First Impressions

Garry Jones, London Metal Exchange – Managing an Exchange in Uncertain Times

“It doesn’t matter where you start, it matters where you finish. Don’t just do the job for the money. Do your research, work hard…and it might work out.”

Garry Jones, CEO of the London Metal Exchange, says that our lives and the career path we go down shouldn’t be seen like a checklist – expecting to work at Company X by the time one is a certain age or saying that “By age Y, I will be married and have children” is unrealistic. Jones himself graduated with a degree in Geology and Geophysics; it would be later in his career that he became interested in banking and the financial industry. Jones stresses that it is important to take risks and not be afraid of failure. He also says that when speaking with other companies in hopes of employment, research is key.

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Quote of the Day

“In the financial industry and legal community, there is a sense that there’s just no relationship between the various accusations and the seeming arbitrariness of the size of the penalties.”

Kathy Wylde, president of the Partnership for New York City, in the story, “Banking Regulator Job Is Tough to Fill”

Lead Stories

EU lawmakers make headway with rules for risky trading at banks
Huw Jones and Tom Korkemeier – Reuters
European Union lawmakers have ended a stalemate over plans to curb risky trading at banks after months of wrangling over how tough the new rules should be.
The draft rules are seen as Europe’s answer to the Volcker Rule on Wall Street to stop risks from trading pulling down other parts of a bank, such as customer deposits.

The Long Shadow of Europe’s Big Banks
Peter Eavis – NY Times
Over the last year, Europe has been unsettled by several significant challenges, including the inflow of migrants, the conflict in Ukraine and the threat of Greece falling out of the euro.
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Perhaps less appreciated is the role that Europe’s largest banks have played in damping the mood on the Continent. And on Thursday, the burden of the big banks was on display.

Traders Expect Fed Hike – Betting on Big Banks
Steven M. Sears – Barron’s
The financial sector is trading as if the Federal Reserve will raise interest rates before the year is up.
Investors are aggressively building positions in upside call options across the banking sector in anticipation the Federal Reserve raises rates in December.

Eurozone creeps out of deflation as unemployment hits 3-year low
Claire Jones – Financial Times
The eurozone’s economy crept out of deflation this month, although price pressures remained far short of the European Central Bank’s target of just under 2 per cent.

Chinese Banks Look to Shadow Banking for Growth
Chuin-Wei Yap – WSJ
Bad loans and new risks are piling up at China’s banks, as some of its biggest lenders combat weak profits by increasing investments in shadow-banking products that analysts say could worsen their financial position should market conditions deteriorate.

Banking Regulator Job Is Tough to Fill
Erica Orden and Christopher M. Matthews – WSJ
Gov. Andrew Cuomo’s administration has made little headway in filling the top job at New York’s banking regulator, a financial watchdog over which the governor’s staff has sought to exert greater control.
Since creating the Department of Financial Services in 2011, the Cuomo administration has faced pressure from Wall Street and the insurance industry to ease its aggressive oversight as well as calls from liberal activists to continue its legacy of serious enforcement.

Bank Of England – Financial Stability Paper 34: The Resilience Of Financial Market Liquidity
Press Release
Financial markets have been affected by a number of structural changes over the past few years. Innovation has generated a broad trend towards fast, electronic trading. And necessary regulation implemented in response to the global financial crisis to ensure the safety and soundness of core intermediaries has discouraged them from market making as principal – though this may also reflect greater risk aversion on their part. These developments, alongside occasional bursts of volatility associated with short-term illiquidity, have led to concerns that market liquidity may have become more fragile. Although episodes of heightened volatility and short-term illiquidity are not necessarily in themselves threats to financial stability, they could become so if they were to persist, amplify or spill over. This paper draws out common lessons from such episodes.

Budget Deal Hikes Pension Premiums Again
David McCann – CFO
The Bipartisan Budget Act of 2015 (BBA), passed by the House of Representatives on Tuesday, contains some eye-opening provisions, like suspending the national debt limit through 2017 and significantly raising federal spending caps imposed by the Budget Control Act of 2011.
In the consumer media, less attention is being directed at another aspect of the BBA, but it’s one that has employer groups hopping mad. That is, the act, if passed by the Senate and signed into law as expected, would raise the premiums that pension-plan sponsors pay to fund the Pension Benefit Guaranty Corp.

Wells Fargo Risks Being Odd Man Out Under New Rule
Ryan Tracy and Emily Glazer – WSJ
Do regulators consider Wells Fargo & Co. one of America’s safest, most stable megabanks? Or one of the riskiest?
The answer depends on which measure is used. New rules to be proposed by the Federal Reserve on Friday likely will force the San Francisco bank—more than some of its rivals—to make significant changes to its balance sheet, even though Wells Fargo has fared better than competitors in earlier tests on safety and soundness.

London, Hong Kong most at risk of housing bubble, UBS says
The Sydney Morning Herald
Sydney house prices are significantly overvalued and vulnerable to a sharp correction should interest rates rise, UBS Group has warned.
Real housing prices in Sydney had increased almost 30 per cent since 2012, in part influenced by strong Asian demand, the bank said. Rents and incomes had stagnated.

RBS warns of difficult ‘obstacles’ stalling bank’s recovery
Jill Treanor – The Guardian
Royal Bank of Scotland faces a mounting bill for mis-selling and other conduct issues, its new chairman has warned just days before the government gets a fresh opportunity to resume selling its stake in the bank.

Is the Economy Really in Trouble? A Debate
Neil Irwin – NY Times
I write about economics for a living. Part of my job is to look into the maw of economic data, financial market indicators, anecdotal reports from businesses and whatever else I can get my hands on, and turn it all into a crisp, clear narrative about the United States and global economies.
But right now I’m stuck. I have no idea how the United States economy is doing. And the closer I look at the data, the more contradictory it looks.
A strong case could be made that it is in its most vulnerable spot in years, at risk of a new recession amid a global slowdown. The market for many types of risky bonds is in disarray, and “the dangers facing the global economy are more severe than at any time since the Lehman Brothers bankruptcy in 2008,” the former Treasury secretary Lawrence Summers wrote recently.

Deutsche Bank Says Goodbye to Clients to Revive Returns
Donal Griffin and Ambereen Choudhury – Bloomberg
Anshu Jain spent two decades turning Deutsche Bank AG into a global investment-banking behemoth. Now the lender is cutting its client list in half and pulling out of countries around the world.

The Bank of England’s Approach To Stress Testing The UK Banking System
Press Release
Last week, we at the Bank of England launched our new approach to stress testing the UK banking system.
We’ve published the approach, which has been evolving with our experience of stress testing, to give banks, markets and others as much clarity as possible.

Credit Suisse Among Firms Involved in FIFA Corruption Probe
John Letzing – WSJ
Credit Suisse Group AG confirmed Friday that it is among the financial firms being scrutinized by U.S. authorities probing alleged bribery and corruption at soccer’s governing body FIFA.

Pimco Added Treasuries to Protect Against Increasing Volatility
Wes Goodman – Bloomberg
The Pimco Total Return Fund added government and related debt last month to guard against financial-market volatility and as a hedge against its other holdings, Scott Mather, one of the fund’s three managers, wrote in an e-mail.

David Stern, Former N.B.A. Commissioner, Joins Paul Taubman’s Firm
Dealbook – NY Times
As the investment banker Paul J. Taubman builds his boutique firm, he is bringing on one of his longtime clients as a consultant of sorts.

First Data Sells $3.4 Billion in New Eight-Year Bonds, Amid Strong Demand
Katy Burne – WSJ
First Data Corp. has sold $3.4 billion in new eight-year bonds, increasing its offering by a record amount from the original $750 million deal planned, in the latest sign that low-rated borrowers are taking advantage of investors’ appetite for high yielding debt.

Europe’s Last Dictator Has Become the Darling of the Bond Market
Ksenia Galouchko and Aliaksandr Kudrytski – Bloomberg
He’s known as Europe’s last dictator, he mangles financial terminology and his secret service once jailed the chief executive officer of the world’s biggest potash miner. He’s also turning into a darling of the bond market.
Alexander Lukashenko, president of Belarus, is showing a softer side that’s helped cut the premium on the country’s debt to the lowest in almost a year compared with other emerging markets. The bonds have climbed at twice the pace of Russia’s since February. And Ashmore Group Plc, which owned Belarus Eurobonds as of the end of September, says the rally has further to go.

If you call it a blockchain, it’s not a single-entry system
Izabella Kaminska – Financial Times
Techies look upon the financial world and find its messy structures hard to reconcile with the physical reality around them.
Which is why we’re going to propose that the blockchain fad is mostly about putting finance in terms that are understandable to techies — i.e. as something absolute – and having them learn for themselves through trial and error why that’s actually a flawed assumption in finance.
Like their world, finance is full of numerical entries in databases, which are theoretically costless to replicate and propagate. Logically, like Lady Gaga MP3s, these entries should have no real-world value because people can’t be trusted to not steal, share or replicate the data.

Central Banks

Fed won’t raise rates in December
Komal Sri-Kumar – Business Insider
In its long-awaited decision, the Fed decided on Wednesday not to hike the Federal Funds rate from the 0 – 0.25% level it has been at since December 2008. Suspense was also building since the Fed has not increased rates since June 2006, and the leading lights of the central bank have been reiterating that they would like to hike by the end of 2015. That left only the meeting this week, and the last meeting of the year in December. The creation of only 142,000 jobs in September – – far below consensus – – and the plunge in the labor force participation rate had already reduced expectations of a rate increase this week.

Federal Reserve on track to raise interest rates despite growth slowdown
Peter Spence – The Telegraph
US growth slowed sharply in the last quarter, but punchy consumer spending numbers signalled that the world’s largest economy still has momentum.

Fed’s Williams: Low neutral interest rates a “warning sign”
San Francisco Federal Reserve President John Williams said on Friday that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand.

Central bank action spurs October equity rally
Robin Wigglesworth – Financial Times
Global markets clawed their way back to near record highs in October as central banks’ efforts to stem rising concerns over the health of the international economy sent investors flocking back into equities.

Monetary policy in Japan: The Bank of Japan keeps printing money at speed
The Economist
Inaction may at first glance seem more timid than pulling out the monetary bazooka—but it took nerve for Haruhiko Kuroda to hold fire at the Bank of Japan’s monetary-policy meeting on October 30th. The central bank’s policy board, which Mr Kuroda effectively controls, voted 8-1 to maintain the existing programme of quantitative easing (QE, or printing money to buy bonds) at its current level of ¥80 trillion ($660 billion) a year. Given that Japan is officially back in mild deflation for the first time since 2013, when the BoJ began QE, it was a bold decision not to act. The BoJ’s mandate, after all, is to produce sustained inflation of 2%.

Swiss central bank seen struggling to make usual payout despite Q3 profit
Brenna Hughes Neghaiwi and Silke Koltrowitz – Reuters
Switzerland’s central bank posted a third-quarter profit on Friday, but analysts said this was unlikely to allow it to make a regular payout to federal and state shareholders unless it generates further strong earnings in the fourth quarter.


Exchange rates still matter for trade
Daniel Leigh, Weicheng Lian, Marcos Poplawski-Ribeiro and Viktor Tsyrennikov – VOX, CEPR’s Policy Portal
A number of studies argue that exchange rates matter far less than they used to for trade, or even that they have disconnected altogether. This column presents new research suggesting that, in fact, there is little sign of a disconnect in the relationship between exchange rates and exports and imports; exchange rates still matter for trade. The findings indicate that 10% real effective exchange rate depreciation implies, on average, a 1.5% of GDP increase in real net exports.

Euro Falls Against Dollar in October on Central Bank Signals
James Ramage – WSJ
The euro weakened against the dollar in October as central bank messages raised expectations for additional stimulus in the eurozone and higher interest rates in the U.S., underscoring the divergence in monetary policy between the two economies.

Yuan Jumps Most Since 2005 as PBOC Mulls Easing Capital Controls
The yuan strengthened the most in a decade as China’s central bank said it’s studying looser capital controls, extending a push by the world’s second-largest economy to win reserve-currency status at the IMF.

Mozambique has suffered a brutal drop in its currency
Omar Mohammed – Quartz
Talk of the commodities slump hitting Africa is rampant right now, with the IMF having recently cut projections for the continent’s economic growth this year to 3.75%, down from an earlier forecast of 4.5%. Declining demand for the continent’s resources, from China especially, is also having an impact on the region’s currencies.

SWIFT Global Tracker Sees RMB Payments Fall in International Use
Jeff Patterson – Finance Magnates
SWIFT, a global provider of financial messaging services, has reported that its latest Chinese renminbi (RMB) tracker has revealed a diminishing use, having fallen back to the fifth most utilized currency for international payments.

Indexes & Index Products

VIX Bets at Record Show Widening Divide on Outlook for S&P 500
Joseph Ciolli – Bloomberg
Betting U.S. stock volatility will increase has never been more popular. Nor has betting it will decrease.
Such is the situation in exchange-traded notes that track the VIX, where shares outstanding have swelled to records in securities that are both short and long the Chicago Board Options Exchange Volatility Index, data compiled by Bloomberg show. The rush to hedge has picked up speed since a six-day tumble that lopped 11 percent off the Standard & Poor’s 500 Index in August drove the VIX to a four-year high, only for a subsequent stock rally to send it tumbling back down to earth.

An ETF’s Options Show Huge December Rate Hike Bets
Tom Lydon – ETF Trends
Few if any sector exchange traded are as levered to Federal Reserve action as are financial services ETFs. So even though the Fed did not raise interest rates this month, the Financial Services Select Sector SPDR (NYSEArca: XLF) and rival funds could be worth examining because many traders believe a December rate hike is certainly on the table.

Indian Traders Turn Most Bearish Since March Amid Earnings, Fed
Santanu Chakraborty – Bloomberg
Indian traders extended the most CNX Nifty Index futures in seven months and the cost of carrying forward contracts fell, signaling weakness for the November series.
The rollover in October index futures was at 74 percent, the highest since March, and compares with a six-month average of 66 percent, data compiled by Bloomberg show. The roll cost, or the difference between current and next month futures prices, slid to 55 basis points from an average 62 basis points in the past six months, the data show.

Brent Crude Gets More Weight in Bloomberg Commodity Index ’16
Irina Slav – Finance Magnates
Bloomberg has announced the new target weights for its Commodity Index (BCOM) for next year, in which Brent crude has merited the largest absolute increase. The international benchmark’s target weight in the index will be 7.53 per cent, up from 7.16 per cent in 2015.

MSCI to report carbon footprint of all global equities indexes
Reporting starts with 19 MSCI ACWI, world and emerging markets indexes
IR Magazine
Index provider MSCI will start publicly reporting the carbon footprint of its more than 160,000 global equities indexes to meet growing demand from investors following SRI strategies worldwide, the company says.

Sensex consistently outperforms MSCI Emerging Market Index
Ami Shah – Livemint
Indian markets have consistently outperformed the broader grouping of emerging markets (EMs) represented by the MSCI Emerging Market (EM) Index, justifying the premium at which local equities trade.


Gold Clearing in London at Decade Low as Interest in Metal Wanes
Eddie Van Der Walt – Bloomberg
A pointer to London’s gold trading volumes fell to a more than decade low in a show of sagging interest by investors as the precious metal heads for its third year of losses.

Einstein’s theory of relativity explains fundamental properties of gold
Some fundamental properties of the coinage metal elements gold, silver and copper, such as chemical behaviour or colours, are already predetermined in their atoms. The unique properties of gold can be largely explained by Albert Einstein’s theory of relativity. Chemists from Heidelberg University have been able to demonstrate this through their investigations of gold, silver and copper carbenes. They examined only single atoms of each metal in order to compare the three elements. The results of this research, led by Prof. Dr. Bernd Straub, were published in both the German and international editions of the journal Angewandte Chemie for applied and fundamental chemistry.

Barrick Gold’s Q3 Earnings Review: Cost Reduction Partially Offsets Impact Of Lower Gold Prices
Barrick Gold Corporation released its third quarter results on October 28 and conducted a conference call with analysts the next day. As expected, the decline in gold prices over the last twelve months negatively impacted the company’s profits. However, Barrick’s ongoing efforts to reduce operating costs and improve the productivity of its operations, aided by favorable currency movements, helped partially offset the impact of weak gold prices on earnings.

Gold, Currencies And Market Efficiency
Ladislav Kristoufeka and Miloslav Vosvrda – ValueWalk
Gold and currency markets form a unique pair with specific interactions and dynamics. We focus on the efficiency ranking of gold markets with respect to the currency of purchase. By utilizing the Efficiency Index (EI) based on fractal dimension, approximate entropy and long-term memory on a wide portfolio of 142 gold price series for different currencies, we construct the efficiency ranking based on the extended EI methodology we provide. Rather unexpected results are uncovered as the gold prices in major currencies lay among the least efficient ones whereas very minor currencies are among the most efficient ones.


On misunderstanding economics
Stumbling and Mumbling
Most of us have long lamented the general public’s lack of understanding of economics. A new paper by David Leiser and Zeev Kril sheds interesting light upon this.
The human mind, they say, “is not particularly equipped to think about economics”:
People are remarkably poor at combining causal links into a system [and] are ill-equipped to cope with the aggregate effects of the individual decisions of many people…Thinking in terms of how an interlocking system of causal links produces an emergent outcome does not come naturally to laypeople.

Focus on Africa for next commodities ‘supercycle’
Paul Murphy – Financial Times
There was a frenetic air to trading in London’s listed miners this week — things were faster, wilder and even more uncontrolled to the downside than battered sector players have come to expect.
No one mentions the concept of a commodities “supercycle” these days, not after four years of a downturn with no end in sight. The themes of oversupply and faltering Chinese demand are well-worn, but the focus recently has moved to corporate debt levels and dividends. Or rather debt and the non-deliverable nature of those dividends.

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