First Impressions

Canary in the Paper Mine?
Doug Ashburn – John Lothian News

Six years ago, the failure of two hedge funds at Bear Stearns sent a small ripple through the commercial paper market. What started out looking like a temporary blip in the economic freight train ended with the failure of large swaths of the banking system, the biggest recession in 70 years, and an unprecedented policy response that continues to this day. Though the crisis had many causes – over-leverage at banks and investment banks, lax lending standards and an opaque derivatives market to name a few – it was a blowup in the commercial paper market that became the proverbial canary in the mine.

Continued here >>>

Quote of the Day

“Neither the banks nor the central reserve itself would be safe without the introduction of commercial or banking paper as a means of exchange.The key, if you please, to the vaults of the central reserve is furnished” by short-term debts that banks could turn quickly into cash.

Paul M. Warburg, early 20th century banker, early advocate of the U.S. Federal Reserve System in the story, “ Bernanke’s Recession-Fighting Weapon Developed by 1900s Banker”

Lead Stories

Chinese Interest Rates in Money Markets Jump on Friday
Interest rates in China’s money markets jumped Friday to levels last seen during a crippling cash crunch this summer, as banks continue to struggle to raise funds in the interbank market.

***DA: The PBoC has stepped in to calm fears – for now.

Macro Horizons: Keep Your Eye on the People’s Bank of China
Michael J. Casey, Alen Mattich and Michael Arnold – MoneyBeat – WSJ
The Federal Reserve is not the only central bank withdrawing monetary stimulus–it seems the People’s Bank of China is also pulling back on the amount of money it is pumping into the financial system.

***DA: But is it enough?

The Federal Reserve’s Goldilocks Universe
Paul Vigna – MoneyBeat – WSJ
It’s hard to recall the last time the Federal Reserve delivered a statement that was as just right for the markets as the one that landed in investors’ laps Wednesday afternoon.

***DA: If only a rising stock market were the only metric that mattered to an economy.

How to Stop Financial Panics? Say Hello to Qualitative Easing
Jason Douglas – MoneyBeat – WSJ
How can governments stop financial panics wrecking their economies? A paper published by the Bank of England on Friday proposes a radical solution: a new breed of central bank-like institutions that buy and sell assets to prevent destabilizing swings in prices.

***DA: Hello, qualitative easing. Goodbye, business cycle recession. Boy, that was easy.

Covered Bonds Get Second-Class Status in EU Liquidity Review
Ben Moshinsky – Bloomberg
Covered bonds, which are debt securities backed by cash flows from other assets such as mortgages, aren’t as stable as European Union sovereign debt for the purpose of building up banks’ liquidity buffers, the London-based European Banking Authority said today. Corporate bonds, equities and some local government debt were also considered to be less liquid than state bonds.

***DA: In looking at current yields, one would think corporates, even junk bonds, are as safe as cash. Guess not.

Treasury’s Final Auction of Year Draws Highest Yield Since 2011
Cordell Eddings and Daniel Kruger – Bloomberg
Treasury’s $29 billion seven-year note auction, the final government coupon sale of 2013, drew the highest yield in more than two years as the Federal Reserve plans to wrap up its bond-buying by the end of next year.

S&P cut of EU rating dismissed by European officials
Credit agency Standard & Poor’s cut its long-term rating of the European Union by one notch to AA+ on Friday, saying it had concerns about how the bloc’s budget was financed, a view EU leaders and other officials dismissed as misguided.

***JM: “Misguided”: 1. adj. That which describes us in an unfavorable way.

We still need to learn the real lessons of the crisis
Martin Wolf –
A passer-by sees a man looking under a lamppost and asks what he is trying to find. “My keys,” he replies. They look for a while but find nothing. The passer-by asks whether the first man is sure he lost his keys here. “Oh, no,” replies the man. “But this is where the light falls.”

***DA: Dodd-Frank, EMIR, et. al., are attempting to erect more lampposts.

European banking union is a sham that solves nothing
Sony Kapoor –
The drumbeat of banking union has drowned out more important and urgent conversations on tackling the severe crisis in Europe. Given the earnestness with which EU leaders talk about the importance of “making progress on banking union”, citizens could be forgiven for thinking it is God’s gift to mankind – or at least that it might stem the eurozone crisis.

***DA: Bah, humbug.

Another grumpy Christmas video… our look back at 2013’s most absurd stories
FT Alphaville
FT Alphaville continues its tradition of signing off for the year with a playful (and consistently grumpy) Christmas video:

***DA: Humbug, humbug humbug.

Central Banks

Bernanke’s Recession-Fighting Weapon Developed by 1900s Banker
Craig Torres – Bloomberg
The first weapon Federal Reserve Chairman Ben S. Bernanke deployed against the worst recession since World War II owes a singular debt to Paul M. Warburg, a banker in the 1900s who understood money markets more than any contributor to the Federal Reserve Act.

Fed Seen Tapering QE in $10B Steps in Next Seven Meetings
Jeff Kearns and Catarina Saraiva – Bloomberg
The Federal Reserve will probably reduce its bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said.

BOJ hails Fed tapering, sticks with its own massive stimulus
Japan’s central bank held its massive monetary expansion unchanged on Friday, and played down chances of the need for an extra dose next year as it took heart from the U.S. Federal Reserve’s decision to begin tapering its own mega-stimulus.

Fed’s Fisher doesn’t comment on policy, economic outlook
Dallas Federal Reserve Bank President Richard Fisher didn’t comment on monetary policy or the outlook for the national economy in remarks prepared for delivery to the Dallas Breakfast Group on Thursday, focusing instead on the strength of the Texan economy.

Fed’s Mortgage Role Expands
The Federal Reserve’s role in the mortgage market has expanded over the past three months and could remain large for now, even as the central bank attempts to shrink its bond-buying program.


Banks Said to Snitch on FX Rivals in Race to Avoid Fines
Gaspard Sebag and Aoife White – Bloomberg
Banks are racing to betray their competitors to avoid possible European Union fines for rigging foreign-exchange markets, according to a person with knowledge of the EU’s preliminary investigation.

Secret Currency Traders’ Club Devised Biggest Market’s Rates
Liam Vaughan, Gavin Finch and Bob Ivry – Bloomberg
It’s 20 minutes before 4 p.m. in London and currency traders’ screens are blinking red and green. Some dealers have as many as 50 chat rooms crowded onto four monitors arrayed in front of them like shields. Messages from salespeople and clients appear, get pushed up by new ones and vanish from view. Orders are barked through squawk boxes.

Currency Talk: Taper Breakdown
Erin McCarthy – MoneyBeat – WSJ
The Federal Reserve caught some investors off guard when it announced Wednesday it would scale back its bond-buying stimulus program by $10 billion in January. But now that it’s happened, traders and analysts must figure out the pace of the pullback, and predict how it will impact foreign exchange and fixed income markets.

2014: another year of the dollar; currency could shift into new bull market
Peter Garnham – Euromoney magazine
2014 looks set to be the year of the dollar, judging by the consensus among the world’s leading currency watchers.

Bitcoin Evangelists See Path to a Cashless Utopia
Michael J. Casey – MoneyBeat – WSJ
“We are at the Mosaic stage of bitcoin,” says Jeremy Allaire, CEO of Circle Internet Financial, a bitcoin-focused technology startup. Mr. Allaire’s analogy, which compares the projected expansion of digital currencies to the past development of Internet technology, is enticing.

***JM: Difference is that Mosaic was NEW technology; while virtual currency is a potentially disruptive form of an existing concept. And Mosaic didn’t have to get governmental approval in order to exist.

Turkish Lira Falls to Fresh Lows
Emre Peker And Yeliz Candemir –
Turkey’s currency slumped to fresh lows Friday as the U.S. Federal Reserve’s decision to start scaling back monthly bond purchases and a corruption probe targeting allies of Turkish Prime Minister Recep Tayyip Erdogan continued to reverberate across local markets, forcing the central bank into action.

Indexes & Index Products

Tel Aviv Stock Exchange And Eurex Sign Derivatives Trading Cooperation Agreement – Eurex To Launch Index Futures Contracts Based On TASE’s Main Index TA-25
The Tel Aviv Stock Exchange (TASE), and Eurex Exchange, the international derivatives marketplace and part of Deutsche Börse Group, have signed a cooperation agreement. Under the agreement, Eurex Exchange will list and clear index futures based on the TA-25 index, Israel’s blue chip index and one of the most heavily traded regional equity indexes. Eurex’s TA-25 index futures will be denominated in US dollars.


Gold Set for First Annual Loss in 13 Years
Matt Day –
Gold prices slid to three-year lows Thursday, effectively closing the book on a historic rally that lured investors on both Wall Street and Main Street.

Gold Climbs From Lowest Close Since 2010 as Goldman Sees Losses
Joe Richter – Bloomberg
Gold rose from the lowest close in more than three years to pare a weekly loss that was spurred by the U.S. Federal Reserve’s decision to begin tapering stimulus. Goldman Sachs Group Inc. said that bullion’s decline isn’t over as it heads for the biggest annual drop since 1981.

Gold Finds Few Friends in the Taper Party
Francesca Freeman and Laura Clarke – MoneyBeat – WSJ
For many markets, the holiday party looks like it just got into full swing, with a sweet gift from the Federal Reserve. But gold has been left out in the cold.

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