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It’s a wonderful economic recovery we’re having:

Retail sales rose 0.3 percent in May as American consumers took a respite following a three-month surge in shopping. The gain followed a revised 0.5 percent gain in April that was much larger than previously estimated, Commerce Department figures showed. The median forecast of 83 economists surveyed by Bloomberg called for a 0.6 percent advance.

A separate report indicated applications for unemployment benefits in the U.S. rose to 317,000 last week. The median forecast of 52 economists surveyed by Bloomberg called for 310,000. Claims have averaged around 324,000 so far in 2014.

The Bank of Canada has published the Financial System Review, June 2014. They cite four main risks:

• A sharp correction in house prices prices, resulting from a large, macroeconomic shock that leads to higher unemployment and a reduced ability of Canadian households to service their debts.
• A sharp increase in long-term interest rates globally, including in Canada, likely resulting from an overshoot in U.S. long-term interest rates.
• Stress emanating from China and other EMEs, triggered by a severe financial disruption in China associated with a significant slowdown in Chinese economic growth. There would be widespread repercussions on global economic and financial systems that would feed back to Canada. (The Globe highlighted this one).
• Serious financial stress from the euro area with global consequences, possibly caused by market concern about the adequacy of bank balance sheet repair or a sudden economic shock related to heightened geopolitical stress in Ukraine and Russia.

In Making Banks Safer: Implementing Basel III, Éric Chouinard and Graydon Paulin sing the usual Rah-Rah-Canada song and make a plea for more cushy foreign based jobs for ex-Bank of Canada personnel:

Early evidence that the Canadian and international banking systems have already made good progress in implementing Basel III—particularly by augmenting the quantity and quality of capital—is excellent news. As this process continues, it is imperative to continuously assess the impact of the reforms on financial stability and their macroeconomic implications more broadly.

Additional analysis and rigorous monitoring are essential, in part to identify any unexpected adverse consequences should they occur. It is also critical that the minimum standards be rigorously respected across all jurisdictions to achieve the full benefits of the reforms and to maintain a level playingfield. This is why the Basel Committee’s enhanced efforts with respect to monitoring are so important. It is essential that, in future impact analyses and consistency assessments, authorities continue to improve prudential standards for the banking sector by supporting greater consistency in risk weights and by addressing the implementation gaps that have been identified.

In Reforming Financial Benchmarks: An International Perspective, Thomas Thorn and Harri Vikstedt emphasize that there must be new employment possibilities for domestic regulators as well:

Public sector authorities around the world are developing and implementing their responses to the allegations of manipulation that have emerged for many financial benchmarks. These efforts seek to ensure that benchmarks are robust without compromising their intended economic role, while also taking into account the complex issues that can arise in transitioning to alternative benchmarks. Canada is no exception: our public sector authorities are working closely with the industry to ensure that our financial benchmarks are robust and meet international standards.

And in Stress Testing the Canadian Banking System: A System-Wide Approach a case is made for more back-room staff:

Stress testing is an important component of the tool kit available to authorities, including the Bank of Canada, to assess risks to the financial system. However, it is important to highlight that, despite recent significant progress in the development of stress-testing models, stress testing remains challenging because it attempts to capture the effects of tail events.

In most stress tests, solvency risk explains a large share of the deterioration in the capital ratios of banks during periods of severe stress. As demonstrated by the recent financial crisis, however, liquidity risk and network spillover effects can generate substantial additional losses for banks. Hence, it is important to take them into account when assessing risks. To this end, the Bank of Canada has developed an innovative stress-testing model, the Macro Financial Risk Assessment Framework (MFRAF), which incorporates various sources of risk for banks—solvency risk, liquidity risk and spillover effects.

Research is ongoing to improve MFRAF in two directions. First, the liquidity module could be enhanced by developing a model to link the evolution of market liquidity conditions with the behaviour of banks under stress (e.g., their decision to sell liquid or illiquid assets to meet their funding needs). Second, MFRAF should incorporate a model of risk-weighted assets to more accurately estimate the effects of solvency risk, liquidity risk and network effects on bank capital levels.

Not mentioned in all of this were the implications of the Ban the Bond movement:

As governments around the world implement “bail-in” provisions to avoid taxpayer-funded bank bailouts, Moody’s Investors Service took action in Canada on Wednesday by changing the outlook to negative from stable on some of the senior debt and uninsured deposits of Canada’s largest seven banks.

The ratings agency, which at the same time affirmed the long-term ratings of the banks, said it took the action on the supported senior debt and uninsured deposit ratings “in the context of previously announced plans by the Canadian government to implement a ‘bail-in’ regime for domestic systemically important banks.”

Moody’s also cited an “accelerating” global trend towards reducing the public cost of future bank “resolutions.”
…
“The negative outlook reflects Moody’s view that the balance of risk for the Canadian bank’s senior debt holders and uninsured depositors has shifted to the downside.”

Sure. Before, the senior debt holders and uninsured depositors could rely on bankruptcy court. Now they’ve got to hope that an unaccountable bureaucrat or panicking politician will give their interests some weight. Result – I’ll bet there ain’t gonna be no more long term senior bank debt.

But most of the interesting news today comes from Britain where, after twenty-two years of intensive study, they have decided what to do if speculators like George Soros attack the sterling: jail ’em:

British finance minister George Osborne will reject European Union plans to outlaw currency market manipulation on Thursday and instead set out his own proposals to make rigging exchange rates a criminal offence.

EU laws taking effect in 2016 will make it a criminal offence with a four-year jail term to rig key prices in a wide range of financial markets.
…
Britain has already introduced a maximum seven-year jail term for trying to manipulate the LIBOR interbank interest rate, and plans to introduce similar criminal penalties for rigging benchmarks in currency, commodity and fixed income markets.

“Our own rules will be as strong or stronger than those of the EU, but will preserve flexibility to reflect specific circumstances in the UK’s globally important financial sector,” Britain’s finance ministry said in a statement late on Wednesday.

We know that this flexibility to reflect specific circumstances will never, ever be misused by the government of the day. After all, as discussed on Guy Fawkes Day, 2008, the counter-terrorist rules have never been misused. Well, hardly ever.

The UK government has instructed one of its junior spokesmen to prepare the market for higher policy rates:

Mark Carney said the Bank of England could raise interest rates from a record low earlier than investors expect as he expressed concern that mounting debt related to the housing market could undermine stability.

“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” the BOE governor said in a speech at the Mansion House in London today. “It could happen sooner than markets currently expect.” The pound strengthened after the remarks.

And future recessions will be completely eliminated through the miracle of central planning!

Chancellor of the Exchequer George Osborne promised the Bank of England new powers over mortgage lending to prevent the strengthening housing market derailing the recovery.

While real estate poses no immediate threat, it could do in the future unless action is taken, Osborne said his annual speech at the Mansion House in London tonight. Under the plans, financial-stability officials would be able to cap the size of mortgages as a proportion of income or property value.

“I want to make sure the Bank of England has all the weapons it needs to guard against risks in the housing market,” Osborne said. “I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust.”
…
The new controls will give Carney more power over the mortgage market than his predecessor, Mervyn King, wanted when he was governor. When the Financial Policy Committee was deciding in 2012 on the “powers of direction” it might need, it resisted requesting authority over loan-to-income and loan-to-value ratios as these would require a high level of “public acceptability.”

Such measures are now publicly acceptable due to the Global War on Traders; the public has been properly conditioned into a state of highly advantageous fear and loathing.

Bloomberg reports that Larry Tabb is pushing block-trades:

If you’re a whale in the stock market, maybe it’s time to stop pretending you’re a guppy.

That’s basically the case being made these days by market researcher [Tabb Group LLC head] Larry Tabb, who argues that the time is right to revive the art of block trading for institutional investors.

The status quo among brokers currently is to slice and dice large trades into tiny orders in an effort to quickly access liquidity scattered across multiple exchanges and dark pools. Much of the song and dance performed by computer algorithms is an effort to buy or sell large chunks of stock without throwing off a scent to high-frequency trading computers trying to sniff out big buyers and sellers in the market.
…
VWAP became a standard for trading execution, in Tabb’s view, amid the proliferation of exchanges and alternative trading venues coupled with paranoia that super-fast computers will exploit “information leakage.”
…
The youngest traders may be most uncomfortable with the patience needed to trade blocks and the notion that faster is not always better, according to Tabb.

VWAP is a standard due to the general incompetence of portfolio managers exacerbated by separation of duties between PMs and traders. I mean, really! If I want to sell A to buy B and take out $X, who really gives a flying Fibonacci Sequence about what the VWAP was, is or might be? But it is very helpful in providing a lowest common denominator in the de-skilling of the market place.

VWAP is useful only in those situations in which the PM says ‘Hey – I have no idea what the fair values for A & B are, but not only is there a headline in the Wall Street Journal today about how wonderful B is, but my big toe is hurting, which I’ve always found to be an excellent indicator, and I have a client meeting next week and haven’t figured out what to talk about yet. So sell A and buy B, will ya? Price doesn’t matter, I don’t have a clue. Just do the VWAP.’

I haven’t been hanging around the institutional trading desks much in the last decade, but I have in the past and probably will in the future. A good salesman will understand what you’re trying to do and how you’re trying to do it and bring things to your attention when he thinks it might get him some business (“Hey – that 5-10-20 butterfly you were trying yesterday is a dime better now!”). In a lot of cases, the salesman is the only person in the entire process who has a clue about the market, because the putative portfolio manager is just a jumped-up stockbroker whose only interest is in sales; or, on the other hand, he’s just a dork off the street, inventing and implementing some dorky strategy and employed only because the front office needs an actual product to sell; performance is not important.

A good salesman will make a huge amount of money because his calls to investment management firms get returned and a lot of the buy side will trust him unquestioningly when a trade is suggested. That adds up to deal flow and deal flow makes the world go ’round.

However, in some third world countries such as Canada, it doesn’t matter all that much. You don’t like us? You want to know something about something that’s not in my script? So what? Where else are you gonna go? The banks have bought up the dealers and banks make their money by deskilling their personnel and running an ice-cream stand with one flavour. In my intermittent exposures to bond institutional desks over the past decade, I certainly got the impression that the actual salesmen (good, bad and indifferent) of the ’90’s were gradually being replaced by high school students spending Career Day at the bank to write down the orders, get the prices from one of the Smart People, and read them back to the client. They’re much cheaper for the bank to hire. So I suspect Mr. Tabb won’t be drumming up much consulting business in Canada.

GMP Capital, proud issuer of GMP.PR.B, was confirmed at Pfd-3(low) [Trend Negative] by DBRS:

DBRS has today confirmed the Pfd-3 (low) rating on the Cumulative Preferred Shares of GMP Capital Inc. (GMP or the Company). The trend remains Negative. The rating reflects the strength of the Company’s business franchise as a provider of investment banking and capital markets products and services to its targeted market of mid-sized, primarily Canadian companies, many operating in the resource and energy sectors. While DBRS recognizes the Company’s demonstrated resilience through the prolonged challenging market environment, the Negative trend reflects the current adverse commodities and M&A market environment, GMP’s modest earnings and coverage ratios and the uncertain outlook going forward given the uneven global economic recovery and overall subdued client demand. While the Company is more diverse geographically and by business line than in the past, GMP has yet to demonstrate the benefits originally anticipated by its U.S. acquisition.

Versesen, proud issuer of VSN.PR.A and VSN.PR.C, was confirmed at Pfd-3(high) [Stable] by DBRS:

DBRS has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Veresen Inc. (Veresen or the Company) at BBB (high) and the Preferred Shares at Pfd-3 (high), all with Stable trends. The confirmation reflects the Company’s strong business risk profile supported by (1) a diverse portfolio of energy infrastructure assets, and (2) stable cash flows underpinned by firm ship-or-pay contracts in the pipeline business and long-term contracts in the power and midstream operations, with strong counterparties. The Company has the potential to further grow and diversify its business through liquefied natural gas (LNG) exports from Jordan Cove Energy Project (Jordan Cove, or the Project) by 2019, subject to Company securing FERC approval and long-term tolling agreements with customers. Veresen’s financial metrics are consistent with current rating category.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 18bp, FixedResets gaining 7bp and DeemedRetractibles up 9bp. Volatility was minimal. Volume was average.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-1.1085 %	2,491.8
FixedFloater	4.54 %	3.80 %	29,072	17.80	1	0.0000 %	3,781.1
Floater	2.94 %	3.05 %	44,498	19.61	4	-1.1085 %	2,690.4
OpRet	4.38 %	-9.80 %	25,422	0.08	2	0.1364 %	2,711.6
SplitShare	4.80 %	4.27 %	57,373	4.13	5	0.1033 %	3,120.4
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1364 %	2,479.5
Perpetual-Premium	5.52 %	1.68 %	82,724	0.08	17	-0.0761 %	2,401.1
Perpetual-Discount	5.27 %	5.28 %	111,309	14.96	20	-0.1800 %	2,544.8
FixedReset	4.50 %	3.73 %	217,429	6.70	79	0.0747 %	2,533.7
Deemed-Retractible	5.00 %	-0.37 %	144,086	0.13	43	0.0911 %	2,532.5
FloatingReset	2.67 %	2.45 %	129,956	3.97	6	0.0264 %	2,488.5

Performance Highlights
Issue	Index	Change	Notes
FTS.PR.J	Perpetual-Discount	-1.39 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 23.10 Evaluated at bid price : 23.42 Bid-YTW : 5.09 %
BAM.PR.C	Floater	-1.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 17.16 Evaluated at bid price : 17.16 Bid-YTW : 3.05 %
PWF.PR.A	Floater	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 20.15 Evaluated at bid price : 20.15 Bid-YTW : 2.62 %
IFC.PR.A	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.85 Bid-YTW : 4.20 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.O	FixedReset	304,855	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 23.16 Evaluated at bid price : 25.03 Bid-YTW : 3.80 %
BAM.PF.D	Perpetual-Discount	130,280	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 21.79 Evaluated at bid price : 22.10 Bid-YTW : 5.54 %
BNS.PR.P	FixedReset	90,805	RBC crossed 90,300 at 25.13. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-04-25 Maturity Price : 25.00 Evaluated at bid price : 25.13 Bid-YTW : 3.33 %
MFC.PR.E	FixedReset	64,211	TD crossed 50,000 at 25.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-19 Maturity Price : 25.00 Evaluated at bid price : 25.16 Bid-YTW : 2.83 %
BMO.PR.T	FixedReset	57,001	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 23.15 Evaluated at bid price : 25.02 Bid-YTW : 3.74 %
BAM.PF.F	FixedReset	55,094	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 23.18 Evaluated at bid price : 25.12 Bid-YTW : 4.36 %
There were 31 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
FTS.PR.J	Perpetual-Discount	Quote: 23.42 – 23.80 Spot Rate : 0.3800 Average : 0.2348 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 23.10 Evaluated at bid price : 23.42 Bid-YTW : 5.09 %
FTS.PR.F	Perpetual-Discount	Quote: 23.60 – 24.03 Spot Rate : 0.4300 Average : 0.2999 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 23.14 Evaluated at bid price : 23.60 Bid-YTW : 5.21 %
TRP.PR.A	FixedReset	Quote: 23.33 – 23.65 Spot Rate : 0.3200 Average : 0.2252 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 22.43 Evaluated at bid price : 23.33 Bid-YTW : 3.75 %
PWF.PR.A	Floater	Quote: 20.15 – 20.61 Spot Rate : 0.4600 Average : 0.3672 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-12 Maturity Price : 20.15 Evaluated at bid price : 20.15 Bid-YTW : 2.62 %
ENB.PR.A	Perpetual-Premium	Quote: 25.26 – 25.55 Spot Rate : 0.2900 Average : 0.2126 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-12 Maturity Price : 25.00 Evaluated at bid price : 25.26 Bid-YTW : -5.04 %
TD.PR.Y	FixedReset	Quote: 25.25 – 25.47 Spot Rate : 0.2200 Average : 0.1475 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 3.38 %

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