First Impressions

“You Can Close your Eyes” – an Appeal from Mark Spanbroek
John Lothian News – Giving News
Most of you know what this message is about. October is the month for breast cancer awareness and to raise money for its research. I am walking again this year for A Sisters Hope during the first weekend in October, for the 9th time, to support this much needed research. Over the last 8 years I raised with your support just over EUR 300.000, and this year I would like to increase this number again with your support.

‘Why still support breast cancer research’ you may ask? Every child needs a mother and not just for the first 9 years of its life. This is how old my son was when his mum passed away. Also every mum by nature needs to see her child grow up. This is my one and only reason to walk and to prevent this to happen to other kids and mums.
Please support me before October 3 through www.asistershope.org/donate and state my participant number 1257.

Read the rest of Spanbroek’s appeal at JohnLothianNews.com
***DA: Spanbroek is acting chairman of the FIA European Principal Traders Association and also serves as the chairman of CME Europe. He will also be speaking at this year’s MarketsWiki Education London series in a couple weeks.

Quote of the Day

“The [African Financial Community] zone is essentially a laughably ill-suited and dysfunctional and loveless marriage that’s being held together for lack of a better option.”

John Ashbourne, an Africa specialist at London-based Capital Economics, in the story, “Loveless Union Shelters Timbuktu to Congo From Currency Turmoil”

Lead Stories

Why ‘If’ Is Such a Bad Word for Banks
John Carney – WSJ
When the economy sneezes, banks’ stocks come down with the flu.
When the severely disappointing September jobs report sent shares of the biggest banks plummeting Friday, the message was crystal clear: Bank stocks have become a proxy for interest-rate expectations.
The biggest banks have mostly positioned themselves to benefit from a rise in interest rates. With large holdings of short-duration securities and plentiful deposit funding, many have said that they stand to benefit even if only the short end of the yield curve rises.
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US swap dealers return to negative quotes
Joe Rennison – Financial Times
A dislocation between two key US interest rate markets shows little sign of easing, with derivative traders quoting negative figures for benchmark swaps over Treasury yields.
Interest rate swaps, like bonds sold by companies, usually have much higher fixed rates than US government yields. This reflects the risk-free status of Treasury debt in the financial system that serves as a foundation for valuing and pricing lower-quality bonds and types of derivative.
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Corporate bonds left battered and bruised
Natalie Harrison – Reuters
The US corporate bond market has gone from bad to worse, and if bears are right that a repricing of risk is at hand, there could be even more trouble ahead.
Two investment-grade deals were pulled this week, and the high-yield new issue market slammed shut following tough M&A trades for Ellucian, Olin and Altice – which were reduced in size, and/or saw pricing hiked sharply – while another for Unisys was pulled.
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Old engine of Wall Street is sputtering
Ben McLannahan – Financial Times
You can imagine teams of bank regulators in the US punching the air at Jefferies’ feeble third-quarter profits when they were announced last month. Net income at the Wall Street bank dropped 98 per cent from the same period a year earlier, as it slashed the carrying value of big inventories of energy bonds.
Jefferies is not a federally insured bank, so it is exempt from toughened post-crisis standards on capital and liquidity — and also the broad ban on proprietary trading, enshrined as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As such, the bank is free to make whatever bets it likes, independent of customer demands or hedging requirements. And it is also free to lose a lot of money doing so.
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US economy’s jobs slowdown raises doubts about interest rate rise
Jana Kasperkevic and Phillip Inman – The Guardian
A slump in world trade and a slowdown in China took their toll on the US economy last month as surveys revealed that firms delayed hiring and factory orders contracted.
US businesses created only 142,000 jobs in September, according to official figures, about 64,000 fewer than expected by analysts. The report by the US Labor department also found that employers kept average pay rises at zero and thousands of workers quit the labour market, taking the participation rate back to levels last seen in the 1970s.
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Europe’s Capital Markets Union and the New Single Market Challenge
Nicolas Véron
The European Union has started a conversation on reforming its capital markets which raises difficult questions about market integration in regulated services sectors, of which finance is one. Powerful political constraints, currently centered on (but not limited to) the United Kingdom, prevent the European Union from creating pan-European agencies for regulatory enforcement. But decentralized enforcement in such sectors tends to defeat the aim of cross-border integration. As regulated services are increasingly important in the continent’s economy, Europeans will eventually need to make a choice between building a single market and maintaining sovereignty over regulatory enforcement.
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JPMorgan Said to Pay Most in $1.86 Billion CDS Settlement
Michael J Moore and Hugh Son – Bloomberg
JPMorgan Chase & Co. is set to pay almost a third of a $1.86 billion settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit-default swaps market, according to people briefed on terms of the deal.
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Merrill Shuffles Brokerage Managers in Wake of Broader Cost Cuts at BofA
Michael Wursthorn and Peter Rudegeair – WSJ
Bank of America Corp. ‘s Merrill Lynch unit is shuffling several of the top executives who oversee the brokerage’s more than 14,000 financial advisers, in the wake of broader cost cuts at the bank.
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Tradeweb Government Bond Report – September 2015
Press Release
Tradeweb Government Bond Report PDF
It shows how government bond yields changed across Europe, North America and Asia-Pacific over the month, comparing monthly highs, lows and spreads against significant historic numbers.
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Free Lunch: Labour’s work in progress – Corbyn’s cocktail is a mix of delusion and plausibility
Giles Wilkes – Financial Times
Losing an election, and supposedly the economic argument, has not prevented Britain’s Labour party from becoming an arena for some interesting new economic thoughts. “Interesting” is, of course, a double-edged sword. Competence tends to be equated with boring virtues such as thrift and an unwillingness to raise taxes. The Conservatives spent five years redefining credibility as the very opposite of what Labour stands for, leaving it forced either to agree with Tory policies or be painted as irresponsible.
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New Greek Debt Framework Not So Flattering for Italy, Spain, Portugal
Gabriele Steinhauser – WSJ
When eurozone governments decided to throw Greece another financial lifeline this summer, they also embraced a new way of assessing whether the country will ever be able to repay its debts. But that framework isn’t so flattering for three other highly indebted euro countries.
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Ben Bernanke relives the ‘terrible, surreal moment’ the US tried to save Lehman Brothers
The Telegraph
Ben Bernanke has used his autobiography to reveal the “terrible, surreal moment” when regulators desperately tried to save the investment bank Lehman Brothers in 2008.
“We were staring into the abyss,” the former Federal Reserve chairman writes of the tense negotiations, led by Timothy Geithner, then head of the New York Fed, and Henry Paulson, then Treasury secretary
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As election nears, Abe turns to new crowd-pleasing arrows
Leika Kihara – Reuters
Prime Minister Shinzo Abe is rewriting “Abenomics”, shifting his focus away from long-term structural reforms to quick-fix crowd-pleasing measures as he looks to boost popular support ahead of upper house elections next year, sources say. That means the government will look at bringing in fresh fiscal stimulus measures later this year, while the Bank of Japan will struggle to win the argument that it should ease monetary policy to meet its inflation target, say lawmakers and politicians with knowledge of the deliberations.
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Central Banks

Monetary policy and economics: QE and the banks revisited
The Economist
The power of central banks over the economy is so great that the debate over the effectiveness of recent policy changes will rumble on for many years. This is all to the good, in a democratic society. But it is important to get the facts right. As my post earlier this week pointed out, the left seems to argue that quantitative easing (QE) was a handout to the banks. In particular, that QE was used to buy assets off the banks. (This post will focus on Britain, but the arguments apply elsewhere.)
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Fed’s Bullard Furthers Argument for Raising Interest Rates–Update
Nasdaq
Federal Reserve Bank of St. Louis President James Bullard in a speech Friday reiterated his call for the U.S. central bank to begin raising short-term interest rates, as long as it does so gradually.
In prepared remarks before the Manhattan Institute for Policy Research, a think tank, he described U.S. monetary policy as being “at a crossroads,” and laid out what he called an “orthodox” view on how to approach the current environment at a time when the Fed is debating when to raise rates for the first time in nearly a decade.
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Fed’s Fischer Sees Few Obvious Bubbles in U.S. Economy
Christopher Condon and Craig Torres – Bloomberg
Federal Reserve Vice Chairman Stanley Fischer said he doesn’t see immediate risks of financial bubbles in the U.S., while raising concerns that the central bank’s policy tool kit to deal with such occurrences is limited and untested.
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Fed Leak Probe Stalls Obama’s Nominee for Senior Treasury Post
Alan Katz and Craig Torres – Bloomberg
Even in the power corridors of Washington, his has been a charmed career: Ph.D. from Princeton University under the tutelage of Ben Bernanke, a quick rise at the Federal Reserve, and finally, a tap from the U.S. Treasury Department.
Seth Carpenter’s trajectory has since stalled.
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ECB President Mario Draghi Says Eurozone Returning to Growth After Policy Moves
Katy Burne – WSJ
European Central Bank President Mario Draghi said in a speech Thursday the eurozone has become more resilient and growth is picking up, the latest indication he thinks the central bank’s accommodative monetary policy is working.
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Currencies

Business leaders’ confidence in yuan currency remains low
Jing Yang and Langi Chiang – South China Morning Post
Business leaders’ confidence in China’s yuan currency remains in tatters even though foreign exchange markets seem to have calmed down, with both onshore and offshore yuan firming at the end of September.
Marc Vandiepenbeeck, Asia-Pacific corporate treasurer at US manufacturing giant Johnson Controls, was among those shocked by the renminbi’s devaluation, which, the authorities said, was a move towards a more freely floating currency regime.
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Emerging Market Corporate Debt In Foreign Currencies
Selim Elekdag and Gaston Gelos – Seeking Alpha
Debt held by firms in emerging market economies in a currency other than their own poses extra complications these days. When the U.S. Fed does eventually raise interest rates, the accompanying further strengthening of the U.S. dollar will mean an emerging market’s own currency will depreciate against the higher value of the U.S. dollar, and would make it increasingly difficult for firms to service their foreign currency-denominated debts if they have not been properly hedged.
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PBOC releases new rules for interbank foreign exchange
Asia Times
China’s economy may be slowing and its stock market is crawling back from a summer crash, but on the upside, the pace of financial reform is anything but glacial these days.
The People’s Bank of China on Wednesday released new rules for allowing foreign investors to participate in interbank foreign exchange trading in the country.
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Loveless Union Shelters Timbuktu to Congo From Currency Turmoil
Olivier Monnier and Moses Mozart Dzawu – Bloomberg
As Chad President Idriss Deby calls on the nations of western and central Africa to ditch their 70-year-old currency union, the voices of opposition are growing louder.
The prime minister of Ivory Coast, the largest economy in the 14-member CFA franc, says the peg to the euro helps maintain stability and attracts investors. Capital Economics Ltd. and Renaissance Capital argue it keeps inflation down. Deby has his backers, too, with an Ivory Coast opposition leader saying the currency is artificially strong and hobbles competitiveness.
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Indexes & Index Products

S&P Dow Jones Indices Market Attributes: Correlation & Dispersion Index Dashboard
Press Release
S&P Dow Jones Indices Market Attributes: Correlation & Dispersion Index
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Confused About Smart Beta? Here’s Morningstar’s Guide
Teresa Rivas – Barron’s
‘Smart beta’ exchange traded products were the subject of a rare warning from the Financial industry Regulatory Authority in late September, but even if your smart beta ETF does well, your dumb mistakes could be undermining its performance.
Yet even more fundamentally, just defining what is a smart beta product and what isn’t is tough. Morningstar’s Ben Johnson takes a stab, noting that broadly, they all share the goal of trying “to either improve their return profile or alter their risk profile relative to more-traditional market benchmarks.”
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How S&P Sector ETFs React To A Strong USD
ETF Trends
With the U.S. dollar strengthening and the Federal Reserve looking at tightening its monetary policy, the various U.S. market sectors and related exchange traded funds could behave differently in a strong USD environment.
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Can Hedge Fund Returns Be Replicated By ETFs?
ValueWalk
If an investor can find actual alpha in a hedge fund investment they should be willing to pay 3 percent (management fee) and 30 percent (incentive fee), Nikki Tippins, managing director and head of Americas equity derivatives distribution at Morgan Stanley (NYSE:MS) said during a liquid alternatives panel discussion at the Morningstar ETF Conference. However, acknowledging that Hedge Funds who can outperform a benchmark offer significant value, she said if alpha can’t be found “don’t pay 2 percent / 20 percent for something that can be replicated.”
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E.T.F. Sponsors Remain Confident in the Face of Volatility
Landon Thomas Jr. – NY Times
It has been a tough week for Direxion, a sponsor of exchange-traded funds that make highly leveraged bets on various markets going up and down.
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The world’s going passive. Is it a mistake?
Pensions & Investments
The move passive from active to investing has been nothing less than seismic for the asset management industry. In the past 10 years, passive equity has gone from around a tenth of total equity assets to more than a quarter, and the momentum seems inexorable.
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Eurex sets October 28 for mini Dax futures launch
Cian Burke – Futures & Options World
Eurex, Europe’s largest exchange operator, has said it plans to launch a mini futures based on the Dax index, the German blue chip index, on October 28.
The new mini contracts have a value of EUR5, one fifth of the value of Eurex’s standard Dax futures. The contract will trade between 8am and 10pm CET.
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Gold

Going for gold: London bullion market finds no clear path to increasing liquidity
Ben Kilbey – Platts
The London bullion market is in a state of flux, with participants — ranging from bankers to brokers to exchanges — jostling to find out exactly what the other one wants in order for the market to evolve and fight off the increasing threat of business moving to Asia alongside mounting regulation.
The market is engaging behind closed doors to find out what it wants, but exactly what that is seems unclear to all involved.
“You’ve got the World Gold Council and the London Bullion Market Association both meeting people, but no one knows what it is that they want,” said one broker.
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Canada’s Eldorado fights gold mine ban by Greek government
Angeliki Koutantou – The Globe and Mail
A Canadian company appealed to Greece’s top court on Friday to overturn a ban on its plans to develop a gold mine in a forested area of northern Greece, in a case widely seen as a test of the leftist government’s approach to foreign investment.
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South African Gold Companies Reach Wage Accord With Labor Unions
Alexandra Wexler – WSJ
South African gold companies Harmony Gold Mining Co. Ltd. and AngloGold Ashanti Ltd. reached three-year wage agreements Friday with unions, as the industry wrestles with higher costs and falling profitability.
The National Union of Mineworkers, UASA and Solidarity, which together represent the majority of employees at their mines, all agreed to the wage deal, concluding contentious four-month negotiations, the Chamber of Mines of South Africa said in a statement.
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Miscellaneous

The smartest economist you’ve never heard of
Steven Pearlstein – The Washington Post
When David Lipton, a promising economist, was finishing his graduate work at Harvard in the early 1980s, he faced one of those potentially life-changing choices. He had one job offer from the International Monetary Fund in Washington, the multinational institution that for 70 years has served as a lender of last resort and dispenser of orthodox economic advice to countries that get into financial trouble. There was also an offer of a teaching job from the University of Virginia. Unsure of which path to take, he turned for advice to an intellectually restless and charismatic assistant professor, a Frenchman named Olivier Blanchard.
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Crisis Chronicles: Defensive Suspension and the Panic of 1857
Thomas Klitgaard and James Narron – Liberty Street Economics
Sometimes the world loses its bearings and the best alternative is a timeout. Such was the case during the Panic of 1857, which started when a prestigious bank in New York City collapsed, making all banks suddenly suspect. Banks, fearing a run on their gold reserves, started calling in loans from commercial firms and brokers, leading to asset sales at fire-sale prices and bankruptcies. By mid-October, banks in Philadelphia and New York suspended convertibility, meaning they would not allow gold to be withdrawn from their vaults even while all other banking services continued. Suspension then swept the nation as part of a defensive strategy, supported by local business interests, to prevent the Panic from spreading. While the suspensions appeared successful and few banks ended up failing, President Buchanan was outraged by what he viewed as yet another corrupt banking practice. He proposed making suspension a “death sentence” for banks as a draconian incentive to encourage safer banking practices. In this edition of Crisis Chronicles, we describe the Panic of 1857 and explain why businesses pushed for national suspension to save themselves.
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Volatility, financial crises and Minsky’s hypothesis
Jon Danielsson, Marcela Valenzuela, Ilknur Zer – VOX, CEPR’s Policy Portal
Received wisdom maintains that financial market volatility has a direct impact on the likelihood of a financial crisis.
Perhaps the best expression of this is Minsky’s (1982) hypothesis that economic agents observing low financial risk are induced to increase risk-taking, which in turn may lead to a crisis. This is the foundation of his famous statement that “stability is destabilising”.
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