First Impressions

We are getting mixed messages from the market again today. In this issue, we see Ireland’s triumphant return to the debt markets after a period of gut-wrenching austerity. Is this the model going forward? Recall the many technocrats who said austerity would not work. Will we be revisiting the austerity/stimulus debate? Another mixed message is coming from the U.S. debt market, where the taper was supposed to usher in higher yields, but we have seen a one-way train down in the ten and 30 since the emerging market scare began. At least exchange volumes are up across the board. No mixed message there.

Quote of the Day

It won’t weigh on people’s minds this quarter, but if Ireland doesn’t get control of debt they will be storing up problems for the long term.

Credit Agricole’s Luca Jellinek on Ireland’s re-entry to debt markets.

Lead Stories

Fed taper driving up volumes in futures market, says CME
Neil Munshi in Chicago –
The US Federal Reserve’s decision to reduce its asset purchase programme will help boost activity in futures markets, the chairman of CME Group said as the company reported a nearly 30 per cent rise in the volume of interest rate contracts in the fourth quarter.

***DA: Meanwhile ten and 30 year yields have done nothing but drop lately.

Subordinated debt: Investor demand swamps bank capital
Louise Bowman – Euromoney magazine
If any evidence were needed that the chase for yield is alive and well and headed further down the capital structure it came with Crédit Agricole’s debut AT1 trade in late January.

***DA: Keep an eye on the emerging market. Or, as Yakov Smirnoff would say, “In Russia, YIELD chase YOU!”

Sovereign debt: Irish reforms rewarded with blowout return
David Wigan – Euromoney magazine
At the beginning of January, Ireland made a triumphant return to the international bond markets, drawing some EUR 14 billion of demand for its EUR 3.75 billion 2024 bond, as investors rewarded the country for its exit from a three-year EUR 67.5 billion EU/IMF funding programme.

***DA: Vive la austerity!

Exclusive: Deutsche fires three New York forex traders – source
Deutsche Bank AG has fired three New York-based currency traders, in the latest sign that a probe over alleged manipulation of foreign exchange markets is gathering steam, according to a source familiar with the situation.

Participation rate hysteresis, labour market slack, and why it doesn’t have to matter
Cardiff Garcia | FT Alphaville
It’s been easy to lose track of the dueling research papers and notes published in the last year that have tried to discern the causes behind the demographic-adjusted fall in the US labour force participation rate.

It’s the hot money, stupid
Izabella Kaminska | FT Alphaville
There is a destabilising force pounding its way through the global economy, generating untold chaos in its wake. You can’t see it, you can’t touch it, and you definitely can’t kill it. At best, you can scare it away (temporarily). Sometimes, if you’re lucky and it serves your interests, you can woo it back as well.

***DA: The problem is when it turns cold.

Home Bias? Not us, says S&P
Dan McCrum | FT Alphaville
Standard & Poor’s have penned a response to the academic paper we recently featured and which suggested that, were the US-based rating agency to be consistent, it should have cut the world’s superpower down another notch in 2011. Click to read the whole letter from S&P in the piqued interior voice of your choosing:

Central Banks

Markets Tumble. How Will the Fed React?
Tim Duy’s Fed Watch
The financial markets are not being kind to freshly minted Federal Reserve Chair Janet Yellen. The level of scrutiny she will face when she makes what is likely to be her first public appearance as Chair next week was already high, and is rising by the minute. Global markets are faltering, and US equity markets tumbled Monday, with the weak ISM numbers reported to be the proximate cause of the sell-off

***DA the drop in yields suggest an impending “untaper.”

Fed’s Lacker says tough to see pause in tapering ahead
The U.S. Federal Reserve will probably keep reducing monthly asset purchases at its current pace and it would be hard to make the case for a pause in the tapering process, a senior Fed official said on Tuesday.

***DA: Or not, as the case may be.

Analysis: Asian governments to central banks: it’s our mess, you fix it
Asia’s central bankers are being forced to juggle their day jobs with what their governments have failed to do – steeling their economies for the hard times.

ECB faces dilemma with inflation drop
Claire Jones in Frankfurt –
Words matter. But for central banks, nothing talks as loudly as printing money. And, while President Mario Draghi has escalated the rhetoric on the European Central Bank’s willingness to act, its balance sheet tells a different story.

Federal Reserve Governor Daniel K. Tarullo: Volcker Rule – Before The Committee On Financial Services, U.S. House Of Representatives, Washington, D.C.

Federal Reserve Banks Laud Industry Response To Consultation Paper And Highlight Next Steps


Analysis: Lawsuits over forex market face uncertain future
As investigations into alleged manipulation of the global foreign exchange market advance, class actions against the world’s biggest banks are piling up, exposing the banks to potentially billions of dollars in damages.

International renminbi update: Luxembourg 1, London 1
Euromoney magazine
London and Luxembourg are at loggerheads to become Europe’s leading offshore renminbi hub – although they wouldn’t let you know it.

Haven appeal of Swiss franc will fade
Mansoor Mohi-uddin –
The Swiss franc and US Treasury bonds are the final remaining haven assets with international appeal. In contrast, German Bunds are denominated in euros, the Bank of Japan’s massive quantitative easing is weakening the yen, and gold has lost its lustre as inflation has stayed low among developed economies.

EM FX safety questioned as money flows back to leading currencies
Simon Watkins – Euromoney magazine
The past few days have seen a spike in global markets’ volatility, a broad-based sell-off in many emerging markets’ currencies, and interest rate hikes in India, Turkey, and South Africa, raising fears this rout in the EM world might gather momentum.

Analysis: Emerging markets buffeted by bipolar world
Ailing emerging markets are caught between a rock and a hard place – Washington and Beijing to be more precise.

Bitcoin: big in emerging markets
Euromoney magazine
What unites drug-smugglers, libertarian critics of fiat currencies and technology evangelists? Answer: the crazy world of digital currencies such as Bitcoin, a peer-to-peer anonymous market that disintermediates banks in the payment process.

BitBeat: 2014 Is The Year of Bitcoin…on Wall Street, Silbert Says
MoneyBeat – WSJ
It may seem odd that, having accepted the idea of an electronic currency that isn’t backed by any government or bank and exists only in the 1’s and 0’s of a computer code, that we’d have trouble wrapping our minds around other unusual concepts, but a release we got from a start-up called Bionym kind of blew our minds.

Indexes & Index Products

May You Live in Volatile Times
David Reilly – MoneyBeat – WSJ
Ah, volatility, you’re back. Equity markets were notably serene in 2013. Now, as fears about emerging markets and tapering roil stocks, the Chicago Board Options Exchange Volatility Index, known as the VIX, closed above 20 on Monday.

New Index Fixes The ‘Broken Link’ Between FTSE 100 Director Performance Pay And Company Performance


EBS Direct launches precious metals trading
EBS, ICAP’s market-leading electronic FX business, announces that it has launched trading of precious metals on EBS Direct.

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