First Impressions

BOJ’s Kuroda says no plan to adopt negative rates now
Bank of Japan Governor Haruhiko Kuroda said he is not thinking of adopting a negative interest rate policy now, signalling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying programme.

****SD: This was the Reuters story from before the BOJ’s decision. We know what happened next. Feels like Kuroda pulled the anti-Super Mario — said exactly what he was ‘thinking’ and then did the opposite.

Quote of the Day

“We may not see a currency war this time, but rather a currency skirmish.”

Kelvin Tay, managing director and regional CIO of southern APAC at UBS Wealth Management, in the story, “BOJ rates shock revives currency war fears”

Lead Stories

Central Banks Intensify Campaign for Negative Rates
Simon Kennedy – Bloomberg
Central banks are turning even more positive about negative interest rates.
In surprising markets by penalizing a portion of banks’ reserves, the Bank of Japan on Friday joined a growing club taking the once-anathema step of pushing some borrowing costs beneath zero.

Negative bond yield universe hits $5.5tn after Japan eases
Elaine Moore and Thomas Hale – Financial Times
Global markets have capped a tumultuous start to the year with a record amount of outstanding government debt at negative yields, reflecting heightened investor pessimism over the outlook for economic growth and inflation. Government bond yields across Europe and Japan fell further below zero on Friday, following the Bank of Japan’s surprising decision to shift a benchmark rate to minus 0.1 per cent in order to combat deflationary pressures.

European investors refuse to budge in move to electronic trading
Joe Parsons – The Trade News
Incoming rules on electronic swaps trading have yet to persuade institutional investors.
The majority of European institutional investors are still unconvinced to move to electronic platforms for their interest rate swaps trading.
According to a report from Greenwich Associates, of 200 investors surveyed nearly 80% said their preferred choice to trade was over the phone.
It also found only 20% of notional volume from institutional investors was executed electronically last year, and less than 40% of investors utilised e-trading tools.

Fund managers trim bank research costs
Naomi Rovnick, Laura Noonan and Madison Marriage – Financial Times
A growing number of British investment funds are declining to pay fees to investment banks for research on stocks and shares, in a move that could eventually bring down costs for investors.
Baillie Gifford, a 108-year old Scottish asset manager that oversees £110bn of funds, has paid its 50 banks and brokers separately for research and trading since the start of January, partner Nick Thomas said. The costs of bank commissions to Baillie Gifford’s investors will fall by at least 30 per cent, Mr Thomas said.

When Systematic Trading Comes to Credit Markets
Tracy Alloway – Bloomberg
A profound trend in credit markets has been borne out by the results of Citigroup Inc.’s latest survey of credit derivatives, with investors expressing continually growing interest in derivatives tied to corporate bonds.
While an overwhelming 94.5 percent of respondents to the survey said they expect corporate defaults to increase over the next year, the majority cited liquidity in the overall bond market as their top concern.

Frugal in Frankfurt: Can a Penny-Pincher Fix Deutsche Bank?
Stephanie Baker, Suzi Ring, Nicholas Comfort and Greg Farrell – Bloomberg
High in the Deutsche Bank Towers in downtown Frankfurt, a radical plan code-named Model 5 was quickly unraveling.
It was April 24, and key players at the German banking giant had assembled on the 35th floor. Rocked by one scandal after another, Deutsche Bank had spent months considering its options. The most extreme was Model 5: cleave the bank in two.

Preet Bharara Throws Shade at Eric Holder
Will Bredderman – Observer
Crusading U.S. Attorney Preet Bharara took a sharp dig at former U.S. Attorney General Eric Holder—whom he served under from 2009 until Mr. Holder stepped down in last year—for how he handled the fallout from the 2008 financial crisis.

Derivatives Mean U.S. Cities Get No Free Pass From Crisis Legacy
Darrell Preston and Elizabeth Campbell – Bloomberg
When Chicago’s city council this month delayed voting on a bond sale sought by Mayor Rahm Emanuel, the elected leaders questioned whether they should go deeper in debt to pay about $100 million to unwind derivative trades.

Outlook 2016: The Street’s Right-Sizing Marches On
Renee Caruthers – Traders News
Morgan Stanley’s December announcement that it was cutting more than 400 fixed-income jobs grabbed headlines. While the announcement may have been depressing news for Morgan Stanley’s bond traders, not everyone saw it that way.

Case Sheds Light on Goldman’s Role as Lender in Short Sales
Gretchen Morgenson – NY Times
It would be easy to overlook the case against Goldman Sachs filed by the Securities and Exchange Commission on Jan. 14. It involved a complex piece of Wall Street plumbing, led to a minuscule $15 million fine and came on the same day that Goldman agreed to pay up to $5 billion to settle prosecutors’ claims that it sold faulty mortgage securities to investors.

China’s Fraud Paper Trail Shows Flaws in Booming Funding System
An archaic part of China’s banking system meant to provide short-term funding to companies is coming under renewed scrutiny after at least two cases of fraud were uncovered recently.

Advance Estimate of GDP for the Fourth Quarter of 2015
The White House
Real GDP rose 0.7 percent at an annual rate in the fourth quarter according to the advance estimate, partially reflecting global headwinds as job growth remains strong.

Central Banks

Monetary policy: BOJ adopts negative interest rates
Ken Moriyasu – Nikkei Asian Review
The Bank of Japan decided to adopt negative interest rates at its policy meeting on Friday, voting 5-4 to apply an interest rate of -0.1 percent on current accounts that financial institutions hold at the central bank. At the same time, the BOJ revised its inflation forecast for fiscal 2016 down to 0.8% from a previous level of 1.4%.

****SD: Other takes from Reuters and Bloomberg

Bank of Japan’s Negative Interest Rate Decision Explained
James Mayger – Bloomberg
The Bank of Japan pushed interest rates below zero Friday, after years of keeping them at the lower end of the positive range.

Over a Fifth of Global GDP is Now Covered by a Central Bank With Negative Rates
Mike Bird – WSJ
The world’s economies are going negative.
Over a fifth of global gross domestic product, or 23.1%, will now be produced in countries that have negative interest rates.

Billionaires urge the US Fed to man the currency-war barricades
Lisa Abramowicz – Australian Financial review
The Federal Reserve may be on the brink of a huge mistake if it decides to retreat from the global currency wars.
So goes the warning implicit in the statements of behemoth investors like billionaires George Soros and Ray Dalio.
The US Fed opted to keep interest rates on hold this week but offered an accompanying statement that was less dovish than some traders had hoped for following the recent market turmoil.

Bank Lending Data Likely to Boost Calls for Looser ECB Monetary Policy
Todd Buell – WSJ
Weak lending data from the end of last year are likely to strengthen the case of those calling on the European Central Bank’s Governing Council for more accommodative monetary policy, analysts say.
Rate-setters are likely to be disappointed after data showed that lending to eurozone firms slowed at the end of the year in annual terms, while loans to households kept pace.
The ECB reported Friday that lending to eurozone firms rose only 0.3% on the year in December, after a 0.7% rise in November. Lending to households rose 1.4%, matching November’s figure.

Odds of Fed Hike This Year Are Practically a Toss-Up After BOJ’s Surprise Move
Alexandra Scaggs – Bloomberg
In the bond market’s view, the chance of a Federal Reserve interest-rate increase this year is practically a toss-up after the Bank of Japan’s surprise policy move.

Fed will be patient on US policy given global risks: Kaplan
Jason Lange and Jonathan Spicer – Reuters
The Federal Reserve will be patient as it decides how trouble overseas could hit the U.S. economy, a Fed policymaker said in an interview, suggesting the central bank will be slower to raise interest rates this year.

The Lords of Finance are skidding out of control; Financial markets have become dangerously dependent on the cheap monetary steroids of central bankers – creating yet more debt
Jeremy Warner – Telegraph
‘When the facts change, I change my mind. What do you do, Sir?” So reputedly said the British economist John Maynard Keynes. Economists are always changing their minds, but few practitioners of the “dismal science” do it quite as regularly as central bankers.


El-Erian says countries weakening currencies in fight for global growth
Jennifer Alban – Reuters
Mohamed El-Erian, the chief economic advisor at Allianz, said on Friday the Bank of Japan’s shocking move to take one of its main interest rates into negative territory underscored the country’s hope to weaken the yen to re-inflate its economy.

Hong Kong Monetary Authority: Yuan loans accelerate as currency weakens
Joyce Ho – Nikkei Asian Review
Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority (HKMA), the special administrative region’s de facto central bank, noticed that yuan loan growth in the city has accelerated in the past few months.
The offshore yuan has experienced significant volatility since August when the People’s Bank of China unexpectedly devalued the currency by 2% to ease its introduction into the International Monetary Fund’s special drawing rights basket.

Swiss Franc’s Journey From Haven During Turmoil to Pimco Pariah
Chiara Albanese and Lucy Meakin – Bloomberg
The Swiss franc’s reaction to the latest gyrations in global markets is raising questions about its traditional role as a haven.
The franc has fallen this month even as stocks around the world entered bear markets, and it’s now weaker against the euro than at any time since Switzerland abandoned its exchange-rate cap a year ago. The Swiss National Bank replaced the ceiling with a policy of interest-rate cuts and franc sales to keep the currency weak, and Pacific Investment Management Co. says it’s now too illiquid to trade.

Are Regulators Holding Back Digital Currency?
American Banker
Federal and state banking regulators are still struggling with how to come to grips with banks whose clients are heavily involved in digital currencies like bitcoin — and that may be curbing interest from many in the financial industry.

Bank of Japan stimulus may increase Asian currency volatility
For the past year or so, China has been the usual suspect behind currency volatility. Step forward Japan.
Tokyo’s unprecedented decision to introduce negative interest rates on Friday may intensify concerns that global central banks are delving into a tit-for-tat currency devaluation fight, strategists warned.

Sheeran tops currency chart
Lytham St Annes Express
Ed Sheeran’s global appeal has been highlighted in new research that shows he has been paid in no fewer than 25 currencies since picking up the coveted best male solo artist award at last years Brit Awards.

****SD: (Of winners from the Brit Awards.)

Indexes & Index Products

Is it time to halt the rise of the ETF machine?
Chris Newlands – Financial Times
Like any good gardener, the US financial regulator has decided that the rapidly expanding exchange traded fund market may need pruning to ensure healthy growth.
Just a couple of months or so before the ETF market had set a new record for global asset gathering — some $372bn for 2015 as a whole — Luis Aguilar, commissioner of the Securities and Exchange Commission, was asking: “Should we consider curtailing the growth of ETFs?”

Five Unforgettable Quotes From the World’s Biggest ETF Conference
Eric Balchunas – Bloomberg
Even the booming exchange-traded fund industry isn’t immune from the current market turmoil.
While ETFs had a banner year in 2015 in asset growth—taking in more money than mutual funds and hedge funds combined—a raft of worries took center stage at the ninth annual Inside ETFs conference in Hollywood, Fla., hosted by

Intercontinental Exchange Launches U.S. Treasury Index Family
Press Release
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges, clearing houses and data services, announced today that its subsidiary, Interactive Data Pricing and Reference Data, LLC (Interactive Data), will become the new benchmark index provider for four of BlackRock’s iShares U.S. Treasury Exchange Traded Funds (ETFs): iShares 1-3 Year Treasury Bond ETF (SHY), iShares 3-7 Year Treasury Bond ETF (IEI), iShares 7-10 Year Treasury Bond ETF (IEF) and iShares 20+ Year Treasury Bond ETF (TLT). Known as the ICE U.S. Treasury Bond Index SeriesTM, the indices will be operated by Interactive Data beginning in the second quarter of 2016.

Are Index Funds a Trap For the Passive Minded?
John Kimelman – Barron’s
Hedge fund manager Bill Ackman has seen the enemy of investors. And it’s in the form of a seemingly benign friend of many investors – the common market-weighted index fund.
In his latest letter to shareholders of his fund house, Pershing Square Capital, Ackman starts out by discussing the reasons for his firm’s sharp underperformance relative to their index benchmarks last year. But he also devotes considerable space to criticizing index funds, which have been one of the fastest-growing segments of money management in the past decade.

Why Good Governance Stock Index Lacks Expert Judgment
Jeff Gramm – NY Times
Last week in Davos, Switzerland, a group of giant pension funds unveiled a new stock index, the Standard & Poor’s Long-Term Value Creation Global Index.
In the image of the World Economic Forum whence it came, the index aspires to collect the best-run global companies, by evaluating their governance, financial quality and sustainability initiatives. Most Standard & Poor’s indexes are defined by mere region and asset class. What is the purpose of a stock index composed of supposed global elites?


Reasons for the Fearful to Be Fearful of Gold
Matthew A. Winkler – Bloomberg
The stock market’s dreadful January coincides with a chorus of predictions that the fall of gold has reached bottom from its lofty peak in 2011. Gold is the investment of the fearful, and there’s fear of just about everything from recession to terrorism. Indeed, gold rallied 6.3 percent during the past six weeks.
On casual inspection, it’s easy to conclude that the price of gold has nowhere to go but up after a four-year slide to $1,045 an ounce in December from a record $1,923 — a 46 percent decline measured by futures contracts.

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