First Impressions

James Gellert, Rapid Ratings International – Connecting the Dots and Innovating Ratings
JohnLothianNews.com

“While you are completing your internships, it is important to think about where you want to be, but you cannot over-prescribe it. You may need to take a circuitous path to get where you need to be.”

James Gellert is a former banker and technology entrepreneur who now runs an entrepreneurial financial technology firm, Rapid Ratings, which uses a proprietary quantitative system to evaluate the financial health of companies. In this MarketsWiki Education talk, Gellert tells the story of his first internship, where he was paid to kick one of the most powerful men on Wall St. to keep him awake during meetings. He then compares his firm to the traditional rating agencies and the difference between a “user pays” model versus an “issuer pays” model.

Watch the video »

Quote of the Day

“The nature of the market changed so quickly, throwing everyone from the top of the mountain to the bottom of the valley. Winter is coming, and maybe we will see many people lose their jobs if the situation lasts for a long time.”

Xu Liping, research institution director at HNA Topwin Futures Co. in Shanghai, in the story, “Winter Is Coming for China Futures Traders as Volumes Tumble”

Lead Stories

Treasurys Trading Is Focus of Probes
Katy Burne and Carolyn Cui – WSJ
Trading in U.S. Treasurys is drawing scrutiny from regulators and plaintiff lawyers, setting the stage for a legal challenge that cuts to the heart of how financial markets work.
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Beijing’s market invasion comes at a cost
Josh Noble – Financial Times
Aggressive policy action is now a regular feature of global markets — Haruhiko Kuroda had his bazooka, while Ben Bernanke took to a helicopter.
But in China, falling asset prices have been met with a full-scale invasion of the market, securing an expensive victory that many believe could yet prove fleeting.
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Brighter German Economic Prospects Trigger Overheating Alarm
Jana Randow – Bloomberg
Germany’s economy is growing at its strongest pace since 2011 and accelerating — and one of the country’s leading research institutes says that’s a problem.
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It is in Warsaw not Athens that the march of the euro will be halted
Matthew Lynn – The Telegraph
Another week, and another Greek crisis looms. It might seem only yesterday that the markets were on tenterhooks over whether the country would finally bring its miserable experiment in sharing a currency with Germany and France to an end, or whether there would be a last-minute compromise that would keep the show on the road for a few more months.
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Brazil has debt rating cut to ‘junk’ status as problems mount
AP – The Guardian
The Brazilian government’s sovereign debt rating has been cut to junk status by one of the major credit agencies, ratcheting up pressure on President Dilma Rousseff to find a way out of the country’s economic and political crisis.
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Pigs help China to fight off threat of deflation
Peter Spence – The Telegraph
A lack of pigs has helped buoy the Chinese economy, helping to fend off a slowdown that economists have warned could wreak havoc on a global scale.
The price of pork flew higher in August, rising by 19.6pc compared with the same month a year earlier. The meat’s surging cost boosted overall inflation, which rose for a third straight month.
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The Reward for Being First Out in a Bond Run Is 2%
Tracy Alloway – Bloomberg
So say Barclays analysts led by Jeffrey Meli.
In a note published on Thursday, the Barclays team takes a fresh look at the already much examined issue of liquidity in the corporate bond market, in which the ability of investors to buy and sell the debt sold by companies without dramatically impacting its price is said to have vastly deteriorated.
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Global stock market rout offers opportunity for M&A hedge funds
Simon Jessop and Nishant Kumar – Reuters
The sharp falls in global stock markets in August potentially offer hedge funds that decide to bet on the outcome of merger deals a chance to make some juicy returns.
A plunge in China’s equity markets last month that triggered falls around the world, in theory, makes it cheaper for hedge funds to set up a so-called merger arbitrage trade.
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Change to Bank Rules Could Spur Political Fight in a Crisis
George Hay – NY Times
Global bank supervisors are tying themselves in knots over T.L.A.C. This ugly initialism – for total loss-absorbing capacity – is supposed to mean that regulators ensure creditors pay for cross-border bank busts. The emerging rules look likely to be watered down for banks like HSBC, to make sure they aren’t disadvantaged against their less sprawling rivals. But what’s being proposed will make the final system even more prone to political standoffs.
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Giant Hedge Fund’s Radical Idea: Performance Guaranteed or Your Money Back
Rob Copeland – WSJ
Hedge-fund managers have long clung to a doctrine of high fees in good years and bad, minting billionaires and riling investors along the way.
A pair of former Harvard University endowment executives have built the world’s largest stock-focused hedge fund with the opposite approach. Robert Atchinson and Phillip Gross let investors in their $28 billion Adage Capital Management LP keep almost all of their trading gains—and promise refunds if the fund’s performance falters.
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Iran Gets Ready to Sell Oil to the World
Matthew Philips and Golnar Motevalli – Bloomberg
Before the most recent round of sanctions went into effect three years ago, Iran was able to sell oil to 21 countries. By mid-2012, that was down to six: China, India, Japan, South Korea, Taiwan, and Turkey. Rather than immediately pull back on production, and risk damaging oil wells by slowing them down, Iran decided to store its excess crude. As it scrambled to build onshore tanks, the government loaded millions of barrels onto its suddenly out-of-work fleet of crude-carrying vessels.
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Environmental Financial Products, LLC (EFP) and CBOE Holdings, Inc. (CBOE) Announce New Interbank Lending Exchange and Interest Rate Benchmark
Press Release – CBOE
Environmental Financial Products, LLC (EFP) and CBOE Holdings, Inc. (CBOE) today announced plans to launch the American Financial Exchange (AFX), an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds. EFP is a prominent, successful exchange incubator headed by Dr. Richard Sandor, universally recognized as the “father of financial futures.” CBOE is the creator of the listed options market and numerous other market and product innovations, including securities index options and the CBOE Volatility Index (VIX Index).
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Global food prices fall at fastest rate in seven years
BBC
Last month saw a 5.2% fall in global food prices, the biggest drop in seven years, according to the UN.
Its Food and Agriculture Organization (FAO) saw monthly falls in all major commodities, from milk and vegetables to oils, sugar and cereals.
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Deutsche Bank CEO to shy away from ‘big bang’ reform at board summit
Thomas Atkins – Reuters
John Cryan, Deutsche Bank’s (DBKGn.DE) new chief executive, will not present “big bang” reforms when the supervisory board gathers Thursday evening, rather an acceleration of existing plans to shed assets and exit countries.
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Economics and democracy: Why politicians keeping economics simple is stupid
The Economist
“A democratic society in its thirst for liberty may fall under the influence of bad leaders”, worried Plato who also feared that “popular acclaim will attend on the man who tells the people what they want to hear rather than what truly benefits them.” These worries seem all the more pertinent today, as a quarter to a third of the electorate in many countries seems willing to lend support to candidates from out of the mainstream. Indeed, the whole appeal of a candidate like Donald Trump is his outsider status.
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The U.S. Economy Is Just Starting to Tap Into a Big Source of Dry Powder
Luke Kawa – Bloomberg
There’s a big reason to believe that the U.S. economy will be able to withstand the start of the Fed tightening cycle: There’s still plenty of pent up activity in the housing sector. And it’s hard to see the U.S. economy running out of steam with this much upside left in residential investment, according to some economists and analysts.
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Central Banks

Brussels to embark on radical plans to create joint EMU treasury and euro parliament
Mehreen Khan – The Telegraph
The survival of economic and monetary union will require the creation of new supra-national institutions, including a joint eurozone treasury and a separate euro parliament, according to the single currency’s bail-out chief.
Klaus Regling, head of the European Stability Mechanism (ESM), joined a clamour of voices in Brussels who are pushing for member states to cede sovereignty in bid to establish a full-blown fiscal union on the Continent.
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How the Fed’s Big Decision Next Week Could Play Out
Craig Torres and Rich Miller – Bloomberg
It’s a tough call. Really tough.
When Federal Reserve officials sit down next week, they will weigh volatile markets and a host of uncertainties about international growth against a U.S. expansion that is looking better with each new piece of data.
Futures traders are betting that the central bankers won’t raise interest rates in a time of jumpy capital markets. Contracts on the overnight lending rate show less than a 30 percent probability of an increase this month.
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Bank of England votes 8-1 to keep UK rates at 0.5%
BBC
The Bank of England has voted 8-1 to keep interest rates on hold at 0.5%.
The bank also lowered its estimate for the UK’s economic growth in the third quarter of this year from 0.7% down to 0.6%.
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This New Study Questions a Key Assumption Central Bankers Make About Themselves
Christopher Condon – Bloomberg
Central bankers in much of the developed world have been trying to boost vexingly low inflation for the last few years. They’ve at least taken comfort in the fact that people’s expectations for future inflation have remained steady, which officials cite as evidence that inflation in real life will eventually come back up as well.
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Fallout From the Fed’s Cognitive Dissonance
Roger Arnold – TheStreet
There is more confusion about what the Federal Reserve will do on monetary policy next week, and how the global capital markets will respond, than at any time I can recall over the past 25 years that I’ve been tracking the central bank.
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German-U.S. Yield Gap Widens as Yellen Splits From ECB Officials
Eshe Nelson – Bloomberg
A divergence in monetary policy between the euro area and the U.S. helped keep down German bond yields relative to Treasuries, widening the 10-year yield gap between them to the most in three weeks.
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The Federal Reserve was just given another reason not to raise rates
Melvin Backman – Quartz
The lowflation is coming from outside the house.
The US Bureau of Labor Statistics released its latest read on import and export prices, and both are sinking to their lowest levels since the financial crisis.
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Emerging market central bankers: ready for end of low-rate party?
Alan Beattie – Financial Times
It’s all very well removing the punchbowl from your own party. But what about when the rich family next door have been supplying liquor to the neighbourhood’s teenagers for the best part of a decade and eventually decide to stop?
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US monetary policy in GIFS! Where we are and how we got here
Robin Wigglesworth – Financial Times
The FT has just published its big “When Rates Rise” package on the prospects of tighter US monetary policy. Of course, it remains far from certain that the Federal Reserve will act later this month – or even this year – but we thought a more visual guide would be appropriate.
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Currencies

Buy-Side FX Shifts in Evolving Market Structure
Ivy Schmerken – FlexTrade
As electronic trading grows on the buy-side and top dealers retreat from sharing market color, exchanges are snapping up FX trading venues. In July, Deutsche Borse said it will buy foreign exchange trading platform 360T for $796 million to diversify and capture volume in the $5.3 trillion-a-day currency markets. This follows BATS Global Markets’ purchase of Hotspot FX from KCG Holdings for $365million earlier this year. Meanwhile, in late August, Nasdaq OMX said it’s preparing to launch its own FX trading platform, most likely in 2016, reported Reuters.
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Dollar Bulls Have Reason to Smile Whether or Not Rout Deters Fed
Kevin Buckland and Candice Zachariahs – Bloomberg
All roads lead to a stronger dollar.
That’s the view of Stephen Jen, co-founder of hedge fund SLJ Macro Partners LLP, who spent 13 years at Morgan Stanley where he helped develop a theory known as the “dollar smile.” He’s predicting gains versus emerging-market currencies in particular, whether or not the Federal Reserve succeeds in raising interest rates without sparking market turbulence.
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30 years on, parallels with Plaza but currency universe very different
Jamie McGeever – Reuters
Imagine a communique drafted by the world’s top economic powers today on the health and direction of the global economy and finance.
Few would be surprised by the following lines:
“The current sustained expansion is occurring within a framework of declining inflation … Inflation rates … show no signs of reviving … There has been a significant fall in interest rates in recent years…”
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Beijing clamps down on forex deals to stem capital flight
Jamil Anderlini – Financial Times
China has tightened its capital controls, in a sharp reversal of its market liberalising rhetoric, as it struggles to contain the fallout from last month’s devaluation of the renminbi.
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So where did that Chinese dollar liquidity end up?
Izabella Kaminska – Financial Times
Everyone has been trying to figure out why the PBoC shed a record $94bn in FX reserves in August.
But did you know their own spokesman has been offering an explanation to the market directly?
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Hong Kong Suffers for Its Devotion to Currency Peg
Bruce Einhorn, Fion Li and Enda Curran – Bloomberg
Hong Kong has pegged the value of its dollar to the greenback since 1983. The peg was meant to ensure financial stability as the city embarked on the long process of re-integrating with China. Since then its currency has been one of the most stable in the region. To lock the HK dollar’s trading range against the greenback into a narrow band, about 7.75 to the U.S. dollar, the Hong Kong Monetary Authority (HKMA) buys and sells the two currencies. Whenever the Federal Reserve raises or lowers interest rates, Hong Kong follows suit.
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Visa, Nasdaq, Others Invest $30 Million in Bitcoin-Related Startup
Bradley Hope – WSJ
Wall Street is putting more money behind a technology it once dismissed as a fad.
Some of the biggest companies in the financial sector have invested $30 million in Chain Inc., a San Francisco-based company that works with banks and other institutions to develop ways to trade and transfer financial assets using the system that underpins the virtual currency Bitcoin.
jlne.ws/1EPUV5e

Indexes & Index Products

SPIVA Mid-Year 2015: Majority of actively managed funds underperformed their respective benchmarks
Press Release – S&P Dow Jones Indices
SPIVA U.S. Scorecard
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Winter Is Coming for China Futures Traders as Volumes Tumble
Bloomberg
China’s futures industry is bracing for job cuts after a government campaign to prevent bearish wagers on the stock market sparked an unprecedented collapse in volumes.
jlne.ws/1JXQ8eC

Results Announced for 2015 Dow Jones Sustainability Indices Review
PR Newswire – MarketWatch
S&P Dow Jones Indices, one of the world’s leading providers of financial market indices, and RobecoSAM, the investment specialist focused exclusively on Sustainability Investing, today announced the results of the annual Dow Jones Sustainability Indices (“DJSI”) review.
jlne.ws/1EPVpbn

Understanding Your Benchmark
Utkarsh Agrawal – Indexology: S&P Dow Jones Indices
Like other fields of study, benchmarks are required in finance, and in capital markets, indices generally serve this purpose. Indices are an important means of understanding the market. They are hypothetical portfolios of assets against which the performance of real portfolios can be assessed. All investors collectively own the entire capital market, and an index designed to include each and every asset would be a true gauge of that market. In general, it is not possible to track the entire capital market because of reasons such as the lack of up-to-date information on prices, among other things. Hence the indices are designed so that they are a close proxy. They have relatively infrequent, rules-based constituent changes that are not motivated by short-term alpha.
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Smart Beta: Sometimes Smart, But Not Exactly Beta
Druce Vertes – Huffington Post
So-called “smart beta” is having a day in the sun. Pioneered by the very smart Rob Arnott, the basic idea is: don’t invest in an index weighted by market cap — invest in one that weights according to a non-market fundamental value measure, or even equally. Smart beta funds and ETFs have grown faster than the market. I’ve even seen versions of this quote in a couple of places: “market cap weighting is the worst way to own a broad index.” This makes me rage a little, hence this post.
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Shanghai Stock Exchange opens new index to boost low-carbon industry
James Phillips – BusinessGreen
China has launched its first carbon efficient financial index, it was announced yesterday, in a bid to direct capital towards its burgeoning low-carbon industry.
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Global Infrastructure Investments
Todd Rosenbluth – Indexology: S&P Dow Jones Indices
Once every four years, America’s civil engineers provide a comprehensive assessment of the nation’s major infrastructure categories. The latest report card has a poor cumulative GPA for infrastructure of D+, with rail and bridges each earning a C+. While Congress continues to debate whether, and how, to fund the projects to improve the quality of the nation’s backbone, there has been some encouraging news at the state level. Nearly one-third of U.S. states, including Georgia, Idaho and Iowa, are addressing infrastructure investment through gasoline tax increases to support improvement of local roads and bridges.
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Gold

Barrick Continues To Battle Weak Gold Prices With Latest Stake Sale
Forbes
Barrick Gold Corporation recently announced the sale of a 50% interest in Barrick (Niugini) Limited, the entity which holds a 95% stake in the Porgera gold mine, located in Papua New Guinea. The Porgera mine accounted for around 7% of the company’s consolidated gold shipments in 2014. The stake sale in BNL is the latest in a series of moves by the company, as it braces for a possible interest rate hike by the Fed and a period of extended weakness in gold prices.
jlne.ws/1gcxNlk

Gold Loses Some of Its Luster in Asia
Biman Mukherji – WSJ
Gold buying in Asia has moderated after a weak monsoon has damped demand in rural India ahead of the festival season and Chinese buying has eased following the recent surge.
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Gold ETF ‘Killed The Primary Reason For Owning Gold Miners’
Chris Dieterich – Barron’s
Gold miner stocks are the cheapest relative to gold in more than three decades, but bottom fishing might not do you any good.
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Gold That Glitters—and Kills
Amanda Foreman – WSJ
Since ancient times, the desire for gold has had a way of turning human beings into monsters of greed. The Greek god Dionysus granted the mythical King Midas the golden touch, but only after the king had inadvertently turned his daughter into gold—and realized that he himself would starve to death—did he see his wish as a curse. The Roman poet Virgil wrote in “The Aeneid,” “Accursed thirst for gold! What dost thou not compel mortals to do?”
The alleged discovery last month in Poland of one of the lost Nazi “gold trains” is a case in point. Missing from the excitement over the train—supposedly dispatched at the end of the war (and buried since then), with millions of dollars worth of stolen loot, gold bars and armaments—is acknowledgment that this so-called treasure is the effluence of evil.
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Miscellaneous

Business groups cry foul as EU rules commuting time is ‘work’
Peter Spence – The Telegraph
An EU court ruling that will require employers to treat commuting time as work has been slammed by business groups, who say it is yet another example of Luxembourg deciding what is best for Britain.
jlne.ws/1EQDeSU

The Bloomberg Terminal, a Wall Street Fixture, Faces Upstarts
Nathaniel Popper – NY Times
For nearly three decades, the flickering orange-on-black screens of the Bloomberg terminal have been omnipresent on Wall Street trading floors and executive suite desks, maintaining a vital lifeline of data and communication.
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