First Impressions

Sweet 16 Honorable Mention – Regulation

Exchange leaders will be dealing with big changes at their respective companies in 2016, from launching new competing markets and dealing with new regulation to integrating new data acquisitions to expanding across different time zones.

The John Lothian News Sweet 16 Series featured our best ideas and thoughts about exchanges, regulation, economics and technology. But there are still more great ideas for 2016 that made our honorable mention. Here are comments from Art Hahn of Katten, Travis Schwab of Eventus Systems, Steve Probst of Global Risk, Brendan Bradley of Eurex, Justin Llewellyn-Jones of Fidessa on regulation.
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Quote of the Day

“We are broke and don’t even know it, or to return to my opening analogy, we are having our cake, eating it at the same time and believing that a new cellphone app will be invented in the near future to magically deliver more of the same. Not gonna happen folks.”

Bill Gross, in his 2016 investment outlook, “It’s a Xanax World”

Lead Stories

Wall Street Promotion Logjam Endures With Fleming Latest to Exit
Dakin Campbell – Bloomberg
Morgan Stanley is demonstrating how rising to the top of a big U.S. bank is getting even harder, as chief executive officers stay on after guiding their firms through the aftermath of the financial crisis.
Greg Fleming, one of Morgan Stanley’s most senior leaders, announced Wednesday he’s stepping down. That came after CEO James Gorman indicated he plans to stay on at least five more years and installed an older deputy in the firm’s No. 2 position, according to people with knowledge of the matter.

****SD: This Business Insider article has the full text of the letter Fleming sent to his staff.

Is the whole theory of secular stagnation a hoax?
Ambrose Evans-Pritchard – The Telegraph
The world’s monetary watchdog has thrown down the gauntlet. It has challenged the twin assumptions of secular stagnation and the global savings glut that have possessed – some would say corrupted – the Western economic elites.
It has implicitly indicted the US Federal Reserve and fellow central banks for perverting the machinery of interest policy to conjure demand that may not, in fact, be needed, and ensnaring us in a self-perpetuating “debt-trap” with a diet of ever looser money.

****SD: “Hi, everybody … Yeah, it’s me, the Bank for International Settlements. How are things? … Good, good … Well, I’m actually calling to let you know you’re all wrong.” *Hangs up*

Blunt elbows: There is less competition among banks than first meets the eye
The Economist
Here’s a puzzle: in bustling Manhattan, where bank branches abound, people pay much more for the privilege of stashing their cash than in sleepy Kansas. Greater competition should reduce charges and fees. Yet there is no sign of such a relationship. That is because much of the competition is phoney, according to a new working paper.
Antitrust authorities typically gauge competition by looking at how many different banks operate in a given area. But the authors argue that this ignores the fact that a handful of big asset-management firms have large holdings in many of these “competing” banks (see chart). An investor who owns shares in two rival banks would naturally be reluctant for them to compete away profits. To please their shareholders, the banks might keep charges and fees high.

Tax-Trade Mess Lingers at Bank of America
Jenny Strasburg – WSJ
A group at Bank of America Corp. that specialized in arranging trades to help clients around the world avoid taxes has been dismantled. Some employees claim they aren’t even allowed to say the group’s name anymore.
But escaping the troubles left by the group, called Structured Equity Finance and Trading, hasn’t been so easy. Regulators have intensified their scrutiny of certain dividend-tax trades and deepened an investigation into whether Bank of America broke rules designed to safeguard client accounts, people familiar with the matter say.
Bank of America also is still grappling with internal dissent and client disputes related to the group, which at its peak had just a few dozen employees working from a quiet corner of a Manhattan trading floor and an office in central London. They spent hour after hour discussing the minutiae of tax codes, accounting and internal bank financing, current and former employees say.

****SD: Apparently, “SEFT” at BofA is the equivalent of “Voldemort” at Hogwarts.

Saudi Arabia is considering an IPO of Aramco, probably the world’s most valuable company
The Economist
Saudi Arabia is thinking about listing shares in Saudi Aramco, the state-owned company that is the world’s biggest oil producer and almost certainly the world’s most valuable company. Muhammad bin Salman, the kingdom’s deputy crown prince and power behind the throne of his father, King Salman, has told The Economist that a decision will be taken in the next few months. “Personally I’m enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco.”

Food Costs at 6-Year Low Trouble Central Banks and Aid Consumers
Whitney McFerron – Bloomberg
Global food prices ended 2015 at the lowest in more than six years, adding to the headache for central banks concerned about deflation while bringing a windfall to the poorest consumers.

Fiduciary rule could make 2016 good for investors
Mark Miller – Reuters
The U.S. stock market may give us a rocky ride in 2016, but the year is shaping up to be a good one for retirement savers. At long last, investment advisers may be required to put your best interests ahead of their own.
The U.S. Department of Labor is applying the finishing touches to the so-called fiduciary rule – a geeky-sounding phrase that actually will mean a great deal to anyone with a 401(k) or Individual Retirement Account (IRA).

Investors cry foul over bank bail-ins
Martin Arnold and Thomas Hale – Financial Times
It was an unpleasant late Christmas present for some of the world’s biggest investors. They woke up on December 30 to find that Portugal had announced plans to impose heavy losses on almost EUR2bn of senior bonds at Novo Banco, the bank created from the ruins of Banco Espírito Santo. This controversial move — prompting threats of lawsuits from some investors — was the latest in a series of rescue operations launched for struggling banks in Greece, Italy and Portugal in the last few weeks of 2015.

****SD: Too bad Joey Crawford is retiring from NBA reffing after this season. He’s the best at crying foul.

China’s 29 Minutes of Chaos: Stunned Brokers and a Race to Sell
Even by the rough-and-tumble standards of China’s stock market, it was a chaotic 29 minutes.
With share prices going into free fall almost as soon as local exchanges opened, market gurus at Huaxi Securities Co. were at a loss to explain why. One manager of $46 million in Shanghai liquidated all his holdings. Other investors, including a top-performing hedge fund, tried in vain to cash out as circuit breakers brought trading to an abrupt halt.

Stress Testing without the Stress – the Bank of England’s Stress Tests
Kevin Dowd – Adam Smith Institute
On December 1 last year, the Bank of England released the results of its second round of annual stress tests of the capital adequacy or financial strength of the UK banking system. This exercise is supposed to be a financial health check for the major UK banks – it tests their ability to withstand a severe adverse shock and still come out in good financial shape.

Far-sighted; Catering to foreign-born customers is a growing niche in finance
The Economist
Most banks wouldn’t lend to Roberta. She arrived in New York from Mexico with papers but no credit history. But Neighborhood Trust Federal Credit Union, which specialises in lending to immigrants, gave her advice and a $2,000 loan. She started out selling Mexican food from a cart. She now runs a food truck, employs five people and has plans to expand.
Many immigrants, like Roberta, want to save or start a business. But they struggle to get finance. In America 23% of households headed by a non-citizen, and 35% of households where only Spanish is spoken, have no bank accounts—compared with 8% for the population as a whole. There are multiple barriers: not just low incomes, which make it hard to meet minimum-balance requirements, but also trouble with language, identification and trust

George Soros Sees Crisis in Global Markets That Echoes 2008
Anusha Ondaatjie and Adam Haigh – Bloomberg
Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka on Thursday.

Investment Outlook: It’s a Xanax World
Bill Gross – Janus Capital
The Romans gave their Plebian citizens a day at the Coliseum, and the French royalty gave the Bourgeoisie a piece of figurative “cake”, so it may be true to form that in the still prosperous developed economies of 2016, we provide Fantasy Sports, cellphone game apps, sexting, and fast food to appease the masses. Keep them occupied and distracted at all costs before they recognize that half of the U.S. population doesn’t go to work in the morning and that their real wages after conservatively calculated inflation have barely budged since the mid 1980’s. Confuse them with demagogic and religious oriented political candidates to believe that tomorrow will be a better day and hope that Ferguson, Missouri and its lookalikes will fade to the second page or whatever it’s called these days in new-age media.

US junk bond market drought breaks
Eric Platt – Financial Times
A drought of US high-yield bond sales showed signs of ending on Thursday with the first deal looming in nearly three weeks.
The market had been shut for the longest period of time since 2011, as gyrations across global equity markets damped risk appetite from an investor base that suffered losses in 2015.

Let’s Have a Time-Out on #ChinaMeltdown
William Pesek – Barron’s
The Catch-22 confronting Chinese President Xi Jinping is painfully on display this week. As 2016 trading began Monday, state-run media made it clear Beijing would forego aggressive steps to spur growth — a prerequisite to accelerating the reforms international investors are demanding. When Xi’s team proved good for its word, those same punters panicked and sparked a world-wide selloff. Xi doesn’t need to read Joseph Heller’s 1961 satirical novel, he’s living it. His biggest challenge isn’t slowing growth, plunging stocks, corruption or blackening skies. It’s nervous nellies in the trading pits of London, New York and Tokyo.

Serious Fraud Office asks for ‘blockbuster funding’ to pay for major investigations
Marion Dakers – The Telegraph
The Serious Fraud Office has asked for a budget top-up of £21.1m to ensure its “blockbuster” investigations are funded through to the end of the financial year.
The SFO has an “urgent cash requirement on existing services” and needs a cash advance of £15m to tide it over until parliament approves the extra funding in full, according to the solicitor general.

The trouble with student loans? Low earnings, not high debt
Susan M. Dynarski – Brookings Institution
If you even casually follow the news, you have probably heard that Americans owe a record $1.3 trillion in student loans. Student loans are now second only to mortgages as the largest source of household debt.[i] Seven million borrowers are in default, and millions more are behind on their payments.[ii]

Bernie Sanders’ Bank Breakup Plan Is Simply Cuckoo
Rob Blackwell – American Banker
During his speech this week on his plan to end “too big to fail,” Sen. Bernie Sanders worked his followers into a frenzy, leaving them chanting “break them up, break them up” by the end.
And no wonder. The Vermont lawmaker excoriated Wall Street, specifically blaming large commercial banks for the financial crisis, and making it sound relatively easy to dismantle them if he wins office.

****SD: Bernie claims that within one year of being elected he would break up the “too big to fail” institutions. Given how hard it is proving to get Mifid in place, for example, a one year timetable for such a momentous plan does appear “cuckoo.”

A mean feat: Despite forecasters’ best efforts, growth is devilishly hard to predict
The Economist
“The only function of economic forecasting is to make astrology look respectable,” John Kenneth Galbraith, an irreverent economist, once said. Since economic output represents the aggregated activity of billions of people, influenced by forces seen and unseen, it is a wonder forecasters ever get it right. Yet economists cannot resist trying. As predictions for 2016 are unveiled, it is worth assessing the soothsayers’ records.

Central Banks

How Central Banks Gained More Control Over the World’s Major Currencies
Luke Kawa – Bloomberg
The reaction of the world’s major currencies to potential changes in monetary policy hasn’t been this strong in 15 years, according to strategists at HSBC.
Global equity markets have started 2016 with a thud amid continued weakness in China’s currency, an echo of August’s market meltdown, with the People’s Bank of China reducing the yuan fixing rate to its lowest level since 2011. But exchange rate potency isn’t just for central bankers who operate in economies with currency pegs, according to HSBC’s strategists.

China Turmoil Has Traders Cutting Odds of Fed Rate Move by April
Lukanyo Mnyanda – Bloomberg
The resurgence of Chinese stock-market turmoil in 2016 has investors increasingly betting that Federal Reserve officials will lose some of their resolve and delay future interest-rate boosts.

Fed’s Evans favors slower interest rate path in 2016
Lindsay Dunsmuir – Reuters
Chicago Federal Reserve President Charles Evans said on Thursday his view of the U.S. interest rate path in 2016 was consistent with two hikes, and cautioned that monetary policy must take into account the potential for lower economic growth in the long term.

Top Currency Forecaster’s Doubts on Fed Shape Outlook for 2016
Lucy Meakin and Andrea Wong – Bloomberg
The world’s top currency forecaster is pinning its outlook for 2016 on just one interest-rate increase from the Federal Reserve.

Pressure on China central bank for bigger yuan depreciation: sources
Kevin Yao and Pete Sweeney – Reuters
China’s central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15 percent, as its recent gradual softening is thought to be doing more harm than good.


After the dips: Big currency devaluations are not boosting exports as much as they used to
The Economist
Might “Made in Russia” labels become common? If currency depreciation alone could boost exports, then yes. According to our latest Big Mac index, the Russian rouble is one of the cheapest currencies around, 69% undervalued against the dollar. The index compares the cost of the famous burger at McDonalds outlets in different countries by converting local prices into dollars using market exchange rates (as of January 6th, see chart 1). It is based on the idea that in the long-run, exchange rates ought to adjust so that one dollar buys the same amount everywhere. If a burger looks like a bargain in one currency, that currency could be undervalued.

The dollar’s international role: An “exorbitant privilege”?
Ben Bernanke – Brookings Institution
This post is the third of three based on my Mundell-Fleming lecture, which discussed the international effects of Fed policy (see here for a video of the lecture and here for a paper that expands on the lecture’s themes). In the two previous posts (see here and here), I addressed a pair of criticisms of recent U.S. monetary policy: (1) that the U.S. had engaged in “currency wars” by depreciating the dollar for competitive advantage in trade; and (2) that shifts in U.S. monetary policy have had spillover effects on financial stability in other countries, especially emerging markets.

Trial and error: The Euro Experiment (AUDIO)
The Economist
Paul Wallace, The Economist’s European economics editor, explores the sources of the euro crisis and assesses the risks that the single currency still faces

Hong Kong’s yuan hub role no longer looks like such a good idea
Enoch Yiu – South China Morning Post
A downward trending yuan is likely to hurt Hong Kong’s role as a hub for offshore trading of the Chinese currency, as depreciation weighs negatively on yuan deposits while financial companies find it harder to sell yuan-denominated products.
Against the US dollar, the yuan has lose 2 per cent of its value in the past four trading days, and is down about 7.4 per cent in the past six months.
Some analysts expect the currency to fall another 10 per cent this year, adding to its 5.3 per cent drop in 2015, owing to concerns over China’s slowing economy and less intervention by the People’s Bank of China.

Yuan Slump Adds to Case Against Buying China Stocks in Hong Kong
Kana Nishizawa – Bloomberg
Add a sinking currency to the reasons for global funds to avoid Asia’s worst-performing stocks of 2015.
An index tracking Chinese companies traded in Hong Kong slumped 19 percent last year and another 9.4 percent this week as concern over a slowdown in the world’s second-largest economy drove the yuan to a five-year low. H-shares are denominated in the Hong Kong dollar, which is pegged to the greenback. Morgan Stanley is shaving about 2 percent off an estimate for the Hang Seng China Enterprises Index’s 2016 year-end level for every 0.1 yuan depreciation past its forecast.

In FX, It Ain’t What You Know, It’s Who You Know!
Geoff Last – Finance Magnates
The first lesson I learnt from my earliest mentor in FX was to build a network – the industry is all about relationships.

Bank of Canada governor says we should get used to a cheap dollar
Chris Hannay – The Globe and Mail
Bank of Canada Governor Stephen Poloz spoke in Ottawa this morning about divergence in monetary policy between the U.S. and Canada. He also touched on the advantages and disadvantages for the Canadian economy of a low dollar, which is currently hovering around $0.70 (U.S.). Here’s an excerpt from his speech (you can read it all here).

Indexes & Index Products

Not Your Father’s Low Volatility Strategy
Fei Mei Chan – S&P Dow Jones Indices: Indexology
Low volatility strategies were a popular and growing category in 2015, and if the first several days of 2016 are any indication, it wouldn’t be surprising to see their popularity continue in the new year. That said, the topic of low volatility investing often comes with much discourse. A frequent argument is that a low volatility tilt is very similar, if not synonymous, to a bet on a small number of sectors or industries. In its 25-year history, the S&P 500 Low Volatility Index has often had high concentration in low volatile sectors – most frequently Utilities, Financials, and Consumer Staples. The index seeks out the least volatile stocks—with no sector constraints—so having large positions in sectors with relatively lower risk is not surprising.

5 Very Successful ETF Launches Of 2015
Seeking Alpha
The year 2015 turned out to be a momentous one for the ETF industry with assets comfortably crossing the $2 trillion mark. About 287 ETFs have been launched so far this year (with nine more days to go) compared with about 180 ETF initiations in 2014, 150 in 2013 and 168 rollouts in 2012. All these have tallied to 1,839 ETFs so far. Not only this, a considerable number of ETFs are in the pipeline, pointing to growing investor interest for exchange-traded products in this market.

ETFs That Investors Loved/Hated in 2015
Amid heightened volatility and uncertainty, the global stock market ended 2015 on a sluggish note. It all started with the collapse in oil prices. Then came Greece instability, global growth concerns and the uncertainty of the Fed rate hike. Persistent weakness in China and the slump in commodities aggravated the situation. In such a weak backdrop, 2015 didn’t turn out to be a record-breaker year in terms of ETF asset gathering.

Franklin Templeton Polishing for Smart-Beta ETF Launch
Tom Lydon – ETF Trends
Franklin Templeton Investments may soon be entering the exchange traded fund space with a handful of smart-beta or alternative index-based ETF options.


Time for gold to sparkle again as a safe haven?
Katy Barnato – CNBC
As global equity markets tumble, analysts say it could be time for gold to shine once more as a safe buy in times of market turmoil.
Spot gold prices rose for a fifth successive day on Thursday, with bullion up about 4 percent since the start of the year. Prices topped $1,100 an ounce for the first time in nine weeks as the dollar fell after concerns over the Chinese economy hit global stocks.

China adds to gold reserves in December, buying streak to continue
China added more gold to its reserves in December, bringing its total purchases in the second half of 2015 to more than 100 tonnes, with analysts predicting the country will continue purchasing at a similar pace this year.

U.S. gold jewelry imports reach seven-year high in October
U.S. imports of gold jewelry rose to a seven-year high in October while platinum jewelry imports surged by more than 60 percent after precious metal prices fell to multiyear lows, Thomson Reuters GFMS calculations showed.

US to help Guyana crack down on gold smuggling
The U.S. government is helping Guyana crack down on a massive smuggling operation that ships gold to New York, Miami, Europe and other countries in South America, authorities said Thursday.


VICTORY: Twitter reinstates deleted tweet about Bank of America Merrill Lynch
Jim Edwards – Business Insider
Twitter has reinstated a tweet of mine that was deleted after Bank of America Merrill Lynch claimed it constituted a copyright violation.
The tweet — which included a screengrab of a small portion of a BAML analyst note on Volkswagen stock, with my commentary on top — was deleted just before Christmas.

Another Chinese billionaire goes missing
Patti Waldmeir – Financial Times
The billionaire founder of Metersbonwe, one of China’s best-known fashion brands, has gone missing, the latest in a series of Chinese business people and financiers apparently embroiled in the country’s anti-corruption campaign.

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