First Impressions

Peeling back the layers of the European regulatory onion with Finex’s Andrew Gebhardt

As regulatory bodies implement sweeping new rules for the financial industry in the wake of the ’08 crisis, an increasing problem lies in navigating these always complex and occasionally differing rules and regs across international boundaries.

JLN sat down with Andrew Gebhardt, managing partner at Finex LLP, to see how the situation is playing out for investment funds in Europe.

The short answer is not well.

Watch the video »

Quote of the Day

“For the Federal Reserve to be saying this impinges upon their integrity, etc., etc. — you know, it’s absurd. This is a body that creates money out of nothing.”

Rep. Peter DeFazio, the top Democrat on the House transportation committee, in the story, “Fed pushes back as Congress eyes its billions”

Lead Stories

Inside the Money Laundering Scheme That Citi Overlooked for Years
Alan Katz and Dakin Campbell – Bloomberg
When Antonio Peña Arguelles opened an account in 2005 at Citigroup’s Banamex USA, the know-your-customer documents said he had a small business breeding cattle and white-tailed deer, ranch-raised for their stately antlers. About $50 a month would come into the account, according to the documents.
A week later, Peña Arguelles wired in $7.09 million from an account in Mexico, allegedly drug money from Los Zetas, a violent cartel founded by former Mexican soldiers, documents in his money-laundering case in Texas say. In all, Peña Arguelles shuttled $59.4 million through the account, according to a confidential report by banking regulators that berated Banamex USA in 2013 for its failure to comply with anti-money-laundering rules.

When Bond Traders Disappear
David Fickling – Bloomberg
Far back in the golden age of finance, interest-rate benchmarks were set by philosopher kings working for the greater good of the markets. Billions of dollars in fines later, we’ve read of traders comparing themselves to “a whore’s drawers” and promising bottles of Bollinger in return for rigging Libor, and the sheen has come off somewhat.

Why the new breed of banking junior is a headache
Sarah Butcher – eFinancialCareers
It’s saying something when a bank like J.P. Morgan feels the need to devote an area of its recruitment website to the parents who are helping their offspring to find jobs in banking: “Ask your daughter or son to think hard about her or his interests and strengths,” it suggests, “Careers sites, job boards and social media are great resources.”

As Investors Shun Debt, Banks Are Left Holding the Bag
Peter Eavis and Leslie Picker – NY Times
In recent years, Wall Street firms have reaped big profits in the scrappy reaches of the credit markets, selling the debt of companies with weak credit ratings to investors who crave higher returns.

Singapore bourse challenges old obstacles with new bond trading system
Saeed Azhar and Saikat Chatterjee – Reuters
Singapore Exchange Ltd’s (SGXL.SI) new corporate bond trading platform is expected to travel a difficult road, with some traders fearing that long-standing problems in Asia’s debt market will see the bourse struggle to make headway just like others before it.

The five things that could still force a government shutdown
Kelsey Snell and Mike DeBonis – The Washington Post
The bipartisan budget agreement reached last month is supposed to put an end to the fiscal fights that have dominated President Obama’s relationship with congressional Republicans.
But that doesn’t mean the threat of a government shutdown is over.

Goldman Says the Years of Emerging-Markets Doldrums Are Over
Ye Xie – Bloomberg
After three years of disappointment, emerging markets are about to turn the corner, Goldman Sachs Group Inc. predicts.
As growth picks up and weaker currencies help alleviate economic imbalances, “2016 could be the year EM assets put in a bottom and start to find their feet,” strategists led by Kamakshya Trivedi wrote in a note Thursday. “There is the prospect of improved growth and better returns, even if it is not a rerun of the roaring 2000s.”

Correspondent banking faces ‘existential crisis’ warns PwC
Elliott Holley – Banking Technology
De-risking, motivated by short-term risk-reward calculations, should not be allowed to kill off one of the cornerstones of the global financial system. Rather than abandon correspondent banking relationships, banks should be thinking about investing in and automating their risk controls, according to a new whitepaper by PwC.

ABN Amro Shares Rise Following IPO
Maarten van Tartwijk and Archie van Riemsdijk – WSJ
Shares in ABN Amro Group NV rose on their first day of trading Friday after an initial public offering valued the bailed-out Dutch bank at EUR16.7 billion ($17.93 billion).

How did the Bank’s forecasts perform before, during and after the crisis?
Nicholas Fawcett, Riccardo Masolo, Lena Koerber and Matt Waldron – Bank Underground
Forecasting is difficult, especially when it concerns the future. If we needed a reminder, the 2008-09 financial crisis demonstrated that macroeconomic forecasts can be highly inaccurate when the economy is buffeted by large shocks (see, for example, Figure 1). But that is not a good reason to avoid forecasting: monetary policy takes time to work, so forecasts are indispensable in monetary policymaking. Instead, we need to understand how different models behave in the eye of the storm: do some cope better during breaks and crises than others? And can we make better forecasts by using information that is not normally included in economic models?

We Can’t Blame The Bankers For The HBOS Collapse: There Weren’t Any Bankers There
Tim Worstall – Forbes
The Bank of England has just published the long awaited report into the collapse of Halifax Bank of Scotland, more formally known as HBOS after their merger. And the really interesting thing about this report, together with the others into that great crash, are that in the UK experience all of this was absolutely nothing at all to do with investment banking, casino capitalism, securitised mortgages or any of the other things that people tend to blame it all upon. More impressively, we can’t even blame this on the bankers: because to a reasonable approximation there weren’t any bankers at the company, not at the top at least. It’s not even a story of inadequate regulation: there was plenty of law to cover what was going on, it just wasn’t used. That is, a story perhaps of bad regulators, but not an absence of them nor regulatory powers.

Russian Corporate Bonds’ Unlikely Winning Ways
Richard Barley – WSJ
From adversity comes opportunity. But given the degree of adversity facing Russia at the end of 2014—sanctions over Ukraine, plummeting oil prices, a collapsing currency—it is surprising quite how much of an investment opportunity it has turned out to be this year.
Russian corporate bonds are the best performing in the emerging markets in 2015, Citigroup notes, with a total return year-to-date of 24%. That is despite Russia being downgraded to junk status, a recession and ongoing turbulence in oil and the ruble.

SEC Agenda for 2016: Tighten Rules on Leverage for Funds; Stress Testing and Third-Party Compliance Reviews for Advisers
Jay G. Baris – JD Supra
In testimony before the House Committee on Financial Services on November 18, 2015, SEC Chair Mary Jo White described what the SEC has in store for the investment management industry.

Eurozone Crisis: A consensus narrative
VOX, CEPR’s Policy Portal
The Eurozone needs fixing, but it is impossible to agree upon the steps to be taken without agreement on what went wrong. This column introduces a new CEPR Policy Insight that presents a consensus-narrative of the causes of the EZ Crisis. It was authored by a dozen leading economists from across the spectrum. The consensus narrative is supported by a long and growing list of economists.

Getting fintech on bank CIOs’ radar
David Bannister – Banking Technology
It is a well-known fact that banks have two types of technology: Cold War-era IBM mainframes running Cobol-based batch programmes and Evil Genius high-frequency trading systems creaming margins from ignorant ‘muppets’.
While both of these widely-held stereotypes contain an element of truth, the mundane truth is that any financial services operation will have a range of hardware and software systems of different vintages and spend a lot of time and money living with the consequences.

Wall Street Regulators Said to Step Up Leveraged-Loan Focus
Sridhar Natarajan – Bloomberg
Federal regulators have started to intensify their scrutiny of risky company loans extended by Wall Street’s biggest banks, just weeks after completing an annual audit of corporate lending, according to people with knowledge of the matter.

Ex-ICAP broker tells court Libor emails should not taken literally
A former ICAP broker charged with conspiring to rig Libor benchmark interest rates said on Thursday his electronic communications with colleagues asking for higher or lower rates should not be read literally. Darrell Read, one of six former brokers on trial at Southwark Crown Court, told the jury that emails to colleagues with headlines such as “morning begging email!!” were designed only to pass on trading information from his principal trader client Tom Hayes and seek market information and were not designed to influence Libor rates.

Leaky Ships: Ocean Carriers in the Age of Profitless Shipping
Ryan Petersen – Flexport
Global shipping rates are astonishingly low right now; it’s possibly never been cheaper to ship goods around the world, ever. The China Containerized Freight Index collapsed to its single lowest point this week.

Central Banks

Fed pushes back as Congress eyes its billions
Zachary Warmbrodt – Politico
Even as members of Congress are slamming the Federal Reserve for being too political with its monetary policy, they are plotting to use the central bank as a government piggy bank.
Congress is aiming to take billions out of the Fed’s accounts to help pay for a new highway and transit bill, but the Fed is balking, registering “strong concerns about using the resources of the Federal Reserve to finance fiscal spending.”

ECB Path to More Easing Littered With Potholes, Analysts Say
Deborah Hyde – Bloomberg
President Mario Draghi’s speech today and European Central Bank accounts yesterday show the euro-area’s central bank is open to doing more to stimulate the region’s economy given it sees downside risks to inflation.

Fed has done ‘everything’ to avoid rate liftoff surprise: Fischer
Ann Saphir – Reuters
The Federal Reserve has telegraphed its imminent interest rate hike so well that central bankers elsewhere have even begun to get impatient about it, the Fed’s second-in-command suggested on Thursday.

Getting boomier: The problem of a one-size-fits-all monetary policy in the euro area is back
The Economist
The swings in Ireland’s economic fortunes have been wilder than for most. Just look at the labels it has attracted. In 1988 it was dubbed the “poorest of the rich” by this newspaper. By the 1990s it had transformed itself into the Celtic Tiger, Europe’s answer to the fast-growing economies of emerging Asia. In the 2000s it was turbo-charged by the low interest rates that came with membership of the euro (some called it a “euro-bubble” economy). But by the end of 2010 it was a ward of the IMF, as its twin housing and credit booms turned to bust. Now its speedy recovery from the crash has earned Ireland a new title: the Celtic Phoenix (see article).

Risk of market jolt on Brexit could complicate BoE decision
Jemima Kelly – Reuters
UK markets have not even begun to discount the chance that Britain could vote to leave the European Union next year, raising the risk of a blowup closer to the vote and complicating the timing of any Bank of England interest rate rise, top investors say.
Global asset managers speaking at this week’s Reuters summit on the 2016 investment outlook said the absence of a firm date for the vote had kept the narrowing odds on “Brexit” and close-to-50/50 opinion polls off most market radar screens so far.

This is why the Fed has waited to hike, says Ken Griffin
By Wallace Witkowski – MarketWatch
The Federal Reserve has lost some of its credibility this year after months of promising to raise interest rates and not pulling the trigger — but hedge fund king Ken Griffin thinks the central bank has waited to hike because it didn’t want to paint itself into a corner.

Monetary Policy: Past, Present and Future
Speech by Mario Draghi, President of the ECB, at the Frankfurt European Banking Congress, 20 November 2015

Dudley says Fed should ‘soon’ be ready to raise rates
Jonathan Spicer – Reuters
The Federal Reserve should “soon” be ready to raise interest rates as U.S. central bankers grow confident that low inflation will rebound and that employment remains stable, William Dudley, the influential head of the New York Fed, said on Friday.


There Is No Holding Back the Greenback
Steven Russolillo – WSJ
It is tempting to take your chips off the table after a winning bet. But when it comes to the sustained resilience of the greenback, doubling down looks pretty good.
As third-quarter U.S. earnings season winds down, S&P 500 profits are set to fall again. This will mark the first back-to-back quarterly decline since 2009. The strengthening U.S. dollar merits much of the blame, particularly since multinational corporations doing the bulk of their business abroad have been hit hardest.

Brexit could spark land grab for London FX trade -Columbia Threadneedle
Nigel Stephenson – Reuters
A British vote to leave the European Union could see Frankfurt make a “land grab” for a slice of London-based foreign exchange trade in the euro, the chief investment officer of Columbia Threadneedle Investments EMEA said on Friday.

When It Comes to Ruble, Oil Means More to Citigroup Than Putin
Ksenia Galouchko – Bloomberg
Beware the rally in the ruble.
The best-performing major currency in the five days through Thursday is being buoyed by a thaw in relations between Russia and the West following the terror attacks in Paris, and the prospect this will lead to the dismantling of sanctions imposed over the Ukraine conflict. Yet with oil near a six-year low, Citigroup Inc. and Morgan Stanley say the gains can’t last.

SNB to Keep Options Open in Event of ECB Fallout, Maechler Says
Catherine Bosley and Albertina Torsoli – Bloomberg
The Swiss National Bank has an eye on the actions of euro-area policy makers and will keep all options open in its bid to combat the strong franc, Governing Board member Andrea Maechler said.

Barclays’ FX fine: The death knell for last look?
Farah Khalique – Euromoney Magazine
The $150 million fine imposed on Barclays this week for abusing its last-look policy on clients’ currency orders until as recently as three months ago signals another nail in the coffin for the controversial practice, say analysts.

Dollar Gain Slows as Focus Turns to Flat Curve From Yield Spread
Chikako Mogi and Hiroko Komiya – Bloomberg
The dollar’s surge is losing steam against the euro and yen as investors shift their attention to how fast the Federal Reserve will raise interest rates next year from whether the first increase in almost a decade will come in December.

The Dollar Is Ripe For Monetary Restrictions
Seeking Alpha
The publication of the FOMC’s October minutes caused nervous investors to lock in their profits on the greenback and encouraged EUR/USD bulls, who, typically, prefer to go on the counter-attack once the Fed’s cycle of monetary restrictions has already begun. This is what happened in 1999 and 2004. However, current conditions are different: the weakness of the eurozone is a long-term issue; meanwhile the US has no complaints about its economic health. The rally of the euro resembles a false start, especially since the historic decision has not yet been made. Will the Federal Reserve opt for monetary policy normalization in December? I think it will.

Aussie to Real Defy Commodity Rout as Fed Defangs Rate Increase
Candice Zachariahs and Chikako Mogi – Bloomberg
Commodity currencies including the Australian dollar, South Africa’s rand and the Brazilian real are surging as traders focus on the potential for a gradual cycle of U.S. interest-rate increases and ignore a rout in raw material prices.

Colombia’s Peso Volatility Highest in World Amid Crude Swings
Christine Jenkins – Bloomberg
Swings in oil prices sent Colombia’s peso volatility to the highest in the world as the currency rebounded from the lowest level since September.

Indexes & Index Products

This Year’s Hottest ETF Now Luring Cautious Set of Europe Bulls
Inyoung Hwang – Bloomberg
Hawkish rhetoric from Janet Yellen plus hints of fresh stimulus from Mario Draghi are making for a winning combination — again.
That scenario at the beginning of the year sent record amount of cash into the WisdomTree Europe Hedged Equity Fund, catapulting it to the No. 1 spot for 2015 ETF inflows in the U.S. And now it’s playing out again, only this time around, investors burned by the stronger euro and summer selloff are making their wagers more cautiously — via the derivatives market — while the pace of inflows to the exchange-traded fund slows.

WisdomTree introduces currency-hedged global small-cap dividend ETF on BATS
James Lord – ETF Strategy
WisdomTree, a leading provider of currency-hedged exchange-traded funds, has listed a new ETF with BATS Global Markets, a leading US exchange for the trading of ETFs. The launch is the fifth WisdomTree fund to be listed on the BATS exchange since the two officially began their partnership on 29 October 2015.

Since The Paris Attacks, Some International Sectors Are Rallying Strongly
Moby Waller – CBOE Options Hub
How has the stock market performed since last Friday’s 11/13 attacks in Paris, France? The S&P 500 Index ETF (SPY) is up around 3.5% in this time frame, an impressive rally. The broad market has largely shrugged off this event, which is likely a sign of strength — the reaction to news among traders and investors often being more important than the news itself.
Many International ETFs are among those that have performed the best since last Friday’s close, We looked at pure sector play Exchange Traded Funds (ETFs), no inverse/ultra etc — those that are optionable and have over 500k average daily volume.

Bond ETF Withdrawals Surge as Investors Brace for Higher Rates
Anchalee Worrachate and Wes Goodman – Bloomberg
Investors in U.S. exchange-traded funds are selling bonds this month for the first time since June as they prepare for the Federal Reserve to raise interest rates.

With emerging-market stock funds, check what’s in the tin
AP via U.S. News
hen you’re built different, in investing, you act different. That’s why it’s important to check what’s in your emerging-market stock fund — even if it’s an index fund.
Emerging-markets index funds track different indexes, which can have very different exposure to different parts of the world. And as Brazil, India and other emerging market economies move in increasingly different directions, actively managed funds are looking more distinct as well.

Bank of China launches first yuan-denominated ETF in Europe
Europe’s first exchange-traded fund (ETF) denominated in yuan and based on the domestic Chinese share market launched on Friday, Bank of China’s international division said in a statement.


Gold Facing Additional Headwinds Ahead of Probable Fed Rate Hike
Finance Magnates
The reaction from the recent ISIS attacks in Paris initially sparked what seemed to be safe haven buying in gold on the early Monday morning session. However, the rally quickly ran out of steam, emphasizing the pattern displayed over recent times, which implies that any market reaction after a terrorist event appears to have a shorter and shorter effect on prices.

Meet the treasure seekers who hunt millions in undersea gold
Barbara Kollmeyer – MarketWatch
Somewhere in the waters off the Florida coast, an estimated $250 million in silver bars and coins is waiting for Kim Fisher and his treasure-hunting family to come and get it. And Fisher, who lives by his father’s “today’s-the-day” motto, thinks he’s close to one of the biggest hauls of his career.

One Very Bad Reason to Hold Gold
After the tragic terrorist attacks in Paris last week, some investors may ponder turning to “safe haven” assets—investments that allegedly do better during extremely uncertain, fearful times. Gold is considered one of the top options in this space, and inquiries about how to invest in the precious metal are rising. While gold’s “safety blanket” narrative has returned, reality hasn’t changed: Gold lacks any mythical powers that make it a better-performing investment during turbulent times.

Gold Goes Quiet as Bears Take Breather After Drop to 5-Year Low
Joe Deaux – Bloomberg
After gold’s punishing drop to a five-year low, bears are finally giving the metal a break.
Signs of the quieting market were evident as a measure of swings for futures slumped on Friday to the lowest in three weeks. Investors are taking a breather after coming down hard on bullion for the past month in anticipation of higher U.S. interest rates, which cut the appeal of the metal as a store of value. Prices posted a fifth straight weekly retreat, the longest slide since July.


20 words you need to know to avoid getting fleeced by Wall Street
Jason Zweig – MarketWatch
Wall Street Journal investing columnist Jason Zweig’s new book, “The Devil’s Financial Dictionary” (PublicAffairs Books) is a satirical glossary of the lingo so often used to make investing more complex and confusing than it needs to be.

****SD: Definition in the article from “The Devil’s Financial Dictionary”: DAY TRADER, n. See IDIOT.

Economists tested 7 welfare programs to see if they made people lazy. They didn’t.
Dylan Matthews – Vox
For as long as there have been government programs designed to help the poor, there have been critics insisting that helping the poor will keep them from working. But the evidence for this proposition has always been rather weak.

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