First Impressions

Your Guide to the Volcker Rule
John Lothian News
After a three year wait (over a year beyond the deadline mandated by the Dodd-Frank Act), a consortium of U.S. regulators released the final Volcker Rule. Under the rule, banks will be prohibited from engaging in proprietary trading and from owning more than a three percent stake in hedge funds and other private funds.

***DA: Handy guide we put together this morning featuring summary and links on MarketsReformWiki, Volcker Rule analysis, commentary and more.

Quote of the Day

“Credit quality is weakening. A lot of supply is coming from first-time issuers and that’s creating attractive opportunities.”

Lead Stories

The emerging risks of ticking time bonds
Martin Wolf –
The most sobering lesson of the global financial crisis was that developments expected to increase resilience – in that case, the “originate and distribute” model of finance – turned out to reduce it. Does a similar danger now threaten stability? Yes. The next round of global illiquidity might derive from foreign currency bonds of non-financial companies of emerging economies. The centre would be asset managers, not banks.

***DA: Ironic. Mr. Wolf has been a critic of austerity and supporter of central bank stimulus. Now he writes of the consequences of cheap money and reaching for yield.

Junk Debt’s Escalating Risk Enticing Money Managers: Euro Credit
Katie Linsell – Bloomberg
Europe’s high-yield bond market will get riskier next year, with some of the world’s biggest money managers predicting the lowest-rated and most-indebted companies will escalate sales to take advantage of cheap borrowing.

***DA: Uh…yeah.

Era of Lucrative Debt Traders Fades as Credit Suisse Sees Exits
Lisa Abramowicz – Bloomberg
Thirteen years after Credit Suisse Group AG crowned itself Wall Street’s new junk-bond king by buying Donaldson Lufkin & Jenrette Inc., the last vestiges of its reign in the most lucrative credit business are being squeezed out by post-crisis banking regulations.

***DA: Know what this is (rubbing thumb and forefinger together)? The world’s smallest violin playing just for the guys featured in the article.

The Post Volcker Life of Wall Street’s Top Prop Traders
Maureen Farrell – The Wall Street Journal
With the passage of the Volcker rule, major banks are now effectively prohibited from trading with their own capital.
Historically, banks executed these types of trades through proprietary trading desks, where teams of traders took bets on equities, bonds and credit derivatives in the hopes of generating big profits with banks’ cash. These desks were where many of the Wall Street’s best-paid traders made a name for themselves.

***DA: Oh, it said TRADES. I thought it read “banks executed these types of traders.”

Bill Gross’s Treasury Holdings Fall in November
Min Zeng – MoneyBeat – WSJ
Bill Gross, who runs the world’s biggest bond fund, slightly dialed back exposure to U.S. Treasury bonds in November after increasing the holdings for two straight months.

***DA: Psst. Hey Bill, if you are looking to sell, I know of someone who is buying, like, $85 billion a month.

Volcker Rule Shift Lets Banks Continue Muni Bond Speculation
William Selway and Darrell Preston – Bloomberg
U.S. financial regulations that curb banks’ ability to speculate with their own money included an exemption for the $3.7 trillion municipal bond market after issuers complained the rules could increase borrowing costs.

***DA: If and when the Fed tapers, someone will need to step in and buy this stuff.

Hot money distorts China’s exports as speculators seek to cash in on yuan, rate reforms
China is seeing a resurgence of “hot money” seeking to cash in on the rallying yuan and record-high interest rates, contributing to distortions in its trade data as speculators move money through regulatory loopholes.

***DA: Regulatory loopholes. China is becoming more like the U.S. all the time.

Secular stagnation and the bastardisation of Keynes
Izabella Kaminska | FT Alphaville
David Roche and Bob McKee at Independent Strategy have put out a strongly worded riposte to Larry Summers’ argument that the world may be beset by secular stagnation.

***DA: Great read on natural interest, productivity and the futility of stimulus or what they call “faux capital.”

Offshore Yuan Debt Sales to Rise, Says HSBC
Fiona Law – MoneyBeat – WSJ
Offshore yuan debt issuance could rise by as much as 60% in 2014, HSBC Holdings PLC forecasts, even as corporate bond sales weakened this year.

Past performance is no guarantee
Dan McCrum | FT Alphaville
With thanks to the eagle eyed Tracy Alloway, the year in asset class returns illustrated in shades of Deutsche Bank blue.

***DA: Best graph of the year – equity returns overlaid with one of the expansion of the Fed’s balance sheet (3-month lag).

Russian Ruble Gets a Symbol
Russia has chosen an official symbol for its national currency as part of an effort to encourage the use of the ruble in international trade and as a potential reserve currency.

Central Banks

Three Standard Deviations For 2014
Alen Mattich – The Wall Street Journal
Market expectations for the coming year can roughly be chopped into three, all of them hinging on central banks.
The most likely, or median outcome–call it a one standard deviation probability, which is to say with around a 68% likelihood–is that economic data allow central banks to continue supporting markets, that economies grow at a steady if unspectacular pace, and that equities post moderate gains and bonds modest losses.

ECB’s Coeuré Sees No Need for Spectacular Policy Action
The European Central Bank sees no need to deploy “spectacular” measures such as large-scale asset purchases given its outlook for a gradual acceleration in consumer prices, ECB Executive Board member Benoît Coeuré said Tuesday, as the International Monetary Fund urged the bank to take steps to keep inflation from falling too low and derailing the euro zone’s nascent recovery.

The Fed’s options
Cardiff Garcia | FT Alphaville
At last December’s FOMC meeting, Ben Bernanke announced the new Evans Rule (forward guidance thresholds) framework at least one meeting before most observers had expected it.

Central banks will move goal posts to keep QE forever
Matthew Lynn – Marketwatch
Right now, there is only one thing that really matters to the markets. And that is whether central banks will continue with quantitative easing and stick with interest rates at three-century lows — and if not, when they will stop printing money and get rates back to something close to normal levels.

Why China’s Central Bank Took the Regulatory Lead on Bitcoin
Liu Xiao – The Corner
The People’s Bank of China is the first regulator in the world to issue rules on the virtual currency, a move that prevents a Bitcoin breakthrough. Apparently, what really concerns the central bank is bitcoins replacing the yuan.


Integral Announces First-of-its-Kind FX Benchmark to Provide Unprecedented Market Transparency
Integral Development Corp., a leading service provider to FX market participants, today announced Integral FX Benchmark, a set of second-by-second foreign exchange benchmark rates for major currency pairs. Based on the broadest available set of market rates and trades, joint research work with Stanford University and feedback from buy-side FX market participants, FXB will provide first-of-its kind benchmark rates for each second of each trading day.

Rise of electronic FX trading won’t silence voice brokers
Peter Garnham – Euromoney magazine
Electronic trading is set to account for an increasing share of the volume on the world’s $5.3 trillion-a-day FX market, but that does not mean the death of voice brokers. That is the view of Aite Group consultancy, which believes the continued adoption of electronic trading will play a key role in fuelling the overall growth in the FX market.

Sorry France, the Euro Might Have to Get Used to Altitude
David Cottle – MoneyBeat – WSJ
The euro’s at a five week high. As of Tuesday morning in Europe it got you $1.3769. Now, in theory, that’s just fine.

China bitcoin arbitrage ends as punters work around capital controls
The price gap between bitcoins trading in Chinese yuan and those sold for other currencies has evaporated in recent days, highlighting the porous nature of China’s capital controls.

Trades for 2014? Why Bother
Clare Connaghan – MoneyBeat – WSJ
Trades for 2014? A waste of time, according to one foreign-exchange analyst. “Why? Because it does not work,” said Steven Barrow of Standard Bank. Such recommendations “rarely come good.”

***JM: An excellent point of view, which will continue to be ignored because our nature makes us nearly helpless to give up the idea that THIS year, those predictions might just work. For the first time ever.

BIS warns of hot-potato FX trading
Peter Garnham – Euromoney magazine
A new form of hot-potato trading has emerged in the FX market in which dealers no longer dominate price action, warns the Bank for International Settlements (BIS).

BlackRock Avoids Fed-Depressed Dollar in Carry Trade: Currencies
Lilian Karunungan and Yumi Teso – Bloomberg
The dollar is becoming too expensive for investors in Asia to use as a source for funding carry trades in the region, a development that may help extend the currency’s best annual gain since 2008 into next year.

Indexes & Index Products

Ask Matt: Fees make beating index tough to do
Matt Krantz – USA TODAY
Q: How good must a stock-picker be to beat the index?
A: Jack Bogle built an entire financial empire at Vanguard on the concept beating the market is all but impossible over the long term. But that doesn’t stop stock pickers and professional money managers from trying to beat the odds.

Thomson Reuters, SGX Ally on Bond Indexes
Max Bowie – WatersTechnology
Thomson Reuters has unveiled a suite of Singapore dollar bond indexes, developed with the Singapore Exchange, to help fund managers, asset owners and custodians benchmark investment performance and to provide increased transparency into local bond markets in response to record bond listings on SGX.

S&P 500 Dynamic VEQTOR Index Named Innovation of the Year
The S&P 500 Dynamic VEQTOR Index, developed and launched this year by S&P Dow Jones Indices, was named Index Innovation of the Year at the William F. Sharpe Indexing Achievement Awards at the annual IMN’s Global Indexing & ETFs conference in Scottsdale, Arizona.


The Wizard of Oz was about the Gold Standard
Joshua M Brown | The Reformed Broker
You learn something new every day. Here’s Jeff Saut, from his latest market commentary as chief strategist of Raymond James:

Tapering Key for Gold: Commodities in 2014
Laura Clarke, Francesca Freeman and Ben Winkley – MoneyBeat – WSJ
Commodities prices have been under the cosh this year, as the supercycle ground to a halt and geopolitical and economic uncertainties combined to apply price pressure. Gold, particularly, had a year to forget, losing one quarter of its value as a 12-year bull run comes to an end. But what about the future?

***JM: Here, I’ll summarize for you. Analysts who were very bullish last year: “Ok, 2013 sucked but 2014 will be the recovery year.” The rest of the analysts: “We were right about gold, once we changed our prediction to ‘down’. And this year, it will go either up or down.” Jon: “Most of you are very likely already wrong.”

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