First Impressions

EU Merry-go-round
Jim Kharouf – John Lothian News

Today’s top story “Europe faces moment of truth on banks, with flawed defences” from Reuters illustrates the merry-go-round that European central banks and Eurozone banks are on.

On the one hand, European banks may need more easy cash to prop up balance sheets. On the other, European governments would then have to borrow more from the European Central Bank. As the article points out, this could indeed lead to further European market shocks. The solution at the moment is to hand over responsibility for bank supervision to the ECB and basically create a Eurozone version of the FDIC to shutter failing banks.

At the end of the day, this could be a good thing in theory. It also runs the risk of concentrating more capital and more risk in the hands of fewer banks. That may create a more manageable environment for regulators but also throws us back into the “too big to fail” debate.

This also may create another bubble in European bonds, as a Moody’s analyst pointed out, especially if banks continue to borrow more and then sell those bonds back to the government.

The question is, what can the new supervisory agency at the ECB actually control?

Quote of the Day

“This is a vicious circle. Four years into the crisis, the link between governments and banks has become even stronger.”

Andreas Dombret, board member of Germany’s Bundesbank, in Reuter’s story “Europe faces moment of truth on banks, with flawed defences.”

Lead Stories

Europe faces moment of truth on banks, with flawed defences
Europe’s banks face a moment of truth next year when health checks will spell out the repairs they need. The trouble is that fixing them could require cash-strapped governments to borrow more, often from the very banks that need their help.

‘Tis the Season for a Rally
E.S. Browning – MoneyBeat – WSJ
Analysts have plenty of explanations for the recent stock-price sag, many centering on the prospect the Federal Reserve will trim stimulus as soon as this week. But there is one that few people have mentioned: Stocks usually do this in mid-December.

**JK: I’ve got a letter to the North Pole asking for a Santa Claus Rally. See here in MarketsWiki.

TIPS Wipeout Signals Fed Losing Fight Against Disinflation
Susanne Walker and Daniel Kruger – Bloomberg
Bond investors are signaling they expect the Federal Reserve to lose its battle against disinflation, even after inundating the U.S. economy with more than $3 trillion in the past five years.
While central banks around the world are trying to spur demand and boost prices, signs are emerging that a slowdown in inflation is becoming entrenched.

A Modest Volcker Rule
eading the lengthy background paper that accompanied Tuesday’s release of the Volcker Rule, it is striking the extent to which the five federal regulatory agencies involved sought to implement the law faithfully (as they put it) by prohibiting proprietary trading by banks while avoiding the worst potential negative impacts on financial markets.

**JK: The virtues of a modest Volcker rule.

Central Banks

Draghi Ally Asmussen to Leave ECB for German Government
Paul Gordon and Rainer Buergin – Bloomberg
Joerg Asmussen is to leave the European Central Bank’s Executive Board for a government position, depriving President Mario Draghi of a key German ally.
Asmussen, 47, will become deputy labor minister in German Chancellor Angela Merkel’s government and will shortly resign from his post at the ECB, he said in a statement distributed by the Frankfurt-based institution yesterday.

Fed Taper Message Succeeds as Bonds Adjust to Economic Data
Caroline Salas Gage – Bloomberg
After misleading investors with a time line for tapering its unprecedented stimulus, the Federal Reserve now is stressing that any reduction in bond purchases will depend on the economic outlook — and the message is sinking in.

ECB’s Weidmann urges Greece to stick to painful reforms: paper
Greece must stick to painful reforms that are yielding results to make its economy competitive and help it exit its economic crisis, the head of the German central bank told Sunday’s Kathimerini newspaper.


FX Math: Journal’s Dollar Index Gets a Makeover
Vincent Cignarella – MoneyBeat – WSJ
Think makeovers are only for reality shows and Hollywood types? Think again: the Wall Street Journal Dollar Index is getting a face lift.

**JK: The new index will measure the US dollar against 16 currencies, up from seven.

Currency Talk: Dollar Seen as Best Bet to Ride Out Taper Concerns
Erin McCarthy – MoneyBeat – WSJ
For traders eager to ride out market noise surrounding possible changes in Federal Reserve policy, look to the dollar, says Ken Dickson, investment director for currencies at Standard Life InvestmentsSL.LN +0.57%, which has $290.8 billion under management.

Your FX year that was
David Keohane | FT Alphaville
At least for the majors. Just some annotated charts courtesy of HSBC, click to enlarge:

Most Americans Don’t Know Bitcoin While Some Guess Xbox
Clea Benson – Bloomberg
Some Americans think Bitcoin is an Xbox game. Others think it might be an iPhone app. The majority have no idea it’s a virtual currency they can use to buy everything from T-shirts to Tesla Motors sedans, according to a Bloomberg National Poll.

***JM: … helping drive home the point that when the mouth-foamers yell about “taking the world by storm”, they’re at least so far talking about the world that exists at the tip of their nose…

Snoop Dogg Isn’t Selling Albums via Bitcoin (But Scary Spice Is)
Paul Vigna – MoneyBeat – WSJ
Snoop Dogg, rapper, artist, newly converted Rastafarian, caused a bit of a flurry earlier this month when he wrote on Twitter that his new album would be available for purchase via the virtual currency bitcoin. Was he serious? Had Calvin Broadus really embraced the digital currency revolution? Well…no.

Reminder: Changes at NASDAQ OMX Riga with changeover to the euro
Latvia is going to join the euro area as of January 1, 2014.

Indexes & Index Products

ETF innovator to launch CoCo financials fund
Joe McGrath – Financial News
Hans Günther Bonk – the co-founder of IndexChange, the legacy ETF business that later became the foundation of iShares’ German operation – is launching a fund investing in the subordinated debt and contingent convertibles of banks and insurers.

Russell Revamps, Unbundles Index Pricing
Faye Kilburn – WatersTechnology
Russell Indexes, the index provider subsidiary of asset manager Russell Investments, is introducing a new pricing model for its RussellTick real-time feed of US and global consolidated index data, reflecting enhancements made to the product as part of an index data distribution partnership with NYSE Technologies, the data and technology arm of NYSE Euronext.


Gold Funds See Unprecedented 31% Slump With World Losing Faith
Glenys Sim, Maria Kolesnikova and Debarati Roy – Bloomberg
Investors are dumping gold-backed exchange-traded products at the fastest pace since the securities were created a decade ago, mirroring the steepest price drop in 32 years.

Swiss Gold Sector Embraces Transparency, Up to a Point
Francesca Freeman – MoneyBeat – WSJ
Starting from Jan. 1, data on Switzerland’s gold imports and exports will be released monthly, broken down by country. That’s quite a departure from the current system, where Swiss gold trade data is released quarterly, with no information on where it’s coming from or going to.

A Journey Into the World’s Deepest Gold Mine
Matthew Hart –
AS IF TOUCHED BY THE LEGENDARY KING MIDAS HIMSELF, everything from tablets to the water faucets of bespoke private jets are coated with shiny, shimmering gold these days. Indeed, some investors can’t seem to get enough of the lustrous metal, especially many of the ultra-affluent, who were made even richer in recent years after placing some huge bets on gold.

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