First Impressions

JLN Video Style
Recently, we rolled out a new video style. Have a look at the first one, featuring John Avery of FIS (formerly SunGard), where he discusses their new derivatives utility. Please drop us a line and let us know what you think. We are constantly striving to deliver the story in the best possible way, and would welcome the input.

We extend our thanks to Mr. Avery for his patience during the numerous iterations of the new style. We also would like to thank Allison Yacker, partner at Katten Muchin Rosenman LLP. We filmed a video interview with her on the same day as Avery, and she has been patiently awaiting the rollout.

Utility Player: FIS’ John Avery Sees the Derivatives Utility as a Driver of Innovation
In June of 2015, SunGard, now part of FIS Global, launched its post-trade derivatives utility, which aims to standardize back and middle office operations and technology, with Barclays as its first customer. According to FIS’ John Avery, it is not about commoditization so much as specialization. In other words, banks and futures commission merchants should concentrate on differentiation through service, cost, and other customer touch points, and leave standardized, replicated functions in the hands of a vendor. This will allow the bank or FCM to innovate from the business level, and allow the vendor to innovate at the fintech level.

Watch the video »

Quote of the Day

“Policy makers have both been aggressive and imaginative in the design of policies when they have been pushed against the wall. Where investors have made mistakes is in assuming that the set of policy tools is limited to those currently on the table.”

Stephen Englander, Citigroup Inc.’s New York-based global head of Group-of-10 currency strategy in the story, ” There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves”

Lead Stories

The eurozone crisis is back on the boil
Larry Elliott – The Guardian
Greece is back in recession. Italy is barely growing. Portugal expanded but only at half the expected rate. The message could hardly be clearer: the next phase of the eurozone crisis is about to begin.
On the face of it, the performance of the eurozone economy in the final three months of 2015 looks solid if unspectacular, with growth as measured by GDP up by 0.3%.

U.S., UK likely to charge multiple banks in Libor rigging: WSJ
American and British regulators are likely to charge several banks with rigging interest rates, including Citigroup, the third-largest U.S. bank, and London-based HSBC Holdings, the Wall Street Journal reported on Friday. The U.S. Commodity Futures Trading Commission and the U.K. Financial Conduct Authority were preparing a final round of civil charges against the banks for rate manipulation in the Libor scandal, the newspaper reported, citing people close to the investigation.

This crisis has been caused by arrogant central banks
Allister Heath – The Telegraph
It was Friedrich von Hayek, the great Austrian economist, who explained just how central the price system is to capitalism and our civilisation’s astonishing prosperity. The fact that goods, services, assets, money, time, ideas and risk all come with a price attached allows resources to be allocated remarkably effectively.

****SD: Or not. See “Many suspects behind murderous markets” in the miscellaneous section.

U.S. Benchmark Yield Will Be at Record Low in March at This Rate
Wes Goodman – Bloomberg
Treasury benchmark yields are on course to set a new all-time low in March if they keep rallying at the current pace.
Ten-year yields dropped almost 40 basis points during the past three weeks to 1.66 percent. The record low of 1.379 percent was set in July 2012. Plunging stock prices are driving demand for the relative safety of government debt, while traders abandon bets for the Federal Reserve to raise interest rates. Yields near zero in Japan and Germany are boosting the allure of U.S. Treasuries.

Technology Is No Panacea for Illiquidity
Markets Media
A misconception has permeated the corporate bond and other fixed-income markets. It’s the idea that technology can solve the liquidity problem for institutional investor.
Ever since the 2008 financial crisis, scores of companies have developed electronic trading platforms, each touted as the better mousetrap that will entice the buy side to come with their trades.

****SD: The best mousetrap is the game Mouse Trap.

Five-Decade Market Pro Who Called Bond Rally Sees 1% U.S. Yields
Andrea Wong – Bloomberg
A year ago, with U.S. equities approaching record highs and the Federal Reserve moving toward raising interest rates, Gary Shilling was a lonely voice on Wall Street predicting financial-market gloom in the 12 months ahead.
Today, the 78-year-old analyst’s calls for $20 oil and a 1 percent yield on 10-year Treasuries look increasingly likely, and he’s sticking with them. The price of West Texas crude has fallen by half to $27.62 since Shilling made his $20 prediction last February, while benchmark Treasury yields have tumbled to 1.68 percent after rising to as high as 2.5 percent in June.

Roboadvisors — and the banks they once threatened — learn to play nice
Mandi Woodruff – Yahoo Finance
Robo-advisors were supposed to make traditional financial planning institutions obsolete. Now some of these so-called disruptors are hoping to play a much different role — ally.
At a private meeting Thursday, dozens of financial services, or “fintech,” startups gathered for the chance to meet face to face with leaders at some of the largest financial institutions in the country, including Bank of America (BAC), Goldman Sachs (GS), JPMorgan Chase (JPM), Citi (C) and BBVA. As the fintech space becomes increasingly competitive, startup founders see the potential in partnering with larger firms that have the customer base — and the capital — to help them scale their business.

****SD: Machine learning: first nice, then “The Matrix.” (Honestly, I’d go for living the illusion and relishing the taste of steak.)

Wall St. Whistle-Blowers, Often Scorned, Get New Support
William D. Cohan – NY Times
Becoming a whistle-blower by reporting wrongdoing on Wall Street or in a federal agency that regulates Wall Street takes lots of guts. And a strong argument can be made that whistle-blowers should be celebrated and rewarded for their courage.

****SD: To be fair, a shrill whistle blown frequently is really grating.

Swap Clearing Volumes Rise in Asia
Markets Media
LCH.Clearnet has cleared record volumes of interest rate swaps in Australian dollars, Hong Kong dollars and Singapore dollars this year as the clearing unit of the London Stock Exchange Group was recognised by the regulator in Singapore this month.

Deutsche Bank to bolster market with EUR4.8bn bond purchases
Tim Wallace – The Telegraph
Deutsche Bank will buy back EUR3bn of euro-denominated bonds and $2bn of dollar bonds in a EUR4.8bn (£3.7bn) bid to shore up its volatile share and bond prices.

****SD: Great day for financials.

Big banks are fleeing the mortgage market
Andrea Riquier – MarketWatch
When it comes to residential mortgages, big banks are waving the white flag.
Banks originated 74% of all mortgages in 2007, but their share fell to 52% in 2014, the most recent data available from the Mortgage Bankers Association. And it could go even lower.

Central Banks

Central banks court danger with desperate measures
Vesna Poljak – Australian Financial Review
Central banks have tightened their grip on negative interest rates to save the economies of Japan and Europe from dangerously low inflation and a fresh outbreak of the global currency wars. The way markets see it, these are the desperate actions of policymakers who have run out of options, and that in itself might be the biggest risk to global financial stability.

****SD: I guess even central banks love a bad boy.

Yellen’s dilemma: A downturn with no easy response
Howard Schneider and Ann Saphir – Reuters
The U.S. Federal Reserve’s carefully scripted decision to raise interest rates last December, and begin a return to “normal” policy, may now become a nightmare for the central bank if an economic downturn forces a return to unconventional methods.

There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves
Simon Kennedy – Bloomberg
If one line of reasoning for the plunge in bank stocks is that monetary policy has lost its punch, investors would do well to recall a law of modern investing: “Don’t fight the Fed.”
As the week draws to a close, some Wall Street economists and strategists say monetary authorities have plenty more tricks up their sleeve — even after more than 635 interest-rate cuts since the financial crisis by Bank of America Corp.’s reckoning and with central banks now sitting on more than $23 trillion of assets.

****SD: If there’s a card up there it probably isn’t an ace.

Swedish Bank Move Creates a Global Shudder
Jr. Landon Thomas Jr. – NY Times
What if the bazooka is shooting blanks?
Since the financial crisis, it has been gospel for many investors that some combination of actions by central banks — bond buying, bold promises or flirtations with negative interest rates — would be enough to keep the global economy out of recession.

ECB rate cut likely but no appetite for now for radical easing: policymakers
Balazs Koranyi and Francesco Canepa – Reuters
There is firm support for a deposit rate cut within the European Central Bank’s Governing Council but appetite for more radical action is still limited, conversations with policymakers indicate a month before the March rate decision.
With long-term inflation expectations falling, the ECB will probably have to act and frame the rate cut as part of broader a package, with some measures involving changes to the bank’s flagship asset-purchase program, policymakers told Reuters.

****SD: My favorite type of radical easing involves a La-Z-Boy.

More Bucks, Less Bang in Store if Draghi Drives QE Higher
Jeanna Smialek – Bloomberg
The European Central Bank could ultimately be in for a let down if it ramps up its mass bond-buying program in March. The charts below explain why adding to so-called quantitative easing will probably elicit diminishing returns — and why policymakers may do it anyway.

Dudley Says Talk of Negative Fed Rates Is Very Premature
Matthew Boesler – Bloomberg
The U.S. economy has the momentum to help weather stormy global financial markets and policy makers have many other options before they would consider driving borrowing costs below zero if they need to protect growth, Federal Reserve Bank of New York President William Dudley said.

****SD: More on negative rates: Negative 0.5% Interest Rate: Why People Are Paying to Save, The New Frontier of Negative Interest Rates and Central Banks Go Negative With Ideas in Short Supply

The Fed, Economy, And Markets: Which Is The Horse And Which Is The Cart?
Seeking Alpha
For many decades, the old adage on Wall Street was “Don’t fight the Fed.” Certainly, I remember that familiar refrain since I began in the industry in the 1980s. And for the most part, the markets have been driven by the Fed’s actions and words. Now, however, Fed Chair Janet Yellen has introduced language in her semi-annual congressional testimony suggesting that, in fact, market conditions may influence Fed policy, a bit of reversal from the usual cause-and-effect.

****SD: The bigger issue is reverting to an economy running on horse-drawn carts.

Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition
Bank of Japan Gov. Haruhiko Kuroda once awed the markets. Now he looks like just another central banker running out of options.

****SD: So many bazooka references with central banks. If they’re all running out of ammo, why don’t we move to some self-propelled artillery? And when we run out of bigger guns, give the banks a space laser or something.

Bank of England paves the way for sharia-friendly finance products
Reuters via The Telegraph
The Bank of England has become the first major Western central bank to set out its stall for sharia-compliant deposit facilities, as Britain seeks to pitch London as the preeminent global centre for Islamic finance.

IMF Warns of Renewed ‘Grexit’ Fears Without Credible Greece Plan
Andrew Mayeda – Bloomberg
Greece will face renewed fears that it will exit the euro area unless the nation’s government and European creditors come up with a credible plan to make the country’s debt sustainable, a top IMF official said.

****SD: Ugh. Just when I was getting used to talk of only one “exit.”


Europe Takes Lead in FX ‘Best Ex’
Markets Media
Spot foreign exchange trading is not covered by Markets in Financial Instruments Directive II, the incoming regulations covering European financial markets from 2018, but that does not mean the asset class completely escapes increased scrutiny. MiFID II expands best execution requirements to non-equities and although spot FX is not included in the mandate, it will be unlikely to be excluded when asset managers start monitoring execution across other asset classes more carefully.

****SD: Valentine’s Day is around the corner and I’m hesitant to award anybody the “Best Ex” accolade.

BOJ Seen as Toothless for Yen Bulls Boosting Currency Forecasts
Netty Idayu Ismail – Bloomberg
Currency strategists are writing off Japan’s ability to weaken the yen through intervention or further monetary easing as the currency continues to benefit from financial-market turmoil.

****SD: Ever been bitten by a toothless dog? Word on the street is it still hurts.

Minimal conditions for the survival of the euro
VOX, CEPR’s Policy Portal
The Eurozone crisis has shown that monetary union entails more than just sharing monetary policies. This column identifies four minimal conditions for solidifying the monetary union. In the case of fiscal policy, this means a decentralised solution. In the case of financial supervision and monetary policy, centralisation is unambiguously the appropriate response. In the case of a fourth condition, debt restructuring, either approach is possible, but the authors prefer a solution that involves centrally restructuring debts while allocating costs at national level.

Dollar Confounds Strategists Ripping Up Forecasts on Market Rout
Lananh Nguyen – Bloomberg
Currency forecasters are getting steamrolled by the $5.3 trillion-a-day market as traders all but abandon bets that monetary policy divergence between the world’s major central banks will fuel a third year of dollar gains.

Won Volatility Climbs to Two-Year High on Geopolitical Tension
Lilian Karunungan – Bloomberg
A gauge of expected swings in the won climbed to a two-year high on rising geopolitical tension after North Korea launched a rocket and the global economic outlook worsened.

Bitcoin’s future threatened by software schism
Richard Waters in San Francisco – Financial Times
A schism among software developers that threatens the future of bitcoin has broken into the open with Wednesday’s release of a rival version of the technology behind the digital currency.

Criminal links of EUR500 banknote could spell its demise
Jennifer Rankin – The Guardian
He had the tastes of a typical millionaire. He owned a gold and silver Rolex and a fleet of expensive cars. He liked to dabble in modern art. But although this Chinese businessman had several companies and a palatial villa in the Madrid suburbs, he had almost no money in the bank, a detail that piqued the interest of Spanish authorities.

Indexes & Index Products

A Positive Divergence at Last
The Reformed Broker
Technicians don’t crack snake eggs into a bowl and whip an elongated pinky fingernail through the yolk to make proclamations about the market’s future.
That would be kind of cool, but it probably wouldn’t be very effective.

Bitten but Not Mauled, Low Volatility ETFs Attract Fans; Money is pouring in from investors looking to soften a bear market beating.
Eric Balchunas – Bloomberg
As wild stock market swings fray investor nerves, exchange-traded funds promising a measure of calm are, not surprisingly, gaining adherents. Such low-volatility ETFs offer a way to stay in the market while sidestepping the beating everyone else is getting.

****SD: And that’s why you keep your low volatility ETFs hanging high from a tree when you go camping.

China’s Handling of Market Volatility May Thwart MSCI Inclusion
Bloomberg Business
China’s response to volatility in its stock and currency markets may have an impact on the country’s bid for entry into MSCI Inc.’s global equity benchmarks, according to the index provider.

Don’t be charmed by the smart beta genie
The term “smart beta” conjures up an image of an all-knowing, all-powerful investment genie. This may help to explain why smart-beta funds have become increasingly popular over the past few years – more than $150bn worth of investment has flowed into them since 2013, according to the Financial Times. But many people buying these products aren’t exactly sure what they are paying for, or what risks they are taking.

Russell Investments expands executive leadership team, naming Vernon Barback President
Press Release
Russell Investments, a global asset manager providing actively managed multi-asset portfolios and services that include advice, investments and implementation, today announced the appointment of Vernon Barback as President. The appointment is effective January 21. Barback will be a member of the firm’s Executive Committee, reporting to CEO Len Brennan.


Jose Canseco Predicts 20% Pop for Gold
Erik Holm – WSJ
Jose Canseco thinks gold is going to $1500.
Mr. Canseco, of course, is a retired baseball slugger best known for his mammoth home runs, his massive biceps, and for the major role he played in pushing the discussion of steroid use in the major leagues into the public light.

****SD: Advice from the guy who made this awesome baseball play

Mark Cuban: I’m Buying Gold Because I’m ‘Confused’ About Markets
Billionaire Mark Cuban said he is counting on gold as the only safe investment in such volatile times like these because the recent global market volatility has “confused” him.

****SD: Do you know what’s confusing to me? How the doggone Dallas Mavericks have managed to stay relevant with an aging Dirk. Amazing.

Gold Prices Can’t Defy Gravity Forever
Liam Denning – Bloomberg
Gold has rallied because: 1) Janet Yellen is freaking out a little, 2) Everyone else is freaking out a lot, 3) It’s almost Valentine’s Day, 4) Two black holes merged, proving Einstein was right roughly 1.3 billion years before the genius was even born.
Spoiler: Reason no. 4, while a cool story, is largely spurious, its inclusion intended to show only that definitive explanations of gold’s movements are a bit like gravitational waves: You know they exist, but they are fiendishly hard to pin down.

Shunned for years, gold stages comeback as equities melt down
Marcy Nicholson and Josephine Mason – Reuters
Gold’s prospects for a sustained price rally are better than they have been for years as a weaker dollar, crashing oil prices and concerns about the global economy have revived its safe-haven status after years as the dog of global financial markets.


Climate risks could wreak havoc on financial markets, EU watchdog warns
Arthur Neslen – The Guardian
The EU’s financial watchdog has called for governments to consider imposing asset disclosures on industry and stress tests on banks as a guard against the economic crisis that could be caused by an emergency switchover to clean energy.

****SD: Duh. Climate change will wreak havoc on everything and financial markets fall in the “everything” category.

Examining ‘Phantom Liquidity’ and the Cost of HFT Regulation
TABB Forum
Some market participants have long argued that the liquidity provided by HFT traders is illusory and difficult to access. But recent research concludes that HFT limit orders exert a stabilizing influence on markets, calling into question the effectiveness and rationale of recent regulatory proposals targeting high-frequency trading.

Many suspects behind murderous markets
Financial Times
Spoiler alert. I am about to give away the ending to the classic Agatha Christie whodunnit thriller, Murder on the Orient Express. There are 12 suspects and it turns out all of them took turns to stick the dagger into the victim. In the midst of the worst global market sell-off since the great financial crisis of 2008, at least 12 suspects are being named. The most worrying thing of all is that they all had a hand in the sell-off.

****SD: Great movie. I wish there were more lavish trains these days, though my bar for “lavish” is pretty low given I ride the “L” to and from work.

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