First Impressions

Mike Forrester reflects on 50 years of trading at the CBOT

For the better part of the Chicago Board of Trade’s history, the exchange was built on the backs of grains traders. Mike Forrester, who started at the CBOT in 1963, has seen the best and worst of corn, wheat and soybean markets during his time on the floor. John Lothian News sat down with Forrester and spoke with him about a career that lasted more than 50 years.
Watch the video »

Quote of the Day

“Expectations for what the ECB will actually deliver still seem stretched. The easy money was made in March.”

Alex Temple, a London-based fund manager at ECM Asset Management, in the story, “Draghi May Prove a Short-Lived Boost to Company Bonds in Europe”

Lead Stories

The Post-Crisis Economy’s Long Debt Hangover
Project Syndicate
The meeting of G-20 finance ministers and central bank governors in Washington, DC last week concluded on a sour note. Small wonder: Global growth prospects have dimmed amid a variety of risks now emanating from both advanced and developing countries. The meeting’s participants addressed – yet again – the need for greater policy coordination, more fiscal stimulus, and a variety of structural reforms. And that discussion has become more urgent, given the widespread view that monetary policy may not have much ammunition left, and that competitive devaluations would do more harm than good.

Ex-UBS Trader in ‘Cartel’ Said to Help U.S. in Currency Probe
A currency trader from the Cartel chatroom — the instant-messaging group the U.S. government named in wringing guilty pleas from five global banks — has been helping prosecutors who are trying to build foreign-exchange manipulation cases against individuals, according to two people familiar with the matter.

Banks’ living wills should be limited in size
Financial Times
Sir, Jonathan Ford, in “Why living wills make the big dumb banks feel uncomfortable”(Inside Business, April 18), makes the sensible argument that banks do not want to be seen as mortal and neither are shareholders enamoured of the consequences of this thought. In defence of the death of banks it must be said that the main reason that living wills have not been well crafted is that any serious bank is extremely complex. But complexity need not overwhelm common sense.

Markets brace for more noise next week
From a fundamental perspective, there was no significant improvement in the global growth outlook to justify the risk appetite. Even if the majority of S&P firms who have reported their quarterly results have exceeded (low) estimates, still it does not make much sense. Singaporeans are extremely fond of acronyms, and local traders are probably aware of commonly used acronyms such as FANG (Facebook, Amazon, Netflix and Google) and FOMO (Fear of Missing Out). Now we have TIME (Tech, Industrials, Materials and Energy) added to the list, which could suggest that there is lack of clear investment themes.

U.S. Government Is Now a Major Counterparty to Wall Street Derivatives
Global Research
According to a study released by the Federal Reserve Bank of New York in March of last year, U.S. taxpayers have already injected $187.5 billion into Fannie Mae and Freddie Mac, two companies that prior to the 2008 financial crash traded on the New York Stock Exchange, had shareholders and their own Board of Directors while also receiving an implicit taxpayer guarantee on their debt. The U.S. government put the pair into conservatorship on September 6, 2008. The public has been led to believe that the $187.5 billion bailout of the pair was the full extent of the taxpayers’ tab. But in an astonishing acknowledgement on February 25 of this year, the Government Accountability Office, the nonpartisan investigative arm of Congress, issued an audit report of the U.S. government’s finances, revealing that the government’s “remaining contractual commitment to the GSEs, if needed, is $258.1 billion.”

Goldman Sachs and Morgan Stanley are split on the future of trading
Business Insider
Morgan Stanley and Goldman Sachs announced first quarter earnings earlier this week, and both banks whiffed. Trading revenues tanked, and profits fell by more than 50%. It is not surprising then that the earnings calls were dominated by questions about falling profitability, and in particular prospects for the fixed income, currencies and commodities business.

Japan’s Life Insurers, Stung by Negative Rates, Look Abroad for Assets
Japanese life insurers are branching out into higher-return investments overseas such as financing airplanes and power plants to combat falling yields at home. Investment managers at major private-sector insurers on Friday described plans to buy more foreign assets in place of Japanese government bonds, many of which now carry negative yields. “Japanese government bonds virtually aren’t functioning as an asset class today,” said Kazuo Sato, head of finance and investment planning at Japan’s biggest private life insurer, Nippon Life Insurance Co. “We are living in an age when we cannot secure yield unless we improve our asset management and diversified investments.”

Oil, pricey US stocks and low bond yields: the market puzzles
Financial Times
It is Passover once again — the time of year when Jews the world over get together to commemorate the exodus from Egypt over a highly stylised meal, or seder. For thousands of years, each seder has started with the youngest person present asking four questions about why things are different compared to other nights of the year. Long View has much more recently adopted the same tradition, and asked four questions each year to try to explain anomalies in the market.

Central Banks

The wrong kind of savings
The Economist
Negative interest rates are surely a sign that something is wrong with an economy. Normally, people have to be rewarded if they are to be induced to postpone consumption. Penalising them for doing so seems perverse. Admittedly, negative nominal rates apply mostly to commercial-bank reserves held at the central bank. But many savers in the developed world are suffering negative returns in real, after-tax, terms. Larry Fink, the chairman of BlackRock, a fund-management group, recently argued that low rates may not work as central bankers intend: those planning for retirement will need to save more, not less, to generate a given income. By the same token, low rates explain why lots of companies’ pension funds are in deficit.

Draghi May Prove a Short-Lived Boost to Company Bonds in Europe
Mario Draghi’s boost to European corporate bonds may end as quickly as it began. The European Central Bank on Thursday announced wider-than-expected criteria for a debt-buying program, sparking a drop in credit risk and giving a second wind to the biggest corporate-bond rally in more than three years. Some money managers are beginning to ask whether the gains can last given the challenges the central bank faces buying significant amounts of debt in an illiquid market.

Interest rates could go negative, Bank of England’s Vlieghe says
The Guardian
A top Bank of England policymaker has floated the possibility of interest rates being cut below zero, meaning companies would pay to deposit their money with banks. Jan Vlieghe, a member of the BoE’s nine-strong monetary policy committee, did not rule out the idea of following other central banks in taking interest rates negative but said the Bank would “have to think very carefully” about whether the positive effects would outweigh the downsides.

Rajan Seen Getting Extension at India Central Bank in Survey
Forget the headlines about tensions with India’s government: Raghuram Rajan is likely to stay on as India’s central bank governor after his term ends in September. That’s the view of most economists in a Bloomberg survey on Thursday following criticism from several government officials over Rajan’s characterization of India’s economic growth in a recent media interview. Thirteen of 15 economists said he’d get an extension, one said it’s unlikely and another said it could go either way.

Rumpelstiltskin at the Fed
Harley Bassman – PIMCO
As our title alludes, I am about to spin a monetary policy fairy tale, a fantasy that could certainly never occur … except for the small detail that it’s happened before. First I must remind you there are only two avenues out of a debt crisis – default or inflate – and inflation is just a slow-motion default. Thus in the darker days of the global financial crisis, the U.S. Federal Reserve set sail on a monetary experiment tangentially suggested by late Nobel laureate Milton Friedman, the original coiner of the phrase “helicopter money.” (Ben Bernanke borrowed this clever construct in his famous November 2002 speech, “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”)

Top central banker vows to fight credit crunch
Korea Times
Bank of Korea (BOK) Governor Lee Ju-yeol said Friday that he will mobilize a wide range of measures to stabilize financial markets, if a credit crunch comes as the government pushes for strong corporate restructuring. The top central banker said that he is willing to inject fresh money into the credit market, seeking to resolve concerns that companies may have difficulties in drawing funds for their businesses.

Regulatory News

Do the New Wall Street Compensation Rules Affect You? Read This
Wall Street Journal
Proposed government rules on banker pay released Thursday could affect tens of thousands of bankers on Wall Street and around the country. Here are some questions and answers about the potential rules, which regulators say are designed to reduce risk taking.

Regulating Banks’ State Debt Pile Is a Job for Basel, Hill Says
European Union policy makers should hold off on imposing restrictions on banks’ holdings of sovereign debt until a global consensus is reached on the issue, said Jonathan Hill, the EU’s financial-services commissioner. “We need to see where Basel is going,” Hill said in an interview in Amsterdam on Friday, referring to the Basel Committee on Banking Supervision. “If you don’t, you’ve got risks of regulatory arbitrage. I think there are risks potentially around financial stability.” As a result, the EU needs to be “sensible and cautious” by approaching reform as part of an international effort, he said.

Banks hope for reprieve on Mifid II bond rules
Financial News
The European Commission is set to publish further standards in the coming days for the revised Markets in Financial Instruments Directive, which will overhaul trading in the region when it comes into effect in 2018. Known as Mifid II, the rules include provisions designed to bring equities-like transparency to the more opaque world of bond trading to boost regulatory oversight. For those bonds deemed liquid enough, quotes and actual transactions will need to be disclosed, but banks fear too much transparency could do more harm than good.

Data is key hurdle in Mifid preparation – panel
Mifid II was delayed in February by a year due to the tech requirements The lack of clarity around some of the technical requirements under impending regulatory game-changer Mifid II is causing internal challenges for banks, market experts have warned, as the lack of clarity on data definitions remains a key stumbling block. “Preparing for Mifid II continues to be a challenge – that is true for the majority of firms today. There are still many unknowns, for example the complete definition of financial instruments is still outstanding,” said Bill Stenning, managing director for clearing, regulatory and strategic affairs at Societe Generale.


Justice Department weighs charges against London forex traders
Financial Times
US authorities are weighing whether to bring charges against London-based traders caught up in the global foreign-exchange rigging scandal, leaving the potential for drawn-out transatlantic criminal proceedings even after UK authorities have dropped a parallel investigation against them. The Department of Justice has offered so-called reverse proffers to about five individuals in the past month, according to people familiar with the situation, in a sign of escalating activity and interest in the Britons since the UK Serious Fraud Office closed its criminal inquiry in March.

Peace breaks out in currency markets?
The Economist
HAS a truce been declared in the currency wars? At the start of the year, the dollar seemed bound to rise because the Federal Reserve was set on pushing up interest rates three or four times, while there were fears that the weakness of the Chinese economy might force the authorities to devalue the yuan. As it has turned out, the Fed has been sounding more dovish (perhaps because the US economy was weak in the first quarter with the Atlanta Fed’s tracker looking at just 0.3% annualised growth); the dollar’s rally has halted. And the yuan has risen, not fallen, against the dollar.

Yen Bulls Vulnerable to Kuroda Shock Amid Record Hedge Fund Bets
Yen bulls are at risk from Haruhiko Kuroda’s favorite tactic: surprise. By pushing bets on a stronger currency to the most on record, speculators have left themselves vulnerable should the Bank of Japan governor blindside them with additional stimulus at the April 27-28 policy meeting. And a warning light is blinking in the options market, where the premium on contracts to buy the yen in a week’s time disappeared for the first time since January.

Indexes & Index Products

Overpriced Index Funds Won’t Go Away
Bloomberg View
Many traders and investors acts as if markets are efficient, meaning that asset prices fully reflect all available information. We see this manifest itself in numerous ways — how prices rapidly adjust to new information and how few investors manage to beat the broader indexes by picking stocks or trying to time the market. At least that’s the gist of the efficient market hypothesis, which won University of Chicago economist Eugene Fama a Nobel Prize. The problem is that in practice, there are lots of information asymmetries and frictions that make markets somewhat less than perfectly efficient. To reflect this, I started referring to Fama’s thesis as the kinda-eventually-sorta-mostly-almost efficient market theory.

Index IDEA: FTSE Emerging Index tells a two-sided story for 2016 year-to-date
FTSE Russell Blog
According to the FTSE Emerging Index, 2016 has included notable ups and notable downs for emerging markets equities. In the first six week of the year, through February 11th, the Index fell 10.2%. From February 11th, when US Fed Chair Janet Yellen signalled a renewed easing of US monetary policy, igniting what many experts have termed a ‘risk-on’ market, the Index has risen 16.7% and now stands at a 4.8% return year-to-date as of April 11th.

A Crude Awakening: How Can Oil Outperform the S&P 500?
Market Realist
Historically, crude oil prices and the S&P 500 index have influenced each other. Crude oil (USO) prices have been falling since June 2014. The correlation of the S&P 500 index and crude oil was highest when crude fell below $30, and lowest when crude oil was at around $100.

Buybacks, Dividends, Capex, and Long-Term Value Creation
This is the fourth and final in a series of blog posts relating to the launch of the S&P Long-Term Value Creation (LTVC) Global Index. In our recent paper “Long-Termism Versus Short-Termism, Time for the Pendulum to Shift?” we discussed reasons why short-term corporate behaviors persist in developed economies. One of the key drivers was the immense pressure that company management teams are under to deliver on earnings, especially at the expense of long-term strategic investment. Looking at how companies in the S&P 500® were dispensing cash flow does indicate a worrisome trend: capital expenditures as a percent of operating cash flow continue to trend downward, and for 2015, it was 42% compared to its 30-year historical average of 56% (see Exhibit 1).


Gold Miner ETFs Are Having the Rally of a Lifetime and Burned Investors Are Missing It
Investors in exchange-traded funds tracking gold mining companies just can’t seem to get it right. After years of trying – and failing – to call a bottom for the miners, investors are scared to buy into what is turning into the rally of a lifetime for ETFs tracking these once left-for-dead stocks. Despite returns of more than 65 percent in a year when the S&P 500 is up 4 percent, gold miner ETFs have seen half a billion in outflows. That is practically unheard of as inflows and performance are usually highly correlated when it comes to ETFs. Gold miner ETFs, it seems, are the rare exception.

Opinion: Gold has everything in its favor
Left for dead for almost four years, gold has suddenly made an amazing comeback: It’s up over 50% this year. Will the strength of gold continue, or is the party over? Several gold investors who have enjoyed the ride so far believe the next move is up from here — possibly even taking out prior highs for the metal.


China’s Great Ball of Money Is Rushing Into Commodities Futures
Chinese speculators have a new obsession: the commodities market. Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete.

Pin It on Pinterest

Share This Story