First Impressions

Pipelines: Nick Solinger talks market infrastructure for SEFs
JohnLothianNews.com

It’s been a historic year for swap execution facilities as more were launched in the wake of Dodd-Frank rulemaking by the Commodity Futures Trading Commission.

Nick Solinger, head of product strategy and chief marketing officer of Traiana, said that its been a good year for firms getting connected to SEFs and for SEFs getting off the ground. The firm connected 16 FCMs to 16 SEFs with six more on the way.

“The typical FCM has been able to clear, three, four, five, six different venues with that one connection to our hub,” Solinger said. “Buy-side firms can similarly trade across multiple SEFs with one-credit line. So we really have realized that initial vision we had as an industry.”

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Quote of the Day

We believe the Fed’s exit toolkit is not ready for primetime.

Bof A analysts in a research report released December 10, as quoted in the WSJ story “Bank Of America Says Fed Needs To Test Interest On Reserves Power”

Lead Stories

Bank Of America Says Fed Needs To Test Interest On Reserves Power
WSJ
Bank of America /Merrill Lynch analysts are warning the one tool the Federal Reserve plans to rely on most when it begins raising short-term rates is the one thing that hasn’t really been put through its paces.
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***DA: The Fed sailed into these uncharted waters a few years ago. The way out is uncharted as well.

The ECB’s second funding offer: Thanks but no thanks
The Economist
Six months ago, the European Central Bank made an offer that seemed too good to be true. As part of its policies to counter low growth and inflation in the euro zone, it would make available to banks funds lasting until 2018 at dirtcheap fixed rates. By the time of the first funding operation, in September, that rate was a mere 0.15% a year. In all, banks could borrow as much as EUR 400 billion in the first two of the operations. The only stipulation was that they should improve their lending record to the private sector (which could mean their stock of loans to businesses declining at a slower pace).
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***DA: Thanks for the free money. Oh, wait, we have to function like real banks and lend it out? Never mind.

Russia hikes interest rates; Greek euro fears hit markets again
The Guardian
There was plenty to unsettle markets, from Russia’s economic woes and its attempt to stop the rouble slide with a 1% rate rise to the Greek political crisis and the poor take-up of the European Central Bank’s latest cheap loans to eurozone banks
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Ifo says weak euro, falling oil supporting German growth
Reuters
Germany’s Ifo institute has revised up its expectations for growth in Europe’s largest economy due to the falling euro and decline in oil prices. The Munich-based institute said on Thursday it expected German gross domestic product (GDP) to expand by 1.5 percent this year and next.
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Japan Yen Crushed by Low Yields as U.S. Bond Pile Grows
Businessweek
Plowing money into U.S. Treasuries hasn’t been this appealing for Japanese investors in almost four years, adding to pressure on the worst-performing major currency in the second half of 2014.
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***DA: I think this story is from 1994.

Janus’s Gross says no bear market in bonds on slow-moving Fed: webcast
The Fiscal Times
Bill Gross, the closely watched bond investor, on Wednesday said the Federal Reserve will most likely begin raising U.S. interest rates in the middle of 2015 but fixed-income securities will not be hurt as much as people anticipate.
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2015 High Yield Bond Outlook: Investors See Opportunities Despite Wildcards
Forbes
Consensus is fairly bullish on the high-yield market for 2015 despite recent volatility. In fact, many market players believe that the volatility has limited frothiness in what they see as attractive valuations to enter the New Year. They say that the end of historically loose monetary policy has already been priced into the market and that the market is underpinned by steady economic growth, sound corporate performance, and ongoing investor demand for yield.
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Central Banks

The Federal Reserve: Opportunistic overheating
The Economist
When officials at the Federal Reserve meet next week, they will wrestle with a problem most other central banks would love to have: what to do if unemployment gets too low? The question is not hypothetical. America’s labour market is on a tear. Non-farm employment rose by an impressive 321,000 in November, the most in nearly three years. Job growth is not only strong, it is accelerating, averaging 241,000 this year, up from 194,000 last year.
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***DA: I have long said there will be no meaningful inflation until we have wage pressures.

El-Erian: Divergent Central Bank Policies May Spell Danger
Newsmax
Global economies are moving at different speeds, creating a divergence in central bank policy that could cause trouble next year, says Mohamed El-Erian, chief economic adviser at Allianz.
The U.S. economy will strengthen, he writes on Project Syndicate. Chinese growth will stabilize at a level lower than recent averages, and Europe will struggle, El-Erian says.
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***DA: In honor of my acting as substitute editor for the ailing Jeff Bergstrom, I am including an article from Newsmax, a publication that leans a tad bit further right than he.

Bank of England to publish minutes faster, cut number of policy meetings
By William Schomberg and Andy Bruce, Reuters
The Bank of England said on Thursday that it wanted to cut the number of monetary policy meetings it holds to eight a year from 12, and that from August 2015 it would publish minutes of its discussions immediately after policy decisions.
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***DA: Good policy. I always hated the long pause between meetings and minutes releases.

Mark Carney signals Bank of England shakeup Business
The Guardian
Policymakers at the Bank of England will reduce interest rate decisions from monthly pronouncements to eight a year as part of a radical overhaul to make the 320-year old institution more transparent.
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BOJ probably finished with ETF buying this year, Amundi says
The Japan Times
The Bank of Japan has probably finished buying exchange-traded funds this year, according to Amundi Japan Ltd., signaling the removal of a key support for the nation’s equities amid a global selloff.
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Central Bank of Russia tries to destroy Russian economy?
Pravda
The Western community has been putting a lot of pressure on Russia lately. At this time of history, Russia needs to take efforts to support the real sector of economy. It is the Central Bank that should play the key role at this point. However, as economists note, it is the Central Bank that shows extremely negative influence on the Russian economy, accelerating inflation and weakening the ruble
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Currencies

Millions of dollars in profits for megabanks at stake in legislation
MarketWatch
The most controversial element of legislation to keep the U.S. government open centers around a minor edit of a Wall Street reform bill. But to the four major banks it impacts, the rub-out could be worth millions of dollars each year.
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Lawsky Said to Probe Barclays, Deutsche Bank FX Algorithm
By Greg Farrell, Bloomberg
New York regulators have found evidence that Barclays Plc (BARC) and Deutsche Bank AG (DBK) may have used algorithms on their trading platforms to manipulate foreign-exchange rates, a person with knowledge of the investigation said.
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Weak yen divisive for Abe ahead of Japanese election
FT.com
Days ahead of Sunday’s lower-house election, Mr Abe’s message could not be simpler. The cheaper yen, the result of his economic policies known as “Abenomics”, is good for Japan. The evidence is growing, Mr Abe says, that the yen’s fall — to a new seven-year low against the dollar to above Y121 — is bringing
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Indexes & Index Products

Ignore John Bogle and dump your S&P 500 index fund
MarketWatch
John Bogle has been a thorn in the side of active stock pickers ever since the 1970s. As an evangelist of index-fund investing, Bogle has been preaching for decades that, on average, stock pickers can’t outperform the market over the long term. What’s most annoying is that, unlike most investment gurus, he’s been consistently right.
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Russell Indexes launches new report on smart beta implementation
Hedgeweek
This new report offers additional insights on smart beta implementation strategies and further demonstrates asset owners’ growing interest in and adoption of smart beta strategies and how they can best fit within investment portfolios.
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CBOE to offer options on MSCI indexes
Saqib Iqbal Ahmed – Reuters
CBOE Holdings Inc (CBOE.O), which runs the largest U.S. stock-options market, said on Wednesday it has entered a licensing deal with stock market indexes provider MSCI Inc (MSCI.N) which would allow the CBOE to offer options on six MSCI indexes.
Under the agreement, the CBOE plans to offer options trading in the MSCI EAFE Index .dMIEA00000PUS, and the MSCI Emerging Markets Index .dMIEF00000PUS, in the first quarter of 2015, subject to regulatory approval, it said in a statement.
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Busting myths about bonds vs. bond funds
MarketWatch
“Reasonable minds can differ on investment advice, and rarely do I read in respected financial publications duly considered viewpoints that cry out for refutation. But boy, did I find one in a recent issue of Forbes magazine. It’s not that the age-old debate over individual bonds vs. bond funds is illegitimate. It’s a fair topic, and in most economic circumstances, persuasive arguments can be made for either investment product. But, with all due respect, the case for funds over individual bonds that is made by William Baldwin in the Nov. 24 issue is specious.
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BlackRock Introduces iShares MSCI ACWI Low Carbon Target ETF
MarketWatch
BlackRock, Inc. has expanded its suite of Environmental, Social and Corporate Governance (ESG)-related products with the launch of iShares MSCI ACWI Low Carbon Target ETF. The new fund which seeks to track the results of the MSCI ACWI Low Carbon Target Index and addresses two dimensions of carbon exposure – carbon emissions and fossil fuel reserves – started trading on the New York Stock Exchange on December 9, 2014.
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Gold

Russia Gold Hoarding Ruble Problems
Business Insider
Russia is finally using all that gold they’ve been hoarding. On Thursday, the Central Bank of Russia announced that gold reserves dropped by $4.3 billion in just one week, reports Vesti Finance.
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Silver ETFs Outshine Gold Amid Global Sell-Off
Zacks.com
Investing in precious metals such as gold and silver once again grabbed investors’ attention following the global stock market sell-off on Tuesday sparked off by political instability in Greece and the announcement of snap presidential elections along with renewed fears surrounding global economic growth (read: Greece ETF Crashes as Political Uncertainty Returns).
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Gold Miners Find Little Solace in Cheaper Oil
WSJ
Falling oil prices have made it cheaper to mine gold, but the yellow metal’s own three-year price decline is pressuring miners to come up with new, sometimes creative ways to cut costs and restructure. Among other things, miners are drawing up plans to spin off assets and share administrative functions between companies.
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Gold’s rally won’t outlast tectonic rate shift
Reuters
The gold price is up, but the three-year downward trend is far from over. The yellow metal looks attractive when oil price falls and a rising dollar are destabilising emerging economies and global stock markets. The little rally could go a bit further, but it is unlikely to survive the tectonic shifts which U.S. rate rises will bring to the financial world.
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Here is what India needs to effectively manage gold demand
Mining.com
Somasundaram PR, Managing Director of the World Gold Council India, peels back the underlying weakness of India’s gold trade, arguing that world’s second-biggest consumer of the metal should allow banks to use bullion as part of their liquidity reserves. This, he says, would let Indians make better use of local gold, reducing the need for imports.
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