First Impressions

Monster Volumes: Jon Najarian Says Weeklys Are Powering Options Volumes
JohnLothianNews.com

US options volume reached its second highest level in 2013 but can it continue to grow in 2014?

Jon Najarian, co-founder of OptionMONSTER said the key drivers for the options industry are: weekly options, a strong economic recovery and continued demand for more options education. “The two biggest things driving volumes in options, or at least holding them, are weekly options,” said Najarian, who is also a regular contributor on the markets for CNBC. “As we get more weekly options, there is more turnover because of course they are an expiring option and you’re in an expiring option every single week. They are extremely popular because they let you drill down into the dates you want.”

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Quote of the Day

What happened? The most popular culprit is the Fed, which has begun to taper its highly experimental policy of “quantitative easing,” or purchases of long-term assets aimed at supporting growth beyond what could be achieved with zero nominal interest rates. But the Fed’s role is almost certainly overblown.

Kenneth Rogoff, on the fragility of emerging markets, in the article “How fragile are emerging markets?”

Lead Stories

How Fragile are Emerging Markets?
Kenneth Rogoff – Project Syndicate
Emerging-market equities and exchange rates are again under severe downward pressure, but are the underlying economies really as fragile as global traders seem to fear? The short answer, for a few, is probably “yes,” but for most, “not just yet.”
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Why Germany Isn’t a Fan of ‘Whatever It Takes’
MoneyBeat – WSJ
The red-robed German constitutional judges in Karlsruhe have held the ECB’s signature crisis tool—a bond-buying plan called Outright Monetary Transactions—in their hands since June. After eight months, they have decided to punt it to Luxembourg and the European Court of Justice.
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***DA: Looks like Germany would like to see QE killed, but cannot be seen as the entity pulling the trigger.

EU Banks’ Debt Addiction Threatens ECB-Led Overhaul
Jim Brunsden and Johan Carlstrom – Bloomberg
When Europe’s leaders set out in June 2012 to break the “vicious circle” between banks and sovereigns, they left rules for treating government bonds untouched, an oversight that may subvert their drive to prevent a recurrence of the debt crisis.
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Trillion-Dollar Linker Deluge Exposes Rift on Dormant CPI
Anchalee Worrachate – Bloomberg
Governments from the U.S. to Italy are boosting sales of inflation-linked bonds, wagering consumer prices will remain in check even after central banks inundated the world with cheap cash.
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Traders Crying Over Losses Missing HSBC’s Bargains
Robert Brand and Joseph Ciolli – Bloomberg
HSBC Holdings Plc, which gets more than half of its revenue from emerging markets, says it’s time to start buying their currencies after a selloff pushed exchange rates to their lowest levels since 2009.
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Won Goes From Asia’s First to Worst as Top Forecaster Says Sell
Jiyeun Lee – Bloomberg
South Korea’s won is leading a drop in Asian currencies this year, after gaining the most in the second half of 2013, as tapering of U.S. stimulus drains funds from emerging-market assets and China’s economy slows.
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Chinese credit crackdown felt overseas
Henny Sender in New York – FT.com
China’s vast development bank has begun asking some international clients to postpone drawing down previously committed credit lines, in moves that highlight how strains on the country’s financial system are reverberating abroad.
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***DA: China’s newest export – credit issues.

Junk Yield Premiums Soar on China’s Looming First Default
Bloomberg
The extra cost to borrow for China’s riskiest companies is at the highest in 20 months as soaring interest rates heighten concern the nation will experience its first onshore bond default.
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Pavlov’s eurozone
David Keohane | FT Alphaville
The plan, basically, is that you, a friendly peripheral eurozone country, get some ex-post cash from your core peers if you have toed a predetermined budgetary line and if, as Citi summarise, your “average cost of funding in the preceding year has exceeded the average funding costs of all participating members in the ERS by a certain premium.” Basically should those countries who benefitted from “flight to safety” borrowing levels spread the wealth now things have calmed down?
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Which middle class, which squeeze?
Gillian Tett – FT.com
Are you middle class? A decade ago, that question was of greatest interest to sociologists – or snobs. Now it is political dynamite.
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***JB: People entering the middle class in China is scant comfort to the American middle class.

Too big to fail and Pascal’s Wager
William Wright – Financial News
Talk about hedging your bets. In what became known as Pascal’s Wager, the 17th-century French philosopher Blaise Pascal argued that the only rational response to the question of the existence of God was to assume that he exists and live your life accordingly. If it turns out that God does not exist, your downside is pretty limited. However, if he does exist and you chose not to believe in him, your downside is almost infinite. So it is with the debate over “too big to fail”.
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***DA: Also known as a free call option. Unfortunately, it requires belief in omnipotence, and any omnipotent deity could see through attempts to game the system.

Watchdog says euro bank failures needed to make health check credible: FT
Reuters
Some banks need to fail a sector-wide review of their financial health in order to make the exercise credible, the head of the euro zone’s new banking supervisor told the Financial Times.
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***DA: In both the education and banking systems, grade inflation has become an epidemic.

Let weak banks die, says eurozone super-regulator
Claire Jones, Sam Fleming and Alice Ross in Frankfurt – FT.com
The eurozone’s new chief banking regulator has warned that some of the region’s lenders have no future and should be allowed to die, heralding a far tougher approach to the supervision across the currency bloc.
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***DA: Easier said than done, as we found out in the U.S. recently.

Central Banks

As Yellen makes Fed debut, expect theater, not fireworks
Reuters
Janet Yellen’s first test as chair of the Federal Reserve comes on Tuesday when she faces U.S. lawmakers, some hostile to the central bank, who will want to know how committed she is to winding down the Fed’s support for the economy.
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***DA: So I can’t eat cotton candy or deep fried Twinkies during the hearing, but I can have a glass of pinot noir at intermission.

ECB in driving seat in new euro zone bank supervision draft
Reuters
The European Central Bank presented draft rules on Friday for how it will supervise commercial banks in the 18-nation euro zone from November, putting itself firmly in the driving seat.
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Attention focuses on central banks’ guidance
Keith Fray – FT.com
Two central bankers will dominate market thinking this week, with “forward guidance” in both the US and UK under review.
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Currencies

Yuan trading lifts Thomson Reuters FX trading volumes
Reuters
Daily spot foreign exchange trading volumes on Thomson Reuters dealing platforms rose 27 percent in January from a month earlier, helped by a rise in Chinese yuan trading, the company said on Friday.
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Foreign Exchange Controls Lift Ukraine’s Currency
WSJ.com
Ukraine’s currency recovered from its lowest levels in years Friday, after the country’s central bank announced measures to restrict operations in the foreign exchange market to preserve currency stability.
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***DA: That will work for a while.

Seer Trading now available through FXCM
Seer Trading, a developer of automated financial trading and back-testing software, has today announced that it has completed an integration of its technology with FXCM, one of the world’s leading forex brokers.
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Banks face forex legal battle
Madison Marriage – FT.com
Barclays, JPMorgan and five other major banks face a growing number of class action proceedings from US pension funds over potential losses from alleged foreign exchange manipulation.
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BitBeat: Mt. Gox Halts Withdrawals, Bitcoin Price Drops
MoneyBeat – WSJ
Oh, Mt. Gox. When one of the larger crypto-currency exchanges has a problem, the entire bitcoin trading universe has a problem. So it was with BTC China back in December, and so it was with Japan-based Mt. Gox today.
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Central Bank Of Cyprus Does Not Like Bitcoin
MoneyBeat – WSJ
It’s not a good day for Bitcoin. Over on Japan-based Mt. Gox, one of the major exchanges for trading the virtual currency, withdrawals have been halted and the price has dropped. Several thousand miles away on the tiny island of Cyprus, the central bank has weighed in on the virtual currency too, and it’s not happy.
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***DA: Cyprus, which has had capital controls in place for several months, now finds itself critical of bitcoin because of capital controls implemented by Mt. Gox.

Russia prepares crackdown on Bitcoin
Kathrin Hille in Moscow and Stephen Foley in New York – FT.com
Russian authorities are preparing to crack down on Bitcoin and have warned that those who use “cryptocurrencies” are breaking the law, as regulatory scrutiny of the virtual payment system intensifies around the world.
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Indexes & Index Products

‘RBI should’ve more power over financial benchmarks’
Business Standard
A Reserve Bank of India (RBI) committee on financial benchmarks has asked for more powers for RBI including a tweak in the RBI Act so that the regulator has more role in fixing benchmarks. In its report released on Friday, the committee also recommended the computation of overnight Mumbai Interbank Bid Rate (Mibid) and Mumbai Interbank Offered Rate (Mibor) to be shifted to a method based on volume weighted average of trades.
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Gold

China Buys, Produces Record Amounts of Gold
Chuin-Wei Yap – The Wall Street Journal
China’s output and consumption of gold rose to record levels last year, entrenching the country’s position as the world’s largest producer and an opportunistic buyer of bargain-price commodities.
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World Gold Council: 2013 Review And 2014 Outlook
Seeking Alpha
The gold price fell in 2013 as investors reacted to Fed tapering expectations, and money flowed into equities. We believe prices now reflect a consensus view to monetary policy normalisation and should be less sensitive to it. We view the direction of the US dollar as well as the strength of Asian demand as key indicators of gold sentiment.
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Miscellaneous

Goldman Sachs Traders Join Citadel in Hedge Fund Migration
Jesse Westbrook and Ambereen Choudhury – Bloomberg
Two Goldman Sachs Group Inc. (GS) managing directors are leaving for Citadel LLC, joining the migration of traders leaving Wall Street banks for hedge funds as lenders pull back from riskier businesses.
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The one place where economic confidence is positive is, you guessed it, D.C.
Niraj Chokshi – The Wshington Post
Residents in all 50 states have a dim view of the economy, but for people living in the nation’s capital everything’s coming up roses.
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