First Impressions

HFT in the Crosshairs
by Doug Ashburn, John Lothian News

When Michael Lewis’ “Flash Boys” hit the bookshelves a couple weeks ago, it was as if a giant HFT target had been placed on the shooting range. Since then, the calls for HFT curbs, taxes, and other regulation have become increasingly shrill. While John Lothian News has been saying for years that the equity market structure is broken and in need of a fix, too much of the current narrative is based on misinformation and partial-truths, and its chief critics have consistently, if not willfully, misrepresented the facts.

A new round of shots was fired this weekend, this time at CME Group, by a trio of disgruntled traders who claim that the exchange is running an “unequal and two-tiered marketplace” and that high frequency traders are allowed to see orders before they are reflected in the market. The complaint is seeking class-action status.

Read the rest of the commentary =>

Quote of the Day

“It’s going to be interesting to see who’ll take the other side of the trade if there’s a meaningful sell-off, which presents a huge risk. We’re much closer to the end of the rally, that’s for sure.”

Arthur Tetyevsky, a credit-trading strategist at Imperial Capital LLC in the story, “Trillion-Dollar Firms Dominating Bonds Prompting Probes”.

Lead Stories

Trillion-Dollar Firms Dominating Bonds Prompting Probes
Lisa Abramowicz – Bloomberg
Bill Gross and Larry Fink manage a $3 trillion pile of bonds — an amount almost as big as Germany’s economy. Their firms, Pacific Investment Management Co. and BlackRock Inc. (BLK), doubled holdings since 2008, outpacing the market’s growth of 50 percent.
Some of the largest hedge-fund firms, including Bridgewater Associates LP and BlueCrest Capital Management LLP, have also more than doubled their investments in debt, data compiled by Bloomberg show.

CME Sued on Claims High-Frequency Traders Bought Access
Andrew Harris and Matthew Leising – Bloomberg
CME Group Inc. (CME), owner of the world’s largest futures market, was sued by three of its users who alleged the company sold access to order information to high-frequency traders ahead of other market participants.
Traders William C. Braman, Mark Mendelson and John Simms claimed the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade perpetrated “a fraud on the marketplace,” according to a complaint filed April 11 in Chicago federal court.

Why Long-Term Interest Rates Are Falling and May Continue to Drop
Vince Foster – Minyanville
On April 11, the 30-year Treasury bond closed at 3.48% — the lowest level since June and over 50bps below where it traded when the Fed commenced tapering of its purchases at the beginning of the year. This move has been completely counterintuitive to participants who believed the Fed’s flow of purchases was responsible for pushing interest rates lower and who have been positioned for higher interest rates. This week I want to address why long-term interest rates are falling and why they may continue to fall as the Fed exits the market and begins to raise the Fed funds rate.

***DA: As growth slows in the developed world, the inflation premium diminishes, which means lower long-term yields.

What low interest rates tell us about the global recovery
Barry Eichengreen – The Guardian
Two of the world’s most prominent economic institutions, the International Monetary Fund and Former US Treasury Secretary Larry Summers, recently warned that the global economy may be facing an extended period of low interest rates. Why is that a bad thing, and what can be done about it?

Obama’s Shrinking Budget Deficits Silence Foreign Fiscal Critics
Ian Katz – Bloomberg
Six months ago, global finance officials meeting in Washington berated the U.S. for failing to put its fiscal house in order. This time, the critics were silent.
The Congressional Budget Office is projecting the 2014 deficit will be the lowest in six years and down more than 60 percent from the record $1.4 trillion in 2009. With the annual April 15 tax filing deadline looming, the U.S. has received about $80 billion more in income taxes this fiscal year than it had 12 months earlier.

***DA: The deficit reduction story looks like a winner. But remember, when Clinton was president, an overheated stock market actually generated a surplus for a year before it imploded.

Putin Turn to China Heralds New Look at Yuan Debt: Russia Credit
Ksenia Galouchko and Elena Mazneva – Bloomberg
President Vladimir Putin’s turn to China amid the worst standoff with the U.S. since the Cold War is prompting companies to take a fresh look at yuan bonds.
OAO Gazprom, the world’s biggest natural-gas producer, is considering issuing yuan-denominated debt, two people with knowledge of the matter said last week.

***DA: Expropriating the Crimea is one thing, but taking potshots at the dollar’s reserve status? Them’s fightin’ words.

CME urges China futures opening
Jame DiBiasio – FinanceAsia
China will not be able to further grow its financial futures markets if it does not open them to the influence of international supply and demand, and it should do so now, said Leo Melamed, chairman emeritus at the Chicago Mercantile Exchange.

***DA: Yes, do it now, especially if yuan is expected to become the new dollar.

Central Banks

ECB set to cut key rate to less than zero, Mario Draghi signals
Claire Jones – The Irish Times
Mario Draghi has signalled that the European Central Bank is getting ready to unleash a new unconventional monetary policy in a bid to fight low inflation.
Speaking after the spring meetings of the International Monetary Fund in Washington at the weekend, the ECB president indicated the strengthening of the euro “requires further monetary stimulus”.

***DA: How about issuing euros with expiration dates on them?

China Rate Swap Falls to Four-Week Low as PBOC Seen Adding Cash
China’s one-year interest-rate swaps slid to a four-week low on speculation the central bank’s money-market operations will add cash to the financial system.
The People’s Bank of China injected a net 55 billion yuan ($8.9 billion) last week as more repurchase agreements matured than were sold, data compiled by Bloomberg show.

When Will the BOE Hike Interest Rates?
FX Street
As expected, the Bank of England (BOE) kept monetary policy unchanged for the meantime, maintaining asset purchases at 375 billion GBP and interest rates at 0.50%. After all, the latest round of data showed a slowdown in industry performance and reduced inflationary pressures.

Bank of Canada’s rate policies in ‘uncharted waters’
Barrie McKenna – The Globe and Mail
When Stephen Poloz leaves the Bank of Canada’s key interest rate at 1 per cent on Wednesday it will be the 29th consecutive meeting that the central bank does nothing.
If economists are right, the bank won’t start raising rates again until the middle of next year. That would mark nearly five years at 1 per cent – the longest span of monetary inaction in more than six decades.

G-20 central banks pledge on better communication post Rajan critique
Simon Kennedy, Anastasia Ustinova and Shobhana Chandra – Bloomberg
International central bankers pledged to take care in telegraphing monetary-policy shifts and consider their global effects amid renewed calls from emerging markets for greater cooperation.
Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi were among the Group of 20 policy makers who yesterday ended Washington talks promising to “provide clear and timely communication of our actions and be mindful of impacts on the global economy as policy settings are recalibrated.”

The Bizarro World Of The Federal Reserve
Mark Hendrickson – Forbes
From the front page of the April 10 edition of The Wall Street Journal: “Fed officials expressed concern about the persistence of low inflation at a policy meeting last month, according to meeting minutes.” I know the Fed has been hoping, wishing, and working for higher inflation for a long time now, but I just can’t get used to the idea of the central bank desiring inflation.

The Constitutional Crisis at the Fed
Peter Conti-Brown – Politico
Throughout its history, the U.S. Federal Reserve has faced accusations, on the left and the right, that it is the mere institutional puppet of powerful bankers who control it from within. Marriner Eccles, the liberal Fed chairman during the 1930s and 40s, called it the “instrument by which private interests alone could be served.” Ron Paul, the former Republican Texas congressman, writes that through the Fed “our money and credit are constantly manipulated for the benefit of a privileged class.”


Draghi’s Patience Snaps on Euro as ECB Threatens Response
Stefan Riecher and Rainer Buergin – Bloomberg
Mario Draghi’s patience with the euro has snapped.
“The strengthening of the exchange rate requires further monetary stimulus,” European Central Bank President Draghi told reporters in Washington on April 12. “That’s an important dimension for our price stability.”

***DA: Talk the euro lower.

BOE FX-Rigging Lawyer Said to Work to Avert FCA Conflicts
Liam Vaughan and Suzi Ring – Bloomberg
The lawyer appointed to investigate the Bank of England’s alleged knowledge of currency manipulation plans to seek an information-sharing agreement with the U.K. regulator, according to people with knowledge of the discussions.

Bitcoin bound for ‘guns and gold crowd’
Joe Morris – Financial Times
Bitcoin is making its way from shadowy digital exchanges to the mainstream US retail fund market and even retirement accounts – much to the dismay of financial advisers.
SecondMarket, a New York-based trading platform that launched a Bitcoin fund for institutional and wealthy investors last year, intends to roll it out to less sophisticated investors in the fourth quarter.

***DA: Less sophisticated, as in people who don’t know which fork to use?

Texas Rep. Introduces Bill To Make Bitcoins Currency
Frederick Reese – MintPress News
The IRS has ruled that, for tax purposes, bitcoins should be classified as securities, but a controversial Texas politician wants to return the virtual currency to currency status.

***DA: Or is it people who don’t eat with utensils?

Indexes & Index Products

Cyclical shares lag bounce in European bourses on Ukraine worry
Francesco Canepa – Reuters
Strong U.S. economic data helped pan-European equity indexes snap a three-day losing streak on Monday but appetite for risk remained muted as the threat of violence between Ukrainian forces and pro-Russia separatists loomed.
Cyclical shares lagged broader indexes as tension in Ukraine and volatile global markets prompted investors to take a more cautious stance and cash in on some of the best performers of the past nine months.

Value Is the New Momentum, in Three Charts
Steven Russolillo – The Wall Street Journal
While many of the biggest momentum plays have stumbled in recent weeks, value stocks have stepped up and filled the leadership void, a trend that Morgan Stanley expects will continue in the months ahead.


Gold Bears Wager Wrong Again as Fed Talk Favors Bulls
Elizabeth Campbell – Bloomberg
Bearish speculators misjudged gold bets again as the release of Federal Reserve minutes extended this month’s rally in bullion.
Money managers cut their net-long position to the lowest since February in the week ended April 8. The minutes of the Fed’s March meeting the next day played down forecasts for higher rates, and gold had its biggest weekly gain in a month.

Goldman Sachs sticks with $1,050 gold forecast
Bloomberg (via Financial Post)
Bullion’s rally this year was spurred by poor U.S. data probably linked to the weather and rising tension in Ukraine, analysts led by Jeffrey Currie wrote in a report, describing the reasons as transient. With the tapering of the Federal Reserve’s bond-buying program, U.S. economic releases will return as the driving force behind lower prices, he wrote.

Large Speculators Trim Gold Net-Long Positions – CFTC Data
Kitco News (via Forbes)
Large speculators continue to reduce net-long gold futures and options positions on the Comex division of the New York Mercantile Exchange, making the current data in the latest weekly commitments of traders from the Commodity Futures Trading Commission the third straight week of losses.


Lending Plunges to 17-Year Low as Rates Curtail Borrowing
Kathleen M. Howley, Zachary Tracer and Heather Perlberg – Bloomberg
U.S. mortgage lending is contracting to levels not seen since 1997 — the year Tiger Woods won his first of four Masters championships — as rising interest rates and home prices drive away borrowers.
Wells Fargo (WFC) & Co. and JPMorgan Chase & Co., the two largest U.S. mortgage lenders, reported a first-quarter plunge in loan volumes that’s part of an industry-wide drop off.

***DA: They say the cure for high prices is high prices.

Western Asset Sees Dollar Debt Buybacks Ahead on Falling Yields
Tanya Angerer – Bloomberg
Chinese property developers with the option to repurchase dollar-denominated bonds later this year may opt to do so amid falling yields, according to Western Asset Management Co.
Shimao Property Holdings Ltd., a residential and hotel builder in China, is considering buying back its 2017 notes, which have a call option in August, as it considers a syndicated loan, Tammy Tam, an investor relations official at the company said in an interview today.

***DA: I suggest a cash-out refi.

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