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Listen Luddites, This Market Action Is About the Machines; Fed raises rates, unveils balance sheet cuts in sign of confidence; Deutsche unifies capital markets businesses

Observations & Insight

Eurex CEO Sees Plenty of Structural Growth Potential

“We also see a lot of structural growth potential… If we look at the equity index complex, there is a clear trend of many asset managers moving to passive investment structures. We see that … on the derivatives side [adding] new liquidity pools to global index families.”

Thomas Book, CEO of Eurex Frankfurt AG and Eurex Zurich AG, believes the exchange can take advantage of the opportunities presented by a changing European landscape. Low interest rates for a long time equated to low interest in Eurex’s fixed income offerings — this year the exchange has seen new adoption of the product. Book views volatility as an underdeveloped asset class in Europe — Eurex wants to grow the European volatility space and extend those offerings to US investors as well. Also, Eurex saw volumes triple in its MSCI futures and options suite so far this year, a trend the exchange wants to continue to support. Then there’s the elephant in the room — MiFID II — which also presents opportunities for the exchange.

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INFOGRAPHIC: Honey, I Shrunk the VIX
RCM Alternatives

****SD: Now we’re waiting for the sequel, “Honey, I Blew Up the VIX.” Plenty of snark in the graphic. Enjoy.


On the hedge of obsession: the trouble with topiary
Jane Owen – Financial Times
It began innocently enough. A venerable yew hedge about three metres high and 40 metres long needed its annual clipping. I decided to maintain its odd, bulgy abstract shape, a sort of homage to Rockingham Castle’s “Elephant Hedge”. But as I went to sleep that night I dreamt about alternative shapes: Pliny’s Tuscan retreat with its topiary menagerie; the fantastical world of Edward Scissorhands, Levens Hall; and the drunken topiary in The Draughtsman’s Contract.

****SD: Sometimes searching for options stories gives you odd results. Needless to say, this is not the sort of “hedging” I was looking for.

Lead Stories

Listen Luddites, This Market Action Is About the Machines
Doug Kass – TheStreet
I vividly remember episode 40 of Twilight Zone entitled “A Thing About Machines.” (Here is a clip of the episode)
Originally aired on Oct. 28, 1960, it’s the story of a repairman who pays a house call to Bartlett Finchley, who is having trouble with his television’s reception. Finchley is an ill-tempered and lonely gourmet magazine critic. He abuses machines in his home and he is as inept with human beings as he with the machines, which he concludes are conspiring against him.

****SD: I too remember that episode (thanks to MeTV). The electric razor with a mind of its own still gives me the heebie-jeebies.

Fed raises rates, unveils balance sheet cuts in sign of confidence
Lindsay Dunsmuir and Howard Schneider – Reuters
The Federal Reserve raised interest rates on Wednesday for the second time in three months and said it would begin cutting its holdings of bonds and other securities this year, signaling its confidence in a growing U.S. economy and strengthening job market.
In lifting its benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent and forecasting one more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data.

****SD: RCM Alternatives’ Blog has The Fed’s No Volatility Mandate; Washington Post has Larry Summers: 5 reasons why the Fed may be making a mistake; Bloomberg Businessweek has The Fed Is Flying Blind and Bloomberg has Bond Traders Detect Fed Error

Deutsche unifies capital markets businesses
Christopher Spink – Reuters
Deutsche Bank is setting up a global capital markets unit within its corporate and investment bank to house both its equity capital markets and debt capital markets businesses as well its hedging services.

REX Shares’ CEO on His Volatility ETF Lineup
In a recent sit-down with, the CEO of REX Shares, Greg King, discussed REX Shares’ lineup of ETFs. We discuss REX’s volatility ETF lineup, how they are different from traditional volatility ETFs, and delve into the reasons why the REX VolMAXX Short VIX Weekly Futures Strategy ETF (VMIN ) has been one of the best-performing ETFs year-to-date. Greg also discusses why he believes gold-hedged investing and REX’s gold-hedged ETFs can protect investors’ portfolio returns.

Here’s the latest proof that complexity in investing tends to hurt returns
Ryan Vlastelica – MarketWatch
If you had to distill the best possible investment strategy to one sentence, you could do worse than the following: keep it simple, and don’t worry about trying to beat the market, because odds are you can’t.

****SD: “Such complex instruments are often used by poorly monitored funds, and are associated with poor outcomes for investors such as lower performance, higher idiosyncratic risk,…and higher fees,’ the study read.” Sounds to me like the “poorly monitored” aspect is the issue and not necessarily the instruments.

Regulation & Enforcement

Yellen says she’s ‘sympathetic’ to Trump’s deregulation plan
Steve Goldstein – MarketWatch
Federal Reserve Chairwoman Janet Yellen may have been nominated by President Barack Obama, but she’s not sounding uncomfortable with the deregulatory agenda of President Donald Trump.

The EU wants to supervise London clearing-houses after Brexit
The Economist
The Brexit devils will be in the details. That much is clear from the European Commission’s latest plans for euro-denominated clearing, a crucial bit of financial plumbing. Clearing-houses sit in the middle of a securities or derivatives transaction, and make sure that deals are honoured even if one side defaults. Clearing has become a much bigger business in the wake of the financial crisis, after which the G20 group of large economies mandated that over-the-counter derivatives should be cleared: 62% of a notional $544trn global market is now settled in this way.

Sebi permits options trading in commodity futures
The Times of India
Sebi today allowed options trading in commodities to deepen the market but will permit each exchange to launch options on futures of only one commodity initially and asked bourses to follow robust risk management measures.
Putting in place strict eligibility criteria, Sebi said options could be launched on futures contract of only those commodities that are among the top five in terms of total trading turnover value of previous 12 months.


Butterfly Option Spread and Iron Condor Comparison
Scott Connor – The Ticker Tape
In a recent Swim Lessons article, we looked at how the buying and selling of vertical spreads can be used for directional trading. We also looked at how we can put together two short out-of-the-money vertical spreads to come up with a high probability non-directional trade for markets that may be range-bound. That’s the iron condor.

Netflix options don’t appreciate how volatile the stock can be, Goldman says
Ryan Vlastelica – MarketWatch
Netflix Inc.’s stock is famously volatile, seeing big swings in both directions as investors weigh its notoriously high valuation against one of the past decade’s most successful growth stories. However, even traders who thrive on the company’s gyrations may be underestimating how much the company could move in coming weeks.

A Turbocharged Trade on Tesla
Steven M. Sears – Barron’s
Where is Tesla headed? Analysts disagree, and that’s an invitation to sell short-dated put options on one of the hottest stocks in the world.


EM currency risk profile in a new era
Guillermo Tolosa, Oxford Economics – Financial Times
There are good reasons why emerging markets are back in fashion. Here we focus on recent developments and long-term macroeconomic trends that have been shaping a new risk landscape for the EM asset class.

Atlanta Fed raises U.S. second quarter GDP growth view to 3.2 percent

****SD: Love this story when paired with the next one. They were back to back in my news feed.

Barclays keeps U.S. second-quarter GDP estimate at 2.0 percent

Lower oil prices set to test U.S. shale drillers
John Kemp – Reuters
Some U.S. shale producers claim they can produce oil profitably with prices well below $50 per barrel or even $45 per barrel; the oil market is likely to put those claims to the test.
Shale firms have hired an extra 425 rigs to drill for oil since the end of May 2016, more than doubling the active rig count, oilfield services company Baker Hughes says.

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Graduate of University of Minnesota School of Journalism and Mass Communication