First Impressions

Dan Day-Robinson, Chairman, Swiss Futures and Options Association – Embracing Change

“…While some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do. – Rob Siltanen, the creative genius behind Apple’s “Think Different” campaign”

Dan Day-Robinson will be the first to tell you he has a flair for the dramatic. As a former market maker, investment banker and now head of a trade association, he has hundreds of stories, and he knows how to tell them. He takes us on a rollicking tour through his years in the financial world, including his most recent charge as head of the Swiss Futures and Options Association. He lays out the history of the SFOA, a group that was once much more prominent than it is today, and explains his vision for its future.

Will you see him as one of the crazy ones, or will you see genius?

Watch the video »


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Quote of the Day

“After all, look what we’ve done for the last seven years. We have done the most extreme monetary policies we could imagine. We’ve had interest rates at zero. We’ve used forward guidance to try to convince people that they’re going to stay at zero. We’ve used quantitative easing to try to bring down the long end of the yield curve as well as the short end. And seven years into this, inflation is below target in all the major economies of the world.”

Adair Turner, former head of Britain’s Financial Services Authority, in the story, “Lord Adair Turner on the ‘largely fictional’ world of finance”

Lead Stories

Monetary policy – The dead hand of debt
The Economist
Mark Carney, governor of the Bank of England, grabbed the headlines this week with a speech that suggested British interest rates were unlikely to rise any time soon. (A bit of a victory for Andy Haldane, the Bank’s chief economist, who has even suggested the next move in rates might be down.) But it is also worth reading a very thoughtful speech from a newish monetary policy committee member, Gertjan Vlieghe (formerly at the Brevan Howard hedge fund group).
Mr Vlieghe examines the case that real interest rates may remain low for a considerable period (readers may recall that Larry Summers has made a similar argument under the “secular stagnation” hypothesis). The BofE man cites three factors; debt, demography and the distribution of income.

High-Yield Warning Signs
Lisa Abramowicz – Bloomberg
One thought is increasingly keeping credit investors up at night.
What if many more companies suddenly go bankrupt, leaving billions of dollars of debts unpaid and wreaking havoc on investment firms? This fear is real enough that bond buyers are taking fewer chances and passing up on loads of potential yield to protect themselves against this possibility. Investors are demanding 16.6 percentage points of extra yield to own the lowest-rated U.S. corporate bonds compared with the highest-rated ones, the largest premium since 2009. They’re requiring the greatest amount of extra yield to own the top-rated junk bonds over the lowest-rated investment-grade ones since 2011, Bank of America Merrill Lynch index data show.

Why Are Corporations Hoarding Trillions?
Adam Davidson – NY Times
There is an economic mystery I’ve been struggling to understand for quite some time, and I’m not the only one who’s confused: Among financial experts, it is often referred to as a conundrum, a paradox, a puzzle. The mystery is as follows: Collectively, American businesses currently have $1.9 trillion in cash, just sitting around. Not only is this state of affairs unparalleled in economic history, but we don’t even have much data to compare it with, because corporations have traditionally been borrowers, not savers. The notion that a corporation would hold on to so much of its profit seems economically absurd, especially now, when it is probably earning only about 2 percent interest by parking that money in United States Treasury bonds. These companies would be better off investing in anything — a product, a service, a corporate acquisition — that would make them more than 2 cents of profit on the dollar, a razor-thin margin by corporate standards. And yet they choose to keep the cash.

Bankers say end of loose monetary policy era has fueled volatility
The end of ultra-loose monetary policy and the divergence between central banks in the United States and Europe are contributing to recent volatility in financial markets, top bankers at the World Economic Forum in Davos said.

R3 connects 11 banks to distributed ledger using Ethereum and Microsoft Azure
Ian Allison – International Business Times
Blockchain consortium R3 CEV has announced its first distributed ledger experiment using Ethereum and Microsoft Azure’s Blockchain as a Service, and involving 11 of its member banks.
The R3-managed private peer-to-peer distributed ledger connected Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit and Wells Fargo.

The Case Against Banking’s Case for Less Capital
Martin Hellwig and Anat R. Admati – Bloomberg
Wouldn’t it be nice if there was a way to make banks safer, healthier and able to lend more? There is a way, and it’s called equity.
If banks were less heavily indebted and relied more on unborrowed money, also called equity or capital, to fund their loans and other assets, they could avoid getting into financial trouble if they incurred losses. They would be better able to continue lending. And the financial system would be less fragile.

Peer-to-peer lending markets: The leading countries for alternative finance and the next high-growth markets
Evan Bakker – Business Insider
Since the financial crisis, borrowers have been eager to get lower interest rates and better access to credit, while lenders have searched for higher returns on their investments. Banks, saddled with regulatory burdens, haven’t been able to fully meet these needs. This has left room for the growth of a new market — peer-to-peer lending.

ATM and overdraft fees top $6 billion at the big 3 banks
America’s three biggest banks — JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) — earned more than $6 billion just from ATM and overdraft fees last year, according to an analysis by SNL Financial and CNNMoney.

Barclays to Cut Investment Bank Jobs in New York, London
Ambereen Choudhury and Stephen Morris – Bloomberg
Barclays Plc Chief Executive Officer Jes Staley has started a fresh round of cuts at the investment bank, affecting staff in New York, London and most deeply in Asia, according to a person with knowledge of the matter.
The bonus pool for the investment bank may be cut by at least 10 percent from the previous year, said the person, who asked not to be identified because the decision is not public. The bank, which hasn’t made a final decision on compensation, plans to pay bonuses in March, later than the usual mid-February timing, according to a separate person.

Central Banks

Stock-Market Rout: Where’s the Fed?
Justin Lahart – WSJ
Investors are finding out just how hard it is to walk on a tightrope when it’ isn’t clear how far down the net is. Or if the net even exists.
Wednesday was another bad day for markets as worries over global growth and the ability of commodity producers to make good on their dollar debt continued to fray nerves. Stocks fell sharply across the world, with Japanese shares entering bear market territory and the Dow Jones Industrial Average taking another big leg down.
With no way to come up with even a rough estimate of how hard the economic hits will be until oil and other commodities steady themselves, markets are in a fragile state. Heightening the uncertainty is the sense nobody is about to swoop in to the rescue.

China’s central bank plans to launch its own digital currencies
China’s central bank wants to launch its own digital currencies to cut the costs of circulating traditional paper money and boost policymakers’ control of money supply, the People’s Bank of China (PBOC) said on Wednesday.

The Central Bank Put Is a Long Way Down for This Hedge Fund Bear
Yuji Nakamura – Bloomberg
Global equities, off to their worst start to a year ever, are still a long way from levels where losses will prompt action from central banks, says Stephen Jen, the co-founder of London-based hedge fund SLJ Macro Partners.
While the so-called “central bank put” remains an important force in markets, recent signals from authorities in the U.S., Japan and Europe suggest a higher threshold before they’ll provide relief, he says. Adjusting to that new reality is the main reason cited by the former International Monetary Fund economist for the $6.6 trillion wiped off the value of worldwide stocks in 2016.

Central Banks Haven’t Shown Control of Deflation: Spence
NYU Professor Michael Spence Discusses market volatility prompted by concerns over China’s economy, market fragility, and central banks’ ability to deal with deflation. He speaks from the World Economic Forum in Davos, Switzerland on “Bloomberg Surveillance.”

Have Central Banks Broken the Link Between Financial Markets and the Real Economy?
Has the heavy lifting by central banks had the desired effect on global growth or is the latest bout of volatility the sign of a darker side to these policies?

Fiscal and monetary policy must be in sync to avoid recession
Louis-Philippe Rochon – The Globe and Mail
There currently exists a considerable degree of contradiction between fiscal and monetary policies that can only end up hurting the country’s economy. The Bank of Canada and the federal government must better co-ordinate their policies to ensure that, at least, we don’t fall back into recession, and even better, that we get out of our current stagnation.

Bridgewater’s Dalio: Fed’s next move toward QE, not tightening
Maneet Ahuja – CNBC
Amid the global market turmoil, the Federal Reserve is more likely to ease than tighten interest rates again, Ray Dalio, founder of the world’s largest hedge fund, said Wednesday.


Saudi Arabia Said to Ban Betting Against Its Currency
Arif Sharif, Matthew Martin and Chiara Albanese – Bloomberg
Pressured by plunging oil prices and costly wars in the Middle East, Saudi Arabia moved to stamp out speculation that it might be forced to break the link between its currency and the dollar.

The cheque republic: money in a modern economy with no banks.
Ben Norman and Peter Zimmerman – Bank Underground
What happens when a country’s banking system shuts down? Just how damaging is it to the economy? During the 20th century, the Republic of Ireland’s banking system suffered industrial disputes, some of which caused the main banks to close for several months. When Greek banks closed temporarily last year, some commentators (e.g. Independent (2015), FT (2015)) recalled how, previously, the Irish public ingeniously circumvented the banking system and kept economic activity going. Using material in the Bank of England’s Archive relating to the 1970 dispute, we shed light on how halcyon those days really were.

BlackRock Has a Not-So-Secret Formula for Predicting the Dollar
Rachel Evans – Bloomberg
New ETFs use momentum, valuation, volatility to hedge FX risk
WisdomTree rolling out its own dynamically hedged funds
For U.S. investors tired of sweating the dollar’s trajectory, BlackRock Inc. says it has the solution: a formula that decides when to hedge the currency risk of international stocks.
The world’s largest money manager is applying the blueprint to a trio of new exchange-traded funds that aim to anticipate dollar strength by measuring four indicators: momentum, valuation, volatility and yield differential. By using trading strategies more commonly associated with hedge funds, BlackRock plans to lure investors seeking to protect the value of overseas returns from dollar gains, while preserving tailwinds from stronger foreign currencies.

Capital flight from China worse than thought
Shawn Donnan – Financial Times
The flow of capital out of China and other emerging markets was significantly worse than previously thought in 2015, according to new estimates.
In a report released on Wednesday the Washington-based Institute of International Finance said outflows increased as overseas investors pulled out of emerging markets and Chinese companies scrambled to pay off overseas loans in the final three months of the year amid a weakening renminbi.

Mark Harts calls for further Yuan devaluation
Julia LaRoche – Business Insider
Texas-based hedge fund manager Mark Hart III, thinks China will further devalue its currency “north of 50%.”
Hart, the founder of Corriente Advisors, was one of the hedge fund managers who correctly predicted and profited from the sub-prime crisis.

Hong Kong Dollar Forwards Sink to Weakest Since ’99 on Peg Bets
Saijel Kishan and Dominic Lau – Bloomberg
Hong Kong dollar forwards sank to their weakest level this century, interbank loan rates jumped the most in seven years and the Hang Seng Index tumbled as China’s market turmoil fueled speculation the city’s 32-year-old currency peg will end.

Ruble Tumbles to Record as Oil Slump Hinders Russia’s Recovery
Ksenia Galouchko and Vladimir Kuznetsov – Bloomberg
The ruble slumped to an all-time low as oil’s retreat choked revenue of the world’s largest energy exporter and restricted Russia’s ability to lift its economy out of a recession.

Indexes & Index Products

Global index slides into bear market territory
Robin Wigglesworth, Michael MacKenzie, Leo Lewis and Jennifer Hughes – Financial Times
The global equity rout accelerated on Wednesday, sending the FTSE All-World index into bear market territory for part of the day as oil prices slid to new lows and investors fled for the safety of high-rated government bonds.
Fear rippled through global markets, taking the UK, French and Japanese stocks to more than 20 per cent below their 2015 highs — the common definition of a bear market — and compounding equities’ worst start to a year on record.

Do ETFs Cause Market Volatility?
ETF Daily News
BlackRock’s Matt Tucker takes a closer look at market volatility and how ETFs interact with market ups and downs.

Why Mutual Funds Lost Their Mojo
US News
Staying power usually means a lot on Wall Street. But apparently when it comes to mutual funds, hardly any portfolio managers have such mojo. Mutual funds with managers who pick securities rather than follow an index – so-called actively managed funds – seem to have little or no ability to stay ahead of the competition, even for periods as short as five years.

Non-resource companies dominate S&P/TSX makeover
The Globe and Mail
Canada’s agonizing transition from its battered resource-based economy toward more diverse sources of growth appears to be gathering pace – at least in the stock market. The biggest percentage of non-resource companies made it into the country’s benchmark stock-market gauge in 2015 than in any year since at least the technology boom in 1998.

How Cheap Gasoline Can Lead to Costly Insurance
Jason Giordano – Indexology: S&P Dow Jones Indices
With oil prices at 12-year lows, drivers are spending less money to fill their tanks. However, investors looking to insure themselves against the default risk of energy bonds are being asked to pay up.

Presidential cycle stock market performance
Myles Udland – Business Insider
In a note to clients on Tuesday, J.C. O’Hara, chief market technician at FBN Securities, noted that going back to 1920 the eighth year of a US president’s term has been bad news for stocks.
As O’Hara’s chart shows, the eighth year of a presidential term has seen the Dow fall about 15% on average since 1920. The two most recent examples are 2000 and 2008, which saw the end of the Clinton and Bush 43 years as well as the collapse of the tech bubble and the US housing market.


Islamic finance set sights on standard for gold-based products
Bernardo Vizcaino – Reuters
A top guideline-setting body for Islamic finance is developing a standard for gold-based products in the industry, a move that could allow the use of bullion in a wide range of sharia-compliant applications.
Until now gold has been treated mostly as a currency in Islamic finance, limiting its use to spot transactions. There has been little guidance from standard-setters on products which classify gold as a commodity underlying more complex contracts.

Donald Trump made a case for gold — and no one noticed
Investors in gold bullion have been suffering brutal losses for more than four years.
The price of gold has nearly halved since its 2011 peak, falling from $1,891 an ounce to just $1,094 today. But last week, for the first time in a long time, there was a bit of good news. Thanks to Donald Trump.
In a remarkable, but little-noticed, exchange during Thursday’s GOP debate, the Republican front-runner opened the door to wider currency wars against America’s main trading partners if he is elected president. And although Trump’s preferred means of retaliating against the likes of China and Japan is apparently through a tariff, similar ends can be achieved far more easily by driving down the value of the U.S. dollar.

Can the gold price continue to shine?
Naomi Rovnick – Financial Times
After spending the past few years disappointing investors, gold is regaining some shine. The precious metal is the best-performing non-agricultural commodities of 2016, thanks to a number of trends aligning in its favour.


Beware…………… it’s Correction Twitter!
The Reformed Broker
Uh oh! It’s that time again – when a stock market correction turns our social network into a minefield of awful id and sophist super-ego, an unholy orchestra of crash calls and recriminations, a field of finger-pointing and frayed nerves.
There are only three worse Twitters than Correction Twitter: Olympic Games Opening Ceremony Twitter, Presidential Primary Debate Season Twitter, and the very worst, Oscar Night Twitter. After these, only Correction Twitter can hold a candle in terms of sheer repulsiveness.
The thing is, it has to run its course – like a fever, or a greyhound at a Florida panhandle race track. Our only hope is to simply ride it out and try not to block or mute too many otherwise nice people.

Goldman To Help Bankroll EU ‘In’ Campaign
Sky News
The Wall Street giant Goldman Sachs has given a six-figure sum to the campaign to keep Britain in the EU, Sky News learns.

Lord Adair Turner on the “largely fictional” world of finance
Matt Phillips – Quartz
With his silver hair, rich baritone, Cambridge education, and British peerage, Adair Turner, Baron of Ecchinswell, would be last person you’d suspect of being an economic radical.
But Turner came away from a four-year stint as the head of Britain’s chief financial regulator, the Financial Services Authority (FSA), with a range of ideas that just a few years ago would have been considered unmentionable in polite political or financial company.

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