First Impressions

It’s All About Jobs
Jim Kharouf and Doug Ashburn, JLN

It must be an election year since we’re talking about jobs. And we’re also talking about the future — primarily blockchain.

On the one hand we have a report in The Trade showing jobs in sales and trading have plunged almost 20 percent over the past five years — largely in the fixed income space.

And yet, we’re seeing a louder drumbeat of interest and initiative in the blockchain space. The FT story on Digital Asset Holdings‘ plans today included an estimate on the amount of money being spent on the technology. Richard Lamb, CEO of Accenture’s financial services operating group, said that of the $100 billion spent on financial technology, 10- to 20 percent could go toward blockchain. On top of that the Global Blockchain Council in Dubai, made up of 32 members, is jumping into the space, with an estimate that $300 billion could be invested in the blockchain space over the next four years. Toss in a few other notable efforts from IBM and DTCC, Microsoft, Australian Securities Exchange which is already allied with Digital Asset, Nasdaq and a host of others and you can see the potential growth in this space. There are jobs to be had, just not in fixed income trading at the moment.

One wonders what the settlement and clearing space will look like in the coming years.

Also, a story about another Jobs — or at least about the company he left behind — has garnered much attention this week, and reignited the age-old balance between privacy and security. Should Apple be required by the FBI to assist it in cracking through the layers of security to obtain information about the recent terrorist attack in San Bernardino, or will that open up the floodgates of personal privacy protection?

Our industry is still grappling with this issue. Nearly six years after the passage of the Dodd-Frank Act, the issue of data sharing among jurisdictional authorities is still being debated. Once all the pieces are in place, who exactly will be allowed a look into our data repositories? How granular will this data be required to be? What is to stop “non-vetted” foreign regulators to use the information to less wholesome ends? In other words, who will regulate the regulators?

We are asking these same questions with the CFTC’s recently proposed Regulation AT, a set of rules addressing the evolution of automated trading on U.S. exchanges, specifically the requirement that proprietary trading firms submit source code for regulator review. These issues – privacy and blockchain – are due to be taken up at next week’s CFTC Technology Advisory Committee meeting on February 23.

Are these good rules designed to protect market participants, or is it regulatory overreach into private matters, and fraught with unintended risks? We will be watching the battle between Apple and the FBI. Early indications on Twitter show that the public is on Apple’s side. Will they feel the same way about our market regulations?

Quote of the Day

“Don’t know if anyone has been paying attention, but the track record of FX and equity leadership in [non-Treasury] fixed income markets has been nothing short of laughable.”

An anonymous participant in the veteran traders group 10,000 Hours Team, in the story, “There are 2 tribes on Wall Street, and they could be about to go to war”

Lead Stories

The Real Economy Is Talking, but Treasuries Aren’t Listening
Luke Kawa – Bloomberg
There’s a massive divergence between recent economic data and U.S. Treasury yields.
Amid widespread risk aversion, the yield on 10-year debt fell below 1.60 percent this month before recovering to back over 1.75 percent on Thursday. According to Deutsche Bank AG Chief International Economist Torsten Sløk, that’s still far too low.

European banks: Borrowed time
The Economist
For those who worry that a repeat of the crisis of 2007-08 is imminent, this week brought fresh omens. Shares of big banks tumbled; despite a mid-week rally, American lenders are down by 19% this year, European ones by 24% (see article). The cost of insuring banks’ debts against default rose sharply, especially in Europe. The boss of Deutsche Bank felt obliged to declare that the institution he runs is “absolutely rock solid”; Germany’s finance minister professed to have no concerns (thereby adding to the concerns). This is not 2008: big banks are not about to topple. But there are reasons to worry, and many of them converge on one country.

****SD: A comprehensive rundown.

NY Fed warns asset managers are vulnerable to ‘runs’
Robin Wigglesworth – Financial Times
The New York Federal Reserve has warned that asset managers are vulnerable to quasi-bank runs that can cause “significant negative spillovers” across financial markets.
The combination of deteriorating trading conditions — especially in corporate bonds — combined with the swelling of the US mutual fund industry that promises investors the ability to redeem money at a moment’s notice has become an increasing concern for some policymakers, fund managers and analysts.

$4.1 Trillion Of U.S. Corporate Debt Maturing By 2020: S&P
Teresa Rivas – Barron’s
Earlier this week, Moody’s noted that a record amount of speculative and investment grade debt will mature between this year and 2020, with much of that maturation at the back end of that range. On Thursday, Standard & Poor’s Ratings Direct released its own refinancing study, which finds that $4.1 trillion of U.S. rated corporate debt is set to mature through the year 2020. That accounts for about 43% of the $9.5 trillion in debt maturing globally.

****SD: Hopefully, that means better decisions and more responsibility. Ever dealt with an immature bond? They are so difficult to babysit.

China’s Banks May Be Getting Creative About Hiding Their Losses
Lianting Tu – Bloomberg
Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank AG estimates may result in losses of as much as 1 trillion yuan ($153 billion) over five years.

Russia Sues Ukraine in London Court Over $3 Billion Default
Anna Andrianova and Natasha Doff – Bloomberg
Russia said it filed a lawsuit against Ukraine in the High Court in London after the government in Kiev defaulted on $3 billion in bonds. Cleary Gottlieb Steen & Hamilton LLP was hired to represent the government in Moscow in a case that will seek to recover the principal in full, $75 million of unpaid interest and legal fees, Russian Finance Minister Anton Siluanov said on Wednesday. The filing comes after Germany tried to mediate talks between the two former-Soviet neighbors to try to reach an out-of-court settlement.

SIFMA Releases Electronic Bond Trading Platform Report For U.S. Corporate And Municipal Securities
Press Release
SIFMA today released the results of its survey of electronic bond trading platforms for U.S. corporate and municipal securities. The survey results highlight a fixed income market structure that is evolving and adapting given regulatory and market constraints, and reflects a significant market focus on electronic trading as an emerging part of fixed income market structure.

****SD: Also see Treasuries Prove Fertile Ground for High-Speed Arbitrage

There are 2 tribes on Wall Street, and they could be about to go to war
Matt Turner – Business Insider
Stock trading specialists on Wall Street are being asked to give their colleagues in the fixed-income markets a hand. The bond-trading veterans aren’t so sure they want the help.
Consider what happened when former Goldman Sachs executive Chris White drew attention to a Bloomberg article on equities and electronic trading employees moving across to fixed income.
White publishes a weekly bond market wrap-up called Friday Newsletter. The story was met with a swift response from a group called the 10,000 Hours Team, made up of trading veterans. The participants are anonymous, so as to allow them to write freely.

OECD calls for less austerity and more public investment
Larry Elliott – The Guardian
The OECD has called for its rich-country members to ease up on austerity and collectively agree to spend more on infrastructure projects to boost flagging growth.
The Paris-based Organisation for Economic Cooperation and Development expressed concern about the state of the global economy as it cut growth forecasts made three months ago and warned that low interest rates and money creation by central banks were no longer enough for a lasting recovery.

Europe Leveraged Loans Post Longest Run of Losses Since Crisis
Europe’s leveraged-loan market is in freefall.
Prices for the riskiest loans to companies dropped for the 13th straight day on Wednesday, the longest run of declines since the global financial crisis, according to an S&P index tracking 95 billion euros ($106 billion) of debt. The yield premium that investors demand to hold bonds backed by such debt is at a record for collateralized loan obligations, or CLOs, sold since the market re-opened in 2013, according to Barclays Plc.

Central Banks

What Monetary Policy 3 (MP3) Will Look Like
Ray Dalio – LinkedIn
Monetary Policy 1 was via interest rates. Monetary Policy 2 was via quantitative easing. It will be important for policy makers and us as investors to envision what Monetary Policy 3 will look like.

Free exchange: Slight of hand
The Economist
Is the job of central bankers more like that of technicians, carefully turning knobs as they fine-tune the economy, or magicians, manipulating the audience into the suspension of disbelief? Most of the time it is the former. Monetary maestros nudge interest rates up and down with meticulous precision. Yet in extreme cases—such as when economies become trapped in a low-growth rut—central bankers must try to conjure up a change in the public’s economic outlook. Just as uncertain magicians often fail to pull off their tricks, so central banks are finding their audiences in an ever-more sceptical mood.

Japan’s Abenomics programme lies in tatters
Nicholas Spiro – South China Morning Post
For an indication of the extent to which the limits of ultra-loose monetary policy have been reached, look no further than Japan. On Monday, the publication of GDP data for the final quarter of last year showed that Japan’s economy shrank at an annualised rate of 1.4 per cent, an even sharper contraction than the one anticipated by analysts. That this was mostly due to a steep fall in private consumption – a crucial gauge of the success of premier Shinzo Abe’s reflationary economic programme, dubbed “Abenomics” – is a double whammy.

Bank of Japan’s New Conundrum on Negative Rates: Negative Reaction
Takashi Nakamichi – WSJ
A clash Thursday between Japan’s central-bank chief and lawmakers highlighted the downside of negative interest rates: They are making the Japanese public feel negative.

Hungary Central Bank Stockpiles Guns, Bullets Citing Terror Risk
Hungary’s central bank, already facing criticism for a spending spree ranging from real estate to fine art, is now beefing up its security force, citing Europe’s migrant crisis and potential bomb threats among the reasons. The National Bank of Hungary bought 200,000 rounds of live ammunition and 112 handguns for its security company, according to documents posted on a website for public procurements.

****SD: If anybody tells you central banking is boring, have them read this story.

Fed’s Kashkari: 25% Capital Requirement May Be Right for Banks
The Federal Reserve Bank of Minneapolis’s new president, Neel Kashkari, called on Tuesday for policy makers to consider breaking up big banks, among other options, to prevent future government bailouts. Mr. Kashkari—a former Treasury Department official, unsuccessful Republican candidate for governor of California and alumnus of Goldman Sachs Group Inc. and Pacific Investment Management Co., or Pimco—met later in the day for a conversation with reporters and editors of The Wall Street Journal. Here is a transcript of the…

Bank breakup blues — Negative thoughts on rates
Francesco Guerrera – Politico
Let’s admit it, few in European banking circles expected a senior Federal Reserve official to propose breaking up the big banks, as Minneapolis Fed President Neel Kashkari did on Tuesday night. Despite the surprise, the reactions were swift.

The world economy: Out of ammo?
The Economist
World stockmarkets are in bear territory. Gold, a haven in times of turmoil, has had its best start to a year in more than three decades. The cost of insurance against bank default has surged. Talk of recession in America is rising, as is the implied probability that the Federal Reserve, which raised rates only in December, will be forced to take them back below zero.
One fear above all stalks the markets: that the rich world’s weapon against economic weakness no longer works. Ever since the crisis of 2007-08, the task of stimulating demand has fallen to central bankers. The apogee of their power came in 2012, when Mario Draghi, boss of the European Central Bank (ECB), said he would do “whatever it takes” to save the euro. Bond markets rallied and the sense of crisis receded.

Speculators Won’t Break China’s Central Bank
Since August, the Chinese renminbi (RMB) has fallen by approximately 5% versus the dollar. For the previous decade, the RMB had appreciated against all major currencies and was widely viewed as being intentionally “under-valued” to support China’s labor-intensive export sector. Market response to the RMB depreciation has gone from confusion back in August over the deviation from the long-term trend, to a rising conviction since January that the People’s Bank of China (PBOC) has lost control, that capital flight will accelerate from here and that market participants outside of China are dictating terms. In this report, we analyze underlying mechanics and the risk – despite China’s trade surplus and currency reserves – the market can “break the PBOC”. We think it is unlikely.

****SD: Will there ever be another Soros moment? Highly doubtful.


Currency Managers Throw Out the Playbook as Trusted Models Fail
Andrea Wong – Bloomberg
Currency managers battered by the failure of most major trading strategies this year are switching tactics. Adnan Akant, who has more than 30 years of experience in foreign exchange, said his firm has reduced the size of its positions to react to, rather than anticipate, market surprises, while Robert Savage, a hedge-fund manager and former chief strategist at FX Concepts LLC, is looking for currencies that correlate with other assets such as oil and gold.

****SD: Good. As Walter Donovan said to Indiana Jones, “Don’t trust anybody.” Let alone playbooks.

Some currency trading positions yield increased returns around Fed announcements
London School of Economics
Announcements by the Federal Open Market Committee (FOMC), which occur regularly at pre-specified dates, are one of the most highly anticipated events by investors around the world. Through these announcements, the Federal Reserve communicates monetary policy in the form of setting the target federal funds rate which is the interest rate at which financial institutions lend to each other overnight.

Risk Swings Weaken FX Options’ Focus on Central Banks: Analysis
Vassilis Karamanis – Bloomberg
Persistent financial-market unrest is eroding the dominance of central banks as the top drivers of currency option prices. Traders now assign increasing importance to short-term risk perceptions based on global economic developments, Bloomberg strategist Vassilis Karamanis writes.

‘Sweet spot’ of volatility seen lifting currency trading – Business News
The Star Online
Volatility in currency markets will be elevated, boosting trading as investors remain fixated with the reaction of central banks to turmoil in financial markets, according to UBS Group AG.
A JP Morgan Chase & Co gauge of global exchange-rate volatility surged to a four-year high of 12.5% on Feb 11 amid concern that monetary policy tools were losing their potency. The market will continue to see “heightened volatility for some time,” said Anthony Hall, regional head of foreign exchange, rates and credit in Asia Pacific at UBS, the world’s fifth-biggest currency trader.

Barclays Forks Over Another $50M For FX Damages in Rigging Settlement
Jeff Patterson – Finance Magnates
As the worldwide banking industry looks to turn the page on its currency rigging scandals, the fines still have not abated, culminating in the latest $50 million settlement by Barclays Plc to settle a US lawsuit, according to a recent Reuters report.

Japanese corporate earnings: Profit growth seen slowing on stronger yen- Nikkei Asian Review
Nikkei Asian Review
The resurgent yen is likely to put the brakes on earnings growth for many Japanese companies this year, though the end to the free fall in crude oil prices is seen buoying oil distributors to the black. Pretax profit of 181 listed companies that close their books in December likely will expand just 2% on the year to 3.07 trillion yen ($27 billion), compared with last year’s 12% increase. Companies doing business globally are to be particularly hurt by a stronger yen.

Pound Volatility Is Highest Since Debt Crisis as EU Talks Begin
Lucy Meakin – Bloomberg
Pound traders’ expectations for price swings against the euro in the next six months are at the highest level since the currency bloc’s debt crisis in 2011, as U.K. Prime Minister David Cameron seeks a deal on the terms of Britain’s membership of the European Union.

Indexes & Index Products

Threats to hedge fund managers’ ‘secret sauce’
Robin Wigglesworth – Financial Times
Hedge fund managers are arguably the celebrity chefs of the money management industry. They are best able to whip up returns that make investors drool. But financial engineers are unpicking their secret sauce and finding new ways to sell it by the bottle. The biggest trend in the money management industry is the shift towards passive investment. About $3tn is now in index-tracking and exchange traded funds that only seek to replicate the returns of a broad market, such as the S&P 500, the Barclays Aggregate bond index or the FTSE 100. The basic return of a market is known as “beta” in financial jargon.

Banks build ETF businesses as growth stalls in bond trading
Olivia Oran and Trevor Hunnicutt – Reuters
Wall Street banks are ramping up businesses that trade exchange-traded funds full of bonds, a bright spot of growth at an otherwise bleak time for trading but one that may carry unappreciated risk.

Hedge Funds Will Pay for You to Own Small-Cap ETFs
Eric Balchunas – Bloomberg
With many exchange-traded funds already dirt cheap, everyone is waiting for the first free ETF. Turns out, it’s already here. In certain pockets of the industry, ETFs are consistently beating the return on the indexes they’re meant to track. Theoretically, an ETF should lag its index by roughly the amount of its fee to investors. But that doesn’t account for revenue from securities lending. ETFs can lend out as much as 33 percent1 of their equity holdings to short sellers in return for a small fee. ETFs can then use that revenue to offset the expense ratio.

Oil Gains This Big Only Happen Around Bottoms
Jodie Gunzberg – Indexology: S&P Dow Jones Indices
The S&P GSCI (WTI) Crude Oil posted a 3-day gain of 14.4% ending Feb. 17, 2016. This is the biggest 3-day gain in about 6 months for the index, and gains of this magnitude have only happened near oil bottoms.

CME Group Announces Launch of E-mini IPOX 100 U.S. Index Futures
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the launch of E-mini IPOX 100 U.S. Index Futures. The futures contract will be available for trading on the CME Globex electronic trading platform effective March 7, 2016, pending all relevant regulatory review periods. This contract will be listed with and subject to the rules and regulations of Chicago Mercantile Exchange.

S&P Dow Jones Indices Market Attributes: Risk & Volatility Feb 18, 2016
Press Release
Dow Jones Indices Market Attributes: Risk & Volatility Feb 18, 2016


Gold Rally: Flash in the Pan or Sustainable?
CME Group
Gold prices jumped nearly 20% from their mid-December 2015 lows into mid-February this year before backing off a little. This move included a $59-an-ounce spike on February 11 to the highest close in over a year. The surge in gold begs the question: what’s driving the rally and can it be sustained?

Gray > Gold
The Reformed Broker
State Street Global Advisors points out that gold has served as a useful hedge during major macro events that hit the stock market. In the chart below, they point out that during these events, it’s often the leading asset class.


Derek Jeter Wants to Help Bank Employees Cry Foul
Peter Rudegeair – WSJ
Bank compliance chiefs who are trying to catch financial fraudsters have a new ally, one who happens to have won five Gold Glove awards for his defense.
STOPit, a New York-based start-up that counts former New York Yankees shortstop Derek Jeter as an investor, is set to announce on Thursday that it is debuting a new product for financial institutions and other corporations that want to give their employees an anonymous way to expose fraud or other kinds of unethical or inappropriate behavior.

Top Democratic economists don’t think much of Bernienomics. He doesn’t care.
Matthew Yglesias – Vox
Four former top economists in Democratic administrations signed a letter taking Bernie Sanders’s campaign to task for touting a document by University of Massachusetts economist Gerald Friedman that purports to show that Sanders’s policies would boost the American growth rate to more than 5 percent.

Leaked Brexit summit text: Full annotated document
Alex Barker – Financial Times
We’ve got our hands on the final pre-summit draft of the UK’s “new settlement” deal, sent to member states by Donald Tusk, the summit’s host, in the early hours of this morning.

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