Breaking News

Brexit, Brexit, Brexit, plus, Legacy Hedging Problems

Lead Stories

How Oil Producers Can Go Broke When The Price Of Oil Soars
Ed Hirs – Forbes
It is earnings season, and oil producers are not all putting out good earnings reports, despite a rise in the price of West Texas Intermediate (WTI) from $40 per barrel just two years ago to $70 per barrel today. You would think that companies that barely survived two years ago would now be flush with earnings, but for some companies, the opposite is true, as financial contracts from a year or so ago are now coming back to bite.
/jlne.ws/2MybLuE

****SD: You don’t need to look very hard or far to find examples – Nikkei has this story on a Hong Kong conglomerate’s “legacy hedging” burden. Or check out this story about Sanchez Energy.

Are You Pound-Proof Yet? The Brexit Endgame Is About to Begin
Charlotte Ryan – Bloomberg (SUBSCRIPTION)
Time is running out to position for a disorderly Brexit.
That’s the chorus growing louder among pound traders and strategists, with Morgan Stanley joining the ranks of those recommending options to hedge the risk of Britain tumbling out of the European Union with no agreement for future economic ties. Asset managers including Allianz Global Investors are betting on wider swings in the U.K. currency as Brexit uncertainty mounts.
/jlne.ws/2ASIoSm

****SD: Lots of Brexit in today’s newsletter – and there is more on sterling in our strategy section.

Britain walks Brexit high wire over financial services
Huw Jones – Reuters
Britain must avoid tying Brussels up in red tape or antagonising its soon to be former European Union partners and the United States if it is to maintain access to the bloc’s financial services market after Brexit.
/jlne.ws/2MvA1xj

****SD: Brexit as a tightrope or high wire is a well used trope at this point. My favorite analogy regarding Brexit, though, came from Sir Martin Donnelly, former permanent secretary of the Department of International Trade, who said that leaving the European customs union is like “giving up a three-course meal… for the promise of a packet of crisps in the future.”

Still Talking About BOE Hikes? Some Are Already Betting on a Cut
James Hirai – Bloomberg (SUBSCRIPTION)
Barely a week after the Bank of England raised interest rates, some investors are betting on a cut.
They are building positions in money-market options that pay off if broad market expectations swing toward a rate reduction as early as March — which happens to be the deadline for Brexit. Simply put, they are looking to profit on a potential policy response from BOE should the U.K. leave the European Union without a deal.
/jlne.ws/2MA4lXI

High-Yield Bond ETFs Try to Fill Liquidity Void; Investors look to unlikely heroes in the corporate-debt market.
Brian Chappatta – Bloomberg (SUBSCRIPTION)
High-yield bonds have delivered better returns than just about any fixed-income assets in 2018, and investors are becoming nervous.
/goo.gl/9tyBW3

****SD: Consider this part of the ongoing trend summarized in the story thusly – “Global credit derivatives are … gaining popularity.”

A gauge of fear on Wall Street just hit its lowest level in about 7 months as stocks flirt with records
Mark DeCambre – MarketWatch
The Cboe Volatility index on Wednesday was near its lowest level since mid January as U.S. stock benchmarks mostly climbed near fresh all-time highs, shaking off tariff fears.
/jlne.ws/2AWsS8a

****SD: Next handle lower is a single digit…

Does the VIX truly reflect the level of volatility in the market?
CNBC (VIDEO)
Jeff Kilburg of KKM Financial discusses whether the volatility index is a true gauge of market conditions.
/jlne.ws/2vT7zi3

Lira Falls to Fresh Record With No Letup in Turkey-U.S. Tensions
Constantine Courcoulas – Bloomberg (SUBSCRIPTION)
Lira-dollar risk reversals climb above 5 percentage points
/jlne.ws/2AWV3Uo

Exchanges and Clearing

Cboe’s VIX Volume Sags in the Second Quarter
Asit Sharma – Motley Fool
Trading in Cboe Global Markets, Inc.’s proprietary VIX instruments could be characterized as, well, volatile over the past three months. Last quarter, I noted that VIX futures volumes were “spirited.” During the global exchange operator’s second quarter of 2018, however, VIX-related activity reversed course.
/jlne.ws/2My8KKS

****SD: VIX declines were offset by a pickup in SPX activity.

NSE co-location case: NSE to seek Sebi nod to resolve co-location case
Economic Times
The National Stock Exchange will soon approach market regulator Sebi to seek resolution of its co-location case through the consent mechanism and is also working on a structure to address its issues with Singapore Exchange, NSE chief executive Vikram Limaye said.
/jlne.ws/2AXNuNn

One default could impact entities across over 90% CCPs – report
Louisa Chender – Global Investor Group (SUBSCRIPTION)
A single failure could have “significant consequences” for the CCP network, according to a study by FSB, BCBS, CPMI, IOSCO
/goo.gl/hd1Yrv

Moves

Bank by bank, here’s where the hiring and firing will happen now
Sarah Butcher – eFinancialCareers
Bank by bank, this is what’s happening this summer – and what will ensue as summer draws to an end.
/jlne.ws/2AUipdf

Regulation & Enforcement

Charges Against Lawmaker Highlight Lack of Trading Limits for Congress
Bill Allison and Erik Wasson – Bloomberg (SUBSCRIPTION)
The indictment of a New York congressman on insider trading charges, along with his colleagues’ holdings in the biotechnology company at the center of the case, highlight how members of Congress face few restrictions on their investments and service on corporate boards, creating the potential for conflicts.
/jlne.ws/2AY8aog

****SD: I was really, really hoping that the Collins story was going to involve short dated out of the money puts, but you can’t have everything in life. I didn’t realize how few restrictions there were on members of Congress. Currently, legislators “only have to recuse themselves from voting on legislation that specifically benefits a personal investment.” I wonder how many folks in Congress trade options – there must be some.

Buffer Annuities Draw Fire From Consumer Group; The commenters say the products are too complicated, without giving examples of actual problems.
Allison Bell – ThinkAdvisor
Representatives from the Consumer Federation of America (CFA) have told the U.S. Securities and Exchange Commission that the SEC ought to keep an eye on buffer annuities.
/jlne.ws/2MvL2yF

****SD: “Some buffer annuities ‘are virtually impossible for economists and quants, much less ordinary retail investors, to understand or value,’ the reps write.”

India’s Brokers Move Against Tax on Physically-Settled Equity Derivatives
Garima Chitkara – Regulation Asia
Brokers’ lobby is asking the Bombay High Court for a resolution on an impasse between market participants and the NSE over a decision to levy a 0.1% tax on physically settled equity derivatives.
/goo.gl/VNhe3S

Did Elon Musk Violate Securities Laws With Tweet About Taking Tesla Private?
James B. Stewart – NY Times
Elon Musk had better be right.
Mr. Musk’s audacious offer Tuesday to take private Tesla, the innovative auto company he founded and leads as chairman and chief executive, will surely go down as one of the most unorthodox takeover bids ever.
/jlne.ws/2ATVJty

Nadex temporarily suspends member over spoofing
Maria Nikolova – FinanceFeeds
North American Derivatives Exchange (Nadex), a subsidiary of IG Group Holdings plc (LON:IGG), has imposed a fine and has temporarily suspended from trading one of its members over suspicious trading activities. According to a notice, published on Nadex’s website, Eric Leung has violated Nadex’s rules regarding prohibited transactions and activities.
/jlne.ws/2OV17j5

Strategy

Sterling looks ripe for a short sharp bounce
Swaha Pattanaik – Reuters
The worm sometimes turns. That could easily be the case for sterling, which has fallen to its lowest in nearly a year against the dollar and the euro. Its latest losses are largely due to growing concern that Britain might suffer a chaotic exit from the European Union. Even a glimmer of hope of a better outcome will spark a scramble to buy pounds.
/goo.gl/5Zjhfr

The Summer Of Volatility, Or Not?
Seeking Alpha
Avid readers of business and finance news will no doubt have come across at least one article supposing that this summer will be one of “volatility”. For example, Bloomberg published an article in June 2018, entitled Wall Street Hunkers Down for Summer of Rising Volatility. Later, in July 2018, they published Volatility’s Coming for Your Summer Break as Headwinds Build.
/jlne.ws/2vRiPLW

This S&P 500 chart shows the market is at a critical juncture
Nigam Arora – MarketWatch
These days it is fashionable for analysts to say they base their analysis on fundamentals and not on charts.
But the chart is at such a critical juncture that even such analysts may want to take a look at it.
/jlne.ws/2vTe986

What’s The Opposite Of “To The Moon” ?
Volatility Futures & Options
As BTCUSD rate is falling (down to the Earth?) prudent traders know that there are many ways to play the market. Of course people who were short futures, or long puts are able to realize gains, but I would like to suggest other ways to play the market as well.
/jlne.ws/2AX94S3

Data You Need to Watch to Predict Where the Yuan’s Going
Bloomberg (SUBSCRIPTION)
The outlook for China’s currency eventually comes down to economic data — and those aren’t looking quite as grim as the trade war headlines would suggest.
/jlne.ws/2Myg7lF

Miscellaneous

Did Quantitative Easing Help Spur Growth?
Erik Norland – CME Group
When it comes to quantitative easing (QE), go deep or go home. Using nearly a decade of evidence we look at what impact QE had in the United States, UK, Eurozone and Japan. Despite all the hopes and fears generated by the asset-purchase programs of central banks to stimulate their economies, for the most part, as far as we can tell QE had no actual impact on growth. Therefore, there is no reason to fear the ending of QE or even the reversing of QE as in the shrinking of a central bank’s balance sheet bloated by these asset purchases.
/jlne.ws/2M6SG6v

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Graduate of University of Minnesota School of Journalism and Mass Communication