First Impressions

Mark Spanbroek, European Principal Traders Association – Financial Markets 2.0
MarketsWikiEducation.com

“What trading is really about is finding an algorithmic, or systematic way, to analyze the market. And this is done with data.” Mark Spanbroek’s trading career spanned the transition from the old world of trading pits to the new world of algorithms. He now serves as acting chairman of the FIA European Principal Traders Association (EPTA). In this MarketsWiki Education presentation, Spanbroek showcases both worlds – Financial Markets 1.0 and 2.0 – from the pit trader in the multi-colored trading jacket to today’s trader, which he says is not a trader, but rather an engineer, and today’s trading strategy is more of a team effort than an individual effort.

Watch the video »

Quote of the Day

“The crisis in a major bank is the last thing Brazil needs in the middle of this whole economic and political mess. 2015 has shaped up as a year to be forgotten and I am not very optimistic regarding 2016.”

Bernardo Rodarte, asset manager at Sita Corretora, in the story, “Brazil’s Authorities in a Pickle as BTG Spillover Fear Spreads”

Lead Stories

Janet Yellen Says Economy Is Ripe for Fed Interest Rate Increase
Binyamin Appelbaum – NY Times
Janet L. Yellen, the Federal Reserve chairwoman, said Wednesday that economic conditions were ripe for the Fed to start raising its benchmark interest rate this month, a move that appears all but inevitable.
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Banks must start clearing interest rate swaps in EU from June
Reuters
Banks must clear derivative trades known as off-exchange interest rate swaps in the European Union from June next year, marking the first so-called “clearing obligation” to come into force in the EU.
The clearing process aims to increase transparency in interest rate swaps, which account for the largest part of the world’s $552 trillion derivatives market.
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Barclays’ boss wants Blythe Masters to run investment bank
Michael Erman and Steve Slater – Reuters
New Barclays Plc Chief Executive Jes Staley has approached his former JPMorgan colleague Blythe Masters to run the British bank’s investment bank division, a person familiar with the matter said on Wednesday.
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J.P. Morgan Enters Online Loan Boom
Peter Rudegeair – WSJ
The largest U.S. bank is hopping on the online-lending bandwagon.
J.P. Morgan Chase & Co. is joining with OnDeck Capital Inc. on a new type of small-dollar loan product designed for the bank’s small-business customers, said Jennifer Piepszak, the bank’s chief executive for business banking, in an interview. For businesses, small-dollar loans generally refer to those that are less than $250,000.
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Brazil’s Authorities in a Pickle as BTG Spillover Fear Spreads
Paula Sambo, Anna Edgerton and Mario Sergio Lima – Bloomberg
A week after the arrest of Brazil’s billionaire Andre Esteves, the lack of guidance from Brazilian authorities on the future of his troubled investment bank BTG is exacerbating investors’ nervousness.
Since Esteves was detained on Nov.25 the only official statement from the central bank the same day was that it is monitoring the situation and that the bank showed solid financial indicators and continued operating normally. President Dilma Rousseff on Monday said from Paris that while she expected some economic impact from the arrest, neither she nor anybody else “had the slightest idea” of its broader implications.
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BTG Pactual soldiers on
The Economist
A week ago BTG Pactual, a Brazilian investment bank, seemed to be headed for the bulge bracket. But since the arrest of its chairman and CEO, André Esteves, on November 25th, it has instead been desperately trying to convince clients and investors that it isn’t bilge.
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Where Janet Yellen’s Path Will Lead Treasurys
Justin Lahart – WSJ
In a couple of weeks, the Federal Reserve is set to raise its target for overnight interest rates for the first time in nearly a decade. But even as the era of near-zero short-term rates comes to an end, the era of low long-term rates looks likely to go on.
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Time to change the investment recipe
Edouard Carmignac – Financial Times
Investors find it tough to let go of recipes that have worked well for years. That is the case today as they are tempted to keep betting on the ingredients of healthy risk appetite, liquidity and economic hope — the product of seven years of highly accommodative monetary policies.
But the situation has already changed. A global economic slowdown and the deflationary impact of overcapacity in China are on a collision course with the dwindling potency of central banks’ attempts at monetary support.
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Banking: Providing liquidity to liquidity providers
Peter Lee – Euromoney Magazine
The fixed income markets have long operated with inter-dealer brokers which, in return for commission, will anonymously match up the leading dealers seeking to lay off risk through an inside market from which those banks’ big asset manager customers are excluded.
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U.S. debt limit threat defanged on Wall Street
David Lawder – Reuters
Wall Street trembled when Republicans first began threatening to force the United States into default by not raising the federal debt limit, but after four years of fiscal standoffs, the threat looks increasingly like a bluff and the markets are calling it.
A Reuters analysis, tracking short-term Treasury yields, credit default swaps and market volatility data, showed traders are increasingly less likely to respond to repeated ultimatums from Republicans in the U.S. Congress about the debt limit.
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The depressing reason Obama and Congress have failed to fix Fannie Mae and Freddie Mac
Bethany McLean – Quartz
The Obama administration and a set of constituents who would seem to be its natural allies are currently at war over the festering problem of mortgages. The NAACP and the National Community Reinvestment Coalition (NCRC)—an association of more than 600 community based organizations— are among the groups that have turned on the government. At issue are Fannie Mae and Freddie Mac, the mortgage giants which have been in the clutches of the government ever since the financial crisis of 2008. The groups argue that government sponsored enterprises (GSEs) need reform now, in order to protect access to affordable housing. Surprisingly, they have been given the equivalent of the middle finger by Obama and company. But why?
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Markets Outlook 2016: Return of inflation could define bonds
Robin Wigglesworth – Financial Times
Betting on a cautious but notable inflation upswing could be the winning trade of 2016, according to a slew of investment bank analysts who have polished off their flagship forecasts for the coming year.
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Top Hong Kong Regulator Peter Pang Referred Son for J.P. Morgan Internship
Ned Levin – WSJ
A top official at a Hong Kong regulator investigating J.P. Morgan Chase & Co.’s Asian hiring program is listed in an internal J.P. Morgan document as having referred his son for an internship there.
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Overcoming Europe’s Twin Growth Challenges by Michael Heise
Michael Heise – Project Syndicate
As economic recovery finally begins to take hold in Europe, the imperative for policymakers is to ensure that growth can be sustained far into the future. Fiscal and monetary stimulus may have been appropriate at the peak of the crisis, but they will do little to address the biggest threat to the continent’s long-term prospects: a toxic twosome of weak demographics and low investment.
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India’s HDFC to issue first corporate masala bond
James Crabtree – Financial Times
Indian housing finance group HDFC is set to press ahead with plans to sell the country’s first corporate offshore “masala” bond of up to $300m early in 2016, according to people familiar with the situation, launching a market in the new instruments worth up to $5bn by the end of next year.
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Hedge fund investors keep the faith in macro bet
Simon Jessop and Lawrence Delevingne – Reuters
A weak overall performance for hedge funds which bet on macroeconomic trends this year has not stopped some investors from gearing up to trust them with their money in 2016.
While returns across hedge funds are flat, many so-called macro funds – which make up around a fifth of the industry’s $3 trillion in assets – have fared worse, caught out in some cases by sharp market moves that wiped out profitable trends.
This has meant the closure of 113 macro hedge funds in 2015, data from industry tracker Eurekahedge showed, although 82 new ones opened, many of which take the view that an eventual divergence in developed market interest rates and increased volatility will boost returns.
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British court approves landmark plea deal over Standard Bank bribery
Reuters
A judge approved Britain’s first deferred prosecution agreement (DPA), a new type of plea deal, on Monday in a case centred on $6 million in bribes paid to Tanzanian officials by the Tanzanian unit of South Africa’s Standard Bank (SBKJ.J).
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Japan’s solution is to raise wages by 10%
Adam Posen – Financial Times
Japan needs inflation, and more inflation than the 0.5 per cent achieved with its quantitative easing programme. The need is not for the usual countercyclical reasons, even if the economy is flirting with technical recession. Rather, the country needs meaningful positive inflation for reasons of fiscal stability. Public debt, even on a net basis, is very high at 160 per cent of gross domestic product. Even a small adverse shock could cause unsustainable debt dynamics — such as debt service payments spiralling up to consume much of the government budget.
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Central Banks

Mario Draghi moves centre stage in Europe’s epic lurch to federalism
Jeremy Warner – The Telegraph
Rarely has the gulf that separates US from European monetary policy looked quite as wide as it does today, with the European Central Bank this week expected to sanction further easing even as the US Federal Reserve prepares to tighten – a great divergence which sees the two central banks, and their currencies, heading in opposite directions.
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E.C.B. Expected to Expand Stimulus, as Questions of Effects Remain
Jack Ewing – NY Times
If there were any lingering doubts that the European Central Bank would ratchet up its stimulus of the sluggish eurozone economy, they probably evaporated on Wednesday.
New official data showed that the region’s dangerously low inflation rate remained at an annual pace of 0.1 percent in November. That was unchanged from October’s reading, and still far below the central bank’s target of just below 2 percent.
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Yellen lays ground for interest rate rise
Sam Fleming – Financial Times
The US economy has “recovered substantially” from the Great Recession and is set for further growth and firmer inflation, Janet Yellen said, as she laid the ground for the first rise in official interest rates since 2006.
A lift in rates would testify to the progress the US has made in shrugging off the legacy of the crash, the Fed chair said, adding that there were risks in waiting too long to start normalising policy.
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The Fed and the ECB: when monetary policy diverges
Mohamed El-Erian – The Guardian
Over the next few weeks, the US Federal Reserve and the European Central Bank are likely to put in place notably different policies. The Fed is set to raise interest rates for the first time in almost 10 years. Meanwhile, the ECB is expected to introduce additional unconventional measures to drive rates in the opposite direction, even if that means putting further downward pressure on some government bonds that are already trading at negative nominal yields.
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FRB: Speech with Slideshow–Yellen, The Economic Outlook and Monetary Policy–December 2, 2015
Federal Reserve
The Economic Outlook and Monetary Policy
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Why It’s Still Too Early for the Fed to Start Raising Interest Rates
Andrew T. Levin – WSJ
The Federal Reserve has signaled that it will begin raising short-term interest rates at its Dec. 15 meeting. The Federal Open Market Committee has maintained its federal funds rate target close to zero for seven years, and it has frequently described the removal of monetary policy accommodation as “normalization.” So many will infer from this decision that the Fed judges the economy to be sufficiently close to “normal” to warrant the onset of tightening. Yet current economic conditions are not consistent with this action, and starting the tightening process now would pose substantial risks to the Federal Reserve’s statutory goals of maximum employment and price stability.
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Mario Draghi Is About to Become the World’s Market Risk Manager
Simon Kennedy and Jeff Black – Bloomberg
Mario Draghi is set to become the new first line of defense for the world economy, whether he likes it or not.
Federal Reserve Chair Janet Yellen’s preparations to raise U.S. interest rates this month put the European Central Bank president in the vanguard of the global charge against feeble inflation. The fresh wave of monetary stimulus that he’s predicted to unleash on Thursday may become the best chance for a much-needed impetus to consumer prices.
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Are we done with ‘rock star’ central bankers?—commentary
Brian Kelly – CNBC
The ISM manufacturing index came in below 50, which usually sends stocks reeling. But that didn’t happen this week — instead, stocks remained strong.
When that divergence happens, it prompts some murmurs of a conspiracy theory — that the Federal Reserve may be buying stocks to prop up the market. I’m no conspiracy theorist but I do think the market action is due to the Fed — just not in the way that the conspiracy theorists suggest.
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Japan’s central bank wants the country’s unions to ask for bigger raises
Tim Fernholz – Quartz
It takes rare circumstances to get a country’s top banker to demand bigger pay raises for union workers, but that’s exactly what we are seeing in deflation-scarred Japan.
There, the largest union association, Rengo, is seeking a 2% raise this year for the 6.75 million workers in its member organizations. But officials at Japan’s central bank, which has been pushing aggressively to raise inflation, say that’s not enough and that workers should be demanding more, the Wall Street Journal reports.
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Meet the Central Bank Governor Who Isn’t Much Impressed by Money
David Malingha Doya – Bloomberg
Kenya’s Njoroge surprised by focus on his religious beliefs
Political pressure is one of the biggest challenges of the job
When Patrick Njoroge took charge of the Central Bank of Kenya six months ago, his biggest surprise wasn’t how tough the job turned out to be. It was the attention on his personal life.
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Currencies

Meet the New Currency Arbitrageurs: Corporate Treasurers
Tracy Alloway – Bloomberg
Strange things have been happening in markets, that much we know.
In the credit world, derivatives linked to the corporate debt sold by companies have been trading at a tighter level than the cash bonds themselves. In the vast and shadowy repo market, the rates charged for interest rate swaps have plunged below equivalent U.S. Treasury yields. Meanwhile, in FX markets, the cost to convert local currency payments from the euro area, the U.K. and Japan into dollars has jumped, sending the so-called “cross-currency” basis deeper into negative territory in the process.
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If history is a guide, dollar will drop after Fed hike
Anirban Nag – Reuters
History is not on the dollar’s side. In the last couple of decades, the dollar index .DXY, which measures the greenback against a basket of six currencies, has fallen every time the Federal Reserve has begun a cycle of interest rate hikes.
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Dollar Risks Grow as Hedge Funds Make Greenback Most Favored Bet
Rachel Evans – Bloomberg
The dollar is on the cusp of its longest winning streak since March and traders keep piling in, yet a growing number of influential strategists are starting to sound alarm bells.
The potential for a pullback is growing, according to Societe Generale SA and HSBC Holdings Plc, which highlighted the U.S. currency’s vulnerabilities before a second-quarter setback. A gauge of the greenback has gained almost 5 percent from this quarter’s low on Oct. 15. Three rallies of similar magnitude ended with 3 percent downturns in March, June and August.
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Euro to Bear Brunt of Yuan’s Inclusion in Reserve-Currency Club
Netty Idayu Ismail – Bloomberg
IMF taking from the euro to give to China, Borthwick says
Shared currency has dropped 13% this year, most in a decade
The euro’s worst year in a decade is looking even grimmer after the Chinese yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies.
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Hong Kong vying for lead role as yuan trading hub
South China Morning Post
Hong Kong will need to introduce more yuan-denominated products to compete for some of the US$600 billion worth of yuan expected to flow into the city’s financial markets over the next five years, in the wake of the International Monetary Fund’s decision to anoint the currency reserve status
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IMF Opens Door to Adding Currencies to SDR Basket After Yuan
Andrew Mayeda – Bloomberg
The International Monetary Fund said currencies beyond the dollar, euro, pound and yen may meet the same key threshold as the Chinese yuan did to qualify for inclusion in the lender’s basket of reserve currencies.
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Indexes & Index Products

There is no defense of ‘closet indexing’ by fund firms
Cullen Roche – MarketWatch
So-called closet indexing occurs when a mutual fund or ETF promises to be able to “beat the market,” charges a fee premium relative to its benchmark and then largely mimics the performance of that benchmark.
This is a tremendous problem for investors because they usually end up paying hefty fees in exchange for empty promises. When I review client portfolios, I find that an alarmingly high number of them hold closet index funds (before I release these demons into the netherworld).
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****SD: Don’t click the link if you hate sharks — a rather frightening picture accompanies the article with a caption pertaining to taking “a bite out of investors’ portfolios.”

Chasing Performance with ETFs
Chris Brightman, Feifei Li and Xi Liu – Research Affiliates
Key Points
1.t is well established that many investors tend to purchase “winning” stocks—those that have recently outperformed—and to shun “losers.”
2. ETF providers evidently take investors’ preference for winners into account by predominately launching funds whose underlying indices are outperforming at the time they make new product decisions.
3. Strategies that produced excess returns over the prior three years generally behaved like an average investor’s portfolio after the ETFs were launched
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Korea, Taiwan, India stocks may fall when China ADRs join MSCI EM index
CNBC
Stocks in South Korea, Taiwan and India could bear the brunt of MSCI’s decision to add 14 U.S.-listed Chinese companies to its Emerging Markets index. The mainland currently holds a 23.9 percent share in the $3.5 trillion market-cap global benchmark, and that’s set to widen to 26.2 percent by next year, following the addition of heavyweight tech names including Alibaba, Baidu and Qihoo 360 Technology.
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101 ETF Investing Tips from the Experts
etfreference.com
The editorial team at ETF Reference surveyed 57 ETF investing experts in search of the best tips for exchange-traded fund investors. The response we received was incredible. Our panel sent us hundreds of amazing tips! We winnowed that list down to 101, which are presented below. Whether you’re a beginner or a veteran ETF investor, there are likely dozens of valuable tips in here for you.
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S&P Dow Jones Indices Market Attributes: Europe Index Dashboard
Press Release
S&P Dow Jones Indices Market Attributes: Europe Index Dashboard
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Gold

Hedge funds have never bet this much on a falling gold price
Frik Els – MINING.com
On Tuesday on the Comex market in New York, gold futures with February delivery dates eked out a small gain in brisk post-holiday trade, but remains not far off near five-and-half year lows hit last week.
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Banks in talks with temple trusts to push gold scheme
Business Standard News
The finance ministry’s revenue department is likely to issue a clarificatory note within this week on the taxation issues of gold monetisation scheme (GMS) investors. The clarifications will include exemptions on income tax and long- and short- term capital gains tax.
Additionally, Business Standard has learnt a number of state-owned banks are in talks with some of the country’s largest and richest temple trusts, including those managing Sabarimala, Sree Padmanabhaswamy, Tirumala Tirupati, Guruvayur, and Puri Jagannath, among others, to part with some of their massive reserves of idle gold for GMS.
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Miscellaneous

Few hours, soaring pay for corporate board members
Sacha Pfeiffer and Todd Wallack – Boston Globe
Michael Heffernan earned $1 million from Ocata Therapeutics Inc. in Marlborough last year, including stock and stock options. William D. Young received $1.7 million in compensation from Vertex Pharmaceuticals Inc. of Boston. And Phillip A. Sharp hauled in $1.9 million from Cambridge-based Alnylam Pharmaceuticals Inc.
But the men are not chief executives or vice presidents. They’re not even full-time employees.
They’re corporate board members, receiving premium paychecks in exchange for, typically, attending a meeting every few weeks. The Boston Globe calculated the men earned more per board meeting than the average Major League Baseball player received per game.
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The Do-Gooder Premium
Michael P Regan – Bloomberg
It’s hard not to root for people like Deborah Winshel at BlackRock and others who are championing the notion of making the world a better place through what’s known as “impact investing.”
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