First Impressions

Editor’s Note: Due to a company meeting, there will not be a JLN Financials newsletter tomorrow, July 2, nor will there be one Friday, July 3, in light of Independence Day.

Summer Intern Education Series Update; Mayor Emanuel Joins Speaker List
By John J. Lothian

John Lothian News is pleased to report that Chicago Mayor Rahm Emanuel has agreed to speak at the August 7 session of the MarketsWiki Education World of Opportunity Summer Intern Education event to be held in offices of Trading Technologies

We are also pleased to announce we have added NYSE COO Stacey Cunningham to our list of speakers for the New York events on July 15 to be held at the NYSE on Wall Street. As we are now two weeks away from the New York event, it is crunch time for adding attendees. Please share this information and registration page with all interested parties.

We thank the CBOE for assistance in securing Mayor Emanuel’s participation in this third annual Summer Intern Education series in Chicago. There is limited seating at the August 7 event featuring the Mayor, so sign up your interns soon to secure a spot.

And, as always, we thank CME Group for acting as Global Premier sponsor of this year’s event series.

Tentatively, our speaker lineup for the Chicago series looks like this so far; on August 4 we will have Scott Gordon from RCG, John Fennell from OCC and Derek Sammann from CME Group. Two other speakers will also be added to August 4.

On August 5, we will have HC Technologies’s Joseph Niciforo, Barchart’s Mark Haraburda and Tradovate’s Rick Tomsic. Two other speakers will be scheduled as well.

And on August 7, we will have Mayor Emanuel, CME’s Phupinder Gill and CBOE’s Andy Lowenthal, as well as two other scheduled speakers.

(CTA) Call To Action: Bryan Johnson Calls For Strategic, Practical Marketing For Managed Futures

Marketing is one of the toughest parts of running a managed futures firm. It takes time, money and is often outside the skill set of most CTAs. Bryan Johnson of Johnson & Co. has spent the past five years helping and teaching fund managers about its importance and how to do it. He said CTAs may in the perfect spot right now to offer managed futures and expand their businesses.

“Marketing has become more critical than it been ever before,” said Johnson, who sat down with John Lothian News at CTA Expo New York. “There’s more noise and there are more people who are misinformed than are appropriately informed. And that’s all that marketing really is – communicating, educating and informing other people about not only your space but who you are, what your processes are and what your performance is like.”

Watch the video »


Quote of the Day

“At the end of the day the models that we’re using in macroeconomics are particularly deficient because they are unable to take into account the [financial] booms and busts. I’m not saying the models are wrong, all I’m saying is that the models are incomplete.”

Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, in the story, ” Economists Discuss the Limits of Economics”

Lead Stories

Waiting for the Fed — 2015 Global Market Outlook, Q3 update
Russell Investments
The advent of Fed tightening is likely to cause volatility, but global equity markets should remain supported over the medium term if the U.S. economy continues to post moderate growth as we expect.

Economists Discuss the Limits of Economics
Tracy Alloway – Bloomberg
Camp Alphaville, the conference held by the Financial Times’ finance and markets blog, bills itself as a Glastonbury for financial-types. There are robots, magicians and transhumanists alongside prominent analysts, economists and short-sellers. So it’s little surprise that the day involves dissecting some of the more avante-garde ideas currently percolating through financial markets.
One idea that has featured continuously is the limits of traditional economics as a whole.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, and who took the stage early this morning in London, criticized traditional economic theory for failing to predict financial booms and busts that can end up having devastating effects. (The talk was extra timely since the BIS this week released its latest opinion of global financial stability warning, amongst other things, that the world had grown over-dependent on monetary policy.)

From the Floor: Greece ‘defaults’ — what next?
Martin O’Rourke – TradingFloor
One finger
That’s effectively all that separates Greece from the abyss after last night’s failure to meet an IMF payment left it clinging on for dear life ahead of next Sunday’s referendum vote, effectively a Yes/No choice on its membership of the European Union.

Data Dependence Is Not a Monetary Policy, But Are the Dots?
Richard Clarida – Smarter Analyst
At its June meeting, the Fed emphasized data dependence in setting monetary policy.
Although a data-dependent Fed is one that appears to retain a great deal of optionality on the timing and pace of future rate moves, data dependence itself is not a monetary policy.
The Fed’s reaction function to evolving data will likely determine the path of policy normalization. The “dot plot” provides some insight, but the dots alone don’t tell us how policy will play out if the macro data evolve differently from the baseline.

Fintech In the Room With Banks, Literally, and Smelling Blood
Paul Vigna – WSJ
If the world’s bankers aren’t careful, they may find themselves in the same position as the tellers who used to staff their branches.
Banks have realized that financial innovation is no longer something they can ignore, but they may not yet realize that “fintech” is about to become as constant a part of their lives at the ATMs that replaced tellers, a new report from the World Economic Forum explains.

Bullish U.S. jobs, factory data brighten growth picture
Lucia Mutikani – Reuters
U.S. private employers hired the most workers in six months in June and factory activity accelerated, providing fresh evidence the economy was gathering solid momentum after contracting at the start of the year.

With green shoots in infrastructure, India’s a bigger story than US Federal Reserve and Greece
R Sriram – Economic Times
First the bad news. A possible Greek exit (now looking more likely than ever) from the eurozone may deal a hammer blow to stocks around the world, including India, forcing risk-averse investors to pull money out of risky assets and move into safe-haven options like US bonds and German bunds. A series of aggressive rate hikes by the Federal Reserve can threaten market stability and make investors squeamish about buying shares in places with sluggish earnings growth.

Keep an Eye Out: The 75 Trillion Dollar Shadow Banking System Is In Danger Of Collapsing
Michael T. Snyder – Smarter Analyst
Keep an eye on the shadow banking system – it is about to be shaken to the core. According to the Financial Stability Board, the size of the global shadow banking system has reached an astounding 75 trillion dollars. It has approximately tripled in size since 2002. In the U.S. alone, the size of the shadow banking system is approximately 24 trillion dollars. At this point, shadow banking assets in the United States are even greater than those of conventional banks. These shadow banks are largely unregulated, but governments around the world have been extremely hesitant to crack down on them because these nonbank lenders have helped fuel economic growth. But in the end, we will all likely pay a very great price for allowing these exceedingly reckless financial institutions to run wild.

Why U.S. Banks Won’t Suffer Big Hits After Greek Default
Peter Rudegeair – WSJ
The fact that Greece defaulted on a loan from the International Monetary Fund shouldn’t create significant direct losses for U.S. banks, but it could disrupt financial markets enough to weigh down future results, analysts said.

Greece’s Tsipras digs in against bailout
Renee Maltezou and Alastair Macdonald – Reuters
A defiant Prime Minister Alexis Tsipras urged Greeks on Wednesday to reject an international bailout deal, wrecking any prospect of repairing broken relations with EU partners before a referendum on Sunday that may decide Greece’s future in Europe.

The Bonds That Broke Puerto Rico
Mary Williams Walsh – NY Times
When Puerto Rico’s governor told lawmakers and citizens on Monday that the commonwealth could not pay its $72 billion in debt, many wondered how a small, seemingly low-key American island in the Caribbean could have amassed a debt big enough to crush it.

Puerto Rico avoids July 1 default
Many had started referring to Puerto Rico as “America’s Greece,” but creditors are breathing a little easier now. Puerto Rico had several debt payments to make by Wednesday, and it has made them, according to government statements and spokesmen.

Why Is China In A Bear Market – And Will It Get Worse?
Chris Wright – Forbes
While world headlines focus on Greece, a far bigger market is gyrating wildly: China.
At the start of this week, China formally entered bear territory when its Shanghai Composite Index dropped 20% from its highs over a period of three days. But, as always with Chinese markets, assessing what it means is not straightforward.
Firstly, China is still a star performer by any normal metric. It has doubled over the last 12 months. At today’s close it was down 22% from its peak in the middle of June, but it remains one of the best performers in the world both over the last quarter and the last year.

Bill Gross is Getting the Band Back Together
Chris Dieterich – Barron’s
Bill Gross, the legendary bond investor, is getting the band back together.
One analyst is upbeat News that Janus Capital Group (JNS) acquired a majority interest in Kapstream Capital, a move that will make former Pimco colleague, Kumar Palghat, the co-manager of Gross’ Janus Global Unconstrained Bond Fund (JUCTX). Gross famously left Pimco in late September.

Don’t Let Short-Term Risk Dissuade You From Europe ETFs
Tom Lydon – ETF Trends
As we look to the second half, investors can still consider an overweight position in European equities and region-related exchange traded funds, even with the ongoing Greece risks.
“We are overweight in the eurozone,” according to a recent BlackRock research note. “Despite giving back some of this year’s strong results as interest rates shot higher across the continent, we look for modest outperformance of eurozone equities over the balance of 2015.”

Bond traders face pitfalls of technology
Joe Rennison – FT
As anyone with a laptop, mobile phone or even battery-powered torch understands, technology can go wrong. And it is no different for the plethora of electronic trading venues that have sprung up trying to bolster the market for buying and selling of corporate bonds.

Central Banks

Greece bossed by European Central Bank
Robert Peston – BBC
I don’t believe I have ever before read a letter from a prime minister promising to liberalise the market for gyms – and certainly I have never done so in a letter that is life or death for an economy.
But Alexis Tsipras’s latest missive to Jean Claude Juncker, Mario Draghi and Christine Lagarde, to secure financial succour from Greece’s creditors, makes that pledge – along with promises to liberalise assorted legal jobs and drinks, petroleum and food markets.

Rethink needed for monetary policy role
Alberto Gallo – Financial Times
Central bankers are not famous for breaking traditions, but the ones in Iceland may be about to start a revolution. An island of 320,000 with a banking system that grew to more than seven times the size of the economy in 2007, Iceland was hit hard by the financial crisis. Under its proposal to reform its monetary system, Iceland’s central bank would take exclusive powers to create money. It would not just set interest rates, but also control the quantity of credit: commercial banks would be allowed to lend within a maximum range, reviewed each month.

Carney Says Greek Crisis Worsened U.K. Stability Outlook: Text
Craig Stirling – Bloomberg
This is the opening statement that Bank of England Governor Mark Carney delivered at a press conference on the institution’s Financial Stability Report in London on Wednesday. The text is unedited and reproduced as published on the BOE website.

Federal Reserve Governor Lael Brainard, At The Policy Makers’ Panel On Financial Intermediation: Complexities And Risks For “The Future Of Financial Intermediation: Banking, Securities Markets, Or Something New?” Salzburg Global Forum On Finance In A Changing World, Salzburg, Austria, Recent Changes In The Resilience Of Market Liquidity, July 1, 2015
Press Release
Recent events and commentary raise concerns about a possible deterioration in liquidity at times of market stress, particularly in fixed income markets.1 These concerns are highlighted by several episodes of unusually large intraday price movements that are difficult to ascribe to any particular news event, which suggest a deterioration in the resilience of market liquidity. For example, on the morning of October 15, 2014, 10-year U.S. Treasury yields gyrated wildly, and the intraday movement in Treasury prices was 6 standard deviations above the mean. In addition, after 4 p.m. on March 18 EDT of this year, a meeting day for the Federal Open Market Committee, the U.S. dollar depreciated against the euro by 1.75 percent in less than three minutes, an unusually large drop in such a short interval. A few weeks later, markets experienced some very large intraday movements in the price of German bunds during times of little market news.

The internet is killing monetary policy
Alan Kohler – The Australian
RBA Governor Glenn Stevens told a nice joke in his speech in London last night.
He referred to the construction of the “Square Kilometre Array” project in remote WA, which will be able to detect the faintest energy emanating from distant stars — billions of light years from earth.
“Reading about that, one can’t help but think of the financial markets. Countless market and media antennae are trained on the sound of the central bank voice, trying to discern and amplify signals out of all the static around, even when the central bank has no new signal to send, and static is all there is.”

World Bank warns China to reform ‘distorted’ financial system
Tom Mitchell and Patrick McGee – FT
China must take urgent steps to reform a “distorted” financial system in its transition to a more balanced economic model, the World Bank has warned in its latest review of the country’s economy.

EU Structural Financial Indicators: 2014
Press Release
The European Central Bank (ECB) has published a comprehensive dataset of structural financial indicators for the banking sector in the European Union (EU). It comprises statistics on the number of branches and employees of EU credit institutions, data on the degree of concentration of the banking sector in each EU Member State, and data on the share of foreign-controlled institutions in the national banking markets of the EU.

China’s central bank reveals its weak hand
Craig Stephen – MarketWatch
China’s domestic stock markets may have bounced back Tuesday, but the damage from the panic despite interest-rate and reserve-ratio cuts at the weekend will take longer to heal.
The big problem is that the People’s Bank of China explicitly targeted the plunging stock market, and yet the Shanghai Composite SHCOMP, -5.23% kept falling, revealing that the PBOC was not in control. Even after Tuesday afternoon’s sharp rebound, the index is still flirting with bear territory, taken as a 20% drop from the recent high.

BOJ newcomer calls for corporate-style pragmatism in policy
Leika Kihara – Reuters
The Bank of Japan’s new board member, Yukitoshi Funo, said policymakers must respond flexibly to changes in the economy while trying to achieve a 2 percent inflation target, signaling that he won’t be bound by a rigid time frame for meeting that goal.


How About a Global Currency?
Leonid Bershidsky – Bloomberg
It’s almost a truism to say that membership in the euro exacerbated the Greek crisis. The thinking goes like this: Because Greece doesn’t have its own currency, it couldn’t increase its competitiveness and boost growth through devaluation. Although devaluation is a valuable instrument, I think most countries and companies would benefit if the world, not just Europe, used a single currency.

For Greek Currency, It’s About Options
Stephen Fidler – WSJ
Greece is poised between remaining a member of the eurozone or leaving it. In fact, there are five possible future currency arrangements for Greece.

Fitch: High FX Mismatch Risk for Latin America Corporates
Press Release – MarketWatch
There is a high foreign exchange (FX) mismatch risk for companies in five Latin American countries, according to Fitch Ratings. We have released our 2015 “Latin America Corporates FX Sensitivity Analysis, which examined the impact from local currency (LC) depreciation for Fitch-rated Latin American (LatAm) corporates’ capital structure and cash flow generation. The analysis data has been grouped by country and also includes individual company’s FX risk exposure.

Dollar Falls in Q2 as U.S. Data Raise Doubts on Interest Rates
James Ramage – WSJ
Investors soured on the dollar over the last three months amid growing doubts about the Federal Reserve’s plans for raising interest rates this year. But asset managers expect the U.S. economy’s health to improve in the coming months, which would likely spark a resurgence in the greenback, they say.
A soft spell in the U.S. economy, rising fears of a slowdown in China, and general worries about tepid growth and deflation around the globe all combined to spook the Fed and arrest a dramatic dollar rally that had driven the buck to multiyear highs against rival currencies

Yuan Forwards Drop as China Factory PMI Spurs Policy Easing Bets
Yuan forwards declined as a gauge of factory activity fell short of economists’ estimates, spurring bets monetary policy will be eased further.

Euro’s Salvation Lies in Its Political Appeal
Greg Ip – WSJ
Even before the euro was launched, many American economists considered it doomed, a political project erected on a flawed economic foundation. “Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity,” Milton Friedman, the Nobel economics laureate, wrote in a 1997 article.
With Greece headed toward a referendum that could start the unraveling of the common currency, those skeptics might be tempted to crow “I told you so.”

ECB Founder Issing Says Idea of Irreversible Euro Was ‘Illusion’
Jeff Black – Bloomberg
Trust between euro-area countries has deteriorated so badly that the idea that the single currency can’t be undone is now dead, former European Central Bank Executive Board member Otmar Issing said.
“Mutual trust is certainly not there any more, and it will be very difficult to restore,” Issing, 79, said in an interview. “The idea — you might now say the illusion — was and is that having joined the euro, it is irreversible.”

Indonesia bans foreign currencies in domestic transactions
The Australian
Australians holidaying in Indonesia could find themselves short of money from today after the country’s central bank pushed through new legislation prohibiting foreign currencies from being used in domestic transactions.

BlackRock Unleashes 11 New Currency-Hedged ETFs
Chris Dieterich – Barron’s
BlackRock (BLK) launched nearly a dozen currency-hedged foreign stock exchange-traded funds, including a pair tied to peripheral European markets Spain and Italy.

Indexes & Index Products

Should You Make Chemical Enhancements To Your Portfolio?
Todd Rosenbluth – Indexology: S&P Dow Jones Indices
Most diversified index-based materials products have significant exposure to the chemicals industry, though the weightings can be different. For example, chemicals comprised approximately 70% of the S&P 500 Materials Index as of late June. Meanwhile, the S&P 500 Equal Weight Materials index had a 54% weighting in chemicals, with more exposure in containers & packaging companies. As such we think investors need to understand what drives the industry.

Bats Announces Annual Rebalancing of BATS 1000 Index
Press Release
BATS Global Markets today announced the results of the annual reconstitution of the BATS 1000 Index, a U.S. equities market benchmark, which will be effective prior to the market open tomorrow.


Gold Shrugs Off Armageddon
Barry Ritholtz – Bloomberg
This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor’s 500 Index lost 2.09 percent and the Dow Jones Industrial Average fell 1.95 percent. Volatility exploded, as the Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, to 18.85.

Why isn’t gold gaining ground on the Greek crisis?
Alex Rosenberg – CNBC
Financial crises are supposed to be good for gold.
After all, unstable situations theoretically cause investors to leave the risk of stocks for the comfort of hard stores of wealth. That’s why gold tends to be considered a risk-off asset, meaning that it rises when investors shy from risk.
But even as Greece edges ever closer to the financial brink, the yellow metal has hardly been able to budge, and neared a three-month low on Tuesday.

Iran Repatriates 13 Tons of Gold Under Sanctions Relief
Adam Kredo – Washington Free Beacon
Iranian officials said Monday that the Islamic Republic’s Central Bank has successfully repatriated 13 tons of gold as part of a package of sanctions relief provided to Iran by U.S. and Western powers.

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