First Impressions

Just How Healthy Are the US and EU Economies?

The climb back from the economic crisis has been long and hard. Two market participants believe that much is left to be done in Europe and in the US.

Bob Swarup, principal of Camdor Capital in London who has studied economic crisis dating back to ancient Greece, says Europe isn’t out of trouble, while Charles Johnson, managing director of Tano Capital said the US economy still has some major hurdles in 2014. Jim Kharouf, editor-in-chief of John Lothian News spoke with Swarup and Johnson at the Emerging Manager Forum in Miami last month.

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Quote of the Day

“The risk environment in the new year is not moving the Fed’s way. However, global de-risking and a 3% decline from record high stock prices alone are not enough to dissuade the Fed, especially with the composition of the 2014 FOMC now turning more hawkish.”

Millan Mulraine, deputy head of U.S. research and strategy at TD Securities, quoted in the WSJ story, “Recap: Fed Statement, Market Reactions”

Lead Stories

The Fed Erred in Ignoring Emerging Markets
Michael J. Casey – MoneyBeat – WSJ
Turks can be forgiven for feeling like they’ve just been kicked in the teeth. The most striking aspect of Wednesday’s statement from the U.S. Federal Open Market Committee was not that it opted to continue tapering the Fed’s bond-buying program – regardless of my failed prediction that emerging-market turmoil would give the Fed pause – but the sheer absence of any reference to that gathering crisis.

***DA: Fed policy created the hot money flows into emerging markets, and it is leading the way out as well.

Recap: Fed Statement, Market Reactions
MoneyBeat – WSJ
The Federal Reserve said it would further pare its signature bond-buying program next month, a move that solidifies the central bank’s strategy for winding down asset purchases as long as the economy continues to improve.

***DA: And if it doesn’t, then what?

Hedge Funds Hire for Europe Asset-Backed Selloff: Credit Markets
Alastair Marsh – Bloomberg
U.S. hedge funds are adding staff in London and relocating executives to profit from disposals of asset-backed securities and bad loans as European banks face new capital rules and stress tests.

Abe Crunch Year Sees Biggest Risk Jump Among Peers: Japan Credit
Mariko Ishikawa, Masaki Kondo and Yumi Ikeda – Bloomberg
Japan’s default risk jumped the most among developed nations this year as the world’s third-largest economy faces mounting challenges from energy import costs and a budget overhaul.

Spanish corporate debt issuance hits 4-year high
Andrew Bolger, Capital Markets Correspondent –
Spanish companies took advantage of improving investor sentiment to push corporate bond issuance in the country to a four-year high in 2013. Excluding financials, Spain’s corporate issuers raised EUR24.7bn in the debt market last year, the highest level since the market peak in 2009, according to Dealogic.

Rate Gambit Raises Stakes for Turkish Central Banker
When the Turkish lira came under heavy selling pressure from investors last summer, central bank Gov. Erdem Basci vowed to defend the currency “like a lion.” As the clock struck midnight Tuesday, Mr. Basci—facing pressure from a prime minister determined to avoid higher interest rates—sought to do just that, surprising investors by more than doubling Turkey’s key one-week repurchase rate to 10%.

What Shock and Awe Means for Turkey’s Banks
Yeliz Candemir – MoneyBeat – WSJ
So Turkey’s central bank has aggressively hiked interest rates. That much we know. But what happens now to the country’s banks?

***DA: More importantly, how does the citizenry react?

The Fed’s converging misses on inflation and unemployment
Cardiff Garcia | FT Alphaville
The final FOMC statement of the Bernanke era included nothing unexpected, which didn’t stop markets from expressing disappointment. But looking ahead, there are at least two reasons why the Yellen Fed might soon consider, or at least should consider, downplaying the unemployment rate threshold in its forward guidance in favour of a greater emphasis on inflation.

China’s yuan carry trade, an anchor and a risk for Asia
The Economic Times
When China averted a default in its shadow banking industry last week in the midst of an emerging market meltdown, investors globally heaved a sigh of relief.

Poland plays with fire over pension reform
Ralph Atkins –
Among turbulent emerging markets, Poland is one of the heroes – with a robust economy and well developed capital markets to rival those of Turkey and Russia, which are not part of the European Union. It may be about to tarnish its reputation.

***DA: The third rail of politics, both in the U.S. and abroad.

Bill Gross: Buy U.S. Treasurys, Don’t Wait
Maureen Farrell – MoneyBeat – WSJ
Investors are running back to the safe embrace of U.S. Treasurys, as they become increasingly concerned about problems in emerging markets.

***DA: Reaching for yield is so 2013. This year it is back to a good ol’ flight to quality.

Chinese chicken
David Keohane | FT Alphaville
More macabre farmyard and less ‘where the WMP things are‘ this time… It’s a matter of canards and Bertrand Russell’s chicken you see. In other words — if you think China can avoid a financial crisis in the future because it has managed to do in the past, you might get your neck wrung.

***DA: Nice graphic, just in time for Chinese New Year.

Emerging market plunge: Sino the times?
Sid Verma – Euromoney magazine
Not all emerging markets are in free fall, investors are discriminating between surplus and deficit countries, it’s not all China’s fault, and domestic EM policies matter.

Clearstream And NSD Have Opened Russian Corporate Bond Market To International Investors
Russian Corporate Bond Settlement Opened By Clearstream On 30 January 2014 – Clearstream To Help Establish Russian Market Linkage Between ICSDs To Boost Liquidity -New Russian Equities Service By Clearstream As Next Step

Central Banks

Analysis: Only time will define Bernanke’s crisis-era legacy at Fed
Jonathan Spicer and Ann Saphir | Reuters
Ben Bernanke did not hesitate when asked whether he was confident that his signature response to the Great Recession would work.

***DA: With enough spin today, perhaps history will blame the next chair.

Fed Policy Makers Rally Behind Tapering QE as Yellen Era Begins
Joshua Zumbrun and Jeff Kearns – Bloomberg
Federal Reserve policy makers trimmed bond buying for a second straight meeting, uniting behind a strategy of gradual withdrawal from Ben S. Bernanke’sunprecedented easing policy as Janet Yellen prepares to succeed him as chairman.

South Africa Did What?
Katie Martin – MoneyBeat – WSJ
Well, no-one saw that coming. The South African Reserve Bank, against overwhelming expectations that it would leave rates on hold, raised interest rates by half a percentage point Wednesday.

***DA: Well timed. A half a percent is chump change compared to Turkey.

Rate hike: Rajan says decision was not to tackle emerging market contagion
Business Standard
Justifying the decision of Tuesday to increase the repo rate by 25 basis points (bps), Reserve Bank of India (RBI) Governor Raghuram Rajan said the move was aimed at tamping inflationary pressures and not at tackling emerging market sell-off.

***DA: Ditto the above comment.


The FX Elephant In The Room. Still There
Clare Connaghan – MoneyBeat – WSJ
The global investigation into possible efforts at manipulating currencies prices has been rumbling on since April. And yet we’re still no closer to finding out what representatives of the biggest banks in the business have said about it at their regular pow-wow: the FX Joint Standing Committee, hosted by the Bank of England.

Calm Broken in Markets Amid Concern of Emerging Contagion
Whitney Kisling, Eleni Himaras and Weiyi Lim – Bloomberg
Declines that erased $1.7 trillion from global stocks as currencies from Turkey to Argentina slid are proving a Wall Street maxim, according to Brian Barish of Cambiar Investors LLC: selling can start anywhere.

SocGen Exits Lira Bet as Central Banks Move
Cynthia Lin – MoneyBeat – WSJ
Anyone buying into the Turkish lira on last night’s policy move has had a small window to take profit.

J.P. Morgan Bets Against the Ruble
MoneyBeat – WSJ
J.P. Morgan has the ruble in its crosshairs, adding to the beleaguered Russian currency’s long list of problems.

Mark Carney warns Scotland over currency union hopes
Mure Dickie and Sarah O’Connor –
An independent Scotland would have to surrender some sovereignty in a monetary union with the UK, Mark Carney has warned. In his first major intervention on the politically charged issue of Scottish independence, the Bank of England governor said London and Edinburgh would need to “consider carefully” how to set up a durable currency union in the event of Scottish independence, given the “clear risks if these foundations are not in place”.

***DA: Maybe they could use this as an opportunity to adopt the gold standard. Nah. Never mind.

Carry Trade Doesn’t Shine in Emerging Currencies
Prabha Natarajan – MoneyBeat – WSJ
With central banks hiking interest rates from Turkey to South Africa, some analysts and investors are predicting a new golden age for the carry trade. Others aren’t so sure.

***DA: Sorry; no free lunch here. Making money on the carry trade requires currency stability.

Investors Still Wary of Efforts to Shore Up Currencies
Emergency measures by Turkey and South Africa to stop a headlong flight of foreign investors had little effect on Wednesday. The financial markets all but ignored increases in official interest rates aimed at strengthening the countries’ currencies.

Law Enforcement Strikes Back in Bitcoin Hearing
Law enforcement officials testified on Wednesday that virtual currencies like Bitcoin have opened up new avenues for crime that government has not been able to keep up with.

Q&A with LMAX CEO: Financial sector ‘foolish’ not to look at virtual currencies
Anna Irrera – Financial News
Last week UK regulated exchange LMAX introduced trading in Ven, a digital currency based on a basket of fiat currencies, commodities and carbon futures.

Indexes & Index Products

Indexes Suffer Big Losses As Fed Trims More Stimulus
Nancy Gondo – Investors Business Daily
Stocks closed near their intraday lows after a seesaw session during which the Fed, as expected, announced it would trim monthly bond purchases by $10 billion.

Asset managers lure insurers with new exchange-traded funds
Louie Woodall –
Asset managers are refining their exchange-traded fund (ETF) products in a bid to attract insurers seeking to invest in a wider range of credit securities.


Gold Bugs Have Reasons to Cheer
MoneyBeat – WSJ
Gold, one of the biggest losers of 2013 with its whopping 28% decline, is on the upswing as tremors in emerging markets rekindle the investor appetite for safe havens that was lacking for much of the last year.

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