen is worried. Merivaara, his Finnish-based hospital bed-making business, is struggling – just like the economy that Finns once held up to debt-laden Greeks as a model of what national thrift can achieve.

***DA: Don’t let the intro fool you. This is not a story about the failure of austerity. It is about the inability to maintain both a welfare state and a competitive export economy amid a highly-valued currency.

Fed to start liquidity draining tests
Michael Mackenzie in New York –
The Federal Reserve is beefing up its tools for implementing interest rate increases, including a new approach that will probably appeal to domestic and foreign banks with large deposits in the US.

***DA: Trial balloons, not being floated, but rather being slowly deflated.

Experts broadly positive on global recovery but warn risks remain
Martin Wolf –
What does the world economy hold in store? Looking into their crystal balls at the Business of Luxury Summit in Mexico City are Willem Buiter, chief economist of Citigroup, and Guillermo Ortiz Martínez, former governor of the Mexican central bank.

How the euro was saved – FT series
To the astonishment of almost everyone in the room, Angela Merkel began to cry. “Das ist nicht fair.” That is not fair, the German chancellor said angrily, tears welling in her eyes. “Ich bringe mich nicht selbst um.” I am not going to commit suicide. For those who witnessed the breakdown in a small conference room in the French seaside resort of Cannes, it was shocking enough to watch Europe’s most powerful and emotionally controlled leader brought to tears.

***DA: For the time being.

Rhode Island Faces Curt Schilling Conundrum on Bonds
Aaron Kuriloff – MoneyBeat – WSJ
Bonds tied to Curt Schilling’s bankrupt video game company are all that stand between Rhode Island and a downgrade to junk status, according to a report released by the state’s Division of Administration.

***DA: Rhode Island swings and misses on a hard slider.

Mervyn King Reviews Thomas Piketty
Tim Worstall – Forbes
Mervyn King*, the former Governor of the Bank of England, has added his take to the ever growing pile of reviews of Thomas Piketty’s Capital in the 21 st Century. And I think it’s fair to summarise the review as being that the book contains a great deal of excellent research but the conclusions drawn from it could do with a little more work.

***DA: Quite right. The British aristocracy is rather fond of inter-generational wealth transfer.

Japanese Dump Most Euro Bonds on Record Amid Ukraine Tension
Mariko Ishikawa and Masaki Kondo – Bloomberg
Japanese investors sold a record amount of euro-denominated long and medium-term bonds in March, Ministry of Finance data showed today.

***DA: Hot potato, Part 1.

Pimco Total Return cuts mortgages securities to near 4-yr low
The Pimco Total Return Fund, the world’s largest bond fund, cut its holdings of U.S. mortgage securities for a third straight month in April to its lowest level since July 2010 on continued bets that the Federal Reserve will conclude bond purchases this year, data from the firm’s website showed on Friday.

***DA: Hot potato, Part 2.

Japan Current Account Surplus Smallest on Record
Japan posted its smallest current account surplus on record in the fiscal year that ended in March as structural changes in the economy undermine Prime Minister Shinzo Abe’s efforts to achieve growth through exports.

Draghi performs another euro conjuring trick
Ralph Atkins in London –
For a few minutes on Thursday, Mario Draghi, the European Central Bank’s president, lost his mesmerising grip over financial markets.

Central Banks

ECB Action: ‘Everything Is Possible….It’s All on the Table’
Josie Cox – MoneyBeat – WSJ
An ECB rate cut in June is a sure thing, right? Mario Draghi promised! Well, not quite.

Soft Data Build Mr. Draghi’s Case
MoneyBeat – WSJ
There’s been a trickle of soft data from euro-zone countries. The numbers may just be a blip, reflecting temporary anxiety about the Ukraine crisis. And so far they haven’t been confirmed by forward looking surveys.

China to avoid big economic stimulus: central bank chief
China will not use any large-scale stimulus to boost its economy, Central Bank Chief Zhou Xiaochuan was reported as saying on Saturday, in response to speculation that authorities might lower reserve requirements for banks to spur growth.

***DA: One thing China likes is reserves. Reserves are a buffer when one is needed.

China should straighten out its wealth managers, says central bank
China should reorganize its wealth management industry as it is unduly raising funding costs and encouraging savers to behave like gamblers by chasing after lucrative short-term returns, a deputy governor of China’s central bank said on Saturday.

Weak Japan exports, not tax hike, could shake BOJ into action
The Bank of Japan is increasingly confident that the economy is weathering a recent tax increase and is on its way out of deflation, but another threat to that optimistic scenario is lurking – weak exports.

***DA: Pushing on a string.

Stevens Seen Taking on Good Cop Role at RBA
Michael Heath – Bloomberg
For the first time in 7 1/2 years at the helm of Australia’s central bank, Glenn Stevens is playing good cop as the nation’s treasurer turns villain.


Industry to meet regulators on FX options clearing plans
FX Week
Industry utility CLS, central counterparties and trade bodies will meet with global regulators and supervisors in June in a bid to continue discussions on establishing a viable framework for clearing physically settled FX options. Market participants and regulators have been trying to come up with a solution to moving physically settled over-the-counter FX options into central clearing, without incurring a same-day liquidity shortfall of potentially as much as $161 billion in a stress event, or other unintended consequence, such as disrupting the global payments system.

***DA: Count CLS among the parties concerned about systemic risk having shifted to clearing houses.

Currency derivatives turnover on bourses drops 23% in FY14
Business Standard
Total turnover in currency derivatives trading of three bourses in India dropped nearly 23% to Rs 67.36 lakh crore in the last fiscal, a period that saw capital market regulator Sebi tightening exposure limits in the segment.

Implied vs Realised Volatility
Jessica James and Jonathan Fullwood – FOW
It is used to predict spot changes. It is used to predict volatility changes. Folk even do technical analysis on it. We lost count of the times that we were asked, when visiting a client, ‘What have you got on implied-to-realised vol spread as a predictor?’

***DA: A better question is why realized volatility contracts have never caught on with investors and hedgers.

Russians ditch rouble en masse, data shows
Russians ditched the rouble in March at the fastest pace in more than four years, official data showed, as the currency was hit by fallout from the worst standoff with the West since the Cold War over Ukraine.

Bitcoin Investments Are Risky, Whether or Not You Believe
Paul Vigna – MoneyBeat – WSJ
The SEC’s investor alert this week on bitcoin and cryptocurrencies was a lot of boilerplate to MarketWatch’s Chuck Jaffe, but it come with one “interesting exception,” he said.

BitBeat: Bobby Lee, Brock Pierce Elected to Bitcoin Foundation Board
MoneyBeat – WSJ
China’s bitcoin community now has a seat at the table of the Bitcoin Foundation. Bobby Lee, CEO of digital-currency exchange BTC China, was elected to one of two vacant seats on the Foundation after a three-way run-off vote concluded late Thursday.

Indexes & Index Products

Deutsche ETP unit eyes US passive assets
Sarah Krouse – Financial News
Deutsche Asset & Wealth Management, Europe’s second-largest exchange-traded product provider, is making a push for assets in the US, bulking up its sales staff and plotting its growth strategy in a market where it ranks 12th.


Gold Bulls Bet Wrong on Fed Easing: Commodities
Elizabeth Campbell – Bloomberg
Gold speculators misjudged prices for a second consecutive week as the prospect of less stimulus from the Federal Reserve pushed futures lower.

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