First Impressions



Sweet 16 Honorable Mention – Exchanges
JohnLothianNews.com

The John Lothian News Sweet 16 Series featured the 16 best ideas and thoughts about exchanges, regulation, economics and technology. But there are still more great ideas for 2016 that made our honorable mention. Here are comments from more industry professionals on exchanges.

The Sweet 16 Series drew from 38 interviews conducted at the FIA Expo Conference in November 2015. Here are comments from Michael Grecoff, head of sales at Cinnober, Matt Chamberlain, head of business development at London Metal Exchange, Magnus Haglind, CEO of Nasdaq Futures, Scott Caudell, Chief Technology Officer at IDC.

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Quote of the Day

“Let’s take a deep breath and focus on the greatest country in the world, the greatest economy in the world, and stop trying to worry about figuring out China.  America, North America and developed markets can go up alone without emerging markets and China. We have to come to that fundamental conclusion and we have to start believing that.”

Brian Belski, chief investment strategist at BMO Capital Markets, in the story, “The $289 Billion Wipeout That Blindsided U.S. Bulls”

Lead Stories

U.S. banks pin Treasury market headaches on high-speed trading: Fed
Reuters
A large share of Wall Street securities dealers believe that the growing presence of high-frequency trading firms has made it more difficult to operate in the market for U.S. government debt, according to a Federal Reserve survey published on Tuesday.
High-frequency trading is an automated strategy that can move billions of dollars worth of trades among different markets in a fraction of a second.
A net share of more than two-fifths of dealers that match clients with U.S. Treasury securities think the rise in high-frequency trading has led to wider bid-ask spreads and smaller quote sizes over the last five years, the Fed said in its quarterly survey of senior credit officers.
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A Growing Conflict in Wall St. Buyouts
Andrew Ross Sorkin – NY Times
It goes by a rather innocuous-sounding name, the sort of phrase you might breeze past in a loan document: “designated lender counsel.”
But pay attention, because it’s the latest conflict-ridden practice on Wall Street.
Over the last several years, a new, insidious relationship has quietly developed between the nation’s largest private equity firms, the banks that lend them billions to fund their buyouts and the law firms that advise on these deals.
Historically, when a bank, like JPMorgan Chase, made a loan to a private equity firm planning a big acquisition, like the Blackstone Group, the bank would hire an outside law firm to scrutinize the loan and the transaction.
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Fears mount over rise of sovereign-backed corporate debt
Elaine Moore and Jonathan Wheatley – Financial Times
More than $800bn of emerging market sovereign debt is being camouflaged by the growing use of bonds that offer implicit state backing without always appearing on government balance sheets, according to new research.
The stock of so-called quasi-sovereign bonds issued in dollars and other hard currencies by emerging markets has risen sharply in the past 12 months to overtake that of all external emerging market sovereign debt by the end of 2015.
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Eurozone bank bond issuance to stagnate
Thomas Hale – Financial Times
European banks are expected to seek little additional funding from the bond market in 2016, suggesting continued subdued demand for loans from businesses and consumers.
The lacklustre outlook follows a disappointing year for sales of bonds by eurozone banks — issuance was EUR196bn in 2015, excluding covered bonds, down from EUR220bn the year before, according to Dealogic.
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Playing to the crowd: An example of poor economics journalism
The Economist
Owen Jones, who mainly works for The Guardian, is an excellent and influential writer, but we feel duty-bound to comment on an article he wrote just before Christmas. Plenty of people are saying at the moment that Britain’s household debt is getting out of control. The Bank of England released new figures yesterday, showing that mortgage and credit-card lending is growing rapidly. Mr Jones weighed in to argue that the “latest figures confirm Britain’s supposed economic recovery rests on a personal debt timebomb. When it runs out is unclear, but run out it will.”
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Negative rates are boosting corporate inventories
Izabella Kaminska – Financial Times
Did you know there was a hidden credit crunch going on in the world economy as far into the post-GFC-crisis era as 2015?
UBS economist Paul Donovan dishes the details in a report on Tuesday, noting how the crunch related primarily to inter-company credit, the sort that companies use to finance inventory. The good news, says Donovan, is that smaller business finally seem to be willing to acquire inventory, suggesting the credit crunch may finally be concluding.
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Recent M&A Deals Suffer from Overly Rosy Projections
J.V. Rizzi – American Banker
Bank acquisitions in the immediate aftermath of the crisis were all about finding bargains, and there were indeed deals too good to pass up. But with the extended recovery, investors are increasingly concerned about high premiums and unsatisfactory benefit from recent deals. In some notable cases, wary shareholders are right that an acquisition just isn’t worth it.
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Wise investors should be playing the long game
Matthew Lynn – The Telegraph
Blinkered, myopic and short-termist. Constantly under pressure to deliver instant results. Guilty of a lack of long-term investment, and showing an unhealthy focus on squeezing out costs, and making a fast buck.
The financial markets are constantly accused of being only interested in what happens this week, or at best the week after, and of ignoring the need to build value over years and indeed decades.
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Banks fourth quarter earnings preview; It is going to be messy on Wall Street
Matt Turner – Business Insider
It’s going to be a messy earnings season for banks.
JPMorgan will kick things off when it reports results on January 14, and analysts are expecting a ‘clean-up’ quarter after a turbulent three months.
That means you can expect plenty of one-off provisions and charges that banks use to write-off weak businesses. In this quarter, a lot of those one-offs are going to be related to struggling borrowers in the energy market and elsewhere.
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The Transitions of 2016
Christine Lagarde – Project Syndicate
November’s terrorist attack in Paris and the influx of refugees into Europe are but the latest symptom of sharp political and economic tensions in North Africa and the Middle East. And these events are by no means isolated. Conflicts are raging elsewhere, too, and there are close to 60 million displaced people worldwide.
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January Effect Lives On As Municipal Bond Funds Flush With Cash
Brian Chappatta – Bloomberg
Mutual funds in the $3.7 trillion municipal-bond market are flush with cash heading into 2016.
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What It Feels Like to Be a Junk Bond Contrarian; J.P. Morgan Asset Management’s Bill Eigen says now is the best time to buy high-yield bonds since 2009
Julie Segal – Institutional Investor
Most investors tell stories about being the odd man out, the contrarian, long after their bold and messy moves have paid off. Their retrospective tales often get taller once the market has recovered and the critics have been silenced.
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****SD: For some bigger picture context, here is a piece from A Wealth of Common Sense titled “A Painful Year for Contrarian Trades”

Hillary Clinton’s credibility on bank reform depends on a banker turned rule-maker
Tim Fernholz – Quartz
US presidential candidate Bernie Sanders’ stance toward Wall Street has served as a touchstone for the socialist senator’s campaign—and his speech on the topic today (Jan. 5) in New York will offer another point of contrast with his main rival for the Democratic nomination, former US secretary of state Hillary Clinton.
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Wall Street and the Economy
Bernie Sanders
The American people are catching on. They understand that something is profoundly wrong when, in our country today, the top one-tenth of 1 percent own almost as much wealth as the bottom 90 percent and when the 20 richest people own more wealth than the bottom 150 million Americans – half of our population. They know that the system is rigged when the average person is working longer hours for lower wages, while 58 percent of all new income goes to the top 1 percent.
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Byron Wien Announces Predictions for Ten Surprises for 2016
Blackstone
Byron R. Wien, Vice Chairman of Multi-Asset Investing at Blackstone, today issued his list of Ten Surprises for 2016. This is the 31st year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.
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Nevsky’s Taylor Blames Algos in Closing $1.5 Billion Hedge Fund
Nishant Kumar – Bloomberg
Nevsky Capital’s $1.5 billion hedge fund is shutting down, part of a growing trend among money managers following weak returns in 2015. What’s unusual is the reason the managers gave for folding: navigating markets driven by computers and index funds.
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Get Tech Expertise in Your Bank’s Boardroom
Kevin Wack – American Banker
In the early days of the ATM, Northtown Bank of Decatur, Ill., considered whether to install one of the newfangled cash machines. My granddad, a longtime board member, spoke against the proposal. He had grown up in a small Nebraska town during the Great Depression, and he reasoned that customers wanted to talk to their banker. That personal connection conveyed a sense of trust.
Years later, after Northtown got gobbled up a larger institution and the ATM became a fixture of modern life, my granddad always got laughs when he recounted this anecdote. The self-deprecating subtext: Can you believe how wrong I was?
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Global investment banking fees fall 8 percent in 2015
Anjuli Davies – Reuters
Global investment banking fees fell 8 percent in 2015 compared to a year earlier, with a boom in mergers and acquisition activity failing to offset a slump in equity and debt capital markets fees, Thomson Reuters data published on Tuesday showed.
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Overstock.com Registration Statement Covering Digital Securities Declared Effective
John D’Antona – Traders News
The world’s first digital securities are at hand.
In an exclusive interview with Traders, Overstock.com chief executive officer Patrick Byrne told Traders that the Securities and Exchange Commission has declared Overstock’s registration statement covering the issuance of digital securities effective. He explained that Overstock has had a registration statement on Form S-3 on file with the SEC for the last eight months.
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Central Banks

PBOC Injects Most Cash Since September in Open-Market Operations
Bloomberg
China’s central bank conducted the biggest reverse-repurchase operations since September, adding funds to the financial system after money-market rates surged and equities slumped.
The People’s Bank of China offered 130 billion yuan ($19.9 billion) of seven-day reverse repos on Tuesday at an interest rate of 2.25 percent. The monetary authority suspended the operations in the last auction window on Dec. 31, ending a six-month run of cash injections that helped drive borrowing costs lower in an economy estimated to grow at the slowest pace in more than two decades.
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BOJ at critical juncture in monetary policy
The Japan Times
The Bank of Japan faces a crucial test this year for its monetary policy amid lingering uncertainty over prices.
The central bank is now aiming for inflation of 2 percent “around the second half” of fiscal 2016, which starts in April, under its policy of monetary easing.
But the pace of growth in consumer prices appears unlikely to accelerate for the time being. One factor in this is cheap oil, which eases the costs of manufacturing.
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Fed minutes may show cracks in central bank’s united front
MarketWatch
When the Federal Reserve increased interest rates in December for the first time in nearly a decade, policymakers presented a unanimous “all for one and one for all” front, even though many officials had made clear they were not fully on-board.
Economists will be examining the minutes of the meeting to see if they reveal where officials disagree. The minutes will be released Wednesday at 2 p.m.
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Monetary Policy in Review: Global rates rise in 2015 and set to grind higher in 2016 as Fed continues to normalize
CountingPips
Global interest rates rose in 2015 and are likely to rise further this year as the U.S. Federal Reserve continues to normalize its monetary policy while the European Central Bank (ECB) and the Bank of Japan (BOJ) remain committed to ultra-low rates and unconventional monetary policy to overcome sluggish economic growth and weak inflation.
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IMF’s Lagarde Says Nigeria Needs Flexibility in Monetary Policy
Yinka Ibukun – Bloomberg
Nigeria needs more flexibility in setting monetary policy so it can use its foreign currency reserves to support the poor population if low oil prices persist, said International Monetary Fund Managing Director Christine Lagarde.
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Currencies

What did you do in the currency war, Daddy?
Ben Bernanke – Brookings Institution
The financial crisis and its immediate aftermath saw close cooperation among the world’s policymakers, especially central bankers. For example, in October 2008, the Federal Reserve coordinated simultaneous interest-rate cuts with five other major central banks. It also established currency swap arrangements—in which the Fed provided dollars in exchange for foreign currencies—with fourteen foreign central banks, including four from emerging markets. However, once the crisis had passed and recovery begun, national economic interests began to diverge. In particular, some foreign policymakers argued that the Fed’s aggressive monetary policies, undertaken to support the U.S. economic recovery, were damaging their own economies.
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Renminbi poses communication challenge
Jennifer Hughes and Gabriel Wildau – Financial Times
Global investors began 2016 with a keen eye on China and the direction of the renminbi. The first two days of trading this year have dramatically demonstrated why the dance around the currency between the markets and China’s central bank matters.
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Gemini: ‘Institutionalization’ of Bitcoin Trading is Definitely Happening
Leon Pick – Finance Magnates
It has long been argued that bitcoin’s wobbly price would stabilize if the market evolves from one dominated by wild day traders to also include mainstream investors, banks and hedge funds.
The question is if such a theory holds for an asset of unknown fundamental value and whose Bitcoin network faces many future unknowns.
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Can Anything Stop the Euro’s Downward Spiral?
Idan Levitov – Finance Magnates
Markets reopened 2016 to much fanfare as weakness in China circled the globe with equity losses echoed across Europe and North America. The new week has also seen a demonstrable pickup in economic data versus the last two weeks of holidays which saw fundamental announcements pared back to a minimum.
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Yen Surge to Eight-Month High Versus Euro Imperils Kuroda Legacy
Chikako Mogi and Hiroko Komiya – Bloomberg
The yen’s first annual gain versus the euro since 2011 is cementing speculation that the currency’s lows are behind it, dealing a blow to Japan’s struggling exporters.
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Swedish Krona Slides on Growing Talk of Riksbank Intervention
Anooja Debnath – Bloomberg
Sweden’s krona is on track for its longest run of declines versus the euro since August on speculation the nation’s central bank is on the verge of intervening to pull its currency back from near a 10-month high.
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Indexes & Index Products

FT Explainer: Pricing mismatch worries hit ETFs
Gavin Jackson – Financial Times
Longstanding fears about the mismatch between bond funds offering clients instant access to their money and the difficulty of trading those bonds finally seemed to be coming true at the end of 2015 following the closure of the distressed debt mutual fund Third Avenue.
One aspect that worries investors is the role played by exchange traded funds (ETFs) which have exploded in popularity over the past decade. In 2005 they managed $372bn in assets, last year the total surpassed $3tn, according to Markit.
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A prolonged sell-off would be dangerous for ETFs-—commentary
Tim Quast – CNBC
Investors polled by researcher Birinyi Associates had expected the S&P 500 to rise 8 percent in 2015, which would’ve been an average return. Instead, we had the first correction in equities since the financial crisis amid wild volatility and the S&P 500 finished down less than 1 percent.
If this were a game of Monopoly, we essentially finished back where we started, at “Go.”
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The $289 Billion Wipeout That Blindsided U.S. Bulls
Dani Burger – Bloomberg
As losses snowballed in U.S. stocks around midday, the best thing U.S. bulls had to say about the worst start to a year since 2001 was that there are 248 more trading days to make it up.
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SPYing on 2016
Greg Harmon – Dragonfly Capital
One day is in the books and already the stock market looks like a disaster. A 1.4% drop in the SPDR S&P 500 Trust ($SPY) was the worst start to the year since forever, or at least a few years. Or maybe the bottom is in for the year. With a Hammer candle on that first day, retracing much of the early drop the first day ended on a strong note. Sentiment turned around and many are looking for a move higher from here.
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S&P 500 First-Day Loss Serves as Barometer for January Recovery
David Wilson – Bloomberg
January may bring a recovery from the Standard & Poor’s 500 Index’s biggest opening-day loss in 15 years, if history is any guide.
The chart below tracks the S&P 500’s performance in years when the index fell more than 1 percent on the first day of trading. The index’s percentage change during the rest of January is shown along with the initial decline.
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The Big Mac Index (VIDEO)
The Economist
Money talks: January 5th 2015: The Big Mac Index
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Gold

Gold Losses Not Quite Steep Enough for Bearish Hedge Funds
Joe Deaux – Bloomberg
The longest losing streak for gold since 1998 isn’t quite enough for some investors, with hedge funds making record bets that prices will continue to fall.
Money managers are anticipating a deeper slump, holding a net-short position in the metal for seven straight weeks and expanding their wager to the most-bearish ever. The moves come after prices slumped 10 percent in 2015, capping a third consecutive annual loss.
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Foreign banks in China could face curbs if they snub gold benchmark
A. Ananthalakshmi – Reuters
China has warned foreign banks it could curb their operations in the world’s biggest bullion market if they refuse to participate in the planned launch of a yuan-denominated benchmark price for the metal, sources said.
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Supermines Add to Supply Glut of Metals
John W. Miller – WSJ
In this volcanic desert, a dusty moonscape patrolled by bats, snakes and guanacos, America’s biggest miner is piling on to the new force in industrial resources: supermines. It’s a strategy that could be driving miners into the ground.
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Miscellaneous

2 Market Myths In 2015 To Learn From This Year
Allan Roth – ETF.com
Do you want to invest better in 2016 and beyond? The first step is to understand what happened in 2015 and identify a few myths you probably believe in. I’ll first break those myths and then help you apply them to 2016 and beyond.
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Cox: How gun control is like zero interest rates
Rob Cox – Reuters
As President Barack Obama heads into his final year in office, he has kicked off the third firearms bubble of his administration. Just a few hours before he unveiled on Tuesday an executive order requiring more gun dealers to perform background checks on customers buying firearms, Smith & Wesson had some very good news for its shareholders. On Monday night, the gunmaker said sales in the current quarter could be up to 20 percent better than it had originally expected.
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Macaskill on markets: 2016 – the year in banking
Euromoney Magazine
The European Central Bank meeting in December provided a reminder that it is tough to make predictions – especially about the future. Goldman Sachs’s chief currency strategist Robin Brooks was forced to admit that he had dropped his crystal ball on his foot in predicting euro parity to the dollar by year-end and revised his forecasts for 2016 before 2015 was out. Undeterred, Euromoney’s Jon Macaskill makes his own predictions for the coming year in investment banking.
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We did the math for the $450 million Powerball jackpot and concluded it’s not worth buying a ticket
Andy Kiersz – Business Insider
The Powerball lottery drawing for Wednesday evening has an estimated jackpot prize of $450 million. While that’s a huge amount of money, buying a ticket is still probably a losing proposition.
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