First Impressions

SEFCON Snapshot 2014, Part II: Cross-Border Issues
JohnLothianNews.com

The WMBA Americas hosted SEFCON V on November 12, 2014, and John Lothian News was there. We interviewed 14 SEF operators, regulators and participants and put together this three part series on the state of SEFs one year into the mandate.

Part II looks at the differences between U.S. SEF rules and those of other jurisdictions. The conference featured a panel on cross-border issues, moderated by ISDA CEO and former CFTC Commissioner Scott O’Malia, and also a keynote address by current CFTC Chairman Tim Massad.

Watch the video »

Quote of the Day

“Mandating trading on exchanges is an elephant-gun approach motivated by commercial interests of a handful of market participants.”

KCG in the story, “NYSE Plan Would Revamp Trading”.

Lead Stories

Financial market manipulation is the new trend: Can it continue?
By Paul Craig Roberts, Pravda
A dangerous new trend is the successful manipulation of the financial markets by the Federal Reserve, other central banks, private banks, and the US Treasury. The Federal Reserve reduced real interest rates on US government debt obligations first to zero and then pushed real interest rates into negative territory. Today the government charges you for the privilege of purchasing its bonds.
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Deflation Warning Sounds as 2-Year Break-Even Rates Go Negative
Daniel Kruger – Bloomberg
Even with the Federal Reserve reminding investors that policy makers remain on course to raise interest rates next year, one corner of the bond market is warning of the risk of deflation.
The difference in yields between Treasury two-year notes and comparable maturity inflation-indexed securities turned negative yesterday for the first time since the aftermath of the global financial crisis in 2009. The measure, known as the break-even rate, is generally seen as reflecting investors’ expectations for inflation over the life of the securities.
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There’s a Blacklist in the $800 Billion U.S. Loan Market and It’s Not Illegal
Nabila Ahmed and Kristen Haunss – Bloomberg
What do Highland Capital Management, Fortress Investment Group LLC and Cerberus Capital Management have in common? The firms, which manage some $110 billion among them, are on a list that says they can never invest in a $155 million loan that’s trading in U.S. markets.
RBS Holding Co., the owner of direct marketer Quadriga Art, banned the three firms and seven others last year from buying parts of the loan, according to two people with knowledge of the matter who asked not to be named because the decision was private. They were deemed, the people said, to be too demanding in debt restructurings, a fate that executives at RBS — which has no relationship to the Scottish bank — considered as Quadriga’s business faltered.
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First Positive Yields in Four Years Bolster Five-Year TIPS Sale
Liz Capo McCormick – Bloomberg
The first positive yields at a Treasury auction of five-year inflation-indexed notes since 2010 helped lift demand from a class of investors that includes foreign central banks to the highest on record.
The $16 billion of Treasury Inflation Protected Securities were sold at a yield of 0.395 percent, the first of 13 sales of the maturity where bidders weren’t willing to accept negative returns in exchange for a hedge against higher consumer prices. Indirect bidders bought 64.8 percent of the securities, the most in records dating to October 2004.
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Wall Street Names Janet Yellen “Person of the Year” and Issues Bullish Forecast for 2015
CNBC
With less than one year in office, U.S. Federal Reserve Chair Janet Yellen, received the most votes as the person who, for better or worse, had the greatest impact on global capital markets in 2014. Thirty-one percent (31%) of respondents of the ConvergEx survey named Yellen “Person of the Year”, followed closely by Russian president Vladimir Putin (24%). Flash Boys author Michael Lewis and IEX President and CEO Brad Katsuyama (11%), offered as a combined choice, finished third. Alibaba founder Jack Ma finished in fourth place with eight percent (8%) after bringing to market the largest IPO in history.
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NYSE Plan Would Revamp Trading; Acting on New CEO’s Critique of Markets, Exchange Operator Offers to Cut Costs to Draw Orders
By Bradley Hope And Scott Patterson, WSJ
The owner of the New York Stock Exchange is pushing a major overhaul of the U.S. stock market aimed at helping exchanges reclaim their role at the center of trading. Intercontinental Exchange Inc. is proposing a compromise between exchanges and Wall Street banks that trade on behalf of large investors. Exchanges would cut banks’ trading costs by more than 80% if they agreed to a rule that would move more trading away from their so-called dark pools and other off-exchange venues, according to a draft letter being circulated to large banks and investment firms by ICE Chairman and Chief Executive Jeffrey Sprecher.
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Bernanke Backs Pimco Forecast for Economic Acceleration
Mary Childs and Matt Robinson – Bloomberg
Pacific Investment Management Co. is diverging with its co-founder and former chief investment officer Bill Gross on whether falling oil prices will delay the Federal Reserve’s move to raise interest rates.
In its outlook for 2015, Pimco projects global growth accelerating in a “rising tide”, with lower oil prices helping economies, and the Fed on track to boost borrowing costs. Gross, who used to run Pimco’s biggest fund before his surprise exit Sept. 26 to join Janus Capital Group Inc., said the U.S. central bank may be constrained by disinflationary pressures after oil prices plunged in recent weeks.
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Mutual Fund Managers’ 2014 Is Another Flop
Lu Wang and Oliver Renick – BloomberBusinessweek
The smart money doubted Apple (AAPL) this year. Oops. The company’s shares rose 33 percent through Dec. 16—almost five times the Standard & Poor’s 500-stock index’s 6.7 percent. “It’s been a really confusing year,” says Kim Forrest, an analyst at Fort Pitt Capital Group in Pittsburgh. “There have just been a handful of stocks that drove the market, and Apple was obviously one of them.”
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Dark Pools in Spotlight as Europe Moves to Fortify Market
By Jim Brunsden and John Detrixhe, Bloomberg
If you play poker with all your cards showing, you can’t bluff. Traders accustomed to operating in Europe’s dark pools, where buy and sell orders are hidden, say a transparency drive by regulators may similarly deprive them of the secrecy they need to shield their trades from competitors. That could drain the liquidity, and the life, from some of the region’s biggest markets, they say.
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Bankers See $1 Trillion of Investments Stranded in the Oil Fields
By Tom Randall, Bloomberg
There are zombies in the oil fields. After crude prices dropped 49 percent in six months, oil projects planned for next year are the undead — still standing upright, but with little hope of a productive future. These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela.
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Central Banks

The Federal Reserve meets: The best of all worlds
The Economist
WHAT could be better than an economy converging rapidly on full employment? A central bank in no mood to get in the way. That is the happy combination America now enjoys, and it explains the stock market’s euphoric reaction to today’s meeting of the Federal Reserve.
In the statement releaed after its meeting, the Fed hailed “solid job gains” and diminishing slack in the labour market. Projections of its officials put unemployment at or below its long-run “natural” rate a year from now. This is not an economy in need of zero interest rates. And, as officials had broadly hinted beforehand, they did start to prepare the way for rates to rise from zero where they have been since 2008. The statement no longer contained the two-year old pledge to keep rates near zero “for a considerable time.”
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Swiss National Bank Starts Negative Interest Rate of 0.25% to Stave Off Inflows
Zoe Schneeweiss and Jan Schwalbe – Bloomberg
Switzerland imposed its first negative deposit rate since the 1970s and threatened further action to stem a tide of money flowing from Russia’s financial crisis.
Swiss National Bank President Thomas Jordan cited the Russian turmoil as a “major contributory factor” for the surprise decision to introduce a charge of 0.25 percent on sight deposits, the cash-like holdings of commercial banks at the central bank. The SNB also lowered its target range for the three-month Libor in an attempt to push the rate below zero. It fell to minus 0.046 percent today.
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Federal Reserve delays parts of Volcker rule until 2017
BBC
The US Federal Reserve has given Wall Street banks even more time to comply with parts of the Volcker Rule, a key provision of the 2010 Dodd-Frank financial reform bill.
The rule prevents federally-insured banks from using their own money when investing in certain risky assets.
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PBOC Offers Loans to Banks as Money Rate Jumps Most in 11 Months
Bloomberg
China’s central bank offered short-term loans to commercial lenders as the benchmark money-market rate jumped the most in 11 months.
The amount of money made available by the People’s Bank of China wasn’t clear, according to people familiar with the matter. Policy makers are adding funds to the financial system to address a cash crunch as subscriptions for the biggest new share sales of the year lock up funds. Twelve initial public offerings from today through Dec. 25 will draw orders of as much as 3 trillion yuan ($483 billion), Shenyin & Wanguo Securities Co. estimated.
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Currencies

Even Russians Are Running From the Ruble
Sergei Guriev – Huffington Post
In recent weeks, the fall in the Russian ruble and Russian stock markets closely tracked the declines in global oil prices. But everything changed on Dec. 15. The oil price remained stable, but the ruble and the stock price indexes lost 30 percent in the subsequent 24 hours. An unprecedented effort by Russia’s Central Bank in the wee hours of Dec. 16 to stabilize the ruble, by hiking the interest rate from 10.5 percent to 17 percent, proved useless.
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Dollar Topping Most Estimates Bodes Ill for Profits: Currencies
Liz Capo McCormick – Bloomberg
The strongest dollar in more than five years is threatening to wreak havoc with the earnings of U.S. companies for a second straight quarter and into 2015.
Just this week, Atlanta-based Coca Cola Co., the world’s largest soft-drink maker, said currency movements will cut its pre-tax profit by 5 percent to 6 percent next year. Pfizer Inc., the biggest U.S. drugmaker, has said it “expects significant negative sales and earnings impacts from foreign exchange” this quarter.
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China Currency Freedoms Beckon as Shanghai Zone Offers Test Run
Bloomberg
It’s called pooling, and it’s made all the difference to the financial operations of refrigeration-equipment maker Dover Corp. (DOV) in China.
Taking advantage of new freedoms in Shanghai’s free-trade zone since April, Dover is pooling yuan — transferring its holdings of the Chinese currency in and out of the nation, without needing the approval of the foreign-exchange regulator.
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Gold

The Price Of Gold And The Art Of War :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website
Darryl_R_Schoon – The Market Oracle
When growth slows in capital markets, the bankers’ daisy-chain of credit and debt breaks down; setting in motion defaulting debt which ends in recession, deflation or, in extreme cases, a deflationary depression.
A deflationary depression is a fatal monetary phenomena where the velocity of money—circulating credit and debt—falls so low capital markets are no longer self-sustaining. This happens after the collapse of massive speculative bubbles such as the collapse of the 1929 US stock market bubble which resulted in the world’s first deflationary depression, the Great Depression of the 1930s.
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Why Russia’s Gold Buying Binge Won’t Stop the Ruble’s Slide
Adrian Ash – The Street
Russia has gone on a gold-buying binge this year, but the move has done nothing to shore up the country’s embattled currency, the ruble. And contrary to speculation, Russia will continue to buy gold through 2015.
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Gold little changed after Fed’s statement – Xinhua
English.news.cn
Gold futures on the COMEX division of the New York Mercantile Exchange rose slightly on Thursday as the U.S. Federal Reserve said they would be patient before raising interest rates after a two-day policy meeting.
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Nearly 10,000 ‘cash-for-gold’ violations found in six cities across N.J., officials say
Bill Wichert – NJ.com
About 70 “cash-for-gold” businesses in six cities across New Jersey have received a combined total of nearly 10,000 civil citations for allegedly violating consumer protection laws, officials announced today.
After undercover operations and unannounced inspections, authorities have cited 71 jewelry stores, pawn shops and other businesses in Newark, Paterson, Camden, Irvington, Trenton and Teaneck for various violations.
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