First Impressions

Christmas in September

The European financial markets got an early Christmas present today in the form of a surprise rate cut by the ECB, which lowered the benchmark rate to a record low 0.05 percent, and pushed the deposit rate further into negative territory at -0.2 percent.

Naturally, equities rallied on the news, and the euro fell over a percent to see the other side of 1.30 for the first time since last summer.

The board also announced the general plans for its next round of quantitative easing. Though the details will be announced at next month’s meeting, it was reported that the central bank will approve up to EUR 500 billion in asset backed securities purchases to be conducted over the next several years.

The actions were deemed necessary due to continued economic malaise, specifically the latest inflation reading which, at 0.3 percent, fell well short of the 2 percent target.

Disinflation is bad news, but in this world of aggressive central bank intervention, bad news is good for markets.

Happy holidays.

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Terry Duffy, president and executive chairman, CME Group – My Road and the Industry Challenge
JohnLothianNews.com

“Take a deep look at where you could possibly go…and if you don’t do that and take the near-sighted approach, you’ll be sorry.”

When starting your career, it’s best to think about where each opportunity can take you, rather than being envious of your peers. Terry Duffy, president and executive chairman of the CME Group gives a brief glimpse of how he entered the financial industry and addresses how his audience should utilize each opportunity they receive. One never knows where each job can take them; an entry-level position could one day lead to a top executive role. According to Duffy, we should not look at our careers in a “near-sighted” way, but instead look at long-term possibilities each job can eventually lead to.

Watch the video »

Quote of the Day

Clearly the deterioration in inflation expectations has been pronounced and precipitous, sending a very worrying signal about the ECB’s recently announced easing policies.

Nomura economist Nick Matthews, as quoted in the Bloomberg story “ECB Unexpectedly Cuts Interest Rates as Outlook Darkens”

Lead Stories

ECB Unexpectedly Cuts Interest Rates as Outlook Darkens
Bloomberg
The ECB’s 24-member Governing Council reduced all three of its main interest rates by 10 basis points. The benchmark rate was lowered to 0.05 percent and the deposit rate is now minus 0.2 percent. The euro slid, as a reduction in the benchmark rate was predicted by just six of 57 economists in a Bloomberg News survey. Draghi will speak to reporters at 2:30 p.m. in Frankfurt to explain the decision.
jlne.ws/1AaiDAz

Bank Liquidity Rules Excluding Munis Set for Approval
Jesse Hamilton – Bloomberg
U.S. regulators set requirements for the amount of high-quality, liquid assets big banks must stockpile to survive a 30-day liquidity drought, taking a major step in efforts to prevent a repeat of the 2008 credit crisis.
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***DA: For more on the history of margin and capital regulation, visit MarketsReformWiki

Fed Will Consider Adding Municipal Debt as Quality Asset
Andrew Ackerman – MoneyBeat – WSJ
States and localities that raise cash in the $3.7 trillion municipal bond market moved closer to winning a reprieve Wednesday after regulators agreed to consider allowing banks to use certain types of municipal debt to satisfy a new post-crisis financing rule.
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***DA: For those who thought the bond bubble has run its course, here is a new avenue.

Fed steps up search for Libor alternative
Gina Chon in Washington – Financial Times
The US Federal Reserve is stepping up efforts to corral market participants to agree to alternatives to the US dollar Libor benchmark, in what would be a major transition affecting hundreds of trillions of dollars in derivatives contracts.
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***DA: The removal of a powerful leader always results in a power vacuum.

ITG Plans to Start Fixed Income Trading Venue Under Posit Brand
Sam Mamudi – Bloomberg
Investment Technology Group Inc. (ITG), operator of one of the oldest U.S. equity dark pools, is expanding in corporate bonds.
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Exchange glitch hurts German bond auction demand – traders
John Geddie and Clare Hutchison – Reuters
Derivatives exchange Eurex suspended trading on its five-year German bond future contracts on Wednesday morning, a move that dented demand at a coinciding five-year German bond auction, traders said.
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Pimco’s Flagship Fund Shrinks Again
Min Zeng – WSJ
Investors withdrew cash in August for the 16th straight month from the Pimco Total Return bond fund run by Bill Gross, the latest reversal for the giant fund and its high-profile manager.
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Lukewarm CoCo Comeback
Ben Edwards – MoneyBeat – WSJ
The market for risky bank bonds in Europe is back. Investors aren’t rushing to get involved.
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***DA: Great idea. You go first.

Funds may raise exposure in commercial paper
Business Standard News
With issuances of Certificates of Deposit (CDs) likely to come down, mutual fund houses might increase their investments in other short-term instruments. The Reserve Bank of India (RBI) had revised the framework for liquidity management last week.
jlne.ws/1pMBDEU

Argentina Swaps Traders Set for $532 Million Payout
Sridhar Natarajan, Abigail Moses and Katia Porzecanski – Bloomberg
Sellers of credit-default swaps insuring Argentina’s debt will have to pay $532 million to settle about $880 million of derivatives wagers after the nation failed to pay interest on its bonds, according to results of an auction today.
jlne.ws/1pMIoa2

Deflation Defeated?
Richard Barley – MoneyBeat – WSJ
Has the war been won? Central banks like the Federal Reserve and the Bank of England are worried about economic slack, particularly in the labor markets. But James Carrick, an economist at Legal & General Investment Management, thinks they’re misinterpreting events. Deflation, he says, has been defeated.
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***DA: I am not convinced. Neither is the ECB.

Central Banks

Introductory statement to the press conference
ECB
Based on our regular economic and monetary analyses, the Governing Council decided today to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.05% and the rate on the marginal lending facility by 10 basis points to 0.30%. The rate on the deposit facility was lowered by 10 basis points to -0.20%. In addition, the Governing Council decided to start purchasing non-financial private sector assets. The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme (ABSPP).
jlne.ws/1lJO3wM

ECB Cuts Rates, Announces Stimulus to Combat Low Inflation
Wall Street Journal
Mario Draghi says new programs will be launched next month
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BOJ Stands Pat on Policy
Takashi Nakamichi And Tatsuo Ito – WSJ
The Bank of Japan on Thursday kept its policy on hold and stuck to its optimistic economic assessment despite a dramatic slowdown in economic activity after the government raised the sales tax in April.
jlne.ws/1pMBT77

China’s Repo Falls a Fifth Day on Signs PBOC Will Stay Loose
Bloomberg
China’s benchmark money-market rate fell for a fifth day on signs the central bank will keep monetary policy loose enough to support an economic recovery.
The People’s Bank of China pumped 7 billion yuan ($1.1 billion) into the financial system in the five days through yesterday, a fourth weekly injection, according to data compiled by Bloomberg. China will allow listed property developers to sell bonds on the interbank market, Reuters reported yesterday, citing three unidentified people.
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***DA: All the cool central banks are keeping it loose.

The governor’s year
Business Standard
In his maiden speech as governor of the Reserve Bank of India, on September 4 last year, Raghuram Rajan produced a long list of must-dos. Two stood out: One, his resolve to “build a bridge to the future, over the stormy waves produced by global financial markets”; and two, he added “transparency and predictability” to the existing traditions of the RBI. One year on, he has taken major steps towards making both those promises a reality.
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Indian Central Bank Chief Raghuram Rajan Ignores Doubters
Gabriele Parussini – WSJ
When advisers to the Reserve Bank of India gathered in January, the mood was bleak. They agreed growth was weak and risks to the economy persisted with “no green shoots in sight,” according to an official meeting summary.
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Currencies

Euro plummets after ECB cuts rates, announces asset purchases
Reuters
The euro hit fresh 14-month lows against the U.S. dollar and nearly two-year lows against the Swiss franc on Thursday after the European Central Bank cut interest rates and said it would launch an asset purchase program to ward off deflation.
jlne.ws/1lJPviy

BOJ Kuroda Voices Support for Weaker Yen
WSJ.com
Talking directly about the currency market isn’t usual for major central bank chiefs. But Bank of Japan Gov. Haruhiko Kuroda, a former senior finance-ministry currency diplomat, takes a different approach.
On Thursday, he went so far as to directly comment in support of a stronger U.S. dollar and a weaker yen.
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Rising Bitcoin adoption emboldens crypto-enthusiasts
Solomon Teague – Euromoney Magazine
Despite the volatility in its price and its still-limited practical use, an increase in the number of merchants accepting Bitcoin in recent months has ignited optimism among digital-currency proponents.
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Indexes & Index Products

F-Squared Investments Receives Wells Notice From SEC, and Brokers Back Away
Chris Dieterich and Corrie Driebusch – WSJ
Three large brokerage firms are distancing themselves from money manager F-Squared Investments Inc., amid regulatory scrutiny of whether the firm overstated its track record. RBC Wealth Management and Raymond James Financial Inc. have set limits on how much new business its advisers can conduct with F-Squared, according to people familiar with the policies.
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Gold

China retail gold survey 2014: China takes a dip
Rob Hartley – Euromoney Magazine
After a strong showing in 2013, this year looks like being less fruitful for China’s gold market. But the retail market continues to flourish. The prediction is for 25% growth in the next four years.
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India gold smuggling rises on import curbs
Avantika Chilkoti – Financial Times
India is suffering a renewed spate of gold smuggling at the start of the annual festive period, which traditionally prompts a spike in demand, as import restrictions continue to throttle official inflows of the yellow metal.
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