First Impressions

NOTE: Due to the exchange holiday in the US on Monday, January 19, there will be no Financials newsletter that day. We will be back on January 20.

Have a great weekend!

Quote of the Day

“With all the technological advances in trading everything from complex swaps, options and even intellectual property electronically and through exchanges, why is it that 95% of the FX market still trades in such an antiquated fashion?”

Raymond McKenzie, consultant and former VP ICE Futures US in the story, “Foreign exchange trading; “Same as it ever was”. A market ripe for disruption”.

Lead Stories

Currency Broker, Rocked by Swiss Move, Gets $300 Million Infusion
Neil Gough – NY Times
FXCM, an online trading service struggling with client losses in the wake of turmoil on the currency markets, will receive a $300 million lifeline from Leucadia National.
Leucadia, the parent company of the investment bank Jefferies, said on Friday that the cash would permit FXCM to meet its regulatory requirements and allow to continue operations.
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Foreign exchange trading; “Same as it ever was”. A market ripe for disruption
Raymond McKenzie, Special to John Lothian News
When I first began trading FX in the age when dinosaurs roamed the earth, spot was traded through brokers and once in a while on the Reuters dealing system or via Telex. And of course direct over the phone. It took much prodding, begging and pleading to convince the brokers and the banks to allow Morgan Stanley (where I traded) to be allowed to use the broker market. Our argument was that we really were
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The Cruel Oil-Market Math Conspiring Against ETF Bulls
By Moming Zhou, Bloomberg
The $2.3 billion that has poured into funds that track oil since December would seem like a logical enough investment. After crude dropped more than 50 percent to a five-year low, the thinking goes, prices are due for a rebound. There’s just one problem. And it’s a big problem. The market is stuck in something called contango, an exotic term that really just means that prices on crude contracts to be delivered in coming weeks are lower than those on contracts due later. Exchange-traded fund (DBO) managers, as a result, are left to sell the cheaper expiring oil contracts and re-invest the proceeds in the more expensive ones due the following month, creating a vicious cycle that erodes returns.
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Beware the Consensus Trades as Franc Shorts Lose With Bond Bears
Kevin Buckland – Bloomberg
Add the Swiss franc to short sellers’ growing list of pain trades.
Speculators who increased bets against the currency to the highest since June 2013 this month got burned by a record surge on Thursday after the Swiss National Bank’s shock decision to scrap its euro cap. A global rally in bonds has confounded the biggest wagers against Treasuries in four years, while a Goldman Sachs Group Inc. gauge of the most-shorted U.S. stocks suggests hedge funds bet wrong in the past three months.
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Volatility Is the New Weather for Banks
By Antony Currie, NY Times
Volatility is the new weather for the likes of Citigroup and Bank of America. The two mega-banks joined JPMorgan Chase in blaming market ups and downs for crimping trading revenue and thus hurting overall earnings. That’s rich after years of claiming conditions were too docile. It doesn’t mask the deeper problem the lenders have, either.
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Euro-Area Bonds Jump as SNB Shock Adds to Speculation for ECB QE
David Goodman – Bloomberg
Euro-area government bonds rose, with yields across the region dropping to records, after the Swiss National Bank policy move added to speculation the European Central Bank may be about to embark on program of buying sovereign debt.
Rates in Italy, Germany and five more euro-area nations fell to all-time lows before the ECB meets next week. Swiss 10-year yields dropped below zero for the first time today after the SNB yesterday removed its cap of 1.20 francs per euro, sending the Swiss currency soaring and roiling markets worldwide. Greece’s bonds fell as two lenders sought to borrow from the nation’s central bank emergency line.
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Biggest Banks Lag Behind as Economy Gains Steam; Slow Trading Environment Hurts Profits at Bank of America, Citigroup and Elsewhere
By Christina Rexrode And Saabira Chaudhuri
More than five years into the economic recovery, the nation’s biggest banks are still on the outside looking in, as their fortunes grow increasingly disconnected from the rest of the country’s.
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Goldman Sachs Posts Lower Earnings, Revenue; Investors to Focus on Investment Bank’s Compensation Ratio, Trading Results
By Saabira Chaudhuri, WSJ
Goldman Sachs Group Inc. ‘s fourth-quarter net income fell while revenue declined. Results beat the estimates of analysts polled by Thomson Reuters, but shares declined 1.3% premarket.
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Low Inflation Bad for TIPS? Nope.
By Allan S. Roth, WSJ
Last week, Jason Zweig offered a tip to buy more TIPS. The drop in prices of these Treasury inflation-protected securities has left them at reasonable levels, he suggested, and they are designed to become more valuable when inflation heats up.
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Morningstar Seeks SEC Consent to Rate Companies, Financial Firms
Matt Robinson – Bloomberg
Morningstar Inc. (MORN), the research firm that started rating asset-backed securities in 2010, is now applying for a license to grade the debt of companies and financial institutions.
The mutual-fund researcher submitted a draft application to the U.S. Securities & Exchange Commission for permission to evaluate corporate debt as a Nationally Recognized Statistical Rating Organization, according to Morningstar Credit Ratings President Vickie Tillman.
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ICE Futures Europe Sets Daily Volume Record in Three Month Euro Swiss Franc Futures
ICE
Intercontinental Exchange, the leading global network of exchanges and clearing houses, today announced that ICE Futures Europe reached a daily volume record of 199,692 contracts in Three Month Euro Swiss Franc (Euroswiss) futures on January 15, 2015. The previous record of 194,340 contracts was set on December 4, 2012.
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Risk Awards 2015: Eurex is Exchange of the Year
Eurex
Decisions were tight as every year. But it was a fair process: The shortlisted companies underwent face-to-face and telephone interviews, this was supplemented by feedback from clients and other market participants. Then the final decisions were made by Risk’s editors and journalists, weighing a number of factors, including risk management, creativity and innovation, liquidity provision, quality of service, and engagement with regulatory issues. In the end the decision was made: Eurex is the Exchange of the year 2015.
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Central Banks

The Swiss Give a Scary Lesson on the Limits of Central Banks
By Swaha Pattanaik, NY Times
Central bankers have to live up to high expectations. Investors and politicians expect them to control inflation, prevent deflation, promote growth and keep the financial system healthy. The Swiss National Bank, an above-average institution, has failed at two simpler tasks, keeping its word and preventing destabilizing currency moves. The lessons for the rest of the world are scary.
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Fed’s Bullard says no direct impact on U.S. from Swiss franc move
Reuters
The currency market turmoil sparked by the Swiss National Bank’s lifting of its euro cap will not have a direct impact on the U.S. economy, a top Federal Reserve official said on Friday.
St. Louis Federal Reserve Bank President James Bullard said he was not aware of any warning that the Swiss bank gave to the Fed ahead of its move to lift the cap, which sent the Swiss franc soaring and led to huge foreign exchange losses across the globe.
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ECB Weighing QE Through National Central Banks, Spiegel Says
Jana Randow – BloombergBusinessweek
European Central Bank President Mario Draghi briefed German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble on quantitative-easing plans under which national central banks would buy bonds issued by their own country, Spiegel magazine reported.
The plan, which tries to avoid a transfer of risk between member states, envisages purchases in line with the ECB’s capital key, with a limit of 20 percent to 25 percent on each country’s debt, Spiegel said in an article published today, without saying where it got the information. Greece will be excluded from the program because its bonds don’t fulfill the necessary quality criteria, the magazine said.
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Fed’s Bullard: Current Low Inflation Doesn’t Support Zero Rates – Real Time Economics
Michael S. Derby – WSJ
Federal Reserve Bank of St. Louis President James Bullard said Friday the surprising weakness of inflation right now doesn’t necessarily support the U.S. central bank keeping interest rates at their current near-zero levels.
“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in material prepared for a speech in Chicago.
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Fed’s Williams sees mid-year rate hike still in play
Ann Saphir – Reuters
The Federal Reserve is still on track for a potential mid-year interest-rate increase, a top Fed official said on Friday, citing strong U.S. economic momentum despite weakness abroad.
“I think that sometime around the middle of the year we are going to be closer to a decision, at least I would think we would be closer to it being an appropriate timing to raise rates,” San Francisco Fed President John Williams said at a meeting of the Bay Area Economic Institute.
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Head of India’s Central Bank Criticizes Post-Crisis Efforts
NY Times
Raghuram G. Rajan, the governor of the Reserve Bank of India, has a reputation for bluntness. A former chief economist of the International Monetary Fund, he has criticized central banks around the globe for focusing too much on their domestic issues instead of considering the international ramifications of their decisions.
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Currencies

Swiss-Franc Move Crushes Currency Brokers; FXCM Suffers ‘Significant’ Losses; Alpari Enters Insolvency; New Zealand Currency-Trading House to Close
By Anjani Trivedi, Lucy Craymer and Tommy Stubbington, WSJ
Brokers around the world are crumbling in the wake of the Swiss National Bank ‘s shock decision to remove the cap on its currency.
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Franc Bears Increased Short Positions Before SNB Scrapped Cap
Liz Capo McCormick – Bloomberg
Traders increased futures positions that profit from a loss in the franc versus the dollar to the highest since May 2013 before the Swiss National Bank scrapped a cap on the currency that roiled markets worldwide.
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UBS’s Richest Clients Seen Flocking to Dollars After Swiss Franc Shock
By Netty Ismail, Bloomberg
UBS Group AG (UBSG), the largest Swiss bank, said its wealthiest clients will be attracted to U.S. dollars after Switzerland roiled markets by scrapping the franc’s cap.
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Russia May Resort to Currency Restrictions If Outflows Continue to Mount
By Andre Tartar and Anna Andrianova, Bloomberg
Russian net capital outflows probably doubled last year and the government may resort to currency restrictions if the pace doesn’t ease in 2015, according to a Bloomberg survey of economists.
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Indexes & Index Products

MSCI to allow overseas listings to be included in major indexes
Ashley Lau and Jessica Toonkel – Reuters
Index provider MSCI Inc said it plans to change its rules to allow foreign-listed companies traded outside of their home countries to be included in its Global Investable Market Indexes.
The move would allow so-called “orphan companies” such as Chinese online retailer Alibaba and China’s online search engine Baidu Inc to be eligible for potential inclusion in both MSCI Global Indexes and MSCI Country Indexes.
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Indexing Innovation: Launching ETFs to the Next Level
Tom Lydon – ETF Trends
Smart- or strategic-beta indices are rapidly gaining traction in the exchange traded fund industry as investors turn to alternative indexing methodologies that employ actively managed investment styles in a passive and relatively cheap fund wrapper.
On the upcoming annual ETF Virtual Summit, an online conference experience hosted by ETF Trends and RIA Database on January 21, financial advisors will hear from industry experts on benchmark construction, the advantages of smart beta indexes and what we should expect in 2015.
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Move would affect Chinese Internet sector, including Alibaba
By Gregor Stuart Hunter, MarketWatch
MSCI will allow shares of companies trading outside their home markets to enter their native country indexes, a move which is likely to funnel billions of dollars in capital flows toward companies that lack a domestic listing, such as Alibaba BABA, -3.28% .
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S&P Dow Jones Indices to Launch S&P 500 Capex Efficiency Index; Licenses… — NEW YORK, Jan. 15, 2015 /PRNewswire/ —
Press Release
S&P Dow Jones Indices, one of the world’s leading providers of financial market indices, announced today its intention to launch a new factor-based index, the S&P 500® Capex Efficiency Index. The Index has been licensed to Elkhorn Investments.
The S&P 500 Capex Efficiency Index will measure the constituents of S&P 500 that have exhibited strong capital discipline in the form of efficient capital expenditures. Capital expenditures efficiency, which is captured from a company’s cash flow statements, is measured through capital expenses that have resulted in increased sales. Capital expenditures are one of the ways in which management can provide return of capital to investors.
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Gold

Swiss shock no ‘game changer’ for gold?
CNBC
Gold traded near its highest level in four months on Friday, and despite a slight dip on the day, the precious metal was close to logging its best week of trade in ten months.
Spot gold closed 2.57 percent higher on Thursday, reaching $1,261 an ounce – a level not seen since early September – after the Swiss National Bank (SNB) rocked markets by scrapping its currency peg against the euro.
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Government hikes import tariff value on gold, silver
Times of India
The government on Friday hiked import tariff value on gold to $401 per 10 grams and on silver to $543 per kg in line with global price trends.
The tariff value on imported gold was at $392 per 10 grams and for silver it was at $519 per kg in the first fortnight of this month.
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