First Impressions

Is it contagious?
Doug Ashburn – John Lothian News

In 1997, the collapse of the Thai baht ignited a crisis that eventually sunk several currencies in Southeast Asia, created a mini panic in equity markets around the world and, arguably, served as a precursor to the Russian ruble (and Long-Term Capital Management) crisis the following year.

Since then, central banks in emerging markets have been rather skittish about so-called hot money flowing in and out of their countries. As such, nations such as Turkey, Brazil and India have tried to keep enough foreign currency in reserve to soak up any temporary liquidity issues that may arise.

Today’s lead story is a stark reminder of the after-effects of the Asian Contagion, as it was then known. As the developed world nears the end of the current phase of stimulus, the idea of interest rate normalization is front and center among developing economies. If the capital that has flowed into developing markets since the U.S. began its zero interest rate policy were to be repatriated too quickly, a new crisis could unfold.

The baht crisis, like the subprime meltdown in the U.S. in 2007, was initially dismissed as “contained” but quickly spread until it reached crisis mode. Let us hope the coming global economic rebalancing is done in a somewhat orderly fashion, that current reserves provide the proper immunization, and that any flare-ups can be quickly quarantined.

Quote of the Day

“This focus [outside finance] is underpinned by the fear of a ‘sudden stop’, where capital flows halt or even reverse. If this happens, the impact on indebted corporates can be devastating, with knock on effects for banks.”

Craig Botham, emerging markets economist at Schroders in the story, “‘Fragile Five’ falls short as tapering leaves more exposed”.

Lead Stories

‘Fragile Five’ falls short as tapering leaves more exposed
James Kynge – FT.com
Forget the “Fragile Five”, the newly minted alliterative grouping of emerging markets at risk. The list of countries exposed as central banks tighten monetary policy is longer than the moniker suggests.
jlne.ws/1arEur2

***DA: Basically any country that would drain foreign exchange reserves if short term funding ever dries up. That would be, like, all of them.

Dim Sum Appetite Set for a Test as Billions of Dollars of the Yuan-Denominated Bonds Mature This Year
Fiona Law and Anjani Trivedi – MoneyBeat – WSJ
Billions of dollars of offshore Chinese bonds are due to mature this year, preparing the ground for companies to refinance at much higher rates this time than last time around.
jlne.ws/1arEuHn

European Rally Belies Slog Ahead With Debt at Record
Mark Deen and Ian Wishart – Bloomberg
The rally in European bond and stocks markets masks the slog that looms as the euro area confronts record unemployment and debt.
jlne.ws/K6uBbJ

***DA: That would make Mr. Draghi the slogmasker-in-chief.

Draghi’s Strengthened Rate Pledge Convinces Economists
Andre Tartar and Emma Charlton – Bloomberg
Mario Draghi’s strengthened pledge to keep interest rates low has improved the impact of the European Central Bank’s forward guidance, economists said.
jlne.ws/K6vuRv

***DA: Alexander the Great would order his men to burn their boats as a sign that there would be no retreat. Now we promise unlimited central bank intervention.

Bank Industry Pushes for More Revisions to Volcker Rule
Cheyenne Hopkins and Jesse Hamilton – Bloomberg
Bank-industry groups and Republican lawmakers called for broader Volcker Rule revisions a day after regulators permitted exemptions for some collateralized debt obligations faulted for obscuring lenders’ capitalization.
jlne.ws/K6uZH3

**JB: If you keep revising it ad nauseum it is almost like there is no rule at all. Neat how that works. Six years on since the financial crisis and they are still dawdling about.

Treasury market poised for jump in foreign inflows
Michael Mackenzie in New York and Ben McLannahan in Tokyo – FT.com
The consensus among strategists at the start of 2014 was that stocks would make further gains and bonds would lose ground, but already US Treasuries are putting that thinking to the test.
jlne.ws/1arEuHk

***DA: The consensus on consensus it it is often nonsense.

Brazil Signals Inflation Will Extend World’s Biggest Rate Rise
Matthew Malinowski and Arnaldo Galvao – Bloomberg
Brazil’s central bank signaled it will extend the world’s biggest interest rate increase after last year’s surge in consumer prices made slowing inflation a greater concern to policy makers than reviving economic growth.
jlne.ws/K6xI3g

***DA: Alexandre Tombini channels his inner Volcker.

Dim Sum Appetite Set for a Test as Billions of Dollars of the Yuan-Denominated Bonds Mature This Year
Fiona Law and Anjani Trivedi – MoneyBeat – WSJ
Billions of dollars of offshore Chinese bonds are due to mature this year, preparing the ground for companies to refinance at much higher rates this time than last time around.
jlne.ws/1arEuHn

A trust product test case in China
David Keohane | FT Alphaville
This is from Reuters and makes a nice little moral hazard gauge for China. The story involves a trust product, called “2010 China Credit / Credit Equals Gold #1 Collective Trust Product” which just screams “buy me” but maybe not “stand behind me when I go bad”
jlne.ws/1arDXW4

***DA: Fine print is hard enough to read when printed in English, let alone Chinese.

BoE discussed FX fixing process with chief dealers -document
Reuters
Bank of England representatives discussed the process of setting foreign exchange benchmarks with senior currency dealers at major investment banks in April 2012, more than a year before regulators launched official probes into alleged rate manipulation, according to a Freedom of Information Request made by Reuters.
jlne.ws/1arDTp3

***DA: It’s called “forward guidance.”

Envelope, Please
Alex Frangos – MoneyBeat – WSJ
And the award for central bank of the year goes to…The People’s Bank of China? So says CentralBanking.com, a publication owned by London trade publishers Incisive Media. This being awards season, the right thing is to quibble with the choice.
jlne.ws/1arEs28

***DA: Another reason to ignore financial awards.

Central Banks

Mark Carney deals blow to Labour bank review plan
Jim Pickard, Sharlene Goff and Sam Fleming – FT.com
Bank of England governor Mark Carney said on Wednesday he opposed both the idea of a “crude bonus cap” and of reducing retail banks’ market share, dealing a blow to Ed Miliband’s proposals to shake up the banking sector.
jlne.ws/1arEs29

***DA: So there will be no cap on crude bonuses this year?

Currencies

Integral FX Benchmark Launches, Making Second-by-Second Mid-Rates for Major Currency Pairs Available for Free
Integral Development Corp. (www.integral.com), a leading service provider to FX market participants, today launched Integral FX Benchmark, making available for the first time a set of second-by-second foreign exchange benchmark rates.
jlne.ws/L9UNlR

Basel loosens banks’ leverage ratio proposals but new FX trading world is still uncertain
Simon Watkins – Euromoney magazine
The recent loosening of rules regarding leverage ratios and collateral by the Basel Committee on Banking Supervision might boost banks’ available trading resources, but FX is not out of the regulatory woods.
jlne.ws/1arEuHu

Currency Dealers Told Bank of England of Fix Trading in 2012
Gavin Finch, Suzi Ring and Liam Vaughan – Bloomberg
Bank of England officials discussed trading practices around key foreign-exchange benchmarks with senior currency dealers 18 months before regulators opened formal investigations into alleged rate-rigging.
jlne.ws/K6yLjA

After carry, RORO and tapering lose their allure, FX trading strategies are a-changing
Simon Watkins – Euromoney magazine
From the carry candidates, the diminished safe havens, and the new negative balance-of-payments club, FX trading strategies are navigating a differentiated and complex global landscape.
jlne.ws/1arEuHv

Turks Seek Gold, Dollars in Lira Rout
WSJ.com
Two years ago, with Turkey’s economy registering double-digit growth, Prime Minister Recep Tayyip Erdogan hailed the lira as one of the world’s most stable currencies and his government unveiled a new symbol for it; a T-shaped anchor, designed to herald its new status as a “safe harbor.”
jlne.ws/1arEs2d

Russia rouble float may hurt investors now but help in long run
Reuters
Russia’s move towards a flexible rouble exchange rate may well prove a boon for the struggling economy, but foreign stock and bond investors should brace for short-term losses as the currency finds a new level.
jlne.ws/1arEuHx

Venezuela’s Maduro bolsters currency amid devaluation talk
Andres Schipani in Bogotá – FT.com
Venezuela’s socialist president Nicolás Maduro on Wednesday shrugged off speculation that the bolivar was to be devalued by confirming the current exchange rate of the local currency in spite of a galloping black market and runaway inflation.
jlne.ws/1arEuHy

A hollow independence if Scotland keeps sterling
John Greenwood – FT.com
It was once widely assumed that the first act of an independent Scotland would be to drop sterling in favour of the euro. But that was before the eurozone crisis exposed deep flaws in the monetary institutions of the single European currency. Now it seems that, if a Scottish state enters into monetary union, it will be with the UK instead.
jlne.ws/1arEuHz

Euromoney FX Survey 2014: Vote now
Euromoney magazine
Help make Euromoney’s 36th annual survey of the world’s foreign exchange markets the most authoritative and comprehensive ranking possible.
jlne.ws/1arEs2j

Wall Street Sees Bitcoin’s Legacy as Payment System: Currencies
John Detrixhe – Bloomberg
While a Texas Senate candidate is accepting Bitcoin campaign donations, and Overstock.com customers can use the technology to buy engagement rings, Wall Street sees its future more as a payment system than a currency.
jlne.ws/K6xdpL

Indexes & Index Products

Exclusive: NASDAQ, S&P eye acquisitions to build index businesses
Jessica Toonkel – Reuters
Exchange operator Nasdaq OMX Group (NDAQ.O) and index provider S&P Dow Jones Indices (MHFI.N) said they are interested in acquisitions to grow their index businesses, in a sign the sector could see a wave of deals as investors pour tens of billions of dollars into portfolios that track benchmarks.
jlne.ws/1hmVaoF

Bell-Ringing Today for ETF that Tracks CBOE NASDAQ-100 BuyWrite Index (BXN)
Matt Moran – CBOE Options Hub
This morning I had the privilege of participating in a market-opening bell-ringing in New York City for a new ETF that is designed to track the CBOE NASDAQ-100 BuyWrite Index (BXN).
jlne.ws/1kE3m8x

Thai Bourse Expects Derivative Warrants On Indices To Be Launched This Year
The Stock Exchange of Thailand (SET) has recently joined hands with brokers to continuously educate investors on using derivative warrants (DW), and expects that DWs on SET Index series can be launched by brokers this year. As many as 761 DWs were launched in 2013, with an average daily trading value of THB 1,000 million (approx. USD 33 million), increasing 254 percent from the previous year.
jlne.ws/1arDW4p

New China A Shares ETF Lists On London Stock Exchange
jlne.ws/1arDVgI

Europe’s First Physical Replication CSI300 ETF Launched On Xetra – Deutsche Börse European Market Leader In China ETF Trading
jlne.ws/1arDXFj

Gold

How low will gold go in 2014? Consensus forecast says down 14.5%
Victor Reklaitis – MarketWatch
Gold will average $1,209 an ounce this year, judging by recent forecasts from six big banks.
That average of their individual calls represents a drop of 14.5% from the precious metal’s average price in 2013 (which was $1,413 per ounce, according to a Deutsche Bank note).
jlne.ws/K6AVjr

Will Gold Rally in 2014? [Video]
Bloomberg
Bloomberg’s Alix Steel and Bloomberg Industries’ Kenneth Hoffman put futures in focus with a look at gold in “On The Markets” on Bloomberg Television’s “In The Loop.”
jlne.ws/K6BjhL

Gold Prices Could Benefit As Global Economic Growth Reaches Its Peak – Henderson Global Investors
Kitco News (via Forbes)
Gold prices could benefit as equities struggle in the second half of 2014 in anticipation that the global economic expansion is nearing its peak and is approaching the end of its latest growth cycle, said one UK economist.
jlne.ws/K6Bvxm

Chinese New Year No Guarantee For Galloping Gold Price
Adrian Ash – Forbes
What should gold investors expect from the Chinese New Year at the end of this month?
First, expect lots of press coverage of housewives buying gold hand over fist to mark the start of the year of the horse.
jlne.ws/K6A568

China Holds How Much Gold?
Peter Grant – Investing.com
Much has been made of Chinese demand for physical gold in recent years and gold imports through Hong Kong were closely tracked in 2013. There is some speculation that the Chinese will announce official gold holdings again this year. You may recall that they shocked the market five-years ago in 2009 when they announced they had accumulated 1054 metric tonnes of gold, well above everyone’s estimates.
jlne.ws/K6AIfS

CPM Group Signs Cooperation Agreements with the China Gold Association and Jingyi Gold Co., Ltd.
CPM Group is pleased to announce the signing of Cooperation Agreements with the China Gold Association and Jingyi Gold., Ltd. in Beijing on December 2nd, 2013. The agreements call for the exchange of gold information, data and strategic cooperation including future projects, events, publications and other opportunities regarding the global gold markets.
jlne.ws/1maTrFT

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