First Impressions

Market Attributes: Risk & Volatility Dashboard, February 2015
Tim Edwards – S&P Dow Jones Indices (reprinted with permission)

After a rocky start to the year, the past two weeks have provided respite to U.S. equities. Nonetheless, it remains an interesting time in global markets: 13 out of the 15 measures of volatility shown are above their average for the last 200 days.

The S&P 500 is making new highs yet again and the VIX is back at 15.45, down by more than five points versus one month ago. Part of the increasing demand for U.S. equities is based on U.S. dollar strength. With currency wars breaking out across the globe, correlations between the U.S. dollar and the S&P 500 are on the increase, while correlations between U.S. and global equities have declined.

Meanwhile a modest rally in oil prices has been converted into a newfound enthusiasm among retail investors for high yield bonds (among which energy is the dominant sector); large flows into associated ETFs accompanied a tightening of CDS spreads by nearly 40 basis points.

Volatility measures for currencies, U.S. Treasuries, oil and gold all gained this month and remain historically elevated. More worryingly, a chorus of commentators has been pointing to vast flows from retail investors into a high yield bond market that remains challenged on the fundamentals.

With negotiations with Greece regarding their bailout package ongoing and in light of the recently announced EUR1.1 trillion stimulus package from the ECB, it is no surprise to see that the euro judged to be most at risk among currencies. Nor should we be surprised at retained high volatility in the oil markets; concerns over the energy sector have fed through to the current high reading in Canada’s S&P/TSX 60 equity volatility.

The S&P Daily Inverse Short-Term VIX index was the only one of our investable volatility indices to outperform the vanilla equity exposure over the last month. Over 12 months, nothing beat a resurgent S&P 500.

The VIX futures curve has steepened, but not unduly given the decline in the VIX. Volatility of volatility (our final measure above) has also declined, suggesting that there is an increased confidence from the market that the next spike in volatility will be manageable.

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Quote of the Day

“I shouldn’t be saying this now, but I’ve sort of developed a few Ponzi schemes. I have my own theories about him. One basic thing, it’s interesting how it’s about trust.”

Robert DeNiro in the story, ” The Next Bernie Madoff? Richard Dreyfuss, Maybe Robert De Niro”.

Lead Stories

U.S. Stepping Up Efforts to Break Greece Impasse, Official Says
Andrew Mayeda – Bloomberg
The U.S. is stepping up efforts to encourage Greece and its European creditors to reach an agreement that would prevent the euro area’s economy from weakening further, according to a U.S. Treasury official.
Treasury Secretary Jacob J. Lew talked today with Greek Finance Minister Yanis Varoufakis, French Finance Minister Michel Sapin and Jeroen Dijsselbloem, who chairs meetings of the 19 euro-area finance ministers, the official told reporters during a briefing in Washington on condition of anonymity.

The investing golden age may be over: Robert Shiller
By Shawna Ohm, Yahoo Finance
The American economy is changing and we may be overcompensating. That’s one takeaway from Yahoo Finance’s latest discussion with Nobel Prize winning economist, and Yale University professor, Robert Shiller.

Wall Street Banks Heed Fed’s Risky Loan Warnings
by Craig Torres, Nabila Ahmed, Bloomberg
U.S. banking regulators summoned Wall Street’s biggest lenders to New York’s Pierre hotel in November to hammer home a message that had gone largely unheeded for more than a year: Stop arranging risky corporate loans that were inflating another credit bubble, or potentially face fines or suspensions.

Why Greece Won’t Ever Be Able to Pay Off Its Debts With Austerity
Brendan Greeley – Bloomberg
The Greek negotiators who went to Brussels in mid-February to argue for more lenient terms from their lenders were especially concerned about one thing in any new deal: the target for achieving and keeping a primary surplus. A measure of austerity, it’s what a government earns in taxes each year, minus what it spends on everything except interest payments on its own debt. It’s usually expressed as a share of gross domestic product.

The dangers in rising bond yields
James Mackintosh, FT
Forget negative interest rates. Forget Greece. Outside Europe, markets have been dominated by major reversals: in bond yields, oil and within stock markets.

HSBC tax scandal prompts rivals to check for ‘problem dossiers’
Martin Arnold and Caroline Binham in London
The reaction of rival private banking executives to the tax evasion scandal unfolding at HSBC has been swift. Many have called internal meetings and brought in outside advisers in the past 10 days to check there are no “problem dossiers” lurking in their own client portfolios, said several industry executives.

FIA and FIA Europe Special Report Series: Algorithmic and High-Frequency Trading Under MiFID II
HFT and algorithmic trading have been the subject of considerable global regulatory attention in recent years and the regulation of this area has been one of the most contentious areas in the MiFID II policy making.

Criminals have stolen up to $1 billion from banks worldwide, security firm says
By Priya Anand, MarketWatch
Cybercriminals have stolen up to $1 billion since late 2013 from banks across 30 countries, including the U.S., Russia, Europe and China, a computer security company says in the latest report to draw a red circle around the financial sector as a vulnerable target for hackers.

JPMorgan Hires Military-Grade Cyberwarriors to Fend Off Data Thieves—and Foreign Powers; The bank is building a new facility near the NSA’s headquarters to attract new talent
Jordan Robertson Michael A Riley, Bloomberg
In the days following the massive breach of JPMorgan Chase’s computers last summer, the bank’s security chief, James Cummings, rarely left his operations center in its Manhattan headquarters. He directed a select group of colleagues to search for links to the Russian government. There was little evidence of a government tie, especially so early in the investigation, but Cummings, a former head of the U.S. Air Force’s cybercombat unit, was confident they’d find more.

Lutnick Says BGC in Talks With GFI Group for Consensual Takeover
Zeke Faux – Bloomberg
Howard Lutnick says he’s on the verge of succeeding in his six-month campaign to acquire interdealer broker GFI Group Inc.
Lutnick’s BGC Partners Inc. is in talks with GFI’s board for a consensual agreement related to its $6.10-per-share bid, BGC said in a statement. A tender offer for GFI shareholders is set to expire at 5 p.m. Thursday in New York.

The Next Bernie Madoff? Richard Dreyfuss, Maybe Robert De Niro
by Max Abelson, Bloomberg
No corner of Wall Street is truly important until Hollywood actors play its heroes and villains. Corporate raiders have “Wall Street,” mortgage-backed securities sparked “Margin Call,” commodities dominate “Trading Places” and stock brokers star in “The Wolf of Wall Street.”

Deutsche Börse profit up nearly 80%
By Chase Gummer, The Wall Street Journal
German exchange operator Deutsche Börse said late Wednesday its 2014 net profit surged more than 59% to EUR762.3 million, on the heels of a strong fourth quarter and high trading volumes.

Japan Stocks Hit 15-Year High; Nikkei Stock Average rises to highest level since May 2000
By Kosaku Narioka, WSJ
Japanese stocks rose to a 15-year high Thursday, as investors take a renewed interest in companies that have shifted their focus back to growth and efficiency.

Central Banks

First peek into secretive European Central Bank meetings show division
By Alanna Petroff, CNN Money
The first-ever peek inside the normally-secretive European Central Bank’s monetary policy meetings shows bankers were divided over the landmark EUR1.1 trillion stimulus program.
Some participants at the historic January meeting opposed the program’s timing, saying there was “no urgent need” for the massive bond buying measures, according to minutes the bank released Thursday. Others said this kind of stimulus program should only be used “as a last resort” if deflation spiraled out of control.

Central Banks and the Perils of Subzero Conditions
The longer such conditions persist, the greater the risk of perverse consequences
By Richard Barley, The Wall Street Journal
The monetary-policy anchor keeps on slipping.
Until recently, it was broadly thought that zero was the final frontier beyond which central banks wouldn’t or couldn’t cut interest rates.
But negative rates are now all the rage. The European Central Bank’s deposit rate is minus 0.2%, although its main refinancing rate remains just above zero. The Danish certificate of deposit rate is negative 0.75% in an effort to prevent the krone appreciating. The Swiss National Bank has gone negative to reduce the allure of the franc. The Swedish Riksbank has cut its key rate to negative 0.1% and says it could go further.

Fed gives the bulls a signal to keep running
By BarbaraKollmeyer, MarketWatch
The Fed has spoken. And His Royal Highness the dollar got blasted as the timing for a rate hike appeared to get pushed out again. But if the Fed is reading the Google tea leaves, it will know that delay is valid. (See our Call of the Day).

ECB Plans to Push Greek Banks to Shed State Debt If Talks Fail
Jeff Black and Alessandro Speciale – Bloomberg
The European Central Bank intends to tell Greek banks to reduce their holdings of state debt if talks over the country’s finances break down, three people familiar with the discussions said.
The ECB’s Supervisory Board, in charge of bank oversight across the euro area since November, is concerned that Greek lenders will be saddled with illiquid assets from a government heading for default. The board’s actions are contingent on progress at a meeting of euro-area finance ministers that starts on Friday, the people said, asking not to be named as the matter is private. An ECB spokesman declined to comment.

Mexico central bank lowers 2015 growth forecast
Fox News Latino
Mexico’s central bank has lowered its growth forecast for 2015 from a range of between 3 percent and 4 percent to a range of between 2.5 percent and 3.5 percent, saying the macroeconomic climate has become less favorable since its previous report.

Argentine unit of HSBC says central bank lifts ban on fund transfers
The Argentine unit of HSBC Holdings Plc said on Thursday that the central bank lifted a ban it had placed on its international cash transfers.
In November, Argentina charged HSBC with helping more than 4,000 clients evade taxes by stashing their money in secret Swiss bank accounts. HSBC Argentina rejected the charge, saying it respected Argentine law.

Hungary Central Bank: Mulls Holding Forex Reserves in Chinese Yuan
By Margit Feher, Dow Jones Business News
BUDAPEST–The Hungarian central bank will this year look into whether it should hold foreign currency reserves and offer a liquidity tool in the Chinese yuan to tackle market turmoil, it said on Thursday.
The move is part of the Budapest Renminbi Initiative which is aimed at expanding Hungary’s financing resources, establishing related foreign exchange and capital markets infrastructure. It also tackles the development of related clearing systems, as well as the start of negotiations about Chinese capital market permits with the appropriate financial, corporate-sector and governmental authorities, the central bank said.

Only One Price Matters for Russia’s Central Bank
Oil’s impact on ruble drives policy
By Agnes Lovasz, Bloomberg Business
At central banks from Canada to New Zealand, prices of a wide basket of goods help determine the direction of interest rates. For Russia, increasingly, only one price matters: oil’s.
Energy exports, already the lifeblood of the nation’s economy, may now be dictating monetary policy. The head of Russia’s central bank, Elvira Nabiullina says she checks the price of oil several times a day. Last year’s 46 percent plunge in crude prices is making it tougher for Russia to fulfill a plan to gradually introduce an inflation-targeting strategy this year with the aim of reducing price increases to 4 percent by 2017.


Swiss Franc’s Surge Sparked a $9.2 Trillion Day for Currencies
by Lucy Meakin, Bloomberg
The removal of the cap on the Swiss franc led to CLS Group Holdings AG, the operator of the world’s largest currency-trading settlement system, processing a record $9.2 trillion of transactions on Jan. 20.

Indexes & Index Products

At 30, Nasdaq-100 Recognized as Benchmark for Innovation
Once considered a pure play on technology stocks, the Nasdaq-100 Index (NDX), which celebrated its 30th anniversary on January 31, 2015, has emerged as the de facto benchmark for broad-based innovation, representing the “new global economy,” according to a recent Nasdaq study titled The Nasdaq-100 Turns 30: Tracking Innovation in Large Cap Growth

Broad Benchmark ETFs Are Breaking Out
ETF Trends
The broad Nasdaq Composite Index, along with related exchange traded fund, is breaking out and could foreshadow similar breakouts in sideways trading among other key U.S. indices.

Weighing the advantages of an all-ETF portfolio
In financial services, exchange-traded funds are somewhere around the third or fourth stage, between new niche and great idea. ETFs attracted more net investment last year ($239 billion) than did mutual funds ($225 billion), according to data from Morningstar. Five years earlier the net inflow into mutual funds was more than triple the net amount invested in ETFs.

BSE to include differential voting right shares in benchmark indices
The benchmark and broader indices of BSE Ltd will soon include differential voting right (DVR) shares as well if normal equity shares of such companies are already part of the index. Such inclusions will be subject to certain eligibility criteria and will be effective when the benchmarks are rebalanced in June.

Why tech can’t keep pulling this market
Last week the markets got serious about the topside and the potential setup to support a break higher was fulfilled. That was pretty much in line with the bullish setup that had presented itself. Now that the breakout has in fact actualized and moved north, the next question is twofold, “Will it continue?” and “How far can it go?”

Currency-Hedged ETFs Better Reflect the International Markets
ETF Trends
A large part of the outperformance in U.S. equities, or underperformance in international stocks, may be attributed to the stronger U.S. dollar. Consequently, investors may find that a currency-hedged equity exchange traded fund is a better pure play on international equities.

Thomson Reuters Expands Equity Index Series With Globally Listed Infrastructure Indices
Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, today announced the launch of a set of index families focused on infrastructure and utilities. The Thomson Reuters Infrastructure Indices, due for release mid-March 2015, will be based on Thomson Reuters Business Classification (TRBC), Thomson Reuters sector and industry classification of every listed company in 130 countries. TRBC has five levels of classification enabling a more accurate and granular selection of companies.


March Date Set For Gold Fix Switch
By Ese Erheriene, The Wall Street Journal
The deadline for the gold fix to enter the digital age is nearing.
The London Bullion Market Association on Thursday said that the gold benchmark will be set via an electronic platform managed by ICE Benchmark Administration beginning on March 20.
The new LBMA Gold Price will be set twice daily – at 1030 GMT and 1500 GMT – in dollars, euros and sterling. It will replace the current private telephone conference between a group of four banks, the remnants of a cozy system that has existed since 1919.
“As regular customers of the fix, we think it’s vital the market gets this kind of clarity on how this key price-point is changing,” said Adrian Ash, head of research at BullionVault, an online marketplace for gold and silver investors.

India’s gold imports set to rise as RBI eases curbs ahead of budget
By Meenakshi Sharma and A. Ananthalakshmi, Reuters
Gold imports to top consumer India are set to jump in coming months after the Reserve Bank of India (RBI) eased gold import curbs, ahead of an expected cut in import duty in next week’s budget.
The Reserve Bank of India said on Wednesday banks would again be allowed to import gold on a “consignment basis”, under which they act as intermediaries and don’t pay for the stock until a buyer has been found, which is usually quickly.
Trading houses will be allowed to bring in gold with no conditions attached.

Gold Mining Stocks Show Favorable Prospects
Gordon Scott, CMT, Contributor, Forbes
Now might be an advantageous time for investors to strike gold. With energy prices lower, it’s cheaper to mine gold and gold mining companies are seeing opportunity ahead to expand operations. If the price of gold goes higher, that’s a bonus, but it isn’t necessary in order for the mining companies to still have respectable performance in the quarters ahead.

Barrick to focus on gold, not diversify, chairman says
Rachelle Younglai, The Globe and Mail
Barrick Gold Corp. chairman John Thornton said the Canadian miner’s focus is squarely on gold, putting a halt to the company’s diversification into copper.
“First and foremost our focus is gold. We have no plans to diversify into other metals and we have no plans to add to our existing copper position,” Mr. Thornton told analysts on a call to discuss year-end results.

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