Lead Stories

Bond Trading Seen Drying Up in Europe as Investors Hoard Notes
By Katie Linsell, Bloomberg
Liquidity in European bond markets has all but disappeared as investors hoard securities that are easier to sell in times of stress and banks reduce inventories, according to the International Capital Market Association.
“As the intrusive nature of many regulatory initiatives begins to bite, market participants are anxiously holding onto their stock,” Godfried de Vidts, chairman of ICMA’s European Repo Council, wrote in the organization’s quarterly report. “Market making activities have all but stopped as the holding of trading securities is now punitive from a capital point of view.”

RBS Said to Discuss $3 Billion Debt Sale Terms With Government
By Richard Partington and Stephen Morris, Bloomberg
Royal Bank of Scotland Group Plc is in talks with the U.K. government over the terms of its planned 2 billion-pound ($3 billion) bond sale amid concern taxpayers’ stake could be diluted, according to a person with knowledge of the matter.
The talks with UK Financial Investments, which manages the taxpayer’s 80 percent stake, are aimed at avoiding a breach of the terms of the Edinburgh-based bank’s bailout, given the Additional Tier 1 securities can be converted to stock and dilute UKFI’s holding, according to the person, who asked not to be identified because the talks are private.

CME Can Thank the Fed for Record Trading While ICE Sees Decline
By Matthew Leising, Bloomberg
Central bank efforts to resuscitate the American and European economies are at different stages, and that’s driving a divergence in fortunes at two of the top derivatives exchanges.

Futures Show Market Expects Fed to Hike in September
Market Pulse
U.S. short-term interest-rate futures contracts rose Friday after a government report showed U.S. employers added more jobs than expected last month, but wage growth lagged.
The contracts now show that traders see a 55 percent chance that the first Fed rate hike will come in September 2015, based on CME FedWatch, which tracks rate hike expectations using its Fed funds futures contracts.

CME Group raises transaction fees again
By Tom Polansek, Reuters
CME Group Inc will raise transaction and clearing fees in markets ranging from interest rates to energy and agricultural products next month, increasing costs for traders for the second time in 13 months.
The increases, which take effect on Feb. 1, appear to target traders who do not own memberships at CME’s exchanges, which include the Chicago Mercantile Exchange and Chicago Board of Trade.

Bill Gross’s New Fund Sees Significantly Lower Inflows in December
By Kirsten Grind, The Wall Street Journal
Bill Gross ‘s new mutual fund at Janus Capital Group Inc. saw net inflows of $176 million in December, down significantly from the previous month, according to data released Friday by fund tracker Morningstar Inc.
The Janus Global Unconstrained Bond fund saw its assets rise to $1.4 billion at the end of the month, the third month since Mr. Gross began running the fund on Oct. 6.
But the source of the money flowing into the fund is unclear.

Central Banks

Federal Reserve Exit Strategy: Number 6
John M. Mason, Seeking Alpha
There was very little activity on the monetary front on the part of the Federal Reserve this past week.
We are out of the “holiday” season, thank goodness, and so there are fewer seasonal factors impacting bank reserve positions.
There are three changes that took place during the banking week ending January 7, 2015 that I would like to call your attention to.

Treasuries Rise as Unexpected Wage Drop May Delay Fed Increase
By Daniel Kruger, Bloomberg
Treasuries rose after a government report showed wages unexpectedly declined in December, sparking speculation the Federal Reserve will take a slower pace with interest-rates increases.
Two-year note yields fell to a three-week low as futures showed a 49 percent probability of a Fed rate increase by September, down from 57 percent yesterday after the Labor Department said average hourly earnings of workers dropped 0.2 percent. The difference between two- and 30-year yields widened to almost the most this year as the economy added more jobs than forecast last month, ending the best year for the labor market since 1999.

ECB study suggests EUR 500bn bond buying programme as QE option
Claire Jones in Frankfurt, FT
A package of up to EUR 500bn-worth of investment-grade government bond purchases was among the options tabled by European Central Bank staff in a study to policy makers on a quantitative easing programme, according to people familiar with the deliberations.

Janet Yellen Now Faces One Of The Most Bizarre Problems The Fed Has Ever Seen
Business Insider
Falling oil prices may be good news for consumers who have seen prices at the pump start falling and the prices of other goods starting to drop as well, but it could prove a headache for Federal Reserve Board Chair Janet Yellen.
That’s because the US, which just posted an astonishing 5% gain in GDP, is now flirting with deflation.

Full Report on ‘London Whale’ Incident Sheds More Light on New York Fed Role
Turf Battles, Crisis-Related Distractions Complicated New York Fed’s Supervision of J.P Morgan
By Victoria McGrane and Ryan Tracy, The Wall Street Journal
WASHINGTON—The Federal Reserve Bank of New York’s failure to examine J.P. Morgan Chase & Co.’s investment unit ahead of the bank’s 2012 “London whale” trading debacle stemmed from turf battles with other regulators, overreliance on J.P. Morgan’s solid reputation and financial-crisis-related distractions, according to the Fed’s watchdog.


Greek Kingmaker-in-Waiting Says He Won’t Gamble Euro Exit
By Nikos Chrysoloras, Jenny Paris and Antonis Galanopoulos, Bloomberg
A Greek political party founded less than a year ago that might end up deciding the makeup of the next government won’t lend support to any coalition willing to gamble with the country’s place in the euro, its leader said.
To Potami, or “the River” in Greek, is polling in third place ahead of Jan. 25 elections. It trails the governing New Democracy party and rival Syriza, which opposes austerity measures imposed as a condition of Greece’s two bailouts and aims to negotiate a writedown on some debt.

Euro-based cocoa futures to struggle in crowded market
By David Brough, Reuters
New euro-denominated cocoa futures may have the backing of processors operating in the currency zone, but will struggle to survive against well-established sterling and dollar contracts, market sources said.

Weak yen last straw for small Japanese firms
Mia Tahara-Stubbs, special to CNBC
The yen’s policy-fueled decline since Shinzo Abe took office at the end of 2012 benefited blue-chip exporters, but expectations that the Prime Minister’s policies would trickle down have fallen short, with a record number of small businesses declaring yen-related bankruptcies in 2014.
“There are no signs that the benefits of Abenomics are trickling down to small and medium-sized businesses (SMEs),” said Osamu Naito, a bankruptcy analyst at credit research firm Teikoku Databank. “If anything, the yen’s latest weakening is the last straw for many struggling small and medium-sized businesses.”

The U.S. dollar trade: Too obvious to be right?
Alex Rosenberg, CNBC
When it comes to the U.S. dollar, everyone seems to agree on two things: It will keep soaring, and everyone’s too bullish.
The U.S. Dollar Index, which tracks the currency by comparing it to a basket of six currencies (though it is heavily weighted toward the euro) is up 15 percent in six months. In fact, the index has risen in 13 of the last 15 sessions, taking it to a nine-year high.

Indexes & Index Products

What went wrong with the Great Commodity Boom?
John Kemp, Reuters via Financial Post
Bank of CanadaThe collapse of oil prices is a once-in-a-generation shock and will have huge reverberations around the world, say economists
Investors, including some of the world’s largest pension funds, have seen billions of dollars of wealth disappear as a result of investing in commodity index products over the last decade.

EU lawmakers eye compromise for U.S. on benchmarks
By Huw Jones, Reuters
European Union lawmakers look set to ease the international impact of rules to stop market benchmarks being rigged, addressing U.S. concerns that global investors could lose out.

Liquid Alts: Active Management’s Comeback
The Share
The pendulum that swung hard towards passive management with the innovation of exchange-traded funds is finally swinging back towards active management. ETFs have disrupted portfolio design for institutional and retail investors since the 1990s, but mutual fund companies are striking back with concentrated alpha in the form of liquid alternatives. Liquid alts are experiencing a sustained period of rapid growth, and this may parallel the early days of ETFs.

World’s Top Performing Equity Indices from Developing Countries
Forex Magnates
Equity markets in 2014 were positive in certain emerging market countries, the Argentinian MERVAL rising 59% YoY. Despite the dollar pulling back, emerging market countries held onto the top five performing markets for 2014.

US Equity REITs Remarkable Year
By any measure—and we are about to discuss two of them. US REITs had a banner year in 2014. Industry association NAREIT reports that US REITs doubled both the total return and dividend yield of the S&P 500 by year end. SNL Financial has separately reported much the same.


Gold Futures Rise as U.S. Wage Data Spurs Fed-Rate Speculation
By Debarati Roy, Bloomberg
Gold futures rose on speculation that the Federal Reserve won’t soon raise U.S. interest rates as wage gains lag behind the pace of employment growth, signaling inflation remains tame.
Average hourly earnings for all employees in December dropped by 0.2 percent from the prior month, the biggest since comparable records began in 2006, to $24.57. Employment rose more than forecast, and the jobless rate declined to 5.6 percent.

Now might be the time to get into gold
StreetWise Journal
Considering how badly oil has been faring recently, it is no surprise that the whole commodities sector, generally speaking, has been trending south. One thing I have learned in all my years observing financial markets is that when it comes to commodity pricing, too many investors never miss to miss an opportunity. Sure, the dollar has been on a tear lately and, save for a few commodities like coffee, the commodities market, precious metals and oils included, are rocking lower prices. This should be a golden opportunity for people to give gold another look.

Record Silver Investing, Record Mine Output in 2014
Bullion Vault
Silver investing hits new highs, but so did production as “thrifting” hits solar PV use.

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