First Impressions

There is no Fear in Fear Itself
Douglas Ashburn – John Lothian News

In compiling today’s newsletter, two themes stick out like sore thumbs. First, the world seems to be getting the message that current policy is having less and less impact, and  the side effects of such policy may be worse than the disease itself. Meanwhile, asset prices keep lurching forward, and there is little to no fear in this market.


Quote of the Day

“Just as the commandment ‘Thou shalt not kill’ sets a clear limit in order to safeguard the value of human life, today we also have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills.”

Pope Francis from the story, “Pope attacks “tyranny” of markets, urges renewal in key document”.

Lead Stories

Inflation Enters the Fed Taper Equation
Cynthia Lin  – MoneyBeat – WSJ
Even if the U.S. economy and jobs market continue to improve, a low inflation environment could keep the Fed’s bond-buying program going to end of the first-quarter, according to Bank of America Merrill Lynch.
***DA: So much for using unemployment as the key metric. My concern is in the Eurozone, where the chief export next year may be deflation.

Pope attacks “tyranny” of markets, urges renewal in key document
Naomi O’Leary – Reuters
Pope Francis called for renewal of the Roman Catholic Church and attacked unfettered capitalism as “a new tyranny”, urging global leaders to fight poverty and growing inequality in the first major work he has authored alone as pontiff.

Analysis: What taper? Low rates for longer is key Fed theme for 2014
Debate over when the Federal Reserve could trim its bond purchases monopolized market talk this year, but as a new Fed chief takes charge, more participants believe the key theme to emphasize for 2014 is low rates for longer.
***DA: Because it has worked so well thus far.

Amid Stock Calm, Investors Look to VIX for Volatility Bets
Kaitlyn Kiernan – MoneyBeat – WSJ
Stock investors seem to be growing more comfortable with the outlook for Federal Reserve policy, but some options traders are betting that uncertainty and wider price swings will return ahead of the mid-December Fed rate-setting meeting.
***DA: The problem with volatility trading is that you must be right on two things – direction as well as time. Yes; someday volatility will normalize. When? I dunno.

Macro Horizons: Central Bankers Try to Square Low Inflation and Asset Bubbles
MoneyBeat – WSJ
Central banks are struggling with pressures pulling them in different directions. Inflation is falling and growth is subdued but asset prices are becoming bubbly. Members of the Bank of Japan’s policy committee are questioning whether the country can achieve 2% inflation in its two-year time horizon. The Reserve Bank of Australia is struggling with an overvalued currency that threatens to crush the country’s manufacturing sector without cutting rates that would inflate its bubbly housing market even further. And the Bank of England is looking for additional macro-prudential powers it might use to limit bank leverage as the U.K.’s own property market heats up.
***DA: In other words, central banks are coming to grips with what many of us have known all along – every central bank action has consequences.

China looks to limit interbank lending
Simon Rabinovitch in Shanghai –
Chinese regulators are set to place new limits on interbank loans after banks exploited a loophole to ratchet up leverage in the financial system, according to draft rules.
***DA: Ratcheting up leverage via off-balance sheet transactions – what could possibly go wrong?

Let a hundred moles be whacked
David Keohane | FT Alphaville
China, caught somewhere between futility and necessity, is attempting to once again regulate the whack-a-mole game that is its interbank market.
***DA: I predict that David Keohane will be getting a call from the Society for the Prevention of Cruelty to Animals.

Goldman Sachs: Masters of Suspense
Katie Martin – MoneyBeat – WSJ
It’s that time of year again: Goldman Sachs is sharing the wisdom. Last week, if you recall, the firm revealed its top 10 macro themes for the year ahead. Monday, it started releasing its closely-watched top trade recommendations.
***JM: It’s like opening an Advent calendar! …and discovering that half the little boxes have dusty orange peanut candy things from your great-aunt’s coffee table.

Central Banks

UK’s Osborne asks BoE to consider new power to rein in banks
Britain’s finance minister George Osborne has asked the Bank of England to review whether it needs more power to restrain banks risk-taking more quickly than under a timeframe agreed by international financial regulators.

Czech National Bank Goes Large For FX Intervention
MoneyBeat – WSJ
The Czech central bank has boosted its foreign exchange reserves 14% by printing new korunas to buy foreign currency, as the institution does its part to help the weak domestic economy boost exports and fuel currently-weak domestic inflation.

BOJ Beat: Minutes Show Split Among Policy Board
Tatsuo Ito – MoneyBeat – WSJ
Skepticism is growing among the Bank of Japan’s policy board over its ambitious inflation target, with some members openly disagreeing with Gov. Haruhiko Kuroda’s optimism that the economy is heading in its intended direction.

DTCC Limit Monitoring To Provide An Early Warning System To Help Identify Unusual Trading Activity And Trading Limit Breaches
The Depository Trust & Clearing Corporation (DTCC) announced that National Securities Clearing Corporation (NSCC) has filed a proposed rule change with the Securities and Exchange Commission (SEC) to provide its members with a new tool designed to serve as an early warning system that alerts those firms to trading activity that is nearing defined trading limits.
***DA: We spoke with DTCC’s Bill Kapogiannis about the new tool, which will become available to DTCC member firms in mid-January, pending regulatory approval. It is based on a pre-determined dollar-value net notional exposure limit, and will generate messages as limits are approached and/or breached. He also said that, though the limits are being rolled out in the equity markets, they are adaptable to other asset classes, with equity options the next possible target. With Reg. SCI entering the pre-trade environment and this tool in the post-trade space, will this mean the end of fat finger crashes and Knightmares?


Goldman Currency-Trading Definition Shows Disclosure Gap
Michael J. Moore – Bloomberg
What’s the difference between trading currency products and currency trading? More than $1 billion, according to Goldman Sachs Group Inc.

The lifecycle of your liberalised yuan
David Keohane | FT Alphaville
The assumption for a long time has been that when a free floating yuan is finally born step 1 on its journey would be a joyous rush of capital inflows sweeping it upwards as foreigner investors finally got to jump into China with both feet. But, as we’ve been arguing for a while, that might not be true anymore.

The Rial — “no longer a troubled currency”
Paul Murphy | FT Alphaville    
You might think “that’s a bit quick,’ but it’s happened. Steve Hanke from John Hopkins university, who runs the Troubled Currencies Project alongside the Cato Institute, has decided that recent stability exhibited by the Iranian currency coupled with the weekend’s news of a possible international rapprochement mean the rial really doesn’t belong in his toxic list.

Corporate hedging demand drives growth in offshore RMB options market
Justin Lee –
A rapid expansion in type and amount of RMB structures traded in 2013 signals how the Chinese currency is going mainstream. But dealers say the real test will come when the US starts to raise interest rates

Render Unto Caesar, but Who Backs the Bitcoin?
How can bitcoin be anything but a passing fad? It seems you can’t open a newspaper or read a website these days without hearing about the super-yet-mysterious virtual currency known as bitcoin.

Indexes and Index Products

Stoxx launches Euro Stoxx Futures Roll Index
FTSE offers low volatility in sharia-compliant format; S&P Dow Jones licenses three indexes to State Street; Nasdaq adds to Newfound series

The ETF professor: Nasdaq director takes indexing to the classroom
When Nasdaq OMX Global Indexes director David Krein was a business school student in the late 1990s, the term “exchange-traded fund” was little known to most of Wall Street, let alone a university classroom.

HKEx Welcomes First RQFII ETF from an Offshore Fund Manager
Hong Kong Exchanges and Clearing Limited (HKEx) welcomes today’s listing of the Hang Seng China A Industry Top Index Exchange Traded Fund (ETF), the world’s first Renminbi Qualified Foreign Institutional Investor (RQFII) ETF from a fund manager based outside Mainland China.

European stocks primed for protection and leverage
Yakob Peterseil –
Some investors fear this year’s stellar rally in European equities could run out of steam, but structured products and exchange-traded funds can still provide smart exposure that boosts returns and guards capital for those seeking targeted plays in a bull market.

Fierce competition and active regulation for product providers in Germany
Michael Marray –
With structured product volumes in Germany having fallen steadily all year, the arrival of new entrants competing for a slice of a smaller market suggests 2014 could be a tough year for profitability.

Bloomberg Feeds European Asset Swap Spreads Into New Benchmark
Nicholas Hamilton – WatersTechnology
Bloomberg Index has launched a benchmark that provides market-driven measurement of credit risk and funding rates of high-quality European banks


Gold Fix Drawing Scrutiny Amid Knowledge Tied to Eruption
Liam Vaughan, Nicholas Larkin & Suzi Ring – Bloomberg
Every business day in London, five banks meet to set the price of gold in a ritual that dates back to 1919. Now, dealers and economists say knowledge gleaned on those calls could give some traders an unfair advantage when buying and selling the precious metal.

Platinum dragged lower by fall in gold
Emiko Terazono in London –
Platinum has fallen to a one-month low, dragged down by gold prices, which lost ground amid easing political tensions after the deal with Iran over its nuclear programme.

What Is Goldman Sachs Doing With Venezuela’s Gold?
Matt Levine – Bloomberg
A while back Greece had a problem. The problem was that it wanted to borrow more money, but didn’t want to increase its debt. (Because the European Union would frown on it having more debt.) So it went to Goldman Sachs, and Goldman told Greece, well, what you can do is borrow some money from us, but we won’t call it debt, because something something something something swaps.

ROSENBERG: Here Are 9 Things Holding Back Gold
Sam Ro – Business Insider
John Paulson and George Soros were among the big gold bulls that cut back on gold this year. Retail investors have pulled out aggressively as seen by the 1,850 metric ton drop in gold ETF holdings.
Despite the drop, Rosenberg isn’t recommending buying.

Gold trade in Thailand: Bullion backwash
The Economist
Earlier this year the Indian government imposed quotas and increased taxes on gold imports, but it takes more than that to limit Indians’ love of gold. Although the country’s statisticians report that Indians officially buy a lot less of the precious metal—148.2 tonnes from July to September, a third less than in the same period last year—there has been a surge in gold smuggling.

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