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World Of Opportunity Chicago 2014: Tim McDermott (Promo)
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Quote of the Day

“In a hot market, pricing can get tighter but safeguards such as call protection and change of control should stay the same. The correct approach is to reach out to the wider investor community and highlight the issues before they ruin the market for everybody.”

Henry Craik-White, a senior investment analyst at ECM Asset Management in the story, “Bond Traders Plot Response as Safeguards Vanish: Credit Markets”.

Lead Stories

The darker side of Iceland’s showcase recovery
Gillian Tett – Financial Times
Six years ago, Iceland became a miniature emblem of the crazy credit boom – and bust. This volcanic island has just 320,000 people; think of Buffalo, New York. But in the 2000s, the country’s three main banks expanded at such a breathless pace that they assumed $85bn of debt to fund a collective balance sheet 10 times bigger than the country’s economy.

**JK – Unwinding a position is often harder than taking one.

Markets of the Once ‘Fragile Five’ Countries Are Now Soaring
LANDON THOMAS JR. – Dealbook – NY Times
Just six months after fears of an emerging-market meltdown rattled world markets, stocks and bonds in the so-called Fragile Five economies — Turkey,
India, Indonesia, Brazil and, to a lesser extent, South Africa — have become the primary targets for yield-hungry global investors.

**JK – Let’s call them the BIITS.

Because low vol just happens some times
David Keohane – Financial Times
On the search for lost vol, complex systems and the limits of analysis from HSBC: A curious feature of current conditions is that the explanation for the phenomenon is often taken to be self-evident. It’s caused by QE and low interest rates. It’s caused by lower trading volumes from hedge funds. It’s caused by lower risk appetite (even though risk premia are highly compressed). It’s caused by crisis fatigue and complacency.

**JK – I’m too tired and apathetic to get excited about this story.

CME to expand paired delivery as banks rethink third-party CLS
Joel Clark – FXWeek
CME Group is to extend its new paired-delivery model for the physical settlement of foreign exchange futures from Europe to the US in September, as banks step back from the provision of indirect settlement through CLS to financial market infrastructures (FMIs), which include exchanges and central counterparties (CCPs).

Bond Traders Plot Response as Safeguards Vanish: Credit Markets
Katie Linsell – Bloomberg
Junk bond investors have had enough of borrowers in Europe eroding safeguards as sales of the high-yield, high-risk debt surge to a record $110 billion.

***DA: If there are too many safeguards, they cannot be called “high risk.”

Deutsche Bank, Fired Euribor Traders Start Settlement Talks
Karin Matussek – Bloomberg
Deutsche Bank AG (DBK) and four Euribor rate submitters the lender fired last year agreed to enter court-monitored mediation to resolve the dispute.
The decision came after a Frankfurt appeals court urged the parties to settle at a hearing today. The judges were reviewing Deutsche Bank’s bid to overturn a labor court ruling that the traders were improperly dismissed because the lender didn’t have processes in place to prevent conflicts of interest when submitting data to calculate interest-rate benchmarks.

***DA: As Otter said in Animal House, “You [screwed] up. You trusted us.”

Why Sanctions Won’t Upend Russia’s Debt Repayments
Lyubov Pronina – Bloomberg
Russian companies facing $14.9 billion of debt payments this year will probably weather U.S. sanctions as OAO Rosneft rakes in oil proceeds from China and the central bank tackles a cash shortage among lenders.
The availability of alternatives will help President Vladimir Putin shrug off the most punitive U.S. sanctions yet as oil producer Rosneft, which has a $12.7 billion loan payment in December, can rely on advanced funding from long-term Chinese crude contracts to cover debt, according to ZAO Raiffeisenbank and BCS Financial Group. OAO Gazprombank, with $2.2 billion due this year, can draw on central bank cash, BCS said.

Putin Sanctions Pummel Markets as Recession Risk Grows
Natasha Doff – Bloomberg
The latest sanctions imposed on Russia by the U.S. over Ukraine are threatening to tip the nation into a recession as they exacerbate a bond selloff and drive credit risk higher.
Yesterday’s 36 basis-point jump in Russia’s August 2023 ruble bond, the most among 24 emerging markets monitored by Bloomberg, extended this month’s increase to 59 basis points. Credit default swaps insuring the nation’s debt against non-repayment climbed 26 basis points to a two-month high.

***DA: Yesterday’s Malaysia Airlines plane crash/ will not help.

Central Banks

Fed comments on valuation fall flat with U.S. fund managers
Fed Chair Janet Yellen may have surprised the markets this week by noting that valuations in some parts of the U.S. stock market look stretched but mutual fund managers mostly greeted her comments with a shrug.

***DA: Gotta put the money somewhere, and cash is not an option apparently.

An Unnecessary Fix for the Fed
Alan S. Blinder – WSJ
The House Financial Services Committee held a hearing on Federal Reserve reform on July 10. The hearing didn’t get much press attention. But it was remarkable. While the House can’t manage to engage on important issues like tax reform, immigration reform and the minimum wage, it’s more than willing to propose radical “reform” of one of the few national policies that is working well.


‘Unprecedented Global Cooperation’ on FX Probe, Says FCA
Chiara Albanese – MoneyBeat – WSJ
The U.K.’s Financial Conduct Authority’s investigation into the possible manipulation of foreign exchange markets has led to an “unprecedented global cooperation” among authorities looking at whether traders colluded to manipulated a key industry benchmark.

***DA: Now let’s move on to cooperating on cross-border swaps rules.

ITG debuts FX liquidity-cost index
Rob Daly – The Trade
As part of its recent push into transaction cost benchmarking, agency brokerage ITG has launched a new index for the FX spot market.

A utility for foreign exchange trading
Financial Times
Banks, asset managers, export companies and anyone else with a passing interest in a properly functioning foreign exchange market should not take off on their summer holidays just yet.

NY Financial Regulator Releases Draft of ‘Bitlicense’ for Bitcoin Businesses
Paul Vigna – MoneyBeat – WSJ
The “Bitlicense” is a step closer to reality. Seven months after holding a clutch of highly publicized meetings on cryptocurrency regulations, Benjamin Lawsky, the superintendent of the New York State Department of Financial Services, released the draft version of the agency’s proposed rules for regulating virtual currencies.

BitBeat: Bitcoin and ‘Wall Street 2.0’
MoneyBeat – WSJ
Bitcoin, at some point, may become the kind of trading vehicle that sits comfortably on a Wall Street trader’s screen alongside stocks, bonds, and commodities. Or, it might be the conduit for trading those other assets. That’s the thinking of the folks over at Andreessen Horowitz, who were the lead investors on a $2.8 million round of fund raising for the data-analytics site TradeBlock.

US banks shunning bitcoin over regulatory fears
Jessica Meek –
Experts warn that regulatory requirements are likely to continue holding back bitcoin and other crypto-currencies, meanwhile European regulators and Canadian lawmakers have both recently addressed the issue

Bitcoins Can’t Shake Bubble Image in Poll After 45% Drop
Olga Kharif – Bloomberg
Bitcoins, which lost 45 percent of their value after skyrocketing to more than $1,100 last year, are poised to tumble further, according to the latest Bloomberg Global Poll of financial professionals.
Fifty-five percent of those surveyed said the virtual currency trades at unsustainable, bubble-like prices, according to the quarterly poll of 562 investors, analysts and traders who are Bloomberg subscribers. Another 14 percent said it’s on the verge of a bubble. Only 6 percent of respondents said a bubble isn’t forming. The remaining 25 percent were unsure.

Indexes & Index Products

VIX Jumps With Gold Bets as Ukraine Ignites Stock Selloff
Inyoung Hwang and Namitha Jagadeesh – Bloomberg
The benchmark gauge for U.S. stock volatility rose the most in a year and gold speculation picked up in the options market amid rising Ukrainian tensions.
The Chicago Board Options Exchange Volatility Index jumped 32 percent to 14.54 for the biggest increase since April 2013. The SPDR Gold Shares (GLD) added 1.7 percent. Bullish contracts on the exchange-traded fund cost the most since December 2012 relative to bearish ones, data compiled by Bloomberg show.

***DA: A 32 percent rise in the VIX, but still far below the long term average for equity volatility.

DAX Serves As Basis For First-Ever European Exchange-Traded Fund In China
The DAX index underlies the first exchange-traded fund (ETF) based on a European index that will be available in China. The HuaAn Germany DAX 30 ETF was introduced by HuaAn Asset Management Co. Ltd. on July 14, 2014 and will later be listed on the Shanghai Stock Exchange.

Investible green bond indices ‘not quite there yet’
Jonathan Williams – Investments & Pensions Europe
Investible climate bond indices will not come about for several more years, despite the universe now exceeding $0.5trn (EUR369bn), according to a report by the Climate Bond Initiative.
The report, ‘Bonds and climate change: The state of the market in 2014’, found that the majority of existing issuances stemmed from the transport sector, accounting for close to $359bn globally.
Climate and green bonds linked to energy issuances accounted for a further $74bn, while financing deals exceeded $50bn.


Gold moves where dollars fear to trade
Neil Collins – Financial Times
What a grand thing it is to control a global currency. The whole world wants to use your notes, those irredeemable, unsecured, zero-coupon loans to the US Federal Reserve, while governments everywhere measure their own reserves in the value of Treasury bills they have bought. Oh, and no international bank can operate without access to the US money markets.

Gold Declines as Dollar Weighed Against Global Tensions
Nicholas Larkin and Glenys Sim – Bloomberg
Gold fell in New York, retreating from the biggest advance in four weeks amid tension in Ukraine and the Middle East, as a stronger dollar curbed demand. Palladium traded below the highest price in 13 years.
Gold rose 1.3 percent yesterday after a Malaysia Airlines plane was shot down over Ukraine and Israel sent ground forces into the Gaza Strip. Russia and Ukraine blamed each other for the downing of the Boeing Co. 777 jet over the eastern region of the country, which killed all 298 people on board.

Gold worth millions recovered from 1857 shipwreck
Michael Winter, USA TODAY
Millions of dollars worth of gold has been recovered from a famous 19th-century shipwreck off South Carolina being fought over in court, the first inventories of the salvaged cargo show.
A federal judge in Virginia overseeing the recovery effort from the SS Central America released the mid-April-to-mid-June tallies late Wednesday, the Associated Press and The Columbus Dispatch reported Thursday. An updated list is likely soon.

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