First Impressions

Keep it Simple: Peter Nabicht on Liquidity and Simplicity of Market Structure

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 2, Peter Nabicht, senior advisor of the Modern Markets Initiative looks at the nature of liquidity and how high-speed traders have aided liquidity over the last decade.

Watch the video »

Quote of the Day

China is about to join Japan in exporting its increasingly troublesome economywide deflation to the west.

SocGen’s Albert Edwards, as quoted in the FT story “Watch out for Chinese deflation exports.”

Lead Stories

Watch out for Chinese deflation exports
When China’s first-quarter GDP data were released last week investors missed the most important bit of news. Nominal GDP growth fell from 9.7 per cent in Q4 to 7.9 per cent year-on-year.

***DA: I would rather not import any of that.

Despite Ukraine Crisis, Positive Mood in German Economy Prevails, Says Ifo
German business sentiment strongly improved in April, surpassing expectations, a key survey indicator showed Thursday, signaling that Europe’s largest economy remains resilient despite uncertainty in Ukraine.

***DA: So long as the nat gas pipelines are running, all will be well.

Ratings Firms Ride Bond Resurgence
Six years after getting a failing grade for their role in the financial crisis, credit-rating firms are at the top of the class.Riding a global bond boom, the two biggest U.S. firms, Standard & Poor’s Ratings Services and Moody’s Investors Service, this month are expected to post record first-quarter profits. Fitch Ratings said in its annual filing this month that 2013 was “one of its best years ever.”

***DA: Not bad for an industry that says its guidance is non-binding and not meant to be taken at face value.

Russia says sanctions hurting, warns foreign firms not to go
President Vladimir Putin said on Thursday that Ukraine-related sanctions were hurting Russia while one of his ministers said foreign oil and gas companies that quit the country would not be able to return soon.

***DA: You’ll be sooorrryyy!

U.S. trade bank chief warns lawmaker ‘political games’ threaten exports
U.S. lawmakers will only hurt American exports and jobs by playing “political games” that threaten to shut down the U.S. Export-Import Bank, the bank’s president said on Thursday.

***DA: Because the Ex-Im Bank has been so effective thus far in promoting our export sector?

MarketAxess adds to Europe team as volumes surge
Financial News
MarketAxess, the US operator of electronic platforms for corporate bonds, has appointed a new product manager for its European business that posted a surge in volumes and revenues during the first quarter.

Strip private banks of their power to create money
Martin Wolf –
Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.
I explained how this works two weeks ago. Banks create deposits as a byproduct of their lending. In the UK, such deposits make up about 97 per cent of the money supply. Some people object that deposits are not money but only transferable private debts. Yet the public views the banks’ imitation money as electronic cash: a safe source of purchasing power.

***DA: Especially if the public is on the hook for any systemic shortfall.

Spain’s rate of growth fastest for six years
Spain’s economic recovery is gaining momentum, with national output growing by 0.4 per cent in the first three months of the year – the fastest rate of growth in six years and double the increase that was recorded in the previous quarter.

***DA: El rock y roll.

IMF warns Africa of ‘homegrown’ economic risks
Sub-Saharan African countries face rising “homegrown” economic risks, the International Monetary Fund has warned, shifting the focus from the external factors that have hitherto worried investors.

***DA: We have seen the enemy and he is us.

S&P warns of bank rating ‘uncertainties’ in independent Scotland
Ratings agency Standard & Poor’s said there were “important considerations and uncertainties” that factored into the creditworthiness of banks should Scotland vote to end its 307-year union with England in September.

Central Banks

New Zealand lifts rates gain as inflation threatens
The Australian
NEW Zealand’s central bank lifted interest rates for the second time in as many months today, saying it was necessary to contain inflation as an economic recovery gains momentum.

***DA: Expect a nasty letter soon from Paul Krugman.

Mario Draghi backs plans to publish European Central Bank minutes
In a speech in Amsterdam on Thursday, the ECB president said he is convinced that publishing an account of the main arguments raised in the central bank’s monthly policy meetings “would be useful” and “will on balance serve to strengthen the governing council’s collegiate decision making and communication”.

***DA: And serve to out any governor not following the playbook.

Exclusive: White House considers former banking lawyer for Fed board – sources
A former lawyer with the American Bankers Association is being considered by the White House as a possible nominee to the board of the Federal Reserve, according to sources familiar with the efforts

Don’t Look Now, but Rising Wages Could Spell Trouble for the Fed
WSJ MoneyBeat
After a torturously long wait since the 2008-2009 crisis, this gloomy U.S. labor market is finally improving. There are clear, albeit early, signs of wage growth for most workers. And while that’s a positive development for Americans in general, we must warn one especially pessimistic breed of American – fixed-income investors – that it means market rates could head sharply higher in the months ahead. Maybe now’s the time to start planning that exit from the bond market.

ECB QE: real prospect or fantasy game?
When Ben Bernanke launched US quantitative easing in late 2008, the Federal Reserve chairman threw a match into a box of fireworks: the subsequent rally in global share prices was dazzling.

Australian Central Banker Warns Against Deep Budget Cuts
Australia’s government needs to be careful not to cut spending too deeply in next month’s budget for fiscal 2014-15, as the economy still faces major challenges, a member of the central bank’s policy board told The Wall Street Journal.

Gulf states gain from Russia’s debt freeze
A handful of oil-rich monarchies in the Gulf have become the unexpected beneficiaries of the crisis in Ukraine, attracting a helping of the global money frozen out of Russia’s debt markets.
Two bond sales planned for this week told the tale of changing fortunes within emerging markets. Russia, which remains mired in a geopolitical dispute, was forced to cancel an issue of government debt when investors demanded a borrowing rate that the country deemed too high. Dubai, meanwhile, was being congratulated for its $750m sale of sovereign debt, the emirate’s first for 18 months.

South Africa’s Central Bank Warns of Capital Flight Risk
Yawning deficits and labor turmoil have made South Africa’s economy vulnerable to capital flight as investors pull back from risky markets, the country’s central bank said Thursday.


Draghi Just Can’t Knock a Good Euro
WSJ Moneybeat
The European Central Bank’s efforts to pull down the value of the euro seem to be in vain. Thursday, ECB President Mario Draghi took (yet another) at least indirect swipe at the strength of the currency, stating that “broad-based asset buys” may be needed “if the inflation outlook erodes.”

India Bond yields unlikely to fall further
Economic Times
The rally in the government bond prices seen last may not sustain due to the continuous supply of debt every week and the caution ahead of the election results next month, say bankers.

Indexes & Index Products

An unsung, diverse index that just beat the Dow
For large companies that compete with $100 billion market-cap competitors that weren’t even publicly traded five years ago, being nimble is essential. It’s the quality of talent that’s going to make the difference between companies that are successful and those that are on the downside of the ever-increasing turnover in the Fortune 500.

BlackRock Starts ETF in Brazil to Follow S&P 500 Index
The ETF will be the first listed in Brazil linked to the performance of stocks trading outside the country, BlackRock spokeswoman Melissa Garville said in an e-mailed statement. The ETF, to be called the iShares S&P 500 FIC FI Investimento no Exterior, will start trading April 29, according to a separate statement from the exchange operator, BM&FBovespa SA.

Russia-themed mutual funds bruised by sanctions fears
Russia-themed equity funds have sunk to the bottom of performance league tables as international tensions over Ukraine and fear of tougher Western sanctions hurt the value of Russian assets.

The hegemony of homogeneity
Dan McCrum – FT Alphaville
Further evidence arrives that if you are looking for value stocks in these markets, then you are going to have a tough time of it. Millennial Invest has charted the change in the dispersion of valuations over the last five years for the US market. What he finds is that it is not just the average valuation that rose in the long post crisis bull market, but the range of valuations has narrowed as well as the market has become much more homogenous.

Investors Embrace ‘Catastrophe Bonds’
With the U.S. hurricane season about a month away, insurers are issuing “catastrophe bonds” at the fastest clip since before the financial crisis. Insurers sell the bonds to help cover potential claims from hurricanes, tornadoes, earthquakes and other major insured risks. While losses on so-called cat bonds have been rare over the years, investors can forfeit both interest payments and their principal if disaster costs exceed designated levels, which gives insurers the right to tap the funds. The bonds have floating interest rates and are usually paid off upon maturity in three or four years.


Barrick Gold and Newmont examine prospects of golden merger
They might not like the word, but employees at Barrick Gold’s giant Goldstrike mine know all about the synergies their company wants from a potential merger with Newmont Mining.

Barrick’s Munk Says Even Einstein Couldn’t Predict Gold Prices
Barrick Gold Corp. Chairman Peter Munk says he finds it impossible to accurately predict the value of the precious metal being produced every day by the mining company he founded more than three decades ago.

***DA: Good thing I’m no Einstein, or else I would have no business trading gold.

Deadly Illegal Mining Booms Below South Africa’s City of Gold
Rockfalls, gang violence and robbery are becoming more common as some of the zama-zamas fight between themselves for a bigger share of the profit. Sithole says that he and his colleagues work “innocently” and carry no weapons, which means they are victims of the violence.

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