First Impressions

Yesterday’s Clickables
We had a repeat offender at the top of the clicks yesterday, The IEX Exchange and Its Consequences for Investors. Brexit may dominate the news cycle, but it is nice to see that there is attention to spare for other major developments. Speaking of Brexit, George Soros’ The Brexit crash will make all of you poorer – be warned came in second. Pundits are equally likely to corroborate or lambast Soros’ point of view — but that’s Brexit in a nutshell. The third place story was related to London, but not Brexit: Fed’s Powell warns that dollar-based Libor could disappear

Quote of the Day

“I’m not Clint Eastwood. When they asked me if I’m the new sheriff I told them I don’t wear boots.”

Maria Vullo, superintendent of New York’s Department of Financial Services, in the story, “New York’s top finance regulator is no ‘Clint Eastwood'”

Lead Stories

Tensions rise on eve of Britain’s EU vote
Financial Times
Queues formed outside foreign-exchange dealerships and banks conducted a final round of wargames to stress-test systems amid mounting signs of tension in London’s financial centre as Britons prepared to go to vote on whether to exit the EU. Some senior financiers saw worrying echoes of the 2008 financial crisis. Lord Mervyn Davies, the former Standard Chartered chairman and Labour minister, said: “Everyone’s fearing a 2008 freeze of the wholesale markets. If that happens [the Bank of England] is going to have to step in as a buyer of all assets.”

****SD: The New York Times has a pre-vote outlook/recap: Bitter ‘Brexit’ Campaign Could Turn on Record Number of Voters

A $541 Million Loss Haunts Deutsche Bank And Former Trader Dixon
Troy Dixon had hit the big time: he’d gone, as they say in his old neighborhood, from “Hollis to Hollywood.” It was a June night last year at the Apollo Theater, the legendary Harlem spot that’s helped launch stars from Billie Holiday to Michael Jackson, and Dixon was back-slapping his way through the annual spring gala. Dixon, a member of the Apollo’s celebrity-studded board, is a star of a different sort. First at Deutsche Bank AG and now at his own hedge fund, he’s become one of the most powerful — and controversial — figures in the $6 trillion market for government-backed mortgage bonds.

****SD: I’d be worried if they weren’t haunted by a $541 million loss.

Questions for Yellen From Congress, but Not Quite to the Point
NY Times
Year after year of disappointing growth in the United States. Disappearing middle-class jobs. Turmoil overseas, including the looming possibility that British voters will decide on Thursday to part ways with Europe. Urgent economic issues all. But what did some lawmakers on the House Financial Services Committee want to talk about on Wednesday when the Federal Reserve chairwoman, Janet Yellen, was called before them for her semiannual testimony to Congress? Whether the Federal Reserve, which has the power to create money at will, is solvent.

****SD: I tuned into the testimony for a bit — lots of grandstanding with little substance. The WSJ: House Republicans Grill Janet Yellen Over Fed Operations, Independence

Brexit Polls and Markets Disagree in Campaign’s Final Hours
Currency, equity markets bet on ‘Remain’ victory Thursday
Polls show race is deadlocked in final campaign stretch
Britain is in the final day of campaigning before its Thursday referendum on European Union membership, with opinion polls and financial markets at odds over the outcome

****SD: “Can’t we agree to disagree?” “No! That means we’d be agreeing.”

How Brexit Could Ruin London’s Startup Scene
Entrepreneurs who’ve flocked to London in recent years to upend the financial world with technology are dreading one potential disruption they can’t control: Britain leaving the European Union.

****SD: Related: Brexit may spur an exodus from London offices, survey finds

The Rapidly Changing Nature of Japan’s Public Debt
Liberty Street Economics
Japan’s general government debt-to-GDP ratio is the highest of advanced economies, due in part to increased spending on social services for an aging population and a level of nominal GDP that has not increased for two decades. The interest rate payments from taxpayers on this debt are moderated by income earned on government assets and by low interest rates. One might think that the Bank of Japan’s purchases of government bonds would further ease the burden on taxpayers, with interest payments to the Bank of Japan on its bond holdings rebated back to the government. Merging the balance sheets of the government and the Bank, however, shows that the asset purchase program alters the composition of public debt, with reserves in the banking system replacing government bonds, but not the amount of the debt taxpayers must pay interest on.

****SD: Related Project Syndicate article from Koichi Hamada: A Japanese Ponzi Scheme?

Why IMF global financial stability report should be taken with pinch of salt
The Guardian
When I asked Google to find the text of the International Monetary Fund’s Global Financial Stability Report for April 2006, it helpfully questioned whether I was looking for the April 2016 version instead. I am sure the IMF would never seek to manipulate a search engine, but I can imagine the Fund’s public affairs officials are happy if as few people as possible can access one of its less prescient publications.

Bankers are braced for a sleepless night after EU referendum
The Telegraph
By four in the morning, as the skies start to lighten and the trickle of crucial referendum results becomes a flood, it’ll be time for a shift change in the City of London. The next lot of sleep-starved bankers will be getting to their desks early tomorrow to field calls from anxious clients and keep up with the latest jumps in the world’s always-open currency markets. Banks including JP Morgan, Barclays, Deutsche Bank, Societe Generale and UBS are all drafting in more workers than usual to their offices in the City and a few miles away in Canary Wharf.

****SD: Related story from The Guardian: Banks on high alert as City sets up war rooms and fills cash machines

Central Banks

Central Banks Ready for Anything as ‘Brexit’ Vote Nears
The Bank of England, Federal Reserve and other major central banks will have to act fast no matter which way the vote goes
Everyone from Barack Obama to George Soros and soccer superstar David Beckham has had something to say about Thursday’s U.K. vote on the European Union. Now it comes down to those who really matter: millions of U.K. voters.

****SD: I’m always leery when people say they’re ready for “anything.”

Cat’s Cradle – Negative Interest Rates
W. Ben Hunt – Salient Partners
In his classic work on game theory, “The Strategy of Conflict”, Nobel Prize winner Tom Schelling begins by writing about cooperative games, where players are trying to arrive at a common outcome for a mutual benefit. This is a different class of games from the competitive games like Chicken and Prisoner’s Dilemma that we usually consider when we think about game theory, but in truth it’s the cooperative games that account for so much more of our daily lives and social interactions. For example, driving on the right-hand side of the road (or the left-hand side in the UK) is an example of a cooperative game equilibrium. The only thing that matters is that we agree on which side of the road we drive on, not that my preferred side or your preferred side ends up being the final choice.

Why the Fed has a rate-setting problem
CBS News
Many people think they know how interest rates get set: The Federal Reserve does it. But that’s not quite how it works. The interest rate that’s consistent with stable inflation and full employment is known as the natural, or equilibrium, rate of interest in the economics literature. And it’s determined by economic conditions that the Fed must take into account when formulating its plans for monetary policy. If the natural rate of interest changes, the Fed must alter the target rate of interest rate accordingly, if it wants to maintain a particular monetary policy stance.

The interest rate unbound?
Brookings Institution
As a monetary policy tool, negative rates have a long way to go. Negative interest rates are not popular with the public in countries where they have been tried and that will limit their usefulness as a tool of monetary policy, says Jean-Pierre Danthine, former vice president of the Swiss National Bank.

Europe Misses a Target
The European Central Bank this month pressed ahead with plans to buy corporate bonds in addition to government debt in the hope of, well, don’t ask. Also don’t ask whether these exertions, known as quantitative easing, are working. There’s growing evidence they aren’t, at least not if the goal is to lift the eurozone’s weakest economies by injecting cash and lowering borrowing costs. The latest data come via a new release of the balances in the Target2 payment-processing system. This is the network the eurozone’s central banks use to shuttle money among themselves, so imbalances in the system can offer some clues about where money is flowing within the currency bloc.

Yellen Productivity Concern Shows Slump’s Theory-to-Policy Shift
Fed chair tells lawmakers low productivity threatens outlook
Views echo Gordon, who Yellen cites most of non-Fed economists
Janet Yellen told Congress this week she’s seriously worried about productivity. A careful read of the footnotes in the Federal Reserve chair’s speeches reveals this as a concern she’s nurtured for while.

Beyond Brexit, easy central banks keep euro zone bonds in demand
Investors bought up euro zone bonds on Wednesday, daring to look beyond Britain’s EU vote to a world in which the U.S. Federal Reserve is in no rush to raise interest rates and the ECB stands ready to do more to nurture weak growth. The recent rise in safe-haven German bond yields, which has come as investors discount the prospect of a vote for Brexit, eased and low-rated debt was also in demand after interventions from the world’s two most powerful central banks.

US Federal Reserve should let inflation overshoot targets, IMF recommends
The Telegraph
US policymakers should allow inflation to rise above official targets, the International Monetary Fund has recommended, as it warned that the risks of deflation still loom over the world’s largest economy.

Don’t write my obit yet: Rajan
Business Standard News
Reserve Bank of India Governor Raghuram Rajan on Wednesday said it was not time to write his obituary yet. He said he would remain in his job till September and visit India regularly even after he moves to the US to teach. “I read these obituaries in the paper, I’m still alive. I will be leaving this office in September but I will certainly be coming in and out of the country on numerous occasions. I will be reading and writing and speaking at several occasions,” Rajan said at an event.

Foreign risks a concern for Bank of Japan
The Straits Times
Some Bank of Japan (BOJ) policymakers believe overseas economies continue to pose downside risks to Japan’s economy and prices, according to minutes of its April policy meeting released yesterday. At the April 27-28 meeting, the BOJ held off on expanding monetary stimulus even as global headwinds, a strong yen and soft consumption threatened to derail Japan’s fragile economic recovery.

Regulatory News

New York’s top finance regulator is no ‘Clint Eastwood’
Financial Times
New York’s top finance regulator is set to soften plans to criminalise executives for wrongdoing at their institutions, even as she put the industry on notice that she could be just as tough as her predecessor Benjamin Lawsky. In her first public remarks since she was approved in the powerful position, Maria Vullo told banks and insurers she was “not Clint Eastwood” but still planned to make “full use” of her authority.

****SD: …with that she stood, adjusted her poncho and rode off into the sunset while stoically chomping on an old cheroot.

SEC will use whistleblower tip to sue Merrill Lynch for investment that lost 95%
The Securities and Exchange Commission is preparing a civil enforcement case against Merrill Lynch over an investment that fell as much as 95% in value and was marketed in a way that one of the firm’s financial advisers called “borderline crooked,” people close to the probe said. The expected case against the brokerage arm of Bank of America Corp. underscores some of the risks of so-called structured notes, securities custom-built by banks out of options and other derivatives and often sold to retail investors.

NY Fed may do ‘enhanced monitoring’ of SWIFT money transfers: Yellen
The Federal Reserve Bank of New York might begin taking closer looks at international money transfers using the SWIFT network, Fed Chair Janet Yellen said on Wednesday in response to questions over a recent theft by cyber criminals.

Ex-BNP Paribas head of spot currency trading sues bank
A former head of spot currency trading at BNP Paribas (BNPP.PA) is claiming the French bank dismissed him for whistle blowing, according to a court filing released on Wednesday. Bob de Groot is scheduled to appear at the Central London Employment Tribunal on July 5.


U.S. CFOs Fret Over Brexit-Related Forex Risk
Grappling with a possible British withdrawal from the European Union, some U.S. finance chiefs said the most immediate challenge they face is managing their exposure to potentially volatile currencies. “The key concern for us is just the stability of exchange rates,” said Frank Calderoni, chief financial officer of software maker Red Hat Inc., adding that swings inforeign exchange rates have increased in recent weeks as the momentous vote draws near.

Yen seen as only gainer among Asian currencies in Brexit vote
Financial Times
China’s renminbi and India’s rupee are seen as the biggest casualties among Asian currencies in the event the UK votes to leave the EU, according to an estimate from Malaysia’s Maybank.

Regulators say bitcoin poses ‘financial stability risks’
Barney Jopson – Financial Times
A powerful club of US regulators has warned that the growing popularity of bitcoin and other digital currencies is posing potential financial stability risks as it revealed they are being put under closer scrutiny. A group that includes the Treasury department, the Federal Reserve and the Securities and Exchange Commission used an annual report on the biggest threats to the US financial system to highlight concerns about digital currencies for the first time.

Cryptocurrency: No longer sticking it to the MAN
Izabella Kaminska – Financial Times
For those who thought things couldn’t get any more absurd with respect to the dumb-contract hack on the DAO (a.k.a the decentralised autonomous organisation which sits on the Ethereum blockchain and which was supposed to prove to the world that companies don’t need executives), you’re in for a treat.

Cash shortages as holidaymakers rush to buy euros and dollars ahead of Brexit vote
The Telegraph
Holidaymakers have stockpiled dollars and euros ahead of the EU referendum and travel money outlets have come close to running out of cash amid the surge in demand.

Britons queue to exchange pounds ahead of referendum
Financial Times
Long queues stretched outside foreign exchange bureaux in the City of London on Wednesday as people cashed in their pounds ahead of the EU referendum. Online currency-exchange companies also reported a surge in activity as customers decided to take advantage of a 3 per cent rise in the value of sterling against the dollar, to $1.48, before the uncertainty of Thursday’s vote.


Default Swaps Broken for U.K. Bank Bonds as Brexit Vote Nears
It’s becoming increasingly difficult to insure U.K. bank bonds, just when debt protection is needed most. Because post-crisis regulation requires the lenders to issue securities from parent holding companies, at least 114 billion euros ($129 billion) of notes are excluded from insurance coverage. Nonetheless, trading of credit-default swaps surged before Thursday’s vote on Britain’s membership in the European Union.

Puerto Rico sued by bondholders after debt negotiations break down
The Guardian
A group of bondholders on Tuesday sued Puerto Rico’s government as debt negotiations fell apart less than two weeks ahead of what would be the largest default in the island’s history.

ECB reinstates waiver affecting the eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations
The Governing Council of the European Central Bank (ECB) today decided to reinstate the waiver affecting the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The decision suspends the application of the minimum credit rating threshold in the collateral eligibility requirements for these instruments. Provided that they fulfil all other eligibility criteria, they may be used as collateral in Eurosystem monetary policy operations.

Indexes & Index Products

ETF Watch: 2016 YTD Launches Match 2015
With the first half of the year almost over, now seems a good time to take stock of how many ETFs have launched so far in 2016. Last year was a record one, with a total of 284 launches. However, the number of launches so far this year matches exactly the number of launches there were by this time last year—112. That means we’re on pace to match the number of launches for 2015 and possibly see another record-breaking year.

Index IDEA: Small caps in focus; FTSE Russell & Steven DeSanctis from Jefferies & Company
FTSE Russell
For the second quarter as of June 15, the Russell 2000 Index, a measure of US small cap stocks, has performed higher than the Russell 1000 Index, a measure of US large cap stocks. However, the Russell 2000 Index has fallen by 9% since the completion of the last Russell Indexes reconstitution on Friday, June 26, 2015.

Smart-Beta ETFs Not All Factors Are Created Equal
ETF Trends
More exchange traded fund investors are looking to smart beta or alternative index-based strategies to fill out their investments, and focusing on which targeted factors within the indexing methodology matters when appropriately balancing a portfolio. On a recent webcast, Smart Beta Factors: How Many and What is Ideal?, Joel Schneider, Senior Portfolio Manager and Vice President of Dimensional Fund Advisors, explained that investors should focus on four factors backed by academic research that have historically driven expected returns, including market equity premium, small-cap premium, value premium and profitability premium.

‘Bollinger Bands’ suggest stocks could break out in a big way
The stock market appears poised to break out in a big way. Although the charts don’t specify in which direction the breakout will occur, history suggests investors could start preparing to party like it’s 1995. According to a technical tool known as “Bollinger Bands,” the S&P 500 index SPX, has been as dead, and for as long, as it has been in 22 years. Basically, the market is like a coiled snake that is ready to strike…soon.

Gundlach’s ‘TOTL’ About To Jump PIMCO’s ‘BOND’ In Assets
The reigning king in the segment of actively managed midterm total return bond strategies has long been the PIMCO Total Return Active ETF (BOND | C). That may be about to change, and any day now. The four-year-old BOND once boasted Bill Gross’ expertise at the helm and went on to become the second-most-successful ETF launch ever—behind only the SPDR Gold Trust (GLD | A-100)—gathering its first $1 billion in assets in only three months after it launched in 2012. But BOND’s uncontested top spot in terms of assets under management is now being challenged by the 16-month-old SPDR DoubleLine Total Return Tactical ETF (TOTL | C)—a fund that marked Jeffrey Gundlach’s and his firm DoubleLine’s entry into the ETF market.


Gold ETF Investors Look Past Brexit, Lift Assets to 2-Year High
Investors have poured $10.7 bln into SPDR Gold Shares in 2016
Market to refocus on U.S. rates after U.K. vote: SocGen
Investors in exchange-traded funds backed by gold are looking beyond this week’s U.K. referendum on European Union membership and the declines in bullion prices it has spawned.

Silver Traders Follow Gold to Longest Bull Bet Since ’09: Chart
Where gold goes, silver often follows. Bearish options on exchange-traded funds tracking the metals have been cheaper than bullish ones for the longest time since at least 2009. That’s a reflection of the bullish mood seen in recent months, Societe Generale SA analyst Robin Bhar said in a phone interview.

Gold to ease further if UK remains in EU
South China Morning Post
As fears over Britain leaving the European Union ease, gold futures have lost ground. Analysts say the price of the precious metal might pull back further if a Brexit is avoided, but could still rise later this year, as anxiety remains over the global economic outlook and the downward trend of interest rates.

What the gold option market tells us
Ole Hansen –
The gold market currently perceives the risk/reward as being heavily skewed to the upside. As the UK referendum has drawn closer, the price difference between out-the-money calls and puts have moved aggressively in favour of calls. This comes on the assumption that a Leave vote would have a much bigger positive price impact than the equivalent negative one on a vote to Remain.


How to win The Game of Thrones
1843 Magazine, The Economist Unwinds
“History is written in blood,” the fantasy writer George R.R. Martin told Rolling Stone in 2014. “The kings, the princes, the generals and the whores, and all the betrayals and wars and confidences: it’s better than 90% of what the fantasists make up.” But Martin’s saga, “A Song of Ice and Fire” (on which the HBO television series “Game of Thrones” is based) doesn’t feel like fantasy. Sure, his world has magic and dragons, but his kings, princes, generals and whores behave like they do in the history books. Like their real-world counterparts, they are forever forging alliances, plotting coups and scheming to take the greatest prize in all the land, the Iron Throne of Westeros.

Inside Trump’s Most Valuable Tower: Felons, Dictators and Girl Scouts
A hedge-fund manager on the 28th floor who pretended to be dead when investors asked for their money reported to prison in January. A few weeks later, an investment adviser on the 17th floor was accused of running a Ponzi-like scheme. Thirteen floors up, a lawyer pleaded guilty this month to stealing millions of dollars from clients. It was all happening at 40 Wall St., across from the New York Stock Exchange, behind golden capital letters proclaiming that this is THE TRUMP BUILDING.

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