First Impressions

Is Eighth Time the Charm for Volatility?
Sarah Rudolph, John Lothian News

After a summertime slump, volatility has jumped back up again. In his market commentary on Friday, Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, noted a pullback in the SPX and continued elevated levels of volatility, and said recent patterns suggested that if the SPX dropped to 1950 it was likely to rebound to another record high.

Expanding on his comments in a telephone conversation with JLN Options, Frederick said recent pullbacks in the S&P 500 Index (“SPX”) and spikes in the VIX were not huge by historical standards, but are significant spikes when compared to the last few months.

“I often say the VIX is good at predicting the next five minutes or the next couple of months – in other words, either very short or very long term,” Frederick said. “When the VIX is on the rise, it could mean there is a pending event in the future that people are concerned about.”

The expected events in this case are the end of the Federal Reserve’s tapering process on Oct. 30, and the midterm elections on Nov. 4.

“Those two things occurring within a week are pretty significant,” he said. “The difficult part for me is knowing whether this current pullback and slight increase in volatility is tied to those events, or does it have more to do with what’s going on in Hong Kong, Ukraine, and other political issues?”

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Quote of the Day

“Banks have been scolded and they have been warned, and yet you are seeing a lot of signals that the market is heating up. We have seen this bad movie before. The issue now is, will the regulators deploy the rest of the arsenal of tools they have?”

Mayra Rodriguez Valladares, managing principal at MRV Associates in New York in the story, “Fed Scrutiny of Leveraged Loans Grows Along With Bubble Concern”.

Lead Stories

Argentina’s central bank chief quits
Benedict Mander in Buenos Aires – Financial Times
Argentina’s central bank governor, Juan Carlos Fábrega, resigned on Wednesday, a day after being criticised in public by President Cristina Fernández as the peso currency comes under growing pressure.

Fed Scrutiny of Leveraged Loans Grows Along With Bubble Concern
Craig Torres, Kristen Haunss and Christine Idzelis – Bloomberg
The Federal Reserve is stepping up its oversight of high-risk leveraged loans, shifting to a deal-by-deal review after its previous industry-wide guidelines were largely ignored by banks.

When Debt Markets Don’t Really Act as Markets
Stephen J. Lubben – Dealbook – NY Times
Is the debt market really a “market”? Several recent events, each largely independent from the others, should cause us to ask this basic question.

Why the bond market is more fragile than you think
Economic Times
A bottleneck is building in the global market for bonds. Main Street investors have poured a trillion dollars into bonds since the financial crisis, and helped send prices soaring.

Fed Critics Say ’10 Letter Warning Inflation Still Right
Caleb Melby, Laura Marcinek and Danielle Burger – Bloomberg
Signatories of a letter sent to then-Federal Reserve Chairman Ben S. Bernanke in 2010 warning of the risks associated with the bank’s policy of quantitative easing are standing by their claims — even as the biggest U.S. companies are flourishing, inflation is muted and holding Treasuries has been one of the best trades out there.

BlackRock bond head says speculators on ECB QE making mistake
Investors loading up on some of the euro zone’s riskiest government bonds on expectations that the European Central Bank will buy them are making a “mistake”, BlackRock’s head of European and global bonds said on Wednesday.

Central Banks

ECB to flesh out asset-purchase plan it hopes will buoy euro zone
Gavin Jones – Reuters
The European Central Bank will present details on Thursday of a new asset-buying plan with which it hopes to revive the flagging euro zone economy and see off the specter of deflation.

ECB Seeking Tenders for Calculating Losses on Asset-Backed Debt
The European Central Bank is seeking tenders from financial firms to provide it with calculations on the likelihood of losses on asset-backed securities and covered bonds as it prepares to purchase the debt.
The central bank is also looking for data on market prices and assistance with modeling cash flows, according to a notice on the ECB’s website. The three contracts are slated to start in November and last four years, the document shows.

Morning MoneyBeat Europe: Can the ECB Bring Enough Firepower?
David Cottle – MoneyBeat – WSJ
Investors will return to their desks Thursday to survey the wreckage of a global equity rout, a sullen backdrop against which the European Central Bank will have to make its October policy decision.

Early BOE Tightening? Don’t Look for Signs in Gilts
Anchalee Worrachate – Bloomberg
If Bank of England policy makers are contemplating an early interest-rate increase, there are few signs of concern in the U.K. government bond market.
For all the data showing the U.K. economy strengthening and stagnation in the euro area, gilts returned 3.9 percent in the three months through September, their best quarterly performance since 2011. They beat German bonds, which gained 2.3 percent, for the first time in a year and outpaced government securities from Spain, Italy and the U.S.

BOE’s Forbes Sees Wage Risk as Pound Price Pressure Eases
Jennifer Ryan – Bloomberg
Bank of England policy maker Kristin Forbes said the pound’s downward pressure on U.K. inflation may start fading and there’s a risk of a pickup in wage growth.
Forbes, a former White House adviser, made the comments in her first speech since joining the BOE in July. While she has voted to keep the key interest rate at a record-low 0.5 percent, her remarks chime with the view of the minority on the nine-member Monetary Policy Committee, who are pushing to tighten policy to ensure inflation remains under control.


Structural reforms could pave way for peso resurgence in 2016
Solomon Teague – Euromoney Magazine
It has been a gruelling few days for Latin American currencies, which have borne the brunt of asset allocations away from EMs and into an invigorated greenback, ahead of expected rates rises – but analysts believe the longer-term outlook for the Mexican peso looks brighter than most other EM currencies.

Euro Jumps Most Since May as ECB Plan Lacks Details
The euro rose the most since May as the European Central Bank failed to provide details on the size of a plan to buy private securities, curbing bets the purchases would expand the ECB’s balance sheet enough to weaken the currency.
Japan’s yen advanced as Vice Finance Minister Nobuhide Minorikawa said weakness in the currency is hurting some companies by driving up energy prices. ECB President Mario Draghi unveiled plans to buy covered bonds and asset-backed securities for at least two years.

BitBeat: The Bitcoin Documentaries Are Coming
MoneyBeat – WSJ
The bitcoin documentaries are coming. Daniel Mross, the star of “The Rise and Rise of Bitcoin,” a documentary he made with his brother Nicholas in 2013, was in New York this week promoting the film’s release on Friday (iTunes, Vimeo, small number of theaters). It leads a field that is going to seem pretty crowded pretty soon, as a handful of film makers have realized the potential of bitcoin not as a currency but as a story.

Indexes & Index Products

Commodity ETF Outflows Reach Highest This Year on Supply
Luzi Ann Javier – Bloomberg
Investors last month pulled more money out of U.S. exchange-traded products backed by commodities than they have all year, as signs of supply gluts drove the biggest price slump since the financial crisis.

Investors Fleeing Pimco Park Money in Bond ETFs—For Now, At Least
Chris Dieterich – MoneyBeat – WSJ
Bill Gross’ abrupt departure from Pacific Investment Management Co. is turning into a bonanza for index-tracking exchange traded bond funds. Plain-vanilla bond ETFs, such as the $18.9 billion iShares Core U.S. Aggregate Bond ETF, have seen money pour in the door from investors looking for at least a temporary parking place as they pull money out of Mr. Gross’s Pimco funds.

Euroclear’s International ETF Structure Is Selected By State Street Global Advisors
Euroclear Bank, the Brussels-based international central securities depository (ICSD), and State Street Global Advisors (SSgA), a global leader in asset management, plan to merge a proposed thirteen SPDR ETFs to an international ETF structure under Irish Law.

Danish regulators launch probe into active managers
Mark Cobley – Financial News
Finanstilsynet, the Danish financial services authority, has launched a formal investigation into “closet indexers” – mutual funds that claim to be actively managed, but in reality charge high fees for index-like performance.

Russian ETF Lures Cash as Bear Market Proves No Deterrent
Elena Popina and Halia – Bloomberg
Foreigners are loading up on wagers that Russia’s stock-market rout is poised to reverse.


Broker ICAP enters race to replace century-old gold fix
Clara Denina – Reuters
ICAP, the world’s biggest interdealer broker, will submit a proposal to the bullion market to replace the century-old global price benchmark for gold known as the “fix”, the company told Reuters on Wednesday.

The collapse in “physical demand” for precious metals in the USA
Matthew C Klein – Financial Times
Some precious metal bulls like to dismiss price declines in gold and silver by pointing to the strength of “physical demand.” (Savers who put their wealth into precious metals never seem to get paid for this “physical demand”, but whatever…)

Gold Close to Erasing Gains for Year on Outlook for Rates
Nicholas Larkin – BloombergBusinessweek
Gold traded little changed in London, with the metal almost erasing this year’s gains as the outlook for higher U.S. interest rates amid an improving economy curbs demand for the metal.
Bullion rose as much as 0.7 percent earlier today as European equities declined and the Bloomberg Dollar Spot Index fell after climbing to a four-year high yesterday. Gold retreated this week to the lowest in almost nine months.

Ned Davis: If Gold Follows 1980s Pattern, Expect $660 An Ounce – Focus on Funds
Teresa Rivas – Barron’s
No doubt it’s been a difficult to be a goldbug lately. However, as a note from Ned Davis Research postulates, it could be much worse.
John LaForge and Warren Pies write that from its peak in January 1980 through its trough in February of 1985, gold suffered 65.8% losses. So far in this cycle, it’s lost 35.7% from its August 2011 peak, so if it were to follow its 1980s path, it could easily slip below $700 an anouce.

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