First Impressions

Today’s newsletter features a healthy portion of Turkey and a few side dishes from the rest of the emerging market. Turkey’s drastic overnight rate hike spiked the lira – for about 20 minutes or so – before giving back most of the gains. The Borsa Istanbul 100 index lost another two percent out of the chute, taking out the December lows.

President Erdogan, whose public statements indicated reluctance to move interest rates, acquiesced in a big way, with hikes far above consensus. The nation’s central bank took the marginal funding rate from 7.75 percent to 12 percent, and the overnight borrowing rate from 3.5 percent to 8 percent.

The move was certainly more Volcker than Bernanke but, arguably, came much too late. Investors are still bailing.

The rest of the emerging world is reeling as well. It could get interesting.

One more thing – Ben Bernanke will hand the reins to Janet Yellen after his last FOMC meeting today, just before they vote to taper an additional $10 billion a month. This according to, well, everyone.

Quote of the Day

“It takes Turkey in the right direction, but this could be grotesquely painful for the domestic economy. The chance of a run on Turkey is significantly lower, but it is still possible.”

Paul McNamara, emerging market portfolio manager for GAM, as quoted in the WSJ story “Impact of Turkey Rate Decision Fades Fast

Lead Stories

Turkey’s Central Bank Declares a Shock-and-Awe Rate Hike
Paul Vigna – MoneyBeat – WSJ
The bank raised interest rates to 12% from 7.75% at the conclusion of an emergency meeting convened late Tuesday night Ankara time to address the pummeled lira. This was far above the expected “emergency” rate hike; market consensus centered on a 2% rate hike.
jlne.ws/MfaqsI

Impact of Turkey Rate Decision Fades Fast
Tommy Stubbington – WSJ.com
The soothing effect of Turkey’s unexpectedly huge interest-rate rise faded quickly Wednesday, as investors worried that many of the problems facing fragile emerging markets remain.
jlne.ws/Mfaqcg

Risky European Bonds Shaken by Emerging Market Tremors
Ben Edwards – MoneyBeat – WSJ
A rising tide is said to lift all boats. A crashing wave can often sink a few of them too. As emerging-market bonds listed from another sharp selloff, other areas perceived risky by investors have been caught in the swell.
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***DA: Methinks the world had gotten a bit complacent about risk (again).

Floating rate Treasuries set for strong demand
Michael Mackenzie in New York – FT.com
Expectations are high that the sale of the first new Treasury security in 16 years on Wednesday will merit a strong reception from investors ahead of another debt ceiling showdown in Washington.
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***DA: Ten whole basis points?!? Put me down for a few billion!!

Investors sound warning on ‘coco’ bonds
Christopher Thompson – FT.com
Investors are sounding the alarm about the riskiness of so-called “coco” bonds as European banks are poised to issue record numbers in an effort to meet new regulatory demands on capital.
jlne.ws/MfaNng

***DA: Please don’t let this story die. Pun-happy headline writers are desperate for new material ever since PPIPs disappeared from the scene. Plenty of coco puns out there.

The challenges of a post-crisis world
Martin Wolf – FT.com
The consensus view of the world economy has become more optimistic, for good reason. The high-income economies seem at last to be taking off; this is particularly true for the US and UK. But significant challenges lie ahead, notably for the eurozone. For emerging countries, stronger growth in high-income countries brings benefits, but also costs. If euphoria is among the dangers to stability, 2014 should not see too much of it.
jlne.ws/Mfamco

***DA: Post-crisis? I would call it mid-crisis, or even pre-crisis, with what is happening this week.

Paul Tucker on the carry trade
Cardiff Garcia | FT Alphaville
An amusing observation from his recent speech to the FSOC Conference
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***DA: Apparently the carry trade is real, and not some hypothetical condition that no one ever thought to implement.

In Search of Confidence
FLOYD NORRIS – NYTimes.com
The consumer confidence figures just released showed an increase, but they remain at a level that is historically low. One question that determines the index is whether consumers expect their own income to rise, fall or remain level over the next six months.
jlne.ws/MfaPeP

Covered Bond Issuance Surges in Europe as Borrowing Costs Fall
Alastair Marsh – Bloomberg
Unione di Banche Italiane SCPA (UBI) and Commerzbank AG (CBK) are among lenders marketing a total of 4.25 billion euros ($5.8 billion) of covered bonds in Europe today, boosting monthly sales of the debt to the most since July 2012 as borrowing costs approach a record low.
jlne.ws/1aHMLwP

RPT-Knock-down bid for foreign lender highlights Hungary’s dilemma
Reuters
The bank that tried to take over Raiffeisen’s Hungarian operations this month has a single branch with just two cash desks for customers. Majority owned by the head of the government debt agency, the rest of it is in state hands. Its failed bid to swallow up the foreign lender’s 123-branch operation offers several clues to the future of Prime Minister Viktor Orban’s nationalist economic policy.
jlne.ws/MfaPeS

US finance regulator voices backing for Bitcoin
Stephen Foley in New York – FT.com
Benjamin Lawsky, the superintendent of financial services in New York whose tough stance against money laundering wrung a $340m settlement from Standard Chartered, says that Bitcoin has reached a “tipping point” where its potential benefits outweigh the risks of illegal activity.
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Central Banks

Goldman Sachs Sees Muted Taper Impact on Asian Debt as Fed Meets
Rachel Evans – Bloomberg
Goldman Sachs Group Inc. (GS) says U.S. cuts to unprecedented stimulus will have a limited effect on the performance of Asian bonds this year, as the Federal Reserve finishes its first policy meeting of 2014.
jlne.ws/1aHMyK2

Challenges for the Yellen Fed
NYTimes.com
The good news for Janet Yellen is that she will take the reins at the Federal Reserve on Saturday with inflationary pressures subdued and the United States economy finally in an upswing (occasional stock market gyrations notwithstanding).
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***DA: The bad news is, maybe the economy has ideas of its own.

Japan PM Abe voices hope BOJ will sustain bold stimulus
Reuters
Japanese Prime Minister Shinzo Abe expressed hope on Wednesday that the central bank will maintain its bold monetary stimulus to revive the economy and end deflation.
jlne.ws/MfaPv6

Rajan continues his fight against inflation
Business Standard
RBI governor Raghuram Rajan has made it a habit of announcing the unexpected. Less than five per cent of economists were expecting the governor to increase interest rates, but he did, by raising repo rates by 25 basis points from 7.75 per cent to 8.0 per cent.
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***DA: On any other day, a 25 bp hike would be a lot.

Hawkish action, dovish guidance from RBI
Business Standard
Raghuram Rajan is making springing surprises a habit. The Reserve Bank of India (RBI) governor delivered four of those in the third-quarter monetary policy, unveiled on Tuesday.
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Let’s first fight the fight that needs to be fought: Raghuram Rajan
Business Standard
Reserve Bank of India Governor Raghuram Rajan spoke to journalists at a post-policy press conference.
jlne.ws/MfaQiT

Currencies

EU exchanges aim to reduce FX risk for ETF trading
Anish Puaar – Financial News
Two of Europe’s largest stock exchange groups plan to launch multi-currency trading for exchange-traded funds in moves designed to reduce currency risk and attract more Asian investors to European markets.
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Banks’ 2013 fall in FX revenues might be repeated this year as risks coalesce
Simon Watkins – Euromoney magazine
Top banks face greater risks in 2014 from shaky economic outlooks, indiscriminate reputational damage from market scandals, strict collateral rules, increased competition from ECNs and historically low market volatility.
jlne.ws/MfaQiW

Dollar, as reserve currency, is a virtue, not a trap: a response to Eswar Prasad
Charles Collyns – Euromoney magazine
I agree with Prasad’s main argument that the dollar is likely to continue in its dominant role as the world’s reserve currency for the foreseeable future – but I see this not as a trap but as a virtue.
jlne.ws/MfaPvc

Global Currency Trading Volumes Show October Increase
WSJ.com
Currency trading volumes rose globally in October from a year ago, according to new data from some of the world’s biggest central banks. The data reflect a revival in foreign-exchange trading amid heavy betting on the decline of the Japanese yen and expectations of a wind-down in stimulus from the U.S. Federal Reserve, as well as an increase in high frequency and retail trading.
jlne.ws/MfaQzb

Winklevosses want sheriff to police virtual currency ‘wild west’
Stephen Foley in New York – FT.com
The Winklevoss twins have called for a sheriff to police the “wild, wild west” of virtual currencies after the founder of a company they backed was charged with money laundering offences.
jlne.ws/MfaPve

Bitcoin’s Future Gets a Hearing
Paul Vigna – MoneyBeat – WSJ
Bitcoin’s future may have started taking shape in a conference room in lower Manhattan on Tuesday, as New York state’s top banking regulator convened two days of public hearing on the subject of regulating virtual currencies. The strong sense from both sides was that regulation is coming, that it will be a good thing, and that bitcoin has already crossed the point where it’s just a passing fad.
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A Swipe at Traditional Banking at a Forum Illuminating Bitcoin
NATHANIEL POPPER – NYTimes.com
A hearing Tuesday on the regulatory future of Bitcoin instead turned into a forum on the shortcomings of the traditional banking industry. The hearing, called by New York State’s top financial regulator, Benjamin M. Lawsky, gave five Bitcoin advocates the chance to discuss what they view as the advantages of Bitcoin over current systems of moving money around the world.
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Indexes & Index Products

ISE ETF Ventures and BlueStar Indexes Expand Partnership
ISE ETF Ventures announced today the expansion of its partnership with BlueStar Indexes, a provider of Israeli-focused investment research, by launching the jointly developed BlueStar Israel Global Technology Index, “BIGTech” (Ticker: BGTH).
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Exchange Traded Fund providers worry about ‘clutter’ in sector
Reuters
At a time when the number of exchange-traded funds has skyrocketed to more than 1,500, major fund providers say they see a need to rein in product proliferation and focus on developing ETFs that are more targeted to specific investor needs.
jlne.ws/MfaoRK

Risk premia: the end of the road for smart beta?
Richard Jory – Risk.net
Allegations of mis-selling are generally the preserve of the financial industry’s regulators and enforcers or, at worst, US law firms trying to drum up business with a scattergun approach to accusations of foul play. But now a new focus for the mis-selling crowd has emerged – so-called smart beta. Ask almost any specialist in the field of structured products, exchange-traded funds or indexes what they think of smart beta and you’ll apparently find all the evidence you need to support the latest outbreak of catcalls aimed in its direction.
jlne.ws/Mfap80

Exchange-traded products industry worth $2.4 trillion, says ETFGI
Richard Jory – Risk.net
The size of the global exchange-traded fund (ETF) and exchange-traded product (ETP) industry hit a record high in 2013, with a total of $2.4 trillion of assets invested last year. The figure was bolstered by $24.5 billion of net inflows in December, according to ETFGI’s latest global ETF and ETP industry insights report. Equity ETFs and ETPs saw inflows of $28.3 billion in December, followed by fixed income at $403 million, but commodity products saw net outflows of $5 billion.
jlne.ws/MfapVM

Gold

Global gold hedging falls to 11-year low
Xan Rice – FT.com
The outstanding volume of gold sold forward by mining companies fell to its lowest level in at least 11 years during the third quarter of 2013. The global hedge book decreased by six tonnes to 92 tonnes, Société Générale and Thomson Reuters GFMS said in a report on Tuesday. That is the lowest level since 2002, when the quarterly hedge reporting series began.
jlne.ws/MfaQzi

Rising US yields bode badly for bullion
Jamie Chisholm – FT.com
The market expects the Federal Reserve will decide to lop another $10bn off its monthly bond buying stimulus programme at the conclusion of its January meeting on Wednesday.
jlne.ws/MfaPLD

FOMC Expected To Continue Tapering No Taper Could Shock Gold Higher
Kitco News (via Forbes)
A weaker-than-forecast U.S. jobs report in December is not expected to deter the Federal Open Market Committee from the tapering of its bond-buying program, as was announced last month.
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Hedge-Fund Manager Paul Singer ‘Shocked’ by Bitcoin Popularity
Rob Copeland – MoneyBeat – WSJ
One of the bigger names in hedge funds has come out against Bitcoin–and in favor of beaten-down gold.
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