PrefBlog

The US jobs number was no great shakes:

“This number isn’t an earth-shaker,” John Manley, who helps oversee $222.7 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “It is debatable if it was good or bad. It was OK. The number still indicates the Fed is going to be there for a while, that is not bad.”

The 162,000 increase in payrolls last month was the smallest in four months and followed a revised 188,000 rise in June that was less than initially estimated, Labor Department figures showed today in Washington. The median forecast of 93 economists surveyed by Bloomberg called for a 185,000 gain. Workers spent fewer hours on the job and hourly earnings fell for the first time since October.
The unemployment rate was forecast to drop to 7.5 percent from 7.6 percent, according to the Bloomberg survey median.

Matthew Klein of Bloomberg points out:

The BLS report also tells us what kinds of jobs were added. Here again, the news is not particularly encouraging. More than half of the jobs added last month were either in retail trade or “food services and drinking places.” People employed in those sectors tend to have much shorter work weeks and much lower hourly wages than everyone else.

Even worse, a recent paper by Canadian researchers suggests that many of the people taking these jobs are relatively over-educated. The authors argue that, since 2000, globalization and technological advancement have reduced the demand for “high-skilled” workers. Desperate for employment, these workers ended up pushing the “lower-skilled” out of the job market entirely. This may help explain why the share of people aged 25 to 54 counted as being in the labor force has plunged by 3.5 percentage points since 2000.

The quality of jobs being created is probably connected to the depressing performance of incomes and the decline in the work week. Hourly pay has grown by just 1.9 percent over the past 12 months — basically unchanged since the end of 2009. The data from the BEA tell a similar story. Real after-tax incomes fell in June. Americans still have less purchasing power than they did in November 2012. Our standard of living has barely improved over the past year.

There’s some good, if politically motivated discussion at hotair.com.

Assiduous Reader nervousone begs me to point out:

James, if you’re going to mention the July number in an upcoming comment, show them you’re ahead of the game and make me proud . . . please include this [final paragraph] from todays release,

“The change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and the change for June was revised from +195,000 to +188,000.”

No one else will mention it . . . or trade on it (well almost no one else).

The twenty minutes bracketting the jobs announcement is entertaining. Every cowboy in the world is placing a bet on what the number will be and how the market will react to it, then reversing the trade a few minutes afterwards, taking whatever P&L there might be – so there’s lots of volume and the dealers jack up their spreads.

Of perhaps more importance than the revisions is the quality of the jobs. Lots of times they’re part-time, or all government, or (as in the current case) largely crummy jobs … there’s a lot more to the number than the headline.

I’m sure that somebody, somewhere, has a proper econometric model that incorporates the data – all the data – in a sensible manner (possibly feeding into a Taylor Rule based system) whereby a sensible person could actually trade at prices that made sense, once the spreads returned to normal; but in such a rational system, the jobs number would (a) be only one of many inputs, and (b) be foreshadowed by the ADP number anyway. I have, however, never seen such a system.

In Canada, those with jobs are buying houses:

Sales of existing homes in both Toronto and Vancouver, the country’s two most precarious housing markets, hit their highest level for the month of July since 2009 last month.

Greater Vancouver saw a 40.4 per cent year-over-year increase in sales over the Multiple Listing Service, while the Greater Toronto Area saw a 16-per-cent increase.
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The Toronto Real Estate Board, meanwhile, noted that last month was the third highest July on record for the city, and pointed to an eight per cent year-over-year increase in the average selling price, to $513,246, as evidence that market conditions are tightening (though averages can be skewed by the types of homes that are selling).

There’s a little reaction to the politicization of the next Fed appointment:

Since the president in an interview with Charlie Rose June 16 indicated he wouldn’t reappoint Federal Reserve Chairman Ben Bernanke, intrigue over his successor has grown to a level where Fed experts and former administration officials are concerned that the selection process is so political it could have long-lasting ramifications for the markets, the eventual nominee’s confirmation hearings and the Fed as an institution.

“What’s really unfortunate is how public and polarized this debate has gotten,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s biggest mutual fund, said in an interview on Bloomberg Television. “This has an impact for the market going forward.”

The president and White House officials have spent the last week trying to defuse an escalating public contest between Lawrence Summers, Obama’s former top economic adviser, and Janet Yellen, the Fed’s current Vice Chair.

Confronted by a chorus of concerns about Summers — and letters from House and Senate Democrats voicing support for Yellen — Obama on Capitol Hill told his party’s lawmakers on July 31 that he has interviewed “lots” of candidates. He threw a new name into the mix, former Fed Vice Chair Donald Kohn, as he and his aides tried to buy some time, saying the choice was weeks away and not until autumn.

The post-mortems on the Fabulous Fab verdict are coming in:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president found liable for his role in a failed $1 billion investment, may have lost his case because jurors rejected his defense that as a junior employee he wasn’t primarily responsible for the transaction.

“Being 28 years old and one of several employees of Goldman Sachs isn’t a defense,” Tom Gorman, a former lawyer with the Securities and Exchange Commission’s Enforcement Division, who is now in private practice, said in an interview.

Tourre was a highly paid specialist working in a particular area who asked people to invest billions of dollars in a product he created, Gorman said.

I think the part “asked people to invest” part is a bit overstated, although technically true. He was a salesman. He had a product. Sold it. Big deal. It is the role of a Portfolio Manager to select good stuff from oodles and oodles of bad they are offered every single day.

Megan McArdle of Bloomberg has a good perspective:

The picture you get from reading about the testimony in the Fabrice “Fabulous Fab” Tourre case is of a bunch of people behaving like idiots. Tourre appears willing to say anything to potential buyers to close the deal. The people buying his mortgage bonds don’t inquire as to whether hedge-funder John Paulson’s “equity perspective” is equivalent to an “equity investment”; they just assume it is, and give Fab Tourre a bunch of money.

But was all this illegal? My impression from watching coverage of the case was that the Securities and Exchange Commission’s case against Tourre was pretty weak. That’s why his lawyers rested without calling any witnesses. And these defenders aren’t arrogant idiots; one securities lawyer I know says they’re “top notch.”

So why did the jury find against him? It’s not exactly clear. “At the end of the day, he probably could have done the right thing,” one, a 61-year-old school principal, said. “But he chose to play the game.”
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One hears it over and over, in writing about the financial crisis: “Why isn’t someone in jail?” Fab Tourre is someone. To be sure, he isn’t a very important someone. And he’s not actually going to jail, because this was a civil trial. But we can’t indict “the game.” Fab Tourre may have been the closest substitute we could find.

It was a day of modest declines in the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 5bp and DeemedRetractibles losing 6bp. Volatility was relatively high, but with no clear pattern. Volume was very low, since many hard-working participants in the highest paid profession on earth took the afternoon off ahead of the long weekend; this provides more time to complain about the appalling work ethic prevalent among bar and restaurant staff.

Here’s an amusing – and perhaps inevitable – consequence of preferential ballotting:

The number of parties registered to contest an upper house election due by Nov. 30 has more than doubled to 54 since 2010, with the electoral commission ordering magnifying glasses for voters to read ballot papers more than 1 meter (3 feet, 3 inches) long. A preferential voting system means results may be splintered, raising the prospect small, single interest parties will have final say over what laws pass in the world’s 12th-largest economy.
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The influx of new parties has led the Australian Electoral Commission to order 100,000 magnifying glasses to help voters read ballot papers that will be printed in a tiny 6-point font to cram in all the contenders’ names. The total number of candidates won’t be known until after the election is called.

Given a voting system that lets voters indicate an order of preference for candidates, contestants with negligible first-choice selections can be elected. That happened in 2004 when creationist Steve Fielding, who went on to cast decisive votes on laws regarding media ownership, won a Senate seat after his Family First Party snared just 2 percent of the vote in Victoria state. In 1984, Jo Vallentine won a seat while campaigning for the now defunct Nuclear Disarmament Party.

I hadn’t realized there was this money laundering wrinkle in the SAC Capital charges:

The money-laundering complaint U.S. Attorney Preet Bharara filed against Steven Cohen’s SAC Capital Advisors LP raised the prospect that the hedge fund’s $14 billion in assets may be subject to forfeiture.
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In announcing the lawsuit and SAC’s parallel indictment for insider trading, Bharara wouldn’t specify the dollar amount he was seeking. His money-laundering complaint just says he wants “all right, title and interest” in SAC’s assets, should he prove his case.

The law underlying the civil case states that any property “involved in” money-laundering activities, or traceable to them, can be forfeited. That sweeping language has proved more limited than it sounds.

Judges have approved forfeiture of illegal profits from a crime plus money derived from those profits, including appropriate interest, according to lawyers who have dealt with the money-laundering law. Bharara said that criminal conduct at the fund had resulted in “hundreds of millions of dollars of illegal profits.”

GWO is still looking for cheap assets:

Great-West Lifeco Inc. won’t let efforts to mesh its recent $1.75-billion acquisition of Irish Life Group with its existing Irish business stand in the way of future mergers.
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“Clearly corporate teams will be working with Irish Life Group, but that is in no way going to constrain us from continuing to look for opportunities to grow, whether its additional growth in Europe or the U.S.,” said Paul Mahon, chief executive of Great-West, on a conference call. While other major Canadian life insurers have looked to Asia for growth, Great-West has intensified its focus on Europe. Mr. Mahon noted that further growth within Ireland itself would be unlikely, though.

Does the US want to find the best possible person for the role of Fed chair? Or does it want a woman?

[Former Fed Governor Susan] Phillips said the focus on gender in speculation over who will succeed Ben S. Bernanke as chairman — Fed Vice Chair Janet Yellen, former Treasury Secretary Lawrence Summers or former Vice ChairDonald Kohn — has reminded her that women remain scarce as central-bank heads.

Yellen, 66, would be the first female leader in the central bank’s 100-year history and, while women have populated its senior ranks, there is a “big difference” in the authority and visibility wielded by the chairmen, Phillips said. They speak for the entire institution, set the agenda and often “preserve to themselves” relationships with the administration and Congress.

It is “the second most-powerful position in the country after the president — it’s a very influential position,” said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former Senate Banking Committee aide. “There is a glass-ceiling element to this that does make this different than being vice chair.”

This follows on the heels of the OSC expanding from policeman to social activist:

Canadian companies will be asked to disclose the proportion of women they have on their boards and in senior management as part of a new policy being proposed by Canada’s largest securities market regulator.

The Ontario Securities Commission will unveil a consultation paper Tuesday suggesting that companies be required to develop and disclose policies to improve their boardroom gender diversity, or else explain why they have opted not to have a policy.

Keystone, Schmeystone! TransCanada’s got a big project in the works!

TransCanada Corp., the country’s second-biggest pipeline operator, plans to go ahead with a C$12 billion ($11.7 billion) pipeline that will ship oil from Western Canada to the East Coast.

The Energy East project would have a capacity of 1.1 million barrels a day and be in service by the end of 2017 for deliveries to Quebec and to New Brunswick in 2018, the Calgary-based company said today in a statement.

The project to supply East Coast refineries and export terminals involves converting a portion of 3,000 kilometers (1,864 miles) of existing 42-inch natural gas pipeline and building 1,400 kilometers of new pipeline, the company said.

Travesty.:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president on trial for his role in a failed $1 billion investment, was found liable on six of seven claims by a jury in Manhattan.

The verdict is a victory for the government in one of the most high-profile trials to come out of the financial crisis of 2007-2008. The U.S. Securities and Exchange Commission accused Tourre, 34, of intentionally misleading participants in a 2007 deal known as Abacus about the role played by Paulson & Co., the hedge fund of billionaire John Paulson.
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Tourre was found liable on three claims of intending to defraud, two claims of negligence and one count of aiding and abetting. He was found not liable on the claim of misrepresentations and omissions.

National Bank has acquired TD Waterhouse Institutional Services:

National Bank of Canada (“National Bank”) and The Toronto-Dominion Bank (“TD”), through subsidiaries, have entered into an agreement providing for the acquisition by National Bank of TD’s institutional services business known as TD Waterhouse Institutional Services.

Like National Bank’s Correspondent Network (“NBCN”), TD Waterhouse Institutional Services is a leader in the provision of back-office solutions, including custody, trading, clearing, settlement and record keeping, for independent Canadian based registered portfolio managers and introducing brokers.

The purchase price for the acquisition is $250 million, subject to a price adjustment mechanism based on asset retention. The transaction is expected to increase National Bank’s 2014 and 2015 recurring EPS by $0.12 and $0.14, respectively, assuming full benefit of the acquisition in fiscal year 2014. National Bank estimates the transaction will reduce its Common Equity Tier 1 ratio under Basel III rules by approximately 40 basis points. National Bank expects its Common Equity Tier 1 ratio to remain above 8% following closing of the transaction. Closing is expected to occur later this year, subject to receipt of required regulatory approvals and other transaction terms and conditions.

I’m glad to see the end of TDWIS – their service policies were an arrogant joke. DBRS notes:

The combination of the Bank’s Correspondent Network and TD Waterhouse Institutional Services will make National a leader in the institutional services business with 408 market intermediaries overseeing over $84 billion in assets under administration.

It would have been nice to see this business pass out of banks’ hands, though. And I find it hard to forget National’s reprehensible conduct regarding playing both sides of the ABCP market prior to the Credit Crunch.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 35bp, FixedResets off 9bp and DeemedRetractibles down 28bp. There is yet another very lengthy Performance Highlights table, heavily skewed towards losers. Volume was on the low side of average.

The FOMC statement was released and had no surprises:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
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To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
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Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Market reaction was favourable:

U.S. stocks extended gains after the Federal Reserve said it will maintain its $85 billion in monthly bond purchases and persistently low inflation could hamper the expansion.

The Standard & Poor’s 500 Index climbed 0.4 percent to 1,692.89 at 2:06 p.m. in New York.

The jury is deliberating on the Fabulous Fab case:

The jurors listened to more than two weeks’ worth of sometimes combative testimony, including from Mr. Tourre himself. Much of the trial was laden with complex jargon that both the S.E.C. and the defense team acknowledged was likely to make the jury’s eyes glaze over. Several jurors appeared to doze off during the financially denser portions of the trial.

The WSJ has a good round-up of the issues:

—Did Mr. Tourre intentionally or recklessly engage in a scheme to defraud investors? This is similar to a conspiracy charge in a criminal case.

— Did Mr. Tourre obtain money or property as a result of material misstatements or omissions? This includes statements in marketing materials for the deal. The jury can decide he was negligent, rather than intentionally committing fraud, in relation to these statements.

—Did Mr. Tourre engage in a deceptive course of conduct related to the offer or sale of securities? Again, the jury can decide he acted in negligence, rather than with intent, in this claim.

Brazil, recently reviled for financial mismanagement is kicking against the pricks:

Brazil’s executive director at the IMF refused to back the fund’s move this week to keep bankrolling Greece, citing risks of non-repayment, and the fund itself said Athens might need faster debt relief from Europe.

“Recent developments in Greece confirm some of our worst fears,” said Paulo Nogueira Batista, Brazil’s executive director at the IMF, who also represents 10 small nations in Central and South America, the Caribbean, Asia and Africa. Batista clarified on Wednesday that he was speaking only for himself.

“Implementation [of Greece’s reform program] has been unsatisfactory in almost all areas; growth and debt sustainability assumptions continue to be over-optimistic,” said Batista, criticizing the IMF executive board’s decision on Monday to release €1.7-billion ($2.32-billion) of rescue loans to Greece.

It was a poor day overall for the Canadian preferred share market, with both PerpetualDiscounts and DeemedRetractibles losing 23bp, while FixedResets gained 6bp. The Performance Highlights table was again very lengthy considering the overall price movement. Volume was average.

PerpetualDiscounts now yield 5.47%, equivalent to 7.11% interest at the standard 1.3x equivalency factor. Long corporates now yield a little under 4.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 240bp, a slight (and perhaps spurious) widening from the 235bp reported July 24.

Pricing for month-end was enlivened by the TSX’s moronic insistence on selling the “Last” quotations rather than the “Closing” quotations. I’m getting really sick of this idiocy, particularly since MAPF owns a hatfull of MFC.PR.C.

The Fabulous Fab trial goes to jury today:

A win by the SEC may demonstrate the agency has the will and resources to win cases at trial, strengthening its hand in future negotiations with Wall Street institutions and their employees.

A loss, following a defeat last year in a trial against Brian Stoker, the former head of Citigroup Inc.’s CDO structuring group, would be the second high-profile trial loss in cases tied to the 2008 financial meltdown, in the Manhattan federal courthouse just blocks from Wall Street.

“At the end of the day, this was a tremendous build-up for what amounts to a minor case involving a midlevel player whose personality essentially became the case,” said Jacob Frenkel, a former SEC lawyer not involved in the Tourre case. “What we’re seeing so far is that the government’s best shot at Goldman was a low-level figure.”

The decision not to call any additional witnesses “highlights the level of confidence the defense has in its case,” Frenkel said.

In other fallout from the Credit Crunch, Barclays has come out with a massive rights deal:

Barclays Plc (BARC), the U.K.’s second-largest bank by assets, plans to raise 5.8 billion pounds ($8.9 billion) in a rights offering to bolster capital as it booked its biggest charge to date for customer compensation.

nvestors will be able to buy one new share for every four they already own for 185 pence, 40 percent less than yesterday’s closing price, London-based Barclays said in a statement today. It will also shrink assets by as much as 80 billion pounds to 1.5 trillion pounds and sell 2 billion pounds of loss-absorbing securities to meet calls by the regulator to cut leverage.

Chief Executive Officer Antony Jenkins, 52, is selling more shares than the 4 billion pounds analysts had anticipated after the lender’s capital shortfall swelled to 12.8 billion pounds at the end of June under the stricter Basel III rules on bank capital. The Prudential Regulation Authority is imposing a 3 percent leverage ratio, forcing banks to hold 3 pounds of equity for every 100 pounds of assets to make the financial system safer. Barclays had sought to plug the deficit by using contingent convertible bonds and retaining earnings.
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Barclays was one of only two British lenders to miss the regulator’s leverage target in June, with only 2.5 percent. Nationwide Building Society, which at 2 percent also failed, was given until the end of 2015 to make up the shortfall.

Barclays said that under the full Basel III rules its ratio was only 2.2 percent at the end of June. The ratio declined after the latest version of the Basel rules added 85 billion pounds of leverage exposure, the lender said. Part of the 12.8 billion-pound gap comes from a PRA calculation of future bad loan losses and potential redress for customers, which reduces capital by 4.1 billion pounds, Barclays said.

Deutsche Bank followed:

Deutsche Bank AG (DBK), continental Europe’s biggest bank, said it will shrink its balance sheet by 250 billion euros ($332 billion), joining Barclays Plc (BARC) and UBS AG (UBSN) in seeking to comply with stricter capital rules.

Deutsche Bank will reduce leverage by changing the way it accounts for derivatives and by winding down a 73 billion-euro portfolio of assets, Chief Financial Officer Stefan Krause told investors on a conference call today. Krause announced the plan after the bank said net income slid 49 percent to 334 million euros, missing the average 767.6 million-euro estimate of nine analysts.

Meanwhile, UBS provides some insight as to why scaremongers talk about “downgrades” rather than “defaults”:

UBS needed state aid after the bankruptcy of Lehman Brothers Holdings Inc. in 2008 froze financial markets and the Swiss bank’s mistimed bet on the U.S. housing market resulted in more than $57 billion in writedowns and losses during the subprime crisis.

The company spun off $38.7 billion of risky assets into the Swiss National Bank fund, while the government provided 6 billion francs ($6.4 billion) of equity and the SNB made a loan to support the assets as they were being run down. The Swiss government sold its investment in UBS less than a year later for a profit of 1.2 billion francs.

As part of the rescue, UBS was granted an option to buy back the equity of the fund once the SNB loan was repaid. Under that arrangement, UBS would pay the central bank $1 billion plus 50 percent of the value of equity exceeding that level — amounting to about $3.25 billion based on values at the end of last year.

REITs are the key to a lot of deals. Does this tell you anything?

The high likelihood that Hudson’s Bay will spin off its real estate portfolio into a real estate investment trust (REIT) – seen by many as not only a means to cash in on the ample high-value real estate it would acquire in the Saks deal, but also a source of funds to reduce the debt burden – is also, paradoxically, a dilemma for Moody’s.
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Still, the REIT looks like the key to solving Hudson’s Bay’s debt puzzle. Mr. Caicco estimates that Hudson’s Bay could hand nearly $1.6-billion of its debt over to the REIT, along with the assets associated with it. There, the debt would be supported by nearly $3.8-billion in properties across Hudson’s Bay, Saks and Lord & Taylor’s holdings.

This is why the market needs to hear the REIT plan. Without it, an awful lot of debt questions remain unanswered.

More trouble for Canaccord?

Aggarwal, 40, of Gurgaon, India, was arrested yesterday by agents of the Federal Bureau of Investigation in San Jose, California, as part of the U.S. government’s six-year crackdown on insider trading at hedge funds, said Peter Donald, an FBI spokesman in New York.

Manhattan U.S. Attorney Preet Bharara’s office said Aggarwal is charged with one count of conspiracy to commit securities fraud and one count of conspiracy to commit wire fraud for passing along an inside tip about a pending deal between Yahoo! Inc. (YHOO) and Microsoft Corp. (MSFT)

“Sandeep Aggarwal leveraged his contacts in the technology industry to obtain an illegal edge in the form of inside information about a highly anticipated development, then lied about his criminal conduct,” Bharara said in a statement.

Aggarwal formerly worked at Collins Stewart LLC in San Francisco, said a person familiar with the situation, who requested anonymity because the matter wasn’t public. Andrea Sergautis, a spokeswoman for Canaccord Genuity in Toronto, which acquired Collins Stewart, didn’t return a call seeking comment on Aggarwal’s case.

Aggarwal provided material nonpublic information about a strategic partnership in Internet search and advertising between Microsoft and Yahoo to two different hedge funds, including SAC, the U.S. alleged in a criminal complaint unsealed today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 1bp, FixedResets up 10bp and DeemedRetractibles gaining 8bp. There was again a surprisingly lengthy Performance Highlights table. Volume was above average.