 | | | | | | | | March 08, 2016 | | | | | First Impressions | | | Editor's Note
Carl Gilmore is guest editing the John Lothian Newsletter this week. In case you missed his column in the newsletter this morning, it is excerpted below.
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"Maybe I'll go to the movies...by myself" The Plight of the FCMs
Carl Gilmore, President, Integritas Financial Consulting
That famous line in the movie "Trading Places" sums up the current financial profitability position of the typical futures commission merchant. With increasing compliance, operational and technology costs, a zero tolerance regulatory environment, virtually no interest income, transactional commissions racing to zero, and increased competition, it is no wonder that the FCM community continues to dwindle. And now, if things weren't bad enough, blockchain technology threatens the final disintermediation. What to do? That is the $64,000 question.
I don't want to spend too much time pointing out problems, or lamenting them, as that ground has been pretty well traveled. Rather, I think it is more useful to step back, look at the overall picture and suggest a path forward.
First, commission rates are not going back up. If you operate an FCM and are waiting for an environment in which you gain upward pricing power, you are probably going to be waiting quite a long time. Thus, don't base your business strategy on incrementally higher transactional revenue. It isn't likely to happen. Also, there are some interesting things going on in the marketplace with respect to subscription models that bear watching.
(To read the rest of the commentary from the morning's newsletter, click here)
| | | | | | Quote of the day: | | | | | | “ | "No US bank clung tenaciously to bond trading like Deutsche Bank. No US bank completely reversed strategy like Barclays and no US bank had to face Swiss capital rules like Credit Suisse."
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| ” | Brad Hintz, a professor at NYU Stern, in the story, "US investment banks open gap over Europeans with quick moves"
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| | | | Lead Stories | | |
US investment banks open gap over Europeans with quick moves
Laura Noonan - Financial Times
Europe's top five investment banks are now making less than half as much revenue as the top five US operators, which beat their European rivals on almost every financial measure last year. Analysis by the Financial Times shows the Americans had investment banking and securities revenue of $138.5bn last year  more than twice the $60.1bn of the Europeans. Their cumulative pre-tax profits of $33.5bn dwarfed the $4.2bn in Europe. It is the latest illustration of the growing global dominance of the US investment banks that now top even the league tables for investment banking fees in Europe, the Middle East and Africa  the traditional stronghold of Europe's banks.
on.ft.com/1LbU560
China's transparency challenges
Ben S. Bernanke and Peter Olson - Brookings Institution
At the recent G20 gathering in Shanghai, three Chinese leadersÂPremier Li Keqiang, People's Bank of China Governor Zhou Xiaochuan, and Finance Minister Lou JiweiÂreassured attendees that the Chinese government had the monetary and fiscal tools as well as the know-how to guide the economy through its current challenges. The success of the communications offensive, which seems to have calmed investor concerns for the moment, stands in strong contrast to the communications missteps that exacerbated adverse market reactions to the Chinese government's stock market and currency interventions over the past year.
brook.gs/1LbSayl
Europe's Negative Yields Seep Into Non-Government Bond Sales
Tom Beardsworth and Alastair Marsh - Bloomberg
The first non-government issuer just got paid to borrow in euros. Berlin Hyp AG sold 500 million euros ($550 million) of three-year covered bonds priced to yield minus 0.162 percent on Tuesday, according to data compiled by Bloomberg. The sale followed the euro area's first zero-coupon covered bond, sold last month by another German issuer, Landesbank Hessen-Thueringen Girozentrale.
bloom.bg/1LbKQTe
****SD: The FT's take here
Long-term Japanese yields set new record lows
Leo Lewis - Financial Times
Longer dated Japanese government bond yields declined to new depths on Tuesday, with the seven-, 10-, and 30-year benchmark yields all setting record lows. While new lows for the JGB market are not unusual after the Bank of Japan cut interest rates below zero last month, a closely watched, Y800bn 30-year auction of new debt was unexpectedly strong  a reminder of the new scarcity of yield in one of the world's major sovereign bond markets. JGBs with maturities out to 11 years are currently trading with negative yields.
on.ft.com/1LbXwcK
Liquidity and Quote Fading
Remco Lenterman - FIA European Principal Traders Association
One observation I see made regularly by commentators on electronic markets is that liquidity can 'disappear in an instant' and is somehow ephemeral. Quotes, they say, tend to fade as soon as the market notices there's a seller around. I'm always rather bemused by this observation, because it implies that in more manual markets, liquidity is (or was) more stable. That's certainly not my personal observation, having traded many manual markets and many electronic markets over the course of my career. Let's take a trip down memory lane...
/goo.gl/bUJW5Q
Will the Blockchain Replace Swift?
Chris Skinner - American Banker
I made a provocative comment, as it turned out, during my keynote at a recent conference. The comment was picked up in a press article that reported I said "the coding behind virtual currency bitcoin could also prove to be enormously transformational, potentially even replacing the Swift network for interbank payments." This remark created a lot of debate as Swift is the backbone of the banking industry worldwide. Built in the 1970s to replace telex machines with electronic transfers, Swift is a co-operatively funded network by the global banking system to let them send funds with confidence. Its very name shows its cooperative nature: the Society for Worldwide Interbank Financial Telecommunication.
goo.gl/0PVAMX
Wells Fargo Said to Expand in Credit Swaps as Clients Hedge
Sridhar Natarajan and Michelle Davis - Bloomberg
Wells Fargo & Co. plans to ramp up trading in derivatives that allow investors to bet against companies' debt, the latest sign of growing interest in a market that many had abandoned. The bank expects to trade credit-default swaps tied to individual companies as soon as next quarter, according to people with knowledge of the matter. Investors have grown more interested in betting and hedging with the instruments since the middle of last year, when corporate bonds started weakening.
bloom.bg/1LbWoWw
****SD: Also, see Bloomberg's Default-Swap Traders Needed
Banking Faces an Existential Crisis
Mark Gilbert - Bloomberg View
Who would choose to be a banker these days? Your colleagues are disappearing at an alarming rate as your business shrinks. The regulators don't want you doing anything exciting. The public despises you.
bv.ms/1LbX0f5
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| Central Banks | HIGHLIGHTS-Bank of England's Carney speaks on Brexit
Reuters
Bank of England Governor Mark Carney and Deputy Governor Jon Cunliffe spoke on Tuesday to members of Britain's parliament about the country's membership of the European Union, ahead of an in-out referendum on June 23. During a session that lasted close to three hours, Carney rejected accusations of partisanship in the EU debate made by Jacob Rees-Mogg, a eurosceptic Conservative member of parliament.
reut.rs/1LbNBnF
****SD: Also see, Brexit: Five things we learnt from Mark Carney and the Bank of England, Carney's `Brexit' Stance Under Fire as BOE Accused of Bias and Brexit: The Bank of England's take - live
Free Lunch: There is no case for ECB timidity
Martin Sandbu - Financial Times
The facts should leave little room for doubt that the European Central Bank should intensify the monetary stimulus in the eurozone this Thursday. That doubters  let alone detractors  remain shows how deeply entrenched is the current mindset of timidity and lack of confidence in the power of central banks to energise economic activity.
on.ft.com/1LbNkRv
Could ECB solutions be creating more problems?
Julia Chatterley - CNBC
What a difference a few weeks make. Market sentiment seems to have improved and the fears of imminent recession now appear a touch hasty. But the question of where markets head next continues to depend on policymakers' ability to deliver bold and decisive action. Step forward "Super" Mario Draghi, the President of the European Central Bank, who is widely expected to tinker with the euro zone's financial plumbing this week in the face of weaker-than-expected inflation and six weeks of volatility weighing on business sentiment.
cnb.cx/1LbN5WT
Draghi may have to throw money out of a helicopter
Matthew Lynn - The Telegraph
A booming stock market. Property prices running wild. Lots of new jobs being created, inflation back on target, and an economy that is starting to party as it recovers some of its verve and swing. If everything had gone according to plan, that would be an accurate description of the eurozone this year. Twelve months after the European Central Bank finally caught up with the US, Japan and this country, a massive blast of printed money should have revived the European economy by now.
goo.gl/GlwpPB
****SD: Also, see the requisite bazooka story for the day from the FT: Draghi's bazooka fails to turn eurozone tide
Germany will resist ECB rate plans, says expert
Arthur Beesley - Irish Times
Looming expansion of the European Central Bank's campaign to revive the euro zone economy is running into resistance in Germany, raising fresh questions over the limits of the bank's actions. At the start of a week in which ECB governors meet in Frankfurt to discuss new stimulus measures, a leading German economist told a Dublin audience there should be no further loosening of monetary policy, as steps already taken by the bank presented threats to financial stability.
goo.gl/pL0LkK
Bank of England Has Scope to Ease Policy If Needed, Weale Says
Emma Charlton - Bloomberg
Bank of England official Martin Weale said the central bank has room to ease policy if the outlook for inflation deteriorates. In a speech in Nottingham, Weale reviewed the extraordinary measures the central bank has employed and still has at its disposal, while sticking to his view that tightening is more likely over the next two years. The BOE's benchmark interest rate has been at a record-low 0.5 percent for seven years. Still, his comments are a further sign of the shifting debate at the U.K. central bank with inflation near zero, far below the BOE's 2 percent goal. Governor Mark Carney said last month that there's scope to loosen if needed, and official Gertjan Vlieghe indicated he's close to voting for more stimulus.
bloom.bg/1LbQdSu
The IMF Is Sounding the Alarm. Is Anyone Listening?
Ian Talley - WSJ
The International Monetary Fund is sounding louder and louder alarms about the state of the global economy. The problem is, few major economies seem to be hearing them. "The IMF's latest reading of the global economy shows once again a weakening baseline," the fund's No. 2 official, David Lipton, warned Tuesday in a speech to the National Association for Business Economics. While the world economy is still expanding, he said, "we are clearly at a delicate juncture, where risk of economic derailment has grown."
on.wsj.com/1LbRetT
Trump Take Note: U.S. Monetary Policy Increasingly Made in China
Rich Miller - Bloomberg
Here's something else for Donald Trump to fulminate about. U.S. monetary policy is increasingly being made in China, not in the good old U.S. of A. That's an exaggeration, of course, but it's more than just misleading click bait. It's indicative of a broader reality that Federal Reserve policy makers more and more recognize. No central bank - even the world's most powerful - is an island. With increasingly interconnected global financial markets, what happens overseas often quickly redounds on the U.S., and vice versa.
bloom.bg/1LbOrkm
Australia: Loose monetary policy is working but here's why the RBA will cut rates again
Business Insider
Australia's remarkable economic run without a recession continued towards 25 years with 4th quarter 2015 GDP printing 0.6%. That surprised many but it was the year on year growth rate of 3% which underscored just how incredible Australia's growth is in a world beset with economic weakness. That growth rate was "despite falling commodity prices and China's slowdown", Paul Bloxham, HSBC's chief economist for Australia and New Zealand highlighted in a note to clients yesterday.
read.bi/1LbPe4R
| | | | Currencies | Here's what's driving the 'Obama dollar rally'
Marc Chandler - Business Insider
We argue that the dollar is in its third significant rally since the end of Bretton Woods in 1971. The Reagan dollar rally was driven by the policy mix of tight monetary policy and loose fiscal policy. The G7 effort to stop the dollar's appreciation at the Plaza Hotel in September 1985 marked the end of the Reagan dollar rally.
read.bi/1LbMSmx
Currency Warrior Hungary Seen Targeting De Facto Cap on Forint
Marton Eder and Gabriella Lovas - Bloomberg
Hungary is the latest country to enter the global currency war.
The eastern European nation's central bank -- which has said it has no exchange-rate target -- has gotten into the habit of announcing stimulus to curb the forint's appreciation whenever it approaches 310 per euro. Now with the currency trading near a six-month high, policy makers have abandoned a commitment not to cut interest rates until 2018.
bloom.bg/1LbNw3n
Pound vs euro: should I buy holiday currency now or after the EU referendum?
James Connington - The Telegraph
The plunge in the value of the pound against the euro is making holidaymakers wonder whether they should rush to buy currency now, if further falls lie ahead. The uncertainty surrounding the referendum is at one of the main reasons for sterling weakness. In late 2016, the pound to euro exchange rate topped EUR1.42, but today it sits at just EUR1.29, and is likely on its way further down.
goo.gl/eE7uGu
Banxico Deputy Worried More Peso Weakness May Spur Inflation
Eric Martin and Nacha Cattan - Bloomberg
Mexico central bank deputy governor Manuel Sanchez said he is concerned about the risks for further peso depreciation, which could trigger inflation and spur policy makers to raise the key interest rate again.
bloom.bg/1LbSZai
China's Outflows of Money Slowed in February
Keith Bradsher - NY Times
ew economic statistics have gone as quickly from obscurity to the center of attention from international financial markets lately as China's foreign currency reserves, widely seen as the best barometer of how long China can avoid a possible devaluation someday of its own currency.
nyti.ms/1LbVTMp
Digital-First Startups Are Challenging Legacy Remittance Firms
Evan Bakker - Business Insider
Every year, migrants send hundreds of billions of dollars worth of remittances back to friends and family in their home country. And there's a massive industry that facilitates these payments  and has for more than a century. The legacy remittance industry has been long dominated by cash, which requires physical locations where customers can hand over or pick up money. Building out those retail networks is a huge investment. It's left just a few players, called Money Transfer Operators (MTOs), controlling a bulk of the industry.
read.bi/1LbMRil
| | | | Indexes & Index Products | VIX Faces Challenge From Trading Robots Unleashed by Bats
John Detrixhe and Brian Louis - Bloomberg
The dominant gauge of investor fear -- the VIX -- is about to face new competition.
Bats Global Markets Inc. is introducing its own volatility benchmark for U.S. stocks called the Bats-T3 SPY Volatility Index, an attempt to muscle in on CBOE Holdings Inc.'s VIX territory. Dubbed SPYIX (pronounced "Spikes") by its creators, the index tracks the price of options linked to the world's biggest exchange-traded fund, the SPDR S&P 500 ETF Trust.
bloom.bg/1U1IqsU
ETFs: Process Matters As Much As Fees
Equities.com
Do a quick Google search for "ETF advantages." You will notice a few main themes. In 9 of the top 10 links, lower expenses are noted as a key benefit of ETFs vs. other product wrappers. Fees do matter when picking investment products. There is no way around this. All else being equal, investors are usually best served by minimizing fees. The problem is that most of the time all else isn't equal.
/goo.gl/8YGCzJ
Why fixed indexed annuities are strong sellers
Andrew Murdoch - MarketWatch
At first glance, a fixed indexed annuity (FIA) might seem almost too good to be true. Among its biggest attractions  and one you can be sure a broker will tout  is that you can invest in the stock market with impunity because you can't lose money. Should you hear this, immediately temper your expectations. The above statement is true in only a narrow sense. FIA owners don't lose money in the market, but they also earn materially less because returns are tied to an index, such as the S&P 500 or a lower-volatility index, and investors are paid only a portion of its increase(vis-a-vis the so-called participation rate). Unfortunately, brokers don't always tell clients this because FIAs are not regulated securities.
on.mktw.net/1LbKUSY
TD Ameritrade's Investor Movement Index: Clients Were Net Buyers of Equities in February
Press Release
TD Ameritrade, Inc. ("TD Ameritrade"), a broker-dealer subsidiary of TD Ameritrade Holding Corporation (Nasdaq: AMTD), is today releasing the Investor Movement Index reading for February 2016. The Investor Movement Index, or the IMXSM, is a proprietary, behavior-based index created by TD Ameritrade that aggregates Main Street investor positions and activity to measure what investors are actually doing and how they are positioned in the markets.
goo.gl/J9Dqft
$IWM: Russell - your looks are becoming a problem
RiskReversal
The rally in the S&P 500 (SPX) from last month's lows near 1800 to today at 2000 was initially powered by some of the most loved and most prominently weighted in the index. But of late it has broadened out to some fairly unloved sectors like energy, materials, miners, transports and heavy machinery. There is a full on short squeeze going on in some spaces. What were fears just a few weeks ago of lower for longer commodity prices leading to some sort of credit event in emerging markets has now turned into a fear of missing out on all the sectors in the middle of that scare. Oil and other commodities have rallied sharply, some highly levered companies have raised equity (MRO), others have gotten some respite on debt loads (PBR) and the potential for high profile bankruptcies appear to be shelved for the time being (CHK, FCX).
goo.gl/4eTM1X
Defaults Are on the Rise
Jason Giordano - Indexology: S&P Dow Jones Indices
The March rebalancing of the S&P U.S. Distressed High Yield Corporate Bond Index saw another increase in the number of qualifying constituents. This marks the eighth increase of this kind in the last nine months. The index, which is designed to measure securities with an option-adjusted spread greater than or equal to 1,000 bps, is down 35% over the past one-year period as of March 1, 2016.
goo.gl/mZA4hS
Why fixed indexed annuities are strong sellers
Andrew Murdoch - MarketWatch
At first glance, a fixed indexed annuity (FIA) might seem almost too good to be true. Among its biggest attractions  and one you can be sure a broker will tout  is that you can invest in the stock market with impunity because you can't lose money. Should you hear this, immediately temper your expectations. The above statement is true in only a narrow sense. FIA owners don't lose money in the market, but they also earn materially less because returns are tied to an index, such as the S&P 500 or a lower-volatility index, and investors are paid only a portion of its increase(vis-a-vis the so-called participation rate). Unfortunately, brokers don't always tell clients this because FIAs are not regulated securities.
on.mktw.net/1LbKUSY
PureFunds ISE Cyber Security ETF Declared ETF Innovative Product of the Year at the Fund Action ETF Performance Awards 2016
Press Release
PureFunds and ISE ETF Ventures today announced that the PureFunds ISE Cyber Security ETF (ticker: HACK) earned three awards in the Flows Category - ETF Innovative Product of the Year, Best ETF Specialist, and ETF Newcomer of the Year - at the inaugural Fund Action ETF Performance Awards. HACK, the first cyber security ETF, launched in November 2014 and tracks the ISE Cyber Security Index (index ticker: HXR).
goo.gl/SLXVEM
| | | | Gold | South Africa's gold industry, like its economy, is crumbling
Kevin Sieff - Washington Post
Just off the highway and behind a yellow auto repair shop, Andile Jeremiah slipped into a hole in the ground, descending into an abandoned 100-year-old mine that had helped make South Africa rich. For a poor man in a country with a slumping economy, it was time to look for whatever had been left behind. South Africa was once the world's biggest gold producer, with more than 75 percent of all global reserves in 1970. That iconic industry created wealth that attracted immigrants from around the world, paid for the construction of roads and railroads and made South Africa's economy the largest on the continent.
wapo.st/1LbQrJc
Miners seek fresh financing options, backed by resurgent gold
Clara Denina - Reuters
This year's double-digit gold rally is opening opportunities for smaller miners to sell future output or tap markets for finance, aimed at paying back debt and strengthening balance sheets. Miners have been hit hard by plummeting commodities prices, forcing them to cut jobs, capital expenditure and dividends.
reut.rs/1LbN9Wo
The global experiment with negative interest rates is fantastic news for gold
Will Martin - Business Insider
The longer the world's central banks continue to experiment with negative interest rates, the better the outlook for gold, according to Britain's biggest bank, HSBC.
read.bi/1LbQHYI
Bet against copper, aluminium, gold, iron ore: Goldman
Pratish Narayanan - Australian Financial Review
Goldman Sachs Group predicted a rally in commodities from iron ore to gold will falter and forecast copper and aluminium prices will slide as much as 20 per cent over the next year. Any increase in raw material prices will prompt more supplies to enter the market, making it difficult for any advance to be sustained, analysts including Jeffrey Currie wrote in a report dated March 7. The bank maintained its bearish outlook for gold, said iron ore's surge would prove temporary and reiterated that oil will fluctuate between $US20 and $US40 a barrel. Goldman also said it was a good time to make bets that copper and aluminium would decline.
goo.gl/ZMzkny
****SD: To some, not the right call - Boockvar: Goldman's gold warning makes no sense
| | | | Miscellaneous | Ontario, Canada announced a plan to test Universal Basic Income for all citizens
Olivia Goldhill - Quartz
Canadian province Ontario is taking the next step toward offering a standard income to all citizens: a Universal Basic Income pilot project, set to unroll this year.
goo.gl/VwSeOw
We were promised jetpacks and flying cars, and all we got was this lousy chart
Max Ehrenfreund - The Washington Post
Witness the marvels of modern technology: Never before in human history have we been able to play with dozens of virtual stray cats, to paste images of our own faces into photographs of celebrities, or to instantly send the word "Yo" -- and nothing else -- in a message to a friend. Only today, in this brave new world, can we idle away the hours smashing colored pieces of digital candy until our minds go numb. If this is our technological future, economists aren't sure that it adds up to much.
wapo.st/1LbRqcm
Trump hits list of corporate targets on campaign trail
Financial Times
Donald Trump used to love Apple products, Oreo cookies and Carrier air-conditioners. But as the New York property developer has made the transition from billionaire businessman to frontrunner for the Republican presidential nomination, he has made some of those same companies and firms the target of his "Make America Great Again" campaign. While Mr Trump plans to build a wall along the US-Mexico border to keep out illegal immigrants, he has also vowed to target US companies that move manufacturing overseas  whether Apple in China or Carrier and Mondelez, the Oreo-maker, in Mexico  via a combination of tariffs and the presidential bully pulpit.
on.ft.com/1LbSPQf
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