First Impressions
Un Parti Québécois: ISDA 2015 Montreal
by Doug Ashburn – JLN
The International Swaps and Derivatives Association descends on Montreal, Quebec this week for its annual meeting and conference. Ahead of the conference, I caught up with ISDA CEO and former CFTC Commissioner Scott O’Malia, who offered up a preview of the conference and a highlight of the issues the swaps world is grappling with.
“The big issue is cross-border harmonization,” says O’ Malia. “I left the commission in the middle of the cross-border debate and came over to ISDA, and now it is all about implementation and coordination of the European and U.S. rules.” He looks at the objectives set out by the G-20 in the early days of the financial crisis (the 2009 “Pittsburgh Summit”), and notes the results have deviated from those early initiatives.
“We have not had a substituted compliance determination (between the U.S. and Europe) in two years.”
As the head of an international organization that must respect all sides of this particular issue, O’Malia looks to be caught in the middle of the dispute between U.S. and European regulators. “It’s like being a daisy at an elephant dance, standing between the U.S. and Europe,” he says. One concern among regulators is mutual recognition of central counterparties, which is ironic, as it means swaps reform is being held up by a futures issue.
Story Continued: http://jlne.ws/1K4DxYl
Quote of the Day
“This move into Chinese equities has become overstretched, especially with the PBoC pumping even more liquidity into the system to support growth. The rally in Chinese stocks has encouraged imprudent speculation, similar to that in the Chinese real estate markets, and may eventually collapse.”
Ankur Patel, chief investment officer at R-Squared Macro in the story, “Crazy Facts About China’s Stock Market That Will Make You Think Twice Before Investing”.
Lead Stories
Flash Crash Arrest Lays Bare Regulatory Lapses at All Levels
Bloomberg
CME Group Inc. concluded within four days of the 2010 flash crash that algorithmic trading on futures exchanges didn’t exacerbate losses in the market.
When Washington regulators did a five-month autopsy in 2010 of the plunge that briefly erased almost $1 trillion from U.S. stock prices, they didn’t consider individuals manipulating the market with fake orders because they used incomplete data.
jlne.ws/1EdjSVl
Bill Gross says German bund is ‘short of a lifetime’
By Ellie Ismailidou, MarketWatch
Bill Gross has the perfect remedy for investors baffled by record-low yields in the eurozone. According to the bond guru, shorting low-yielding eurozone bonds is a great opportunity for profit, at a time when “not even ‘thin gruel’ is being offered to our modern day Oliver Twist investor.”
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Bill Gross’s ‘Short of a Lifetime’ Would Mean Armageddon
Bloomberg
The trade that George Soros and Stanley Druckenmiller pulled off in 1992 by betting against the British pound — and making $1 billion in the process — has gained legendary status. So when Bill Gross, the world’s best-known bond investor, tweeted yesterday from his current employer Janus Capital that betting against German government debt is the trade of a “lifetime,” he reached for that bit of history to benchmark the current opportunity:
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The Irresistible 2% U.S. Yield Whose Downside Appears Forgotten
Bloomberg
Who’s afraid of locking up their money at yields of 2.6 percent for 30 years? Basically no one, or so it seems.
Just take a look around the world. China bought $6.5 billion of longer-dated U.S. bonds in February, even as the nation reduced its overall holdings of Treasuries by $15 billion.
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Liquidity in markets: Frozen
Regulators have made banking safer. But has that made markets riskier?
The Economist
TO ENSURE that it meets the 750 new rules on capital imposed in the aftermath of the financial crisis, JPMorgan Chase employs over 950 people. A further 400 or so try to follow around 500 regulations on the liquidity of its assets, designed to stop the bank toppling over if markets seize up. A team of 300 is needed to monitor compliance with the Volcker rule, which in almost 1,000 pages restricts banks from trading on their own account.
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Gundlach Buys $20 Million of Junk-Rated Puerto Rico Bonds
Bloomberg
DoubleLine Capital’s Jeffrey Gundlach bought $20 million of junk-rated Puerto Rico bonds this year as the commonwealth struggled with its fiscal crisis.
DoubleLine’s $2.26 billion Income Solutions Fund held $20 million of Puerto Rico general obligations as of Feb. 27, data compiled by Bloomberg show. The fund didn’t hold any commonwealth debt at the end of 2014. The bonds, which were issued in March 2014, traded Wednesday at record-low prices.
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China Has a Massive Debt Problem
Bloomberg
China has a $28 trillion problem. That’s the country’s total government, corporate and household debt load as of mid-2014, according to McKinsey & Co. It’s equal to 282 percent of the country’s total annual economic output.
President Xi Jinping’s government aims to wind down that burden to more manageable levels by recapitalizing banks, overhauling local finances and removing implicit guarantees for corporate borrowing that once helped struggling companies. Those like Baoding Tianwei Group Co., a power-equipment maker that Tuesday became China’s first state-owned enterprise to default on domestic debt.
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‘Flash Crash’ Case Suggests Small Problems Can Cause Systemic Issues
Dealbook – NY Times
The flash crash of 2010 resurfaced with an arrest on Tuesday. Prosecutors at the Department of Justice along with the Commodity Futures Trading Commission have accused one self-employed trader in Britain of manipulating futures markets so much that he played a significant role in the events that led to the five-minute, 1,000-point plunge in the Dow Jones industrial average on May 6, 2010.
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Spreadsheet and Gumption Were All U.K. Trader Needed to Rig Market
Sam Mamudi – Bloomberg
It only took a spreadsheet souped up with custom enhancements to manipulate one of the world’s biggest markets with a strategy that on some days involved trading billions of dollars’ worth of stock-futures contracts.
According to the U.S. Justice Department, London trader Navinder Singh Sarao earned $40 million from 2010 to 2014. His product of choice: CME Group Inc.’s E-mini futures on the Standard & Poor’s 500 Index, the key measure of U.S. stock prices. He traded so much, the U.S. government says, that he contributed to the flash crash of May 6, 2010, that briefly drove shares into a nosedive that erased nearly $1 trillion in value.
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CME Group says flash crash was not caused by futures market
Reuters
CME Group Inc on Wednesday denied allegations that the futures markets, which prosecutors are accusing a London-based trader of having illegally manipulated, caused the May 2010 Wall Street “flash crash.”
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U.S. regulator wants better deposit data from big banks
BY DOUWE MIEDEMA, Reuters
The largest U.S. and foreign banks would need to keep track of deposits better under a plan launched by the Federal Deposit Insurance Corporation on Tuesday, as many lenders have grown and become more complex.
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U.S. judge rules funds suing Argentina entitled to bond documents
Reuters
A U.S. judge on Wednesday ruled that hedge funds suing over unpaid debt stemming from Argentina’s 2002 default are entitled to details of a recent bond offering by Buenos Aires.
U.S. District Judge Thomas Griesa in Manhattan said the funds can seek documents from Argentina and banks including Deutsche Bank AG related to Tuesday’s $1.4 billion bond sale to determine if any assets exist in the United States that could satisfy billions of dollars in unpaid judgments.
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How advisers can avoid Finra scrutiny over personal liens, judgments, or bankruptcies
Investment News
While disclosures of negative personal financial events are not pleasant, the consequences of not making them can be severe
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Goldman Sachs makes $20m investment in HFT tech provider
Financial Times
Not much money in high-frequency trading? Goldman Sachs begs to differ.
The US investment bank announced on Tuesday it had spent $20.5m on an undisclosed minority stake in Perseus, a six-year old US technology company that provides banks and high-speed traders with cutting edge tools.
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British Regulator Fines Merrill Lynch $19.8 Million for Reporting Failures
Dealbook – NY Times
A British regulator on Wednesday fined an arm of Bank of America Merrill Lynch 13.3 million pounds, or about $19.8 million, for failing to properly report tens of millions of client transactions over a seven-year period.
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Citigroup must face South Korean bank’s lawsuit over failed CDO
Reuters
A U.S. appeals court on Wednesday revived a lawsuit in which South Korea’s Woori Bank accused Citigroup Inc of defrauding it into buying risky mortgage securities that Citigroup was betting against, prior to the financial crisis.
The 2nd U.S. Circuit Court of Appeals in New York said a lower court judge erred in finding that Woori waited too long to sue over its $25 million investment in 2007 in Armitage ABS CDO Ltd, a collateralized debt obligation that Citigroup sold.
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Whistleblower Jim Marchese Scores Millions in Payout—Again; Bank of America settlement brings Marchese, of ‘Real Housewives of New Jersey’ fame, a rare second award; ‘It’s not within me to not say something’
By CHRISTINA REXRODE, WSJ
On television, Jim Marchese is the trash-talking bad boy from “The Real Housewives of New Jersey.” His off-camera role is lesser-known but still lucrative: Mr. Marchese is a whistleblower who twice has collected seven-figure awards for tipping off authorities to corporate wrongdoing.
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Crazy Facts About China’s Stock Market That Will Make You Think Twice Before Investing
Forbes
A common saying is you can tell a bull market has run its course when your taxi driver starts recommending which stocks to buy. In China, everybody seems to be an expert today.
While shares in Shanghai and Shenzhen have doubled in value over the past year, economic fundamentals are painting a distinctively gloomy picture for the world’s second largest economy. China’s GDP outlook hasn’t looked this bad in 25 years, while concerns over a real estate bubble, overcapacity and deflation plague the wider economy.
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Forget about Wall Street: Shanghai is now the market to watch
MarketWatch
Get up. Take shower. Brush teeth. Feed the cat or the dog. Check what the Shanghai market has been doing overnight.
For anyone in Europe who takes the markets seriously , that is now the regular morning routine. It is very much as it has always been, except with one big difference. Whereas once the standard reflex would have been to look at what had happened on Wall Street overnight, with perhaps a sideways glance at Tokyo, now it is Shanghai that investors look to.
What happens in China is now what dominates what happens in the rest of the world.
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Central Banks
Blankfein Says September Rate Rise ‘Unlikely, But Possible’
Bloomberg
Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein said an interest rate increase by the Federal Reserve in September is “unlikely, but possible” as policy makers grapple with a strengthening economy.
The U.S. economic recovery is further along than Europe’s and probably China’s, Blankfein said Wednesday at an event in Johannesburg. If rates increase, it won’t be a source of optimism, although the cause for any tightening would be, he said, adding there haven’t been many signs of inflation.
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You Thought the Taper Tantrum Was Bad? Wait Till Fed Lifts Rates
Bloomberg
No amount of reassuring rhetoric by Janet Yellen and her colleagues at the Federal Reserve can prevent markets’ overreaction when benchmark interest rates start heading higher.
That’s the conclusion of Deutsche Bank AG economists Joseph LaVorgna and Brett Ryan after studying turns in Fed policy in the past two decades.
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Will U.S. Rate Hikes Be Different This Time for Emerging Markets?
Bloomberg
Historically, the road to higher U.S. rates has been littered with emerging-market casualties. So as the Fed contemplates liftoff (probably in the second half of 2015), the pressing question for many economies is, “will this time be different?”
That’s one of the most dangerous phrases in the field of economics.
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Grand Central: Digging Deeper Into the Strange Seasonality of Fed Decision-Making – Real Time Economics
WSJ
There’s a good deal of talk these days about the seasonality of post-crisis economic patterns. The first quarter seems to be a perpetual disappointment. As researchers at the Federal Reserve Bank of Atlanta’s Macroblog pointed out last week, output in the first quarter has grown at a 0.6% average rate during the past five years, compared to a 2.9% average during the remaining three quarters of the year. It is a development that has gotten the attention of senior officials.
What gets less attention, if any, is the seasonal pattern that seems to have set in on Fed decision-making in the post-crisis environment.
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ECB to fund Greek banks as long as they stay solvent: Coeure
Reuters
The European Central Bank will continue to fund Greek banks as long as they stay solvent and have enough collateral, Executive Board Member Benoit Coeure told a newspaper on Wednesday, dismissing talk that Athens might ditch the euro.
Worries over the standoff between the leftist-led government in Athens and its creditors – the euro zone and the International Monetary Fund – over reforms needed to unlock bailout funds has sparked uncertainty and deposit flight from Greek banks.
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Currencies
Deutsche Bank Expects $1.6 Billion in Legal Costs
Dealbook – NY Times
Deutsche Bank said on Wednesday that it would incur 1.5 billion euros, or $1.6 billion, in costs from legal proceedings as reports surfaced that the bank was set to accept a record penalty for its involvement in a plan to rig the benchmark rates used to set trillions of dollars in interest rates.
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FXCM to focus on wholesale business
By Chelsey Dulaney, The Wall Street Journal
FXCM said on Monday that it plans to focus its institutional operations on its wholesale business, as the New York-based foreign-exchange broker sells off non-core assets to repay debt.
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Thomson Reuters March FX volumes rise 13 pct from month ago
Reuters
Daily foreign exchange volumes on currency platforms run by Thomson Reuters rose to $402 billion last month from $355 billion in February, the company said in a statement on Tuesday.
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Genesis Trading Launches as Bitcoin Broker-Dealer
Traders Magazine Online News
There’s always a first time for something – and now the industry’s first digital currency broker-dealer has opened its doors. Genesis Trading, a wholly owned subsidiary of Digital Currency Group and a division of the broker-dealer SecondMarket, has just opened its doors and launched itself as the first U.S. broker-dealer to specialize in the trading of digital currencies, including bitcoin.
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RMB usage hampered by expertise, liquidity deficit
Euromoney Magazine
The internationalization of the renminbi could be further turbo-charged if knowledge and liquidity concerns were addressed, according to a new study on corporates’ views of the Chinese currency.
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Indexes & Index Products
Nikkei 225 passes 20,000 after 15-year wait
Josh Noble in Hong Kong, FT
Japan’s Nikkei 225 closed above 20,000 points on Wednesday for the first time since the days of the dotcom bubble, as investors respond to signs of improving corporate governance and an uptick in exports.
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Index funds (still) beat managed funds
www.chicagotribune.com
In honor of Financial Literacy Month, it’s time to return to a core concept of investing: the difference between a managed and an index fund. According to the Investment Company Institute (ICI), from 1990 to 2013, the number of households owning mutual funds more than doubled — from 23.4 million to 56.7 million. Given the explosion, it is amazing how many investors still do not understand the nuts and bolts of funds.
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International Adviser: A-share inclusion in the MSCI could drive foreign capital inflow
www.international-adviser.com
If China’s A-shares are included in world indices after a review in June, large amounts of capital could flow into the mainland market, said Catherine Yeung, investment director at Fidelity Investments.
“The economy is slowing, but what is interesting is if you look at China’s contribution to global growth, and then you look at China’s weighting in the MSCI World Index, then there is a huge under-representation of China,” Yeung said in an interview with International Adviser’s sister publication Fund Selector Asia.
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Low Volatility Works For This Small-Cap ETF – SPDR Russell 2000 Low Volatility ETF
Seeking Alpha
With risk appetite high, low-volatility exchange-traded funds have recently taken some flak for lagging their traditional broad market peers.
That criticism, a familiar refrain as low-volatility funds have become increasingly popular with investors, often focuses on the performance of “low-vol” ETFs in short time frames. Over the long haul, ETFs that emphasize a volatility damping approach have often offered superior risk-adjusted returns.
jlne.ws/1QiA6BE
STOXX LIMITED AND KRX ENTER INTO MOU
STOXX
STOXX Limited, a leading provider of innovative, tradable and global index concepts, and The Korea Exchange, Inc. (KRX) today announced the signing of a memorandum of understanding (MOU) to create a long-term cooperation between the two companies.
(No Link)
Gold
India, Seeking a Boost, Plans to Put Its ‘Idle Gold’ to Work
NY Times
Just after 10:15 every night, the three stone goddesses of Mahalakshmi Temple are stripped of their finery — the gleaming masks, said to contain 17 pounds of gold; ropy gold necklaces; pendants shuddering with jewels.
The treasure is transported to a “strong room,” where it remains until morning alongside decades’ worth of offerings given to the deities. Sharadchandra V. Padhye, who heads the temple’s managing trust, would not give the value of what is kept in the room, but made it clear that it was vast.
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Gold has sharpest single-day loss in six weeks on U.S. housing data
Reuters
Gold fell to its lowest level in more than a week on Wednesday, suffering its sharpest single session loss in over six weeks after a report showed strong U.S. home sales in March, raising expectations for a June U.S. Federal Reserve interest rate hike.
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Zombie Gold
Seeking Alpha
Gold sure looks like dead money, but is it really? The upside appears limited for gold for as long as the dollar is supported, but its downside risk seems even more limited. While gold may feel like dead money, catalysts exist in waiting that could lift it higher at a moment’s notice. Therefore, like a zombie, I suggest it’s worthwhile to let gold rest in your portfolio undisturbed.
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Molten Markets makes precious metals trading available on MoltenFX platform
LeapRate
US provider of Forex trading platforms and marketplaces Molten Markets Inc has beefed up the offering on its MoltenFX ECN platform via the addition of precious metals. The move is done in response to demands from clients of the company.
jlne.ws/1IJAdAT
READ MORE: JLN Financials: Flash Crash Arrest Lays Bare Regulatory Lapses at All Levels; Bill Gross says German bund is ‘short of a lifetime’; Bill Gross’s ‘Short of a Lifetime’ Would Mean Armageddon.