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

“When I started collecting art 20 years ago, it was really a market dominated by collectors. Today we’re seeing far more people pursuing art as an investment. I would have some cause for concern around that.”

Ken Griffin, the billionaire founder of the hedge fund Citadel, in the story, “A billionaire hedge fund manager explains what is freaking him out about the art market”

Lead Stories

New York Fed – Household debt at highest level since 2010
Household borrowing in the U.S. climbed to its highest level since 2010 in the third quarter, driven by increases in mortgage lending, auto loans, student loans and credit cards, according to the New York Federal Reserve.

China Has a $1.2 Trillion Ponzi Finance Problem
Chinese borrowers are taking on record amounts of debt to repay interest on their existing obligations, raising the risk of defaults and adding pressure on policy makers to keep financing costs low.
The amount of loans, bonds and shadow finance arranged to cover interest payments will probably rise 5 percent this year to a record 7.6 trillion yuan ($1.2 trillion), according to Beijing-based Hua Chuang Securities Co., whose lead fixed-income analyst was top-ranked by China’s New Fortune magazine in 2012 and 2013. Dubbed “Ponzi finance” by Hyman Minsky, the use of borrowed funds to repay interest was seen by the late U.S. economist as an unsustainable form of credit growth that could precipitate financial crises.

Money Managers Now Have a Record Proportion of Their Portfolio Dedicated to Corporate Bonds
Tracy Alloway – Bloomberg
A financial market record was quietly reached this week.
Allocations to corporate bonds by big buy-side investors moved to 35.5 percent, up from 35.3 percent last week, according to the latest Stone McCarthey survey of senior money managers. It is an all-time high for a data series that began back in 1999, when the figure was as low as 19.1 percent.

China police busts country’s biggest underground banking cases
Chinese police have busted the country’s biggest underground banking cases involving transactions totaling 410 billion yuan ($64.24 billion), the official Xinhua news agency said on Thursday, part of a drive to combat money laundering.

Clearinghouse basis hits interest-rate hedging
A difference in pricing for interest rate swaps across the two main clearinghouses for US derivative contracts has blown out to all-time wides this week, leading to higher costs for banks and fund managers looking to hedge interest rate exposures. The cost of paying fixed rates on a 30-year interest rate swap that clears through the CME Group rose to 3.75bp higher than the cost of the same position at LCH.Clearnet – the widest spread ever between the two positions.

The world’s multi-trillion dollar bond market is circling the drain
Ben Wright – The Telegraph
Add one more name to the chorus of doom. Earlier this week, Andrew Tyrie, the Conservative MP and chairman of the Treasury Select Committee, wrote to Mark Carney, the Governor of the Bank of England, to express his concern about bond market liquidity – or, more precisely, the lack thereof.

What junk bond credit spreads reveal
Gavin Jackson – Financial Times
The yield premium on US high-yield bonds has been moving up steadily this year ahead of a possible Federal Reserve interest rate rise, and as falling commodity prices put pressure on miners and oil companies.
Investors use so-called credit spreads — the percentage-point difference in yields between junk bonds and investment-grade corporate or Treasury bonds — as an indicator of the overall creditworthiness of the private sector. A deterioration in companies’ ability to service their debt is likely to be felt first among junk-rated businesses.

Bank trading reform would lift capital needs by up to ninefold
Caroline Binham and Laura Noonan – Financial Times
Global regulators have estimated that contentious new rules will force one bank to set aside nine times as much capital as it currently does to guard against market risk in its trading book.

Robert F. Dall, Mastermind of Mortgage-Backed Bonds, Dies at 81
Landon Thomas Jr. – NY Times
Robert F. Dall, an investment banker and a pioneer of the mortgage bond market on Wall Street, died on Sunday in Manhattan. He was 81.
His son Matthew said the cause was complications of pneumonia.
While at Salomon Brothers in the 1970s, Mr. Dall oversaw the first sale of bonds backed by American home mortgages to large private investors.

Investors spoilt for choice as European banks seek capital
Martin Arnold – Financial Times
Like shoppers wandering through a Christmas market, investors in shares of European banks are being peppered with offers of seasonal merchandise.
On Friday, the Dutch government plans to raise about EUR4bn by floating ABN Amro in the biggest initial public offering of a European bank since the financial crisis.

Bank of England to consider bans for executives behind HBOS failure
Huw Jones and David Milliken – Reuters
British regulators will consider barring up to 10 executives linked to the 2008 collapse of the country’s biggest mortgage lender, HBOS, some of whom still hold senior business roles.

Apec: Services liberalisation a must for greater integration of Apec economies, says PM Lee
Straits Times
Regional economies should be integrated further by liberalising the services industry, Prime Minister Lee Hsien Loong said here on Thursday morning at a session of the Asia-Pacific Economic Cooperation (Apec) Leaders’ meeting.

Canada Banks Need $114 Billion for 2008 Crisis They Avoided
Ari Altstedter – Bloomberg
Canadian banks are starting to get their share of the bill for global regulations designed to prevent a repeat of the taxpayer funded bailouts of the 2008 financial crisis.

Finland’s depression is the final indictment of Europe’s monetary union
Ambrose Evans-Pritchard – The Telegraph
Finland is sliding deeper into economic depression, a prime exhibit of currency failure and an even more unsettling saga for theoretical defenders of the euro than the crucifixion of Greece.

CFTC details swap dealer thresholds
Cian Burke – Futures & Options World
The Commodity Futures Trading Commission (CFTC) on Wednesday issued a preliminary report on swap dealer registration thresholds, ahead of plans to reduce the threshold from its current $8bn in notional swap dealing to $3bn, from December 2017.

Nasdaq injects further millions into NLX
James Rundle – Financial News
Nasdaq has poured a further £6 million into its European derivatives venue NLX, bringing its total share capital investment in the troubled initiative to £62 million.

JPMorgan’s executive line up
Jonathan Marino – Business Insider
Jamie Dimon is the undisputed leader of JPMorgan. The end of this year will mark his 10th anniversary at the consumer and investment-banking powerhouse.

Banks and Fintech Firms’ Relationship Status: It’s Complicated
Daniel Huang – WSJ
Joshua Reich co-founded mobile-banking app Simple six years ago with an indirect shot at the nation’s largest lenders: “By not sucking,” he wrote after starting the firm, “we will win.”
That was before he decided to sell his startup to the U.S. unit of Spanish megabank Banco Bilbao Vizcaya Argentaria SA . Now, the West Coast entrepreneur is singing a different tune.

Central Banks

House passes bill calling for rule-based monetary policy
The U.S. House of Representatives on Thursday approved a bill that would make the Federal Reserve set interest rate policy using a mathematical rule, a proposal that has little chance of becoming law given a White House veto threat.

Central Banks Fight to Ensure Crisis Tools Become the Norm
Craig Torres and Simon Kennedy – Bloomberg
Unconventional tools deployed by central bankers from Frankfurt to Washington to mitigate the economic fallout of the financial crisis may be conventional when the time comes to combat the next downturn.

Reserve Bank of India hit as 17,000 staff take ‘mass casual leave’
Amy Kazmin – Financial Times
India’s central bank ground to a halt on Thursday as 17,000 staff went on strike to protest against a proposed overhaul of the country’s monetary policy framework that would curb the bank’s independence, and to demand improved pensions.

History Shows ‘Slow and Steady’ Is Best Rates Mantra for Stocks
Kate Garber – Bloomberg
The stock market’s message for Janet Yellen has been that slow and steady on interest rates is preferable to fast and furious. History not only backs that up, it also shows the margin of victory can be wide.

US inflation rise increases likelihood of Federal Reserve interest rate hike
The Guardian
The costs of food, gasoline, shelter and medical care rose last month, yet inflation continues to run at low levels ahead of a Federal Reserve meeting in December to consider raising short-term interest rates for the first time in nearly a decade.

Fed’s Lockhart says rate hike path may be ‘slow’ and ‘halting’
The U.S. Federal Reserve may be heading for a “slow … halting” effort to raise interest rates after it begins its first tightening cycle in about a decade, Atlanta Fed President Dennis Lockhart said on Thursday.

The “Data Dependent” Fed Continues to Consider the Data
Kevin Davitt – CBOE Options Hub
This afternoon the minutes from the most recent Federal Reserve Open Market Committee (FOMC) meeting were released. Yesterday the market digested the October CPI (inflation) data.
Next week, GDP (Tuesday) and Durable Goods (Wednesday) will be relatively important. Without question, the upcoming Unemployment Report (Non-Farm Payrolls) on 12/4 will be the most influential piece of economic data before the December Fed Meeting where most market participants anticipate the Fed will raise interest rates for the first time since June 29, 2006.

The Global Central Bank Put Option
Sam Kirtley – Seeking Alpha
Highly accommodative monetary policy and the increased responsiveness of central banks globally to economic shocks and other crises have led to a situation where, if such a shock occurs, then central banks ease monetary policy quickly in response. This action calms markets, resulting in minimized sell-offs and contained volatility while driving equities higher.
This phenomenon can be described as the Central Bank Put Option, as the situation effectively means that investors have a put option given to them by the central banks. We will discuss its origin and how it is currently in play, and then cover different strategies that can be used to take advantage of the put. Following this we will also look to analyze whether the Central Bank Put will be in play next year and how it may be traded going forward.

BOJ keeps policy steady despite recession, sees capex rebound
Leika Kihara and Tetsushi Kajimoto – Reuters
The Bank of Japan kept its monetary stimulus program unchanged on Thursday, with Governor Haruhiko Kuroda holding fast to his view that the corporate capital expenditure vital to economic growth will pick up – suggesting that no new monetary easing is imminent.


Europe clamping down on Bitcoin to stop terrorism funding
Reuters via Business Insider
European Union countries plan a crackdown on virtual currencies and anonymous payments made online and via pre-paid cards in a bid to tackle terrorism financing after the Paris attacks, a draft document seen by Reuters said.

What a carry on
The Economist
Next month will probably see the first great divergence in monetary policy since the financial crisis of 2008. The Federal Reserve is widely expected to push through a rate increase—its first since 2006. But the European Central Bank is expected to cut its deposit rate, already in negative territory, or to expand its programme of asset purchases. The Bank of Japan is also expected to maintain or amplify its expansionary monetary policy.

SGX to launch FX block futures on EBS market
Straits Times
The Singapore Exchange has inked an agreement with EBS BrokerTec, ICAP’s electronic foreign exchange (FX) and fixed income business, to launch SGX FX block futures on the EBS Market.

The Euro-Dollar’s Most Important 24 Hours This Year
Vassilis Karamanis – Bloomberg
While foreign exchange markets are gearing up for the all important Federal Open Market Committee meeting on December 16, implied volatilities in euro-dollar show that key events prior to that may prove even more important, Bloomberg strategist Vassilis Karamanis writes.

Japanese Deflation Threat Hangs Over China; Political pressure on China not to devalue the yuan could be adding to deflationary pressure, as it once did to Japan
Greg Ip – WSJ
Donald Trump, if elected, says he’ll brand China a currency manipulator and slap steep tariffs on its exports. Such threats have been a staple of American politics for years.

China inclusion in IMF currency basket not just symbolic
Jennifer Hughes – Financial Times
Back in 2009, the west was desperately seeking green shoots of recovery and paid little attention when Zhou Xiaochuan called for nothing less than a new world financial order.
China’s central bank governor proposed replacing the US dollar as the international reserve currency with a global system controlled by the International Monetary Fund. If, as expected, the IMF this month approves the inclusion of China’s renminbi as a reserve currency, it will mark a small step for Mr Zhou’s 2009 vision, but a big move for the renminbi.

As Biggest Hedge Funds Stumble, One Currency Manager Gains 21%
Andrea Wong – Bloomberg
In a year when the world’s biggest hedge funds are suffering losses and closures, one asset manager is trouncing rivals by betting on currencies — without taking a view on their direction.
Quaesta Capital AG, a hedge fund based in the Zurich area, runs a $420 million foreign-exchange options program that earned 21 percent this year through Nov. 11 by wagering on volatility, according to Thomas Suter, the company’s chief executive officer. It’s the top performer among 15 programs tracked by the Parker Global Currency Manager Index, which lost almost 2 percent in that period.

5 More Banks, Bitcoin Experts Join R3 Blockchain Consortium
Leon Pick – Finance Magnates
Five more banks have joined a consortium led by FinTech development startup R3 CEV that is looking to collaboratively build a distributed financial ledger.

Indexes & Index Products

Baltic Dry Shipping Index Drops to All-Time Low
Manisha Jha and Naomi Christie – Bloomberg
The cost of shipping commodities fell to a record, amid signs that Chinese demand growth for iron ore and coal is slowing, hurting the industry’s biggest source of cargoes.

The Trickiness of ETF Diversification
ETF Trends
According to Barry Ritholtz of Ritholtz Wealth Management, a frequent contributor to CNBC as well as Bloomberg, “the beauty of diversification is that it’s about as close as you can get to a free lunch in investing.” Since 2011, however, investors who diversified in stocks outside of the U.S. and who diversified across other asset types (e.g., commodities, currencies, gold, pipeline partnerships, etc.) have consistently underperformed the plain vanilla approach of owning the S&P 500 SPDR Trust (SPY) alongside a modest buffer of Vanguard Total Bond Market (BND).

The Indexing Quirks of Junk Bond ETFs
ETF Trends
Some investors may have noticed deviations in the way junk bond exchange traded funds track benchmark indices. However, the perceived discrepancies in their respective tracking performances may be a result of indexing quirks.


Prepare for Gold Below $1,000 as Fed Pulls the Trigger on Rates
Ranjeetha Pakiam and Jasmine Ng – Bloomberg
Gold may become a three-figure commodity once again after holding above $1,000 an ounce for the past six years.

How investors are abandoning gold, in one chart
Gold has suffered a rough month, with prices dropping to levels last seen in February 2010.
You can see just how much the metal has fallen out of favor by looking at the investor money rushing out of the SPDR Gold ETF, a popular way to get exposure to gold.


A Harvard Professor Doesn’t Have a Monopoly on ‘Disruption’
Justin Fox – Bloomberg
Does Clayton Christensen own the word “disrupt”? The Harvard Business School professor certainly behaves as if he has a proprietary interest. This is from a new Harvard Business Review article, co-authored with Deloitte consultant Michael E. Raynor and HBS professor Rory McDonald, that has made a few headlines during the past week: Uber is clearly transforming the taxi business in the United States. But is it disrupting the taxi business?

Biggest Diamond in More Than a Century Unearthed in Botswana
Kevin Crowley and Thomas Biesheuvel – Bloomberg
A 1,111 carat gem-quality diamond, second in size only to the Cullinan diamond cut into the British Crown jewels, has been unearthed by Lucara Diamond Corp. in Botswana.

Two in Three Adults Worldwide Are Financially Illiterate
Justin McCarthy and Anita Pugliese – Gallup
Two-thirds of adults worldwide are financially illiterate, with sizable gaps between men’s and women’s financial literacy.

Economies are too tough for Isis to destroy
John Gapper – Financial Times
A few days after the assault on Paris, it is hard to name the businesses that were singled out by the terrorists. The public venues — the Bataclan theatre and the Stade de France — are memorable. The cafés and bars of eastern Paris — Le Carillon, Comptoir Voltaire, La Belle Equipe — were not symbolic in themselves. They were simply places for people to gather.

Ken Griffin worried about art market
Linette Lopez – Business Insider
Ken Griffin, the billionaire founder of the hedge fund Citadel, was collecting art before it was cool on Wall Street.
Now he’s concerned that his peers who have jumped into the art market are doing it for the wrong reasons — they consider it an investment.

‘Star Wars’ Aims Its Mighty Force Toward a Box Office Smash
Ben Fritz and Erich Schwartzel – WSJ
Most movies would be lucky to open to $50 million. Four weeks before its debut, “Star Wars: The Force Awakens” has more than that in the bank.

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