First Impressions

Flash Point: Peter Nabicht Talks HFT, Innovation and Misinformation

Today’s financial markets can be summed up in three words – global, fast, and complex. But as the market structure evolves, so must the regulatory structure that oversees it. John Lothian News has spoken with several industry experts to create this series on the evolution of financial market structure.

In Part 1, Peter Nabicht, senior advisor of the Modern Markets Initiative, welcomes the public’s interest in high frequency trading in the wake of Michael Lewis’ book “Flash Boys”, but cautions that changes may have unintended consequences.

Watch the video »

Quote of the Day

Do not give credit to other than the official statement. We are on our duty.

Turkish Central Bank Governor Erdem Basci, responding to rumors he has been replaced by Prime Minister Tayyip Erdogan, as quoted in the World Bulletin story “Turkey central bank head denies dismissal rumors.”

Lead Stories

Treasury Five-Year Notes Near Cheapest Since 2010 on Fed
Susanne Walker – Bloomberg
Treasuries fell as reports showed initial jobless claims were lower than forecast last week and a manufacturing index expanded, adding to speculation the Federal Reserve will raise interest rates at some point next year.

HSBC Says Broker-Linked Note Demand Rises on China Access Plan
Regina Tan – Bloomberg
Investors are seeking more structured notes tied to brokerages and exchanges after China said it will link the Shanghai and Hong Kong bourses, according to HSBC Holdings Plc, the biggest foreign bank in China.

U.K. Interest rates ‘to rise sharply next year’ as wages grow
Peter Dominiczak and Matthew Holehouse – The Telegraph
Interest rates are expected to rise sharply next year, experts have predicted, as official figures heralded the end of the squeeze on wages.
A Treasury survey of City economists found that all now expected rates to rise, with some predicting them to more than triple to 1.75 per cent.

***DA: So will the U.K decouple from the Continent? Or will it too will see a spike in inflation? Or are the economists flat out wrong (again).

GPIF Should Sell 25 Trillion Yen of Local Bonds, Ito Says
Anna Kitanaka and Shigeki Nozawa – Bloomberg
The world’s largest retirement fund should seek to sell 25 trillion yen ($245 billion) of Japanese bonds as soon as possible, said the head of a panel that advised the government on overhauling pension investments.
The Government Pension Investment Fund should start shifting from local debt to other assets now, and the Bank of Japan could be a buyer, Takatoshi Ito said in an interview in Tokyo today.

***DA: So that’s why bitcoin rallied yesterday.

Morgan Stanley Beats Estimates on Brokerage Increase
Michael J. Moore and Zeke Faux – Bloomberg
Morgan Stanley reported profit that beat analysts’ estimates as a surprise jump in fixed-income results helped the firm post the only increase in trading revenue among the six biggest U.S. banks this year. The stock rose 3 percent in early New York trading.

***DA: Sibling rivalry among J. Pierpont’s children? JPM’s earnings were a disappointment while Morgan Stanley surprised to the upside.

Bubbles, Bubbles, Toil, and Trouble
Pedro Nicolaci da Costa – The Wall Street Journal
The difficulties of revamping bank oversight in the wake of the worst financial crisis in generations were palpable at a conference on financial markets this week sponsored by the Federal Reserve Bank of Atlanta.
Janet Yellen’s keynote speech, delivered by video, emphasized the prospect of even higher capital requirements for the largest, most complex financial firms, while laying the groundwork for a new set of rules on short-term funding markets, which played a key role in transmitting risk during the 2008 meltdown.

***DA: Ixnay on the ubblebay.

Fed paper challenges New Keynesian orthodoxy
Working paper argues sticky prices, which underpin most central banks’ New Keynesian models, can produce implausible results at the zero lower bound, with major implications for policy.

***DA: My relatives that lived through the Great Depression shunned stocks

Korean Companies Facing Debt Wall Turn to Dollar Bond Market
Tanya Angerer – Bloomberg
Bond investors are readying for a slew of South Korean deals as companies from Asia’s fourth-biggest economy face the most maturing dollar notes since 1999.
Korea Land & Housing Corp. and Woori Bank Co., a unit of the country’s biggest financial group by assets, are finishing investor-update meetings today ahead of possible U.S. currency note sales next week, people familiar with the matters said. Korea Resources Corp., a state-run minerals explorer, began meeting fund managers in Asia and Europe yesterday.

***DA: Those Americans. They’ll lend to anyone. Except other Americans.

China Rate Swaps Drop Most Since June as Some Reserve Ratios Cut
China’s interest-rate swaps fell by the most since June after the government said it will lower reserve-requirement ratios at some rural banks.
The cost of the one-year rate swap, the fixed payment needed to receive the floating seven-day repurchase rate, dropped 18 basis points to 3.86 percent as of 4:47 p.m. in Shanghai.

Central Banks

Yellen Says Job Weakness Forestalls Raising Rates
Nelson D. Schwartz – The New York Times
Even as a number of indicators point to better economic times ahead, the chairwoman of the Federal Reserve, Janet L. Yellen, reiterated on Wednesday that she expected interest rates to remain very low until the recovery is on a more secure footing and the American economy is more fully involving available workers and other resources.

Why the Fed is Happy with the Dollar
Kathy Lien – FX Street
The Federal Reserve should happy with the lack of volatility in the U.S. dollar. Many arguments can be made for why central bankers want a weaker or stronger currency but at the end of the day, what they really prefer is a stable currency especially when they are in the middle of dramatic changes to monetary policy.

***DA: Tell me about it. I was a happy FX options guy when the Fed declared war on currency volatility after the crisis. Look at me now.

Bank of England unlikely to rush into an early interest rate rise
Larry Elliott – The Guardian
Employment up by more than 250,000 on the quarter. The unemployment rate below 7% and at its lowest rate in five years. Average earnings are picking up and finally outpacing prices. With the labour market as strong as that, surely an increase in interest rates must be coming?

China to relax rules for foreign central banks in interbank market: sources
The People’s Bank of China (PBOC) is planning to ease restrictions now in place on foreign central banks and financial institutions trading in China’s interbank bond market, sources with direct knowledge of the situation told Reuters.

A star abroad, India central bank boss riles bond traders at home
Neha Dasgupta – Reuters
Since taking the helm of India’s central bank, Raghuram Rajan’s agenda to reform markets has put the noses of Mumbai bond traders firmly out of joint by upending practices that provided them with a relatively secure rate of return.

Turkey central bank head denies dismissal rumors
World Bulletin
Turkish Central Bank Governor Erdem Basci has refuted rumors that he has been replaced.
Basci has had a difference of opinion with Prime Minister Recep Tayyip Erdogan over interest rates after the Turkish economy was affected by a graft probe that targeted Erdogan’s allies last year.
Basci denied the rumors after an ordinary Central Bank meeting Thursday.


High-Frequency Fight Starts in Foreign Exchange
Lucy Meakin – Bloomberg
Foreign-exchange dealers say they have the solution to the high-frequency trades eroding banks’ profits across financial markets.
A currency-dealing platform known as ParFX, established in 2011 by firms from Deutsche Bank AG to Citigroup Inc., was approached last month by banks asking if its technology could be applied to other asset classes, Chief Executive Officer Dan Marcus said.

‘Car Wash’ Case Puts Focus on Brazil Underground FX Trade
Peter Millard -Bloomberg
A $4.5 billion money laundering investigation is putting the spotlight on an underground currency market wealthy Brazilians have used for years to dodge taxes.
The federal police have charged 46 people, including the former head of refining at state-controlled Petroleo Brasileiro SA, Paulo Roberto Costa, for financial crimes including money laundering and illegal money transfers in the so-called Lava Jato, or car wash, operation, the federal police said in a statement. Two of them were charged with financing drug trafficking.


Agnico Eagle, Yamana Gold And Osisko Mining Strike $3.6 Billion ‘Friendly’ Deal To Sidestep Goldcorp Takeover Bid
Maggie McGrath – Forbes
It’s a merger, Canadian style: Three Canadian gold mining companies — Agnico Eagle Mines, Yamana Gold and Osisko Mining — are coming together in an apparent attempt to sidestep a takeover bid for Osisko by a fourth miner, Goldcorp. But where Goldcorp’s efforts were hostile, Osisko’s agreement with Agnico and Yamana is decidedly friendlier.

USAGX’s Denbow: Improving U.S. Economy Could Be ‘Double-Edged Sword’ For Gold
Kitco News (via Forbes)
A stronger U.S. economy may mean some initial headwinds for gold but that also means the metal is likely to draw support whenever more robust growth translates into inflation, said the portfolio manager of a major gold mutual fund.

China in gold collateral financing shock
Izabella Kaminska – FT Alphaville
This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC.
But it’s hardly a revelation.
We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages.

China Doesn’t Need Much Gold To Create a Gold-Based Dollar Alternative
Nathan Lewis – Forbes
Although the idea of Classical money — in practice, a gold-based currency — is not popular today in the U.S., it actually has quite a lot of support elsewhere. Both China and Russia are clearly making moves in that direction, even if perhaps in the form of contingency plans should the present dollar-based system become unusable.

***DA: I know gold bugs who are convinced the U.S. is doing it without any gold.

Gold Import Curbs Seen Continuing in India to Defend Rupee
Pratik Parija and Prabhudatta Mishra – Bloomberg
India, the world’s second-largest gold consumer, will probably keep restrictions on imports to control the current account deficit and defend the rupee, said the managing director of the country’s biggest refiner.
The limits would result in shipments of 650 metric tons to 700 tons in the 12 months started April 1 from 650 tons a year earlier, according to Rajesh Khosla at MMTC-PAMP India Pvt. Purchases were 845 tons in 2012-2013, the finance ministry says. While the form of restrictions may change, the government will continue to restrain buying, he said in an interview.


How a 56-Year-Old Engineer’s $45,000 Loss Spurred SEC Probe
Kevin Dugan – Bloomberg
Jeff Steckbeck didn’t read the prospectus. He didn’t realize the price was inflated. He didn’t even know the security he read about online was something other than an exchange-traded fund.
The 56-year-old civil engineer ultimately lost $45,000 on the wrong end of a volatility bet, or about 80 percent of his investment, after a Credit Suisse Group AG (CSGN) note known as TVIX crashed a week after he bought it in March 2012 and never recovered.

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