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 is at

Sponsored Content
Foreign Exchange Industry Conference (FXIC),
June 20, 2014, Grand Hyatt Hotel, NY

Shift Forex’s FXIC NYC 2014 will bring together more than 400 foreign exchange market participants to network and exchange ideas about current issues and opportunities ahead for the markets and industry.

This year’s event will have a focus on the expansion of exchange-traded foreign exchange products driven by current market and regulatory trends.

Speakers include Phil Harris, Head of FX Derivatives, NASDAQ OMX, Jamil Nazarali, Head of Citadel Execution Services, Jon “DRJ” Najarian, cofounder of optionMONSTER as well as senior executives from brokers, banks and technology firms serving the foreign exchange markets.

John Lothian News is pleased to be an FXIC Media Partner. Event sponsors include NASDAQ-OMX, Forex Factory, Citadel Securities, Advanced Markets, Currenex, Deltix and CitiFX.

The event will be held at the Grand Hyatt hotel in midtown Manhattan. It kicks off with an evening reception Thursday, June 19th.The main program, exhibit hall and a closing reception will take place June 20th.

Readers of John Lothian Newsletters are invited to apply for a complimentary pass to the event. Please write “JLN” in the Comment box on the event’s registration page.

Registration and full agenda  HERE.


Quote of the Day

“U.S. Treasuries don’t look that bad, relative to the rest of the world. Given the liquidity, the size of the markets, owning some duration is agreed by many as pretty OK. At these levels today, U.S. Treasuries at 2.43 percent aren’t that bad.”

Blackrock’s Chief Investment Officer Rick Rieder in the story, “BlackRock’s Rieder Say Low-Yield Treasuries Still a Value”.

Lead Stories

The ECB Eyes Danish Negativity
MoneyBeat – WSJ
One of the options available to the European Central Bank, as next week’s policy-setting meeting looms large, is to take its already rock bottom official interest rates negative.

***DA: If only the calorie count from eating a Danish was negative.

BlackRock’s Rieder Say Low-Yield Treasuries Still a Value
Liz Capo McCormick – Bloomberg
BlackRock Inc., the world’s biggest money manager, says U.S. Treasury 10-year notes yielding less than 3 percent still have value in today’s low-inflation environment.
“U.S. Treasuries don’t look that bad, relative to the rest of the world,” Chief Investment Officer Rick Rieder said in a television interview on “Bloomberg Surveillance” with Tom Keene. “Given the liquidity, the size of the markets, owning some duration is agreed by many as pretty OK. At these levels today, U.S. Treasuries at 2.43 percent aren’t that bad.”

***DA: Especially true once the front end goes negative, like in the story above.

Fink Says Leveraged ETFs May ‘Blow Up’ Industry
Mary Childs – Bloomberg
BlackRock Inc.’s Laurence D. Fink, who oversees the world’s biggest exchange-traded fund lineup, said leveraged ETFs are a structural problem and have the potential to “blow up” the industry.

***DA: Don’t sugar-coat it, Lar. Tell us what you really think.

Goldman Shuns Bonds Pimco’s Gross Favors in ‘New Neutral’
Charles Stein – Bloomberg
As Bill Gross vows to restore top performance at the world’s biggest bond fund, he’s taking a path many of his rivals shun.
Gross, who manages the $230 billion Pimco Total Return Fund (PTTRX) at Pacific Investment Management Co. in Newport Beach, California, is betting five-year Treasuries, which are more sensitive to changes in the central bank rate than longer-dated bonds, will do well because markets overestimate how much the Federal Reserve will raise interest rates.

***DA: Differing viewpoints is what makes a market.

Stanley Fischer Sworn In As Member Of The Board Of Governors Of The Federal Reserve System–May 28, 2014
Stanley Fischer took the oath of office on Wednesday as a member of the Board of Governors of the Federal Reserve System. The oath was administered by Chair Janet L. Yellen in the Special Library.

***DA: The Fed now has a Fischer man and a Fisher man. I wonder how many fishermen are on the board.

Bond Surge Worldwide Drives Index Yield to One-Year Low
Wes Goodman, Justina Lee and Lucy Meakin – Bloomberg
A worldwide bond-market surge pushed yields to the lowest levels in a year on growing evidence central banks can keep stimulating economic growth without igniting inflation.

Freddie Mac 30% Gains Luring Non-Agency 2.0 Investors
Alexis Leondis – Bloomberg
Hedge-fund manager Chris Hentemann has found what he calls his favorite deal of all time.
Hentemann’s 400 Capital Management LLC bought a new type of bond sold by Freddie Mac in July in which private investors share the risk of home-loan defaults with the mortgage-finance company. Hentemann, chief investment officer of the hedge fund, said these securities, categorized as agency credit-risk transfer securities, were “exceptional value” because they were a new asset class offering high yields with relatively low credit risk.

***DA: Relative to what, exactly?

Wanted: reliable second-hand bond dealers
Ralph Atkins – Financial Times
For carmakers, a strong second-hand market is essential. Unless buyers “hold to maturity” – the scrap heap – they want to sell their vehicles easily; they shun unpopular colours or lesser-known models. A poor resale market damps demand, and thus the prices customers are prepared to pay for new vehicles.

Bond investors borrow to boost returns
Michael Mackenzie and Tracy Alloway in New York – Financial Times
“Keep calm and carry on” is a British motivational poster from the second world war that has been co-opted by a generation of design-crazy hipsters and now global investors desperate for higher returns. This year’s extended run of low yields and meagre risk premiums in the bond market leaves investors with a tough choice; they can either accept a very low return or rely on borrowing money to enhance their income.

***DA: I don’t always comment on newsletter stories, but when I do, I keep calm and comment on.

Carney Seen Giving $630 Billion Puzzle to Successor: U.K. Credit
Emma Charlton and David Goodman – Bloomberg
Mark Carney risks leaving his successor a 375 billion-pound ($630 billion) conundrum: what to do with the government bonds the Bank of England amassed during its stimulus plan.
BOE officials say unwinding quantitative easing is unlikely to begin until the key interest rate has risen materially from its record-low 0.5 percent because they want the option of cutting borrowing costs again if the recovery falters. Derivatives contracts suggest that point may not be reached before Carney leaves in 2018.

Video: interview with Mian & Sufi on “House of Debt”, and a review
Cardiff Garcia – Financial Times
This is the uncut, extended version of my interview with Atif Mian and Amir Sufi, a shorter version of which appeared on And below is a time guide, followed by some brief thoughts on their excellent new book, “House of Debt”.

***DA: The name “House of Cards” would have been a better title but it was already taken by Netflix.

Kocherlakota’s Case for Price Level Targeting
Quantitative Ease – Carola Binder
Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, described the benefits of price level targeting to the Economic Club of Minnesota on May 21. He began by explaining that Congress has charged the FOMC with making monetary policy to promote price stability and maximum employment. Since January 2012, the FOMC has interpreted an inflation rate of 2% as most consistent with the price stability part of the mandate.

Rothschilds look for $30tn capitalism fix
James Mackintosh – Financial Times
There was no bald supervillain stroking a white cat, but other than that the City of London hosted a conspiracy theorists’ perfect scenario yesterday: a meeting organised by the Rothschilds, sponsored by the Rockefellers and with managers of $30tn, or more than a tenth of all financial assets worldwide, in the room. Even the British royal family was represented, essential for any decent conspiracy, although usually Prince Philip is preferred to the Prince of Wales.

Economic Inclusion and Financial Integrity—an Address to the Conference on Inclusive Capitalism
Speech by Christine Lagarde, Managing Director, International Monetary Fund

man Shuns Bonds Pimco’s Gross Favors in ‘New Neutral’

Charles Stein – Bloomberg
As Bill Gross vows to restore top performance at the world’s biggest bond fund, he’s taking a path many of his rivals shun.

Guest post: When anyone can be a money issuer
David GW Birch – Financial Times
The Maltese thinker Edward de Bono is famous, to older readers, for having originated the concept of “lateral thinking” back in the 1960s. He has a long track record of trying to bring new thinking to old problems.

Desperately seeking volatility
Izabella Kaminska – Financial Times
The curious case of vanishing volatility deepens, with the latest installment coming by way of the oil market. From Harry Tchilinguirian’s team at BNP Paribas, this is apparently what the death of volatility looks like:

Paper money is unfit for a world of high crime and low inflation
Kenneth Rogoff – Financial Times
Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes? Getting rid of physical currency and replacing it with electronic money would kill two birds with one stone.

Central Banks

Watch out for Swiss version of negative rates
Jamie Chisholm – Financial Times
By this time next week, the market expects to have received the latest stimulus jolt from, probably, the world’s second most important central bank.

***DA: And they will need to be even more negative if the ECB moves downward. Must keep the 1.20 floor in place.

Carney Seen Giving $630 Billion Puzzle to Successor: U.K. Credit
Emma Charlton and David Goodman – Bloomberg
Mark Carney risks leaving his successor a 375 billion-pound ($630 billion) conundrum: what to do with the government bonds the Bank of England amassed during its stimulus plan.

***DA: Same question being asked in the U.S. and Japan – what next?

Turkey’s Central Bank Faces Mounting Government Pressure
Emre Peker and Yeliz Candemir – WSJ
The Turkish government’s calls this week for the country’s central bank to lower interest rates have spurred concerns about political pressure on the bank. Prime Minister Recep Tayyip Erdogan’s comments followed the bank’s decision last week to cut its benchmark rate for the first time in a year, easing by 0.5 percentage point, to 9.5%.

BOJ Member Says Easing Could Continue for Few More Years
The Bank of Japan will likely miss the deadline for its inflation target and have to continue with stimulus measures for a few more years, one its policy board members said Thursday, challenging the optimism of its governor, Haruhiko Kuroda.


Falling renminbi raises eyebrows overseas
Josh Noble – Financial Times
When the renminbi began falling back in February, traders expected it to be temporary as China’s central bank fired a warning shot across the bows of naughty exporters. Many of them had been fiddling invoices to bring cash onshore and profit from a steadily rising renminbi.

On The ‘Fear Of Ostracism’ And Fixing FX
Chiara Albanese – MoneyBeat – WSJ
Bank of England Governor Mark Carney told bankers in no uncertain terms Tuesday to clean up their act. Nestling in his speech were some clues on where the sprawling probe into the currencies market may lead.

HFT, bitcoin and the path towards mouse designed meta-experimentation
Izabella Kaminska – Financial Times
We’ve been wondering about the consequences of paradoxical markets here at FT Alphaville, especially as financial information systems run into the laws of physics. (How does an HFT trader, for example, gain an advantage when he’s already approaching the speed of light, which presumably counts as the universal circuit breaker?)

BitBeat: Bitcoin Continues to Grow – Gingerly – in China
MoneyBeat – WSJ
Who’s afraid of the People’s Bank of China? Not Danny Deng, it seems. The founder of 798 Satoshi Square, a bitcoin informational and meetup site in Beijing’s art district, has teamed up with Robocoin to give mainland China its first two-way bitcoin ATM.

Ruble Bears Unimpressed by Rally as Putin’s Economy Sinks
Ye Xie and Gabrielle Coppola – Bloomberg
Currency traders and analysts are showing no faith in the rebound that has made the Russian ruble the world’s best-performing currency this month.

Indexes & Index Products

Global ETP inflows hit $33.5bn in April, says BlackRock
Richard Jory –
Year-to-date inflows in Europe bigger than those for the whole of 2013; Lyxor lists first ETF to track Euronext CAC PME index; commodity ETPs helped by precious metals and agriculture; ETFs tracking the healthcare sector see assets pass $1 billion

More ‘adult supervision’ needed, SEC’s Muoio tells conference
Richard Jory –
Structured products in the US can fall under the jurisdiction of the SEC, state regulators and Finra. Representatives from each were speakers at this year’s Structured Products Americas conference.

Growing appetite: Which smart beta strategies are available to order?
Joe McGrath – Financial News
Investors normally employ smart beta strategies either to reduce the level of risk in a portfolio or to enhance returns.

JonesTrading Names Lutz To Head ETFs
JonesTrading Institutional Services LLC, a leading block trading firm in U.S. and international securities for institutions, announced today that industry veteran David Lutz has joined the firm to lead an expansion to develop ETF business. The expansion builds on the already substantial presence the firm has in equities and derivatives.


Gold Reaches 16-Week Low on Bets U.S. Economy to Rebound
Debarati Roy – Bloomberg
Gold futures reached a 16-week low in New York amid speculation that the U.S. will rebound from its winter slowdown.
The American economy contracted for the first time in three years from January through March, a government report on gross domestic product showed today. Federal Reserve policy makers said at their April meeting that growth has strengthened after adverse weather took its toll. Fewer Americans than forecast filed applications for unemployment benefits last week.

One Sure Sign of a Bottom for Gold (and Why It’s Not Yet Here)
Paul Vigna – MoneyBeat – WSJ
Gold’s been down lately, and it’s down on Wednesday as well (off 0.6% at $1,258), but it may have further to fall, MarketWatch’s Mark Hulbert said this morning on the MoneyBeat show.

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