First Impressions

An Emerging Disagreement
Doug Ashburn – John Lothian News

Today is Janet Yellen’s first Humphrey-Hawkins testimony to Congress. Though she is still being grilled as of press time, by all appearances, Ms. Yellen is unapologetically continuing down the path forged by her predecessor. I say “unapologetically” in reference to the part of her prepared statement that responds to critics from the emerging markets world, namely India’s central bank chief Raghuram Rajan, who recently pinned the blame for emerging market panic squarely on the shoulders of Fed policy.

Though Rajan’s point is well taken. While the tapering of the Fed’s bond buying program is not a rate hike per se, emerging markets from Turkey and India to South America have been forced to push up rates to defend currencies amid an outflow of hot money. Much of this hot money flowed into emerging markets due to the reach-for-yield created by ultra-low interest rates among developed countries.

Yellen and the Fed pointed instead to weak economic reports coming from China and kooky economic policy from places such as Argentina as the real culprits. I look forward to Mr. Rajan’s reply.

Quote of the Day

It is the economic future of Greece – not its past – that we believe will be the key factor as institutional investors consider Greece’s return to the capital markets.

Stelios Papadopoulos, head of Greece’s debt management office, in the FT story “Greece wants a return to bond markets.”

Lead Stories

Greece wants a return to bond markets
Ralph Atkins in London – FT.com
The head of Greece’s debt management office has pressed the case for the crisis-hit country’s return to international capital markets, saying its re-entry would boost confidence and highlight strengths other states “would find enviable”.
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***DA: Ireland and Portugal have returned to the bond market; why not Greece? Gone is the stigma of a default and central banks care little about moral hazard, so why not?

The debt ceiling — yes, again
Cardiff Garcia | FT Alphaville
Eventually I’m going to do exactly what the other side wants me to do seems like an odd starting point for a negotiation. But the debt ceiling negotiation that matters right now isn’t between Republicans and Democrats, but between the Republican leadership and the Republican won’t-be-leds.
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***DA: It is a critical election year for the tea party wing. They are playing to their constituencies, not to Republican Party brass.
***JB: Just before we published today’s newsletter it has been reported that the House will vote on a debt limit bill without conditions.

Fund Futures Rate Guidance Even Lower Than Fed: Chart of the Day
Liz Capo McCormick – Bloomberg
Money-market derivatives show investors are even more convinced than Federal Reserve policy makers that interest rates will remain low for years to come.
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Blankfein Says Emerging Markets in Better State Than in ’98
David Scheer and Michael J. Moore – Bloomberg
Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd C. Blankfein said emerging markets are better able to weather an investor retreat now than in 1998, when currency turmoil spread and forced international bailouts.
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P2P lenders install investor speed bumps
Tracy Alloway and Arash Massoudi – FT via CNBC
The biggest peer-to-peer lenders have been forced to install “speed bumps” to stop sophisticated investors from snapping up the most attractive loans. P2P lending was conceived to directly connect borrowers with individual lenders, bypassing banks. But the sector has rapidly evolved as institutions such as hedge funds and other large investment companies went to great lengths to get their hands on the best loans—to the extent that now, more than 60 per cent of the industry’s loans are purchased by institutions.
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***DA: Complicated issue, but reminiscent of the rise in mutual funds a generation ago, where there was fear that all the alpha was commandeered by the pros, and, since you couldn’t beat them, you had to join them. The retail investor survived, though.

A dangerous mistake lies at Bitcoin’s intellectual core
Mark Williams – FT.com
This weekend Russia became the latest country to crack down on Bitcoin. China has already banned its citizens from buying the “cryptocurrency”, which functions like cash in that it can be transferred anonymously from one person to another without the involvement of a central clearing house. Western regulators are also watching nervously.
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***DA: Some western regulators are watching, but I doubt many are “nervous.”

Central Banks

A Question for Yellen
Jared Bernstein – NYTimes.com
If any of the committee members or their staffs are reading this, I’d like to suggest a question for the new chief: What data would prompt the Fed to slow or suspend its unwinding of monetary support?
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***DA: Why bother with the question. The Fed has demonstrated it will walk back any previous statements it made if they conflict with the game plan, which is to promote a rising stock market.

Yellen’s first testimony provides chance to set out Fed outlook
Robin Harding in Washington – FT.com
Janet Yellen’s first testimony as chairwoman of the US Federal Reserve is a crucial chance to stamp her authority on her new role, just as a research paper highlighted the extent of her challenge with forward guidance about monetary policy.
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***DA: Experts are predicting a volatile day. I am not.

When Will the Fed End Its Zero Rate Policy?
Jens Christensen – Federal Reserve Bank of San Francisco
U.S. Treasury yields and other interest rates increased in the months leading up to the Federal Reserve’s December 2013 decision to cut back its large-scale bond purchases. This increase in rates probably at least partly reflected changes in what bond investors expected regarding future monetary policy. Recent research on this episode tentatively suggests that investors moved earlier the date when they believed the Fed would exit its zero interest rate policy, even though Fed policymakers made few changes in their projections of appropriate monetary policy.
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All central banks do is talk, talk
James Saft – Reuters
Unfortunately these promises – “forward guidance” in banker parlance – are ones they appear unable to honor for more than a few months, and ones that investors demonstrably didn’t believe while they lasted.
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Russia’s central bank revokes licences from two Moscow banks
Reuters
Russia’s central bank has withdrawn the licences of two small Moscow-based banks, part of its widening campaign to clean up the banking system and crack down on money laundering.
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China’s Central Bank Vows To Fight Credit ‘Crisis’
Kenneth Rapoza – Forbes
China won’t say it has a credit crisis. But consider that one significant fixed investment fund was recently unable to pay investors interest on a roughly $423 million bond. The Industrial and Commercial Bank of China found a white knight last month for its Credit Equals Gold #1 trust fund. That white knight was probably sitting in an office on Chengfang Street in Beijing, home to the People’s Bank of China.
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China’s Central Bank Leads Effort to Regulate Internet Finance
Lingling Wei And Paul Mozur – The Wall Street Journal
China’s technology giants are marching onto the turf of the country’s state-controlled banks, soaking up tens of billions of dollars’ worth of investor money.
Now, regulators are taking notice.
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Currencies

BOE Opens Review Into Currency Meeting Amid Calls for Inq
Liam Vaughan, Ben Moshinsky and Suzi Ring – Bloomberg
The Bank of England has opened a review into allegations officials condoned practices at the heart of the currency-manipulation scandal, as lawmakers demand an inquiry into what the regulator knew.
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Goldman Currency Strategist Stolper Leaving to Form Venture
Andrea Wong – Bloomberg
Thomas Stolper, chief currency strategist at Goldman Sachs Group Inc., said he will be leaving the firm by early March to set up a venture.
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Norway GDP to give clues on ‘nokkie’ trade
Jamie Chisholm – FT.com
Norway on Wednesday will publish its fourth quarter 2013 gross domestic product report. Analysts are forecasting growth of 0.5 per cent, quarter-on-quarter. Any upside surprise and the Norwegian krone could add to its recent gains.
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Could China’s Yuan Be Overvalued? Lombard Street Analyst Says Yes.
Richard Silk – MoneyBeat – WSJ
At a time when markets consider the yuan practically a one-way bet and foreign governments are still badgering China to let its currency rise, some contrarians hold the opposite view.
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***DA: Years ago, when China was being pressed to let its currency float (appreciate), I said that the nation would not allow a free float until it was deemed as overvalued. Has the time come?

Weakening Loonie Is Growing Puny
WSJ.com
Add the Canadian dollar to the list of cratering currencies in 2014. The currency, known as the loonie, has slumped 3.9%, making it one of the worst-performing currencies against the U.S. dollar this year
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Untengeable
Dan McCrum | FT Alphaville
Competitive devaluation is a go, starting in the ‘Stans. The official rate of the Kazakh Tenge has fallen to to 163.9 to the dollar on Tuesday, from 155.56 on Monday, shortly after the central bank announced that it would allow the national currency to devalue to around 185 per dollar.
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Bank Vontobel Selects smarttrade Technologies to Power Its FX Platform
smartTrade Technologies announces today that Bank Vontobel, a global Swiss private bank, will introduce a new offering in Forex trading for spot, forward and swaps to its clients based on smartTrade’s LiquidityFX hosted solution.
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BitBeat: Bitcoin Getting Hammered, and Sickled
MoneyBeat – WSJ
The light is dimming for bitcoin. The tone has changed sharply from the one that existed just before those hearings at the New York State Department of Financial Services. After the cordial reception bitcoin got at those hearings, the future seemed pretty bright. That was only 12 days ago. Since then, the Charlie Shrem arrest has dominated the headlines, the Bank of Russia laid down the hammer and sickle, and Mt. Gox is going through another series of convulsions.
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Indexes & Index Products

More Money Left North American Equity ETPs Than Emerging Markets in January
Sarah Krouse – MoneyBeat – WSJ
It’s no secret that January was a rough month for emerging market equities. But surprisingly even more money flowed out of North American equities during the month, according to the latest exchange-traded product flow figures.
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Gold

Gold hits three-month high, shares up ahead of Yellen
Reuters
Gold hit a three-month high and global shares edged higher on Tuesday as investors bet that the new head of the U.S. Federal Reserve would navigate through her first testimony to Congress without rocking the markets boat.
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China Bought, Produced Record Amounts of Gold in 2013
WSJ.com
China is poised to snag the title of the world’s biggest gold buyer, a feat that could support prices of the precious metal as well as accelerate the global bullion market’s shift eastward. Gold purchases by Chinese consumers jumped 41% last year to a record, according to data released Monday by the China Gold Association.
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China’s 500-tonne gold gap fuels talk of stockpiling
Simon Rabinovitch in Shanghai – FT.com
A 500-tonne gap in China’s gold consumption data is fuelling talk that the central bank took advantage of weak prices last year to bulk up its holdings of the precious metal.
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