First Impressions

Index Evolution: Guillermo Cano Looks at the New Generation of Equity Indexes

Equity indexes have come a long way over the past few decades, says Guillermo Cano of Russell Indexes.

While market cap-weighted indexes still capture the lion’s share of volume, new investment choices include such things as sector weighting, factor modeling and so-called “smart beta ” which aims to blend active and passive investing.

Watch the video »



MarketsWiki World of Opportunity Summer Intern Series Goes to London

John Lothian & Co. is pleased to announce the MarketsWiki World of Opportunity Summer Intern Education Series is coming to London on July 1st and 2nd, 2014 with the generous support of the CME Group.

***JK: For employers with interns, please contact John to get them on the list. It’s a great event, and great for your interns’ brains. John can be emailed at:


Quote of the Day

“I don’t expect the consensus to be right, I’m just surprised by how wrong it has been.”

Jim Bianco, president of Chicago-based Bianco Research LLC on bond price models in Bloomberg’s piece: “Unstoppable $100 Trillion Bond Market Renders Models Useless.”

Lead Stories

Osborne plans tougher oversight of forex markets
Sam Fleming – FT
George Osborne, the Chancellor of the Exchequer, is set to announce tougher oversight of foreign exchange dealing within weeks, as the UK attempts to demonstrate that it is getting to grips with the series of scandals that have hit the financial markets.

Unstoppable $100 Trillion Bond Market Renders Models Useless
Susanne Walker and Liz Capo McCormick – Bloomberg
If the insatiable demand for bonds has upended the models you use to value them, you’re not alone.

**JK – Who hasn’t broken their brother’s model airplane, car or boat? They can always be fixed with a little or a lot of smelly glue.

Complacency Everywhere
Attain Capital
Josh Brown had a quick little post this week about the comparisons with the 2007 market highs which summarized the current volatility environment quite nicely: “To recap – Volatility is nowhere to be found – not in currencies, in fixed income or in equities. Complacency rules the day as investors and institutions gradually add more risk, using leverage and increasingly exotic vehicles to reach for diminishing returns in an aging bull market.”

**JK – And the Apathy Society has cancelled its annual meeting.

Back to Chasing Bonds
Joshua M Brown – The Reformed Broker
Investors are back to doing what they do best this month – running after the thing that’s getting away from them, regardless of whether or not it’s in their best economic interest to do so.

U.S. bond market faces possible reckoning
The rally in U.S. Treasury bonds surprised many, taking 10-year yields to their lowest levels in 11 months. Jobs data and the European Central Bank meeting next week will determine whether bond prices have further to go.

Protecting European bank test data from lucrative leaks
It would be an insider trader’s dream to know ahead of time which of Europe’s banks will fail or need more capital, and all that data will be stored somewhere in cyberspace as the European Central Bank assesses the euro zone’s top banks.

Investors prepare for bond pricing push-back
The strongest European banks are struggling to capitalise on the performance of their bonds in the secondary market as expectations of ECB action to boost the economy drive yields down to what investors view as irrationally low levels.

Bond funds worldwide attract $6.3 bln, 12th week of inflows – BofA
Fund investors worldwide poured $6.3 billion into bond funds in the week ended May 28, marking the 12th straight week of inflows into the funds, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

IMF Approves $4.6 Billion in Bailout Funds for Greece
The International Monetary Fund on Friday approved $4.6 billion in long-delayed bailout funds for Greece, nine months after its last disbursement as Athens struggles to implement tough changes to its economy.

The ‘other’ great bond mispricing theory
Izabella Kaminska – Financial Times
A lot of people are puzzled over why US yields are falling when nothing has changed on the Fed communication side, and QE is supposed to be slowing. Frances Coppola notes an even stranger phenomenon. When you look at the very big picture you realise that if there is a correlation between QE and rates, it’s actually a very counterintuitive one:

**JK – Nice piece on QE and rates.

The Europe-based flow monster is under siege
Izabella Kaminska – Financial Times
Bank “trading” is all about flow. And in Europe there has never been a bigger flow monster than Deutsche Bank. But as has been well reported, FICC flow profits are beginning to wane.

Central Banks

Draghi Primes ECB as Inflation Scarcity Alarms Officials
Scott Hamilton – Bloomberg
Mario Draghi will confront the threat of deflation this week as he prepares to unleash an array of measures to jolt the economy and ignite prices.

Buy With Central Banks Is U.S.-Japan Lesson for ECB QE Scenario
Simon Kennedy – Bloomberg
If central banks are buying, it pays for investors to join in.
That’s the lesson from quantitative-easing episodes in the U.S. and Japan, which hand investors a template to follow should the European Central Bank begin its own asset-purchase program.

Time for ECB to put money where its mouth is
The European Central Bank will eclipse all else in economic terms this week, following heavy hints that monetary policy will be loosened in a variety of ways.

ECB, BOJ Fighting a Zero Sum Battle
Alen Mattich – MoneyBeat – WSJ
Has economic recovery become a zero sum game? Looking at the contrasting fortunes of Japan and the euro zone over the past year suggests that’s the way things are playing out.

Bond Investors Wary of Yield Trap Heeding ECB Alert: Euro Credit
Katie Linsell – Bloomberg
Europe’s biggest fund managers are heeding policy makers’ warnings that an “excessive” search for yield is making bonds from companies in the region’s most indebted countries vulnerable to a selloff.
Pioneer Global Investments Ltd., which oversees $246 billion, said it cut holdings of corporate notes from most peripheral nations, while SEB AB in Stockholm, the manager of $191 billion of assets, lowered its recommendation to neutral from overweight. BlackRock Inc., the world’s biggest money manager, is underweight, while Amundi, the region’s largest asset manager, says it’s being more selective.

Fed’s Policy Hawks Express Mix of Views on Timing of Rate Hikes
Jon Hilsenrath and Pedro Nicolaci da Costa – WSJ
The Federal Reserve’s policy hawks aren’t speaking with a unified voice as central-bank officials discuss when to start raising interest rates.

Fed’s Evans expects tapering to be completed by end of year
The U.S. Federal Reserve is expected to complete the tapering of its stimulus plan by the end of this year, Chicago Fed President Charles Evans said at a conference in Istanbul on Monday.

RBI flags high credit growth of some banks
Business Standard
While overall bank credit growth was a little less than 15 per cent in 2013-14, some public sector banks recorded a significantly higher figure, resulting in a Reserve Bank of India (RBI) caution to these lenders.

Rajan Seen Holding India’s Key Rate as Modi Takes Power
Kartik Goyal – Bloomberg
Indian central bank Governor Raghuram Rajan will keep the benchmark interest rate at an 18-month high to fight Asia’s second-fastest inflation after raising it three times since taking office last year.


FX Funds Extend Losses In April
Chiara Albanese – MoneyBeat – WSJ
Now is not a pretty time to be a currency manager. April was the worst month for global currency managers since the start of the year, according to the latest print of the Parker FX index. The index, which tracks the performance of 34 specialized funds with about $40 billion in assets, was down by 0.7% in April.

Renminbi bulls offered glimmer of hope
Josh Noble in Hong Kong – Financial Times
Remember when currency policy, rather than maritime disputes, used to top the agenda for US-China relations?

Death of US dollar is greatly exaggerated
John Authers – Financial Times
What does not kill the dollar makes it stronger. There have been plenty of obituary notices for the US dollar’s reserve currency status in recent years, and with good reason. And yet, whenever crisis hits, the dollar rises – even when the epicentre of the crisis is itself in the US.

Asset quality trumps hedging cost in volatile currencies
Aaron Woolner –
High cost of hedging out forex exposure in volatile currencies is unnecessary due to the correlation between the underlying asset and currency it’s denominated in, investors believe

BitBeat: As Bad News Subsides, Bitcoin Prices Rising Again – MoneyBeat
MoneyBeat – WSJ
It’s like a weight has been lifted from the shoulders of the bitcoin community. The first four months of 2014 will go down as ones that bitcoiners would rather forget. But it now looks like May will be remembered as the month in which the spirits of the community were lifted once more.

Indexes & Index Products

BlackRock’s Fink jolts ETF business with ‘blow up’ warning
BlackRock Inc Chief Executive Larry Fink this week dropped a stink bomb on a small corner of the $2.5 trillion global market for exchange-traded funds.

Volatility index posts 52-week low
Chris McKhann – optionMONSTER
Equity indexes were mixed on Friday, closing out a week of gains and sending the CBOE Volatility Index to a 52-week low.
The S&P 500 gained 3.54 points, or 0.81 percent, to close at 1923.57. That was just off the high of the day, but both levels were new records. The SPX added 24 points in the holiday-shortened week and has support at 1900.


El Niño concerns spread to gold
Emiko Terazono – Financial Times
Concerns about the effect of El Niño, which have hit commodities markets since the start of the year, are spreading to gold, as some analysts point to the weather phenomenon’s potential impact on India’s monsoon season.

Funds Cut Bullish Gold Wagers Most This Year: Commodities
Debarati Roy – Bloomberg
Hedge funds pared bets on a gold rally at the fastest pace this year after prices capped the biggest monthly decline since December.


No Free Lunch in Dividend Funds
MoneyBeat – WSJ
There’s no such thing as a free lunch, but there is an inexhaustible supply of investors who will trip all over themselves in pursuit of it.

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