First Impressions

It Ain’t Broke, but We Fixed it Anyway: A Letter to the Editor
Dear Sirs,

Last week in this column, Jim Kharouf, one of my friends in the industry, referred to the “broken” FCM model. Having had a front row seat to the travails of operating an FCM over the past 10 years, I take exception to the word “broken.” While the FCM model has been bent, twisted, shaken and turned on its ear, Mark Twain said it best: “Reports of my death have been greatly exaggerated.”

We all know what has happened to FCMs since business conditions began to change almost eight years ago. For me, the credit crisis began when Sentinel suspended withdrawals in August 2007. With industry scandals, low volatility, increasing regulation, rising compliance costs, potential disintermediation, virtually no interest income and stagnant volumes, it would be easy to declare the FCMs dead, and our model irreparably broken as many have.

But the role that an FCM plays in facilitating the transfer of risk remains a vital component for our industry and for our overall economy, and we continue to help foster efficient markets. Market conditions of the last eight years have forced all who have survived to improve our businesses. Another great scholar, Friedrich Nietzsche, provided us with the perfect summation of the recent FCM experience: “That which does not kill us makes us stronger.”

So what have most of us done? Specifically, the FCMs that have survived over the last few years have been forced to re-engineer their business and consequently those efforts have resulted in more efficient, better-run businesses. Customers are better protected, systems are more integrated, risk management has risen to the forefront, and most remaining FCMs have streamlined their business models. Those that couldn’t, or wouldn’t, have fallen by the wayside.

What is the end result? Most of the remaining FCMs are mature, better-run, more efficient businesses with better client services, client safety and more capacity. Scant few made those changes to evolve when interest income was rolling in, but that’s what businesses in a changing environment have to do to survive, and that’s what most of us still in business have done and continue to do.

Carl Gilmore
Co-Head of Futures
Wedbush Futures

Quote of the Day

“Exiting a long period of zero interest rates is tricky and a bit unsettling. Some of us feel like the informed citizens of Pompeii around 79 AD: we are grateful for the lovely sea views but worry about the volcano in the background.”

Blackrock executives in a report published this week from the story, “BlackRock: With Fed Poised to Act, This Feels Like Pompeii “.

Lead Stories

The Biggest Surprise of the Global Bond-Market Butchering
Sridhar Natarajan and Cordell Eddings – Bloomberg
The biggest surprise from the selloff in global bond markets may be that fixed-income investors are signaling that they don’t expect central banks to pull away the punch bowl anytime soon.
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BlackRock: With Fed Poised to Act, This Feels Like Pompeii
Giles Turner – Wall Street Journal
“This is when we find out if hedge funds really hedge,” said Ewen Cameron Watt, global chief investment strategist at BlackRock Inc.’s Investment Institute. Mr. Watt was referring to what happens following that much speculated date when the U.S. Federal Reserve decides to increase its short-term interest rates, which BlackRock predicts to be in 2015, but not before September.
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Senate reversal opens debate on key trade bill – Doug Palmer
Doug Palmer – Politico
The Senate voted Thursday to start debate on key trade legislation to “fast-track” a landmark Asia-Pacific free trade deal, reversing an embarrassing setback for President Barack Obama earlier this week and setting the stage for approval of the bill as soon as Memorial Day.
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BofAML: Three Reasons Why Treasuries Will Avoid Another Taper Tantrum
Lucas Kawa – Bloomberg
The bloodletting in bond markets may be the final nail in the coffin of a bull market that’s run for decades. U.S. Treasury yields, however, have seen this play before.
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The Current Bond Market Drubbing Is Nothing Compared to the Last Six
Ari Altstedter – Bloomberg
The bond-market freak-out that’s wiped out about $280 billion in value during the last three weeks pales in comparison with other recent market meltdowns.
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Central Banks

Debt Traders to Fed: We Dare You to Try Raising Rates This Year
Lisa Abramowicz – Bloomberg
Go ahead, Federal Reserve, keep trying to prepare markets for an interest-rate increase this year. It isn’t working.
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Fed Rate Move Will Make Doves Cry
Justin Lahart – Wall Street Journal
The Federal Reserve wants to avoid sparking another taper tantrum. That will be easier said than done.
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RPT-BlackRock says regulators misunderstand securities lending risks
Sarah N. Lynch – Reuters
lackRock Inc on Wednesday pushed back against arguments by the New York Federal Reserve and other regulators that asset managers’ securities lending operations may pose major risks to the market and may need greater oversight.
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What anemic retail sales mean for the Fed
Anthony Mirhaydari – CBS News
It wasn’t supposed to be this way: Wednesday’s April retail sales report was a surprising disappointment.
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Biggest stock disconnect with JGB yields in 23 years reveals Kuroda’s heavy hand
Anna Kitanaka and Shigeki Nozawa – The Japan Times
The weakest correlation between Japanese bond yields and stocks in 23 years is showing how dependent the nation’s markets have become on central bank support.
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Bank of England cuts growth outlook, backs market’s view on rates
David Milliken and William Schomberg – Reuters
The Bank of England cut its forecasts for British economic growth over the next three years on Wednesday, and cautiously backed bets in financial markets that it will only start to raise interest rates in around a year’s time.
jlne.ws/1cAZTW7

German Bundesbank chief rips into ECB over Greek loans
Michelle Martin – Reuters
The head of Germany’s Bundesbank ripped into the European Central Bank on Thursday, saying emergency funding for Greek banks broke the taboo of financing governments and it was not up to central banks to decide who was or wasn’t in the euro zone.
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Bank of Russia to Replenish Foreign-Currency Reserves
Andrey Ostroukh – Wall Street Journal
Russia’s central bank said Thursday it was back in the market rebuilding the country’s depleted international reserves, seen as crucial for the country’s financial stability and credit rating.
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China’s latest interest rate cut will lower bank profitability; loan rates to fall more than deposit rates
Moody’s
Moody’s Investors Service says that the People’s Bank of China’s (PBOC) lowering of interest rates for the third time in less than six months will lower the profitability of banks operating in China, because overall loan rates will fall by a larger margin when compared to deposit rates.
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Lehman Sues Federal Home Loan Bank of N.Y. Over Interest-Rate Swaps
Patrick Fitzgerald – Wall Street Journal
Lehman Brothers Holdings Inc. is suing the Federal Home Loan Bank of New York for more than $150 million over dozens of soured interest-rate swaps.
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Currencies

Bats Intensifies Price War in Currencies to Build Market Share
John Detrixhe – Bloomberg
Bats Global Markets Inc. will open another front in its price war on June 1 when it offers free foreign-exchange trading to some customers on its Hotspot FX platform.
jlne.ws/1Fh1oni

Dollar Bulls Wondering What Went Wrong in Drop to Four-Month Low
Lananh Nguyen and Anooja Debnath – Bloomberg
Dollar bulls are pondering what’s left of the rally that had pundits talking of dollar hegemony just months ago.
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Euro, Clawing Its Way Back, Hits 3-Month High
David Jolly – New York Times
As recently as March, the dollar was looking so strong against the euro that the only question seemed to be how soon the eurozone currency would sink to parity.
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Indexes & Index Products

MSCI India index rejig may increase inflows from passive foreign funds
The Economic Times
The quarterly tweaking of the MSCI India Index — a widely tracked emerging market index by global funds — on Wednesday may result in an increase of net inflows from passive foreign funds. India’s weight in the MSCI Emerging Index is expected to increase by 50 basis points from 6.7%. The changes in the index will be effective from May 29.
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China exchanges make gains in drive for inclusion in MSCI global indexes
China Economic Review
China’s drive to have its mainland stock exchanges included in MSCI’s global indexes is gaining traction, with Templeton Emerging Markets Group’s Mark Mobius, a former detractor who oversees roughly US$40 billion in emerging markets, saying his funds are buying yuan-denominated shares, Bloomberg reported.
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S&P Dow Jones Close to Including Mainland-Listed Chinese Stocks in Indexes
Gregor Stuart Hunter – Wall Street Journal
One of the major global equity index providers, S&P Dow Jones Indices, said a recently opened trading link between Hong Kong and Shanghai means Chinese stocks listed on the mainland will soon be included in its indexes. “I don’t think it’ll be terribly long” until so-called A-shares are included, said David Blitzer, chairman of the index committee at S&P Dow Jones Indices.
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What are the Missing Pieces in Chinese Fixed Income?
Michele Leung – S&P Dow Jones Indices Indexology Blog
Unsurprisingly, most Chinese investors favor high-risk and high-return products. They tend not to find the fixed income assets appealing, especially after the recent China stock rally. However, Chinese investors often overlook the risk component. As of April 30, 2015, the three-year annualized risk of China’s equity market is 19.5% versus 2.77% of Chinese fixed income, represented by the S&P China Bond Index.
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DoubleLine’s first actively managed ETF hits $500 mln
Jennifer Ablan – Reuters
DoubleLine Capital’s first actively managed exchange-traded fund, the SPDR DoubleLine Total Return Tactical ETF, surpassed $500 million in assets in less than three months, according to its administrator on Wednesday.
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Taiwan’s ratings cut by MSCI in two indices
Taipei Times
Taiwan’s weightings in the two indices provided by MSCI Inc have been cut after the global index provider’s semi-annual index review, but analysts said the local equity market will continue an uptrend in the mid-term amid ample liquidity.
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Gold

Gold reserve holdings by country
Akin Oyedele – Business Insider
The World Gold Council is out with its latest report on gold demand.
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Why the Gold rush: Record $150mn seized in 10 months
Anjali Lukose and Khushboo Narayan – The Indian Express
In Mumbai Customs lingo, ‘Dhanalakshmi’ or ‘Kuber’ aren’t gods their officers propitiate or horses they bet on at the city’s famous Mahalaxmi racecourse. ‘Dhanalakshmi’ is the code for the Emirates flight EK500 from Dubai to Mumbai while ‘Kuber’ refers to Air India’s AI 984 which flies the same route. Officials say these are the flights used most often by gold smugglers.
jlne.ws/1IDILep

The Great Silver Debate
Bill Holter – SilverSeek
Over the last weeks, a great debate has erupted regarding silver. More to the point, Ted Butler claims JP Morgan has accumulated at least 350 million physical ounces. Some pooh pooh this and say it is not possible while others who may believe it are scared witless because they are afraid Morgan will dump the metal and destroy the silver price.
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