First Impressions

As Grain Prices Cool Down, Options Volume Heats Up
Doug Ashburn – John Lothian News
When the USDA released its quarterly grain stocks numbers on June 30, corn and soybean markets took a nasty tumble that lasted several days and sent prices to their lowest levels since 2010. When the USDA released its world supply and demand report two weeks later, grain markets eroded further as acreage and yield predictions, combined with current carryover stocks, are pointing to a possible storage glut next year – a phenomenon not seen in the U.S. for a number of years.

As corn and soybean prices retreat from the lofty levels of the past few years – corn down over 50 percent from the 2012 drought and soybeans about 45 percent off the highs, one metric has ticked up considerably – options trading. Volume and open interest on CME Group’s flagship agricultural contracts – corn, wheat and the soy complex (soybeans, meal and oil), are up double digits versus last year. Average daily volume in options on soy products are up over 70 percent year-on-year.

Many of the highest volume days, not surprisingly, coincide with big releases such as planting, acreage and supply and demand reports.

For the rest of the commentary, visit the JLN blog here:

Quote of the Day

This is not your grandpa’s financial system where banks provide all the credit.

Alberto Gallo, head of European macro credit research at RBS, as quoted in the FT story “Fears grow over steep decline in bond market liquidity”

Lead Stories

US looks at ‘ultra-long’ Treasury bonds
Michael Mackenzie in New York – Financial Times
Where Canada and Mexico have ventured in recent months, will the US follow? Strong demand for a 50-year government bond sold by Canada and a 100-year issue from Mexico earlier this year appears to have prompted a reaction from their largest neighbour.

***DA: As the front end stays pinned to the zero bound, the next step is moving out the yield curve.

Spain’s 50-Year Bond Could Be Drawing Near
Emese Bartha – MoneyBeat – WSJ
Could Spain’s long-awaited 50-year government bond be drawing near? The country has been mulling the issuance of a super long dated bond to take advantage of falling borrowing costs for almost a year, but it has yet to set a timetable. Now there are growing expectations that time is ripe.

***DA: Ditto.

Fears grow over steep decline in bond market liquidity
Tracy Alloway in New York – Financial Times
The ease with which investors can trade corporate debt has declined sharply in the five years since the financial crisis according to research that is likely to feed fears over the prospect of an intensified sell-off in the $9.9tn US market.

***DA: The end of bullish sentiment in the complacency market?

New Rule Gives Banks Discretion on Early Loan Write-Downs, but Attracts Skeptics
FLOYD NORRIS – Dealbook – NY Times
A new accounting rule will give banks much more leeway to write down the value of loans, something that both regulators and bankers demanded in the wake of the financial crisis. Yet the rule could also make it less attractive for banks to make loans in the first place because every loan will lead to an immediate reported loss.

***DA: You mean banks’ values would be based on long term profitability rather than short term accounting profitability? Perish the thought!

Retail investors dump high-yield bond funds
Andrew Bolger – Financial Times
The flight of retail investors out of high-yield bond funds is accelerating amid fears that the asset class’s bull run may have come to an end.

A Secret in Cyprus Bank Bailout Stirs Resentment
LANDON THOMAS JR. – Dealbook – NY Times
Of all the financial implosions in the eurozone, few matched last year’s collapse of tiny Cyprus in terms of drama and chaos. Now, the foundation of the bailout, an analysis by bond giant Pimco, is being challenged by economists, lawyers and politicians in Cyprus.

***DA: Having been on the wrong end of a trader blow-out, I can say there is nothing more annoying than having to negotiate with him on the final number. Belly-up is belly-up, irrespective of price.

Draghi Safety Net Becomes Blindfold to Risk as Bonds Soar
David Goodman – Bloomberg
Two years since European Central Bank President Mario Draghi’s historic promise to defend his currency bloc, there are signs bond investors are growing too complacent under his protection.

It’s the Bean-Counters’ Turn to Bash the Banks
Paul J. Davies – MoneyBeat – WSJ
Forebearance is a dirty word – at least among the bean-counters who set accounting standards for roughly half the world’s economy, but not the U.S. and China. Banks will be forced to recognize losses from bad or dubious loans much sooner under a new rule, which could lead them to increase provisions by 50%, according to experts.

Argentine debt mediator says time running short for deal
Daniel Bases – Reuters
Less than a week before Argentina could default on its sovereign bonds, the government and holdout creditors have yet to meet face-to-face despite an urgent plea from the U.S. court-appointed mediator on Thursday that they start direct talks.

Wall Street Takes a Shine to Argentine Bonds
Matt Wirz – WSJ
Argentina hasn’t made many friends on Wall Street. But that hasn’t stopped bankers from trying to bring the country back into the bond market.

Bubbles are forming in the credit market
John Authers – Financial Times
Where is the next bubble going to form? And will it hurt when it bursts? After all the bubbles of the last two decades, it is tempting to find them everywhere. But the next bubbles do seem to be brewing in credit.

Sub-investment grade firms in dollar rush
Business Standard
A host of mid-sized Indian companies are hitting the bond street abroad with a vengeance, and bankers say most of these sub-investment grade companies are expected to raise around $4 billion debt in the next few months.

How to forward a new golden age
Financial Times
This is a guest post by Carlota Perez, Centennial Professor of International Development at the London School of Economics (LSE) and author of Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages in which she responds to arguments set out by Bank of England chief economist Andrew Haldane at the launch of the Mission-Oriented Finance this week.

The importance of patience and the danger of information overload
Izabella Kaminska – Financial Times
That Andrew Haldane, chief economist of the Bank of England, believes that short-termism is a bad thing for markets is hardly news. But what was fascinating about his speech at the mission-oriented finance launch party this week – where he once again outlined this argument — was not only the breadth and range of the colourful anecdotes he provided to make the case for long-termism, but also the concerns he raised about information overload.

ISDA: Revisiting Cross-Border Fragmentation Of Global OTC Derivatives: Mid-Year 2014 Update

Central Banks

Yellen Settles for a Slingshot Instead of a Shotgun
WILLIAM D. COHAN – Dealbook – NY Times
Has Janet Yellen jumped the shark already? That appears to be the case after Ms. Yellen, the Federal Reserve chairwoman, testified before Congress last week that in the face of insatiable demand from investors for higher yields — because of the Fed’s continuing zero interest-rate policies — the Fed would use nothing more than its supervisory authority over the big Wall Street banks to try to rein in excessive risk-taking.

***DA: Some are asking her to re-holster whatever weapon she is using.

Draghi Safety Net Becomes Blindfold to Risk as Bonds Soar
David Goodman – Bloomberg
Two years since European Central Bank President Mario Draghi’s historic promise to defend his currency bloc, there are signs bond investors are growing too complacent under his protection.
While Draghi’s pledge, backed up with unprecedented policy action, held the euro region together, recent price moves suggest it also immunized investors against risk. The average yield on bonds from Europe’s most-indebted nations touched a record low yesterday, even after the downing of a passenger plane over Ukraine, an escalation of conflict in Gaza and financial woes at Portugal’s Espirito Santo Group.

Geopolitical central banking
Joseph Cotterill – Financial Times
What happens when you raise rates by 2.5 percentage points, within a period of six months, for an economy that might only grow 0.2 per cent this year?

Russian Central Bank Raises Key Interest Rate to 8% From 7.5%
Olga Razumovskaya – WSJ
The Russian central bank on Friday raised its key interest rate to 8% from 7.5%, and warned that if inflation risks remain high in Russia, the bank will continue to increase its key rates.

Can New Zealand Really Keep a Lid on the Kiwi?
Josie Cox – MoneyBeat – WSJ
New Zealand’s central bank has dropped what many consider to be a heavy hint that it’s ready to intervene to weaken its currency.


Why It Could Be Time to Expect More Action in FX
Chiara Albanese – MoneyBeat – WSJ
In foreign exchange, all is still very quiet. Equity markets may have got the jitters (a little) from the latest round of geopolitical angst, but major currency exchange rates – including the euro and the dollar – have shown very little sign of movement and have lacked persistent trends over the past few months. That’s left funds who bet on price spikes with few opportunities to make money.

Unafraid of Liquidity Squeeze, Investors Turn to Emerging Currencies
James Ramage – MoneyBeat – WSJ
Even though currency investors have been preparing for higher interest rates for some time, many aren’t ready for an upward jolt in U.S. rates.

Goldman Sells Most Yen Steepeners Since ’06 as Spread Rise Seen
Regina Tan – Bloomberg
Goldman Sachs Group Inc. sold the largest so-called steepener notes denominated in yen in eight years as investors bet the spread between short- and long-term interest rates in Japan will widen.
Signum Finance Cayman Ltd., a special purpose vehicle of the New York-based investment bank, issued 6 billion yen ($59 million) of the notes earlier this month in two separate offerings, according to data compiled by Bloomberg. The last time more steepener securities were sold was in September 2006 when a funding company Japan Finance Organization for Municipalities raised 20 billion yen.

***DA: Those investing in steepeners are not putting on a bet; they are putting on a hedge.

Rollercoaster rouble freaks analysts
Farah Khalique – Euromoney Magazine
The Russian rouble is facing strong headwinds as the political fall-out over the fatal MH17 plane crash and fresh economic sanctions bite, with analysts predicting a tough year ahead for the Bric currency.

Indexes & Index Products

Options Show Rising Concern Over High-Yield Bond ETFs
Chris Dieterich – MoneyBeat – WSJ
The options market is flashing concern about high-yield bond exchange-traded funds. Demand for protective “put” options in the market’s largest high-yield bond ETF versus bullish options this month crept up to its highest level since May 2013’s “taper tantrum,” when hints from the Federal Reserve on changes to its bond-buying program sent high-yield bonds, and other rate-sensitive assets, reeling.

Hard times for commodity and currency ETFs
Rob Daly – The Trade
The year-over-year growth numbers for US exchange-traded funds (ETFs) are up approximately 19%, but their average daily volumes (ADV) has fallen 15% over the same period, according to recent finding published by Société Générale.


London gold fix company appoints committee to oversee benchmark
Clara Denina – Reuters
The company operating the gold price ‘fix’ has appointed a supervisory committee to oversee the century-old system of benchmarking gold prices ahead of the implementation of stricter regulations, its website showed on Friday.

***DA: If this system remains intact, I for one will be shocked, as it does not deviate too far from the old system.

China gold demand falls by a fifth, but output rises
Xan Rice – Financial Times
China’s gold demand fell by nearly a fifth in the first half of 2014 from a year ago as consumer interest in bullion bars and coins waned.

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