"Prepare For Runs", IMF Warns Policymakers Of "Elevated Financial Stability & Liquidity Risks"

The extended period of monetary accommodation and the accompanying search for yield are leading to credit mispricing and asset price pressures, increasing the chance that financial stability risks could derail the recovery.

 [6]

Concerns have shifted to the shadow banking system, especially the growing share of illiquid credit in mutual fund portfolios.

Should asset markets come under stress, an adverse feedback loop between outflows and asset performance could develop, moving markets from a low- to a high-volatility state, with negative implications for emerging market economies.

 [7]

Funds investing in credit instruments have a number of features that could result in elevated financial stability risks.

First is a mismatch in liquidity offered by investment funds with redemption terms that may be inconsistent with the liquidity of underlying assets. Many credit funds hold illiquid credit instruments that trade infrequently in thin secondary markets.

Second is the large amount of assets concentrated in the hands of a few managers. This concentration can result in “brand risk,” given that end-investor allocation decisions are increasingly driven by the perceived brand quality of the asset management firm. Sharp drawdowns in one fund of an asset manager could propagate redemptions across funds for that particular asset manager if its brand reputation is damaged, for example through illiquidity or large losses.

Third is the concentration of decision making across funds of an individual fund manager, which can reduce diversification benefits, increase brand risk, or both.

Fourth is the concentrated holdings of individual issuers, which can exacerbate price adjustments.

Fifth is the rise in retail participation, which can increase the tendency to follow the herd.

These features could exacerbate the feedback loop between negative fund performance and outflows from the sector, leading to further pressure on prices and the risk of runs on funds. These risks could become more prominent in the coming year as the monetary policy tightening cycle begins to gain traction.

 [8]

Such stress might be triggered as part of the exit from unconventional monetary policy or by other sources, including a sharp retrenchment from risk taking due to higher geopolitical risks.

And, as we have discussed numerous times previously, less liquidity is available from traditional liquidity
providers...

 [9]

The IMF is worried...

Policymakers and markets need to prepare for structural higher market volatility. Doing so requires strengthening the system’s ability to absorb sudden portfolio adjustments, as well as addressing structural liquidity weaknesses and vulnerabilities.

Advanced economies with financial markets at risk for runs and fire sales may need to put in place mechanisms to unwind funds should they come under substantial pressure that threatens wider financial stability.

Source: IMF

http://www.zerohedge.com/print/495580

The Stronger Dollar = Stealth QE

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Whether this trend will hold or reverse is unknown, but it does suggest that there are advantages to being the cleanest shirt in the dirty laundry.

Dave at Trade with Dave recently posed an interesting question: Is A Stronger Dollar Stealth QE? The question might seem wonky, but it's actually a nuts-and-bolts topic in the context of a larger question: why is the U.S. economy now the shining beacon of growth (albeit modest) in a world rolling over into recession?

As I understand Dave's thinking, the dynamic works something like this: in QE (quantitative easing), the Fed creates money out of thin air and pushes it into the financial system, with the hope that some of that inflow of cash will trickle down into the real economy.
 

A stronger dollar encourage foreign capital to flow into the U.S., as it makes more sense to shift money into appreciating dollars (that are gaining purchasing power) than leave it in currencies that are depreciating (losing purchasing power compared to the dollar).
 

This inflow of new money into U.S. bank accounts, bonds, stocks and real estate is more or less the equivalent of the Fed's QE operations, minus the money-creation step.
 

So in terms of fresh money flowing into the U.S. financial sector, capital inflows driven by the stronger dollar are generating the same effect as the Fed's QE.
 

Does this matter? At a minimum, it gives the Fed a PR victory, as the Fed has the freedom to end QE without upsetting the apple cart too severely. It also gives the Fed the freedom to keep interest rates low without all the bond-buying of QE, because overseas buyers are snapping up bonds and other dollar-denominated assets.
 

Some observers think the money-printing baton has simply been passed to the European Central Bank, China's central bank and the Bank of Japan, and all that new money is finding it's way into the U.S. financial system. In effect, the Fed gets the PR victory of ending its own money-printing operation because other central banks are doing the heavy lifting and the U.S. is benefiting from all their money creation.
 

It's not easy to track capital flows, and so it may not be possible to provide a definitive answer to this inquiry. But it does seem that the relative strength of the U.S. economy vis a vis other major economies and the emerging markets is supporting U.S. assets (broadly speaking--this week's stock market freefall notwithstanding) via capital flows from weaker economies and currencies.
 

Whether this trend will hold or reverse is unknown, but it does suggest that there are advantages to being the cleanest shirt in the dirty laundry (insert your metaphor of choice).

Swiss National Bank Explains Why It Is Against Repatriating Gold

The Swiss National Bank has lashed out at the so-called "gold initiative" efforts to "Save Our Swiss Gold" unsurprisingly proclaiming it as a bad idea. AsRon Paul previously noted, "The gold referendum, if it is successful, will be a slap in the face to those elites," and so the full-court press ahead of the Nov 30th vote has begun (a la Scotland fearmongery) as SNB Vice Chairman Jean-Pierre Danthine explains how a 'yes' vote for the initiative"would severely constrain the SNB’s room for manoeuvre in a future crisis," as it "poses danger to the conduct of a successful monetary policy." His reasoning (below) is stunning...

Via Jean-Pierre Danthine, Vice Chair Swiss National Bank

On 30 November, the Swiss electorate will vote on the so-called “gold initiative” (“Save our Swiss gold”, in full), which, paradoxically, would severely constrain the SNB’s room for manoeuvre in a future crisis. Let me digress for a few minutes to explain why the SNB is opposed to this initiative.

The initiative is calling for three things:

first, the SNB should hold at least 20% of its assets in gold;

second, it should no longer be allowed to sell any gold at any time; and

third, all of its gold reserves should be stored in Switzerland.

Let me address the last point first. Today, 70% of our gold reserves are stored in Switzerland, 20% are held at the Bank of England and 10% at the Bank of Canada. As you know, a country’s gold reserves usually have the function of an asset to be used only in emergencies.

For that reason, it makes sense to diversify the storage locations. In addition, it makes sense to choose locations where gold is traded, so that it can be sold faster and at lower transaction costs. The UK and Canada both meet that criterion. In addition, they both have a strong and reliable legal system and we have every assurance that our gold is safe there.

The initiative’s demand to hold at least 20% of our assets in gold would severely restrict the conduct of monetary policy. Monetary policy transactions directly change our balance sheet.

Restrictions on the composition of the balance sheet therefore restrict our monetary policy options. A telling example is our decision to implement the exchange rate floor vis-à-vis the euro that I mentioned above: with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros, but also to buy gold in large quantities. Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.

Even worse consequences would result from the initiative’s proposal to prohibit the sale of gold at any time. An increase in gold holdings could not be reversed, even if necessary from a monetary policy perspective. In combination with the obligation to hold at least 20% of total assets in gold, this could gradually lead the SNB into a situation where its assets would mainly consist of gold: each extension of the balance sheet for monetary policy reasons would necessitate gold purchases, but whenever the balance sheet needed to be reduced again for the same reasons, we would not be able to resell our gold holdings. This would severely restrict our room for manoeuvre.

Furthermore, because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the Confederation and the Cantons would be impaired.

As a final point, note that currency reserves which cannot be sold are not truly reserves. It does not make sense to call for an increase in emergency reserves – gold holdings – and simultaneously prohibit the use of these reserves even in emergencies.

The SNB’s overriding objection to the gold initiative stems from the danger it poses to the conduct of a successful monetary policy. It would severely impair the SNB’s ability to fulfil its constitutional and legal mandate to ensure price stability while taking due account of economic developments, in the interests of the country as a whole.

*  *  *
We will hazard a guess that the voting will go exactly as Scotland's independence vote went - young vote for it, old against it... as fearmongering status quo managers step up the propaganda with no regard for what happens next.

http://www.zerohedge.com/news/2014-10-10/swiss-national-bank-explains-why-it-against-repatriating-gold

Did Today's "Satan Signal" In S&P Futures Give The 'All-Clear' For Selling To Begin?

Even Bob Pisani knows by now that the European Close seems to create a trend-reversal moment intraday that few machines (and even fewer humans) are willing to fight. Whether this is remnants of short-term cycles found due to POMO or just a drop in liquidity is unclear; but what is clear, it happens, and all too regularly... except today. After a notably weak start to the day, the machines were just getting revved up for the 1130ET reversal to kick in and lift the market back to VWAP when a curious thing happened... "someone" canceled-and-replaced orders for 666 contracts 26 times in the 1130ET to 1200ET period... and selling accelerated lower, no reversal, to close at the lows on heavy volume.

Thanks to the incredibly detailed work of Nanex's Eric Hunsader, we can see the 'secret' signal that only the HFTs would have been capable of seeing...

For a sense of how out of place this was, here is the quote size histogram for that period:

We are sure this is nothing... just pure coincidence that on the 4th most active trading day in history and on following a huge surge day in stocks not trusted by any other asset class, someone would send 26 separate times in a few minutes orders for 666 contracts.

Only a tin-foil-hat-wearing digital dickweed would see anything odd about that: for everyone else this is merely yet another market anomaly that is best left unmentioned.

*  *  *

Oh, one more thing, this all happened just after VIX 'fat-fingered' spike down and VXX volume surged, launching today's selloff.

http://www.zerohedge.com/news/2014-10-09/did-todays-satan-signal-sp-futures-give-all-clear-selling-begin

Russia Spends Up to $1.75 Billion in Two Days to Buoy Ruble

Russia’s central bank spent as much as $1.75 billion to prop up the ruble over the last two trading days, its biggest market intervention since President Vladimir Putin’s incursion into Ukraine in March.

Russia’s central bank spent the equivalent of $980 million to shore up the ruble on Oct. 3, the latest data on the authority’s website showed today. The bank also said it shifted the upper boundary of the currency’s trading band by 10 kopeks yesterday, a move that may have involved spending between $420 million and $769 million that day. The exchange rate weakened 0.3 percent to 44.6234 versus the basket by 5:12 p.m. in Moscow, set for a record low for the fourth time this month.

Putin is suffering the consequences for shaking up the post-Cold War order in eastern Europe as the U.S. and European Union impose sanctions on his economy and investors pull money out of the country. Demand for dollars and euros is growing among Russian companies locked out of western debt markets as they contend with $54.7 billion of debt repayments in the next three months, according to central bank data.

http://www.bloomberg.com/news/2014-10-07/russia-spent-980-million-in-biggest-intervention-since-march.html

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Market Breadth Has Collapsed Around The World

Via Gavekal Capital's blog,

The 100-day moving average of the advance/decline ratio for the MSCI World Index has collapsed to its lowest level since November 2008.

Out of the 46 MSCI country indices, we count 20 countries where the 100-day moving average of the advance/decline ratio is at its lowest level since 2008 or below it.

Below are charts for the MSCI World Index and MSCI Emerging Markets Index as well as our top 10 worst advance/decline country charts.

http://www.zerohedge.com/news/2014-10-03/market-breadth-has-collapsed-around-world

King dollar rules: Betting on the buck

Amid wild fluctuations in stocks and range-bound trading in bonds this week, the U.S. dollar marched ever higher. 

The currency is set to finish another week stronger, which would mark 12-straight weeks of gains, the longest winning streak ever. 

And pros say though the move has been sharp, the uptrend is still firmly intact. 

Kyu Oh | E+ | Getty Images

First, a warning: Buying the dollar is the trade du jour. As the U.S. economy flexes its muscles amid an increasingly uncertain global backdrop, more investors have jumped on the strong dollar bandwagon. 

Read MoreDollar surges to four-year high on robust U.S. jobs report

Weekly data from the Commodities Futures Trading Commission show hedge funds and other large speculators' positions have increased substantially in the past few weeks, and the net long dollar bet now stands at $35.81 billion, not far from its its highest ever. 

Net shorts on the euro and yen grew larger as well. 

Read MoreWhy the dollar-yen rally will fizzle soon

Those crowded trades mean the dollar is vulnerable to a painful drop when momentum turns on any given day and trades unwind. 

However, it doesn't change the logic for buying the dollar and the currency's trajectory.

"As the Fed steps away from ultra-loose policies, the dollar should gain against the chief beneficiaries of those policies, namely emerging market and commodity currencies," currency strategists led by Kit Juckes at Societe Generale wrote in a note this week.

That goes for the dollar against emerging markets' currencies, too.

"The jump in total debt levels in the emerging markets in recent years leaves them vulnerable to rising interest rates and a resurgent dollar," Juckes wrote.

Read MoreWhy a strong dollar is scarier than taper tantrum

In the third quarter, the dollar index shot up 7 percent, the biggest gain since the third quarter of 2008, when investors everywhere were scrambling for safe-haven assets as the financial crisis gripped the globe.

Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi, found that after a strong quarterly performance, there's still scope for further gains.

"Looking back over the last 20 years, we found that similarly large quarterly gains have tended to be followed by further, although more modest, gains in the following quarter," Hardman wrote in a note this week. 

"Technical momentum indicators have climbed to extremely overbought levels signaling a high risk of a near-term correction lower for the U.S. dollar before it resumes its uptrend."

http://www.cnbc.com/id/102057048

Russian Central Bank rejects capital controls as ruble hits lowest level since 1998

The ruble slid to a new record low of 39.71 against the dollar Tuesday. The Russian Central Bank has been quick to quash fears it would re-introduce capital controls to limit the amount of foreign currency purchases, or even moved outside the country.

“Bank of Russia is not considering the introduction of any restrictions on cross-border capital flows as it was reported in some publications in the mass-media,” the bank said in a statement on Tuesday evening.

The bank’s statement followed a report by Bloomberg News citing anonymous officials that the bank is considering imposing capital controls, as the ruble hit new historic lows.

The Central Bank said it would intervene once the euro-dollar currency basket against the ruble reached a level of 44.4, which it reached on Tuesday before quickly retreating.

Capital controls are a monetary tool by Russia’s key lender to restrict money flowing overseas, which in Russia is projected to reach $100 billion in 2014, nearly on par with the $120 billion that fled in 2008 when the financial crisis hit. In 2007 Russia had a positive net capital inflow.

Andrey Kostin, Chairman and CEO of VTB, doesn’t believe that Russia will impose capital controls just yet, talking to CNBC at VTB’s annual investment forum ‘Russia Calling!’.

“The basic issue now is whether the Russian leadership, under the circumstances, will switch to the model of a mobilization economy, and introduce the old mechanism of currency control, or they will stay on the principle of their open market economy. I think that is the big question that will be asked tomorrow,”Kostin said.

Russia repealed capital controls in 2006, however last week Central Bank Chairwoman Elvira Nabiullina said that Moscow would consider “non-standard” mechanisms to ensure economic stability.

Capital controls aren’t the only monetary tool the Central Bank could consider. If the ruble continues to weaken, it may decide to re-start currency interventions, pumping in billions of dollars to artificially prop up the currency. This would be a policy reversal for the bank, which has recently loosened its monetary controls in order to make the overvalued ruble free floating by 2015.

“Never say never, but not at this stage, definitely,” the VTB CEO said when asked if capital controls are on the horizon.

http://rt.com/business/192116-russia-central-bank-capital-controls/ 

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Caught On Tape: HFT Algo Manipulating GOOGL 1000 Times Per Second

Via Nanex,

It is very common to find examples of stock quotes changing rapidly - hundreds and sometimes thousands of times per second in a single stock. At the extreme, we've seen in excess of 25,000 quote changes in a single stock in one second of time or less (this page has a chart that documents every extreme example). Often there are no trades during these events. Sometimes a simple pattern evolves from the quote price changes, such as in the case of a certain High Frequency Trading (HFT) algorithm that we've recently seen run every day in Google stock.

This particular algorithm starts with a bid (or offer) several dollars away from the bids (offers) from one of the other 10 exchanges trading Google Class A stock (symbol GOOGL). We've also seen this algo running in other higher priced stocks. The algo in this example only appears to run from the Nasdaq-Boston (BOST) exchange. In the chart below, we show bids and offers color coded by reporting exchange (there are 10 exchanges in GOOGL). Note that these are "top of book" quotes - that is, they are the highest bid price and lowest ask price from that exchange. The best top-of-book bid and ask become the National Best Bid/Offer (NBBO) and  is shown as light gray shading in these charts. Note, this algo only affects the NBBO when it gets near the end of its price stepping loop.

The algo starts with an order to buy 100 shares at $581.87. This is replaced, sometimes only milliseconds later, with an order to buy 100 shares at $581.88 (1 penny higher). Over the course of 1.5 seconds, this process repeats another 253 times, ending with a order to buy at $584.41. Within less than a second, the $584.41 order is canceled and replaced with an order several dollars lower, and the cycle repeats.

In the case below, the number of quote changes from this HFT algo is averaging 175 per second, but during some periods the rate approaches 1000 per second (1 per millisecond).

1. GOOGL bids and asks color coded by reporting exchange over a 5 second period of time.

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Now, some folks (particularly the math/physics challenged) will say:

"So what? HFT needs to be able to cancel quotes fast so they can tighten spreads, add liquidity and lower costs."

The problem is that when HFT cancels a quote after just 1 millisecond (ms), then anyone located more than 93 miles (150 km) away will see a stale quote. Worse, they won't know it's stale unless and until they try to act on it and wait for a response. The animation below shows how this works. Note, this animation assumes zero processing time on the part of the investor or any other real-world delays. In other words, this is the best possible case, and it will be much worse for the investor in the real-world.

• The animation starts at an Elapsed Time of 0 microseconds. 1 microsecond (?s) is 1 millionth of a second. 1000 ?s is 1 millisecond (ms).
• HFT places an order at the top of an exchange's order book, which causes a quote to be transmitted out to investors.
• An investor 93 miles away receives the quote after 500 ?s (0.5 ms).
• Assuming the perfect case, the investor immediately acts on the quote and transmits an order to the exchange (really their broker, but let's assume a perfect world).
• The exchange won't see this investor's order until a total elapsed time of at least 1000 ?s (1 ms).
• HFT changes its mind after 1 ms and cancels the order - just before the investor's order arrives.
• The investor won't know that their order failed for another 500 ?s or a total of 1500 ?s since HFT sent the initial order!

---

Effectively, when HFT changes its mind 1000 times a second (or after 1 millisecond) anyone located outside the (93 miles/150 km) circle below will receive stale quotes:

An expanded map is shown below. Each red circle shows how far quotes can travel before expiring at different update rates. For example, the ring labeled 150 is how far quotes will get if HFT is canceling and replacing 150 quotes each second. At 150 quotes/second, people in Chicago will be processing quotes they can't act on! People in Los Angeles have it even worse - quotes changing just 38 times a second will render them all obsolete by the time Los Angelians or anyone on the Google Campus in Stanford California first sees them.

Now, look back at the example in Google above - that HFT algo was changing Google quotes an average of 175 per second, which means those quotes were expiring somewhere between the two rings labeled 150 and 250 in the map below.

---

Back to our Google example, let's zoom out and see how often this HFT algo is running.

2. Zoomed out to just under 30 seconds of time (the zoom box is detailed in chart 1 at the top).

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3. Zoomed out to about 18 minutes of time (the zoom box is detailed in the chart above). Note how often this algo runs!
Each green sliver is made up of one HFT algo's bids or offers changing 1 penny at a time at rates exceeding 100 times and sometimes 1000 times a second.

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4. Zoomed out showing 9am to about 3pm Eastern Time (the zoom box is detailed in the chart above).
Note the distinct periods of time when this algo runs. Too bad other HFT algo's don't make themselves this visible.

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5. Another close-up, showing how the algo does the same thing on the offer size.

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6. A different pattern in a different stock on another day. This involves multiple exchanges and affects the NBBO.
Note: The chart shows 3,549 quote changes in about 1/4 of a second of time. These are not rare! Not many people outside of the exchange datacenter will see these quotes before they expire. Yet everyone will have to process them (because there is no way to know how long before they are canceled).

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Russia could ditch US dollar in 2-3 years – head of Russia's #2 bank

wo to three years would be enough time for Russia to switch to international settlements to the ruble, Andrey Kostin, head of Russia’s second-biggest bank VTB, said.
“Two to three years is enough, not only to launch [settlements in rubles], but also to complete these mechanisms. But much will depend on how banks will cope with the task,” Kostin said in an interview with Izvestia newspaper.
Kostin first put forward the idea of switching to national currencies in international settlements about a decade ago, which means a move to the ruble shouldn’t be considered a counter-sanction measure.
"I did not find understanding in this matter with the previous leadership of the Central Bank [10 years ago ] They believed that since the [US] dollar works, we shouldn’t do anything, and settlements in rubles will just bring additional risks. Under the new leadership the position of the Central Bank changed. I think that soon we will achieve a major breakthrough,” Kostin said.
Creating a national payment system and establishing a domestic rating agency are among other priorities for the bank, the VTB head added.
The media has reported on the possibility of the US and EU widening sanctions to exclude Russia from the SWIFT global money transfer system.
Kostin said the move would become “a point of no return” and that any further dialogue would be impossible if SWIFT was cut off.
“If you look at Iran’s experience, shutting down SWIFT only happens when all relations; political, economic, cultural, even diplomatic, break down,” the VTB boss said.
“I don’t know how [Western] banks could block SWIFT and then expect cooperation in the fight against terrorism and nuclear disarmament.”However, replacing SWIFT within Russia won’t be difficult, Kostin said.
“We have a [similar] system at the Central Bank of Russia and others. The Central Bank has tested this system, and we can switch to it at any moment.”He said that domestic payments account for about 90 percent of VTB settlements and won’t be affected. Across the entire Russian banking system the share of domestic payments is even higher, Kostin explained.
SWIFT action
http://rt.com/business/191804-russia-ditch-dollar-2-years/ 

US Stocks Slide, Ruble Plunges As Russia Prepares Capital Controls

Just days after Ukraine began discussing capital controls, and Russian lawmakers passed a bill enabling asset freezes, it appears Russia has reached its limit.

• *RUSSIA SAID TO WEIGH CAPITAL CONTROLS IF NET OUTFLOWS INTENSIFY

The Ruble is plunging towards 40 to the USD (CB intervention levels), US equity futures gapped lower, and European stocks are sliding.

As Bloomberg reports,

Russia’s central bank is weighing the introduction of temporary capital controls if the flow of money out of the country intensifies, according to two officials with direct knowledge of the discussions.

Such measures would be preventative and used only if net outflows rise significantly, the people said, who asked not to be identified because no decision has been made. They didn’t give a timeline or a level that may force such a move, saying they are looking at all possible scenarios.

The discussions are the latest sign that U.S. and European sanctions are hurting Russia and rethink policies the central bank has sought to avoid. The Economy Ministry last week raised its estimate for this year’s outflows to $100 billion from $90 billion. Russia hasn’t had a net inflow of private capital since 2007, the year after lifted restrictions.

Central bank Chairman Elvira Nabiullina, a former economic aide to President Vladimir Putin, said in an address to the government on Sept. 25 that “introducing capital controls doesn’t make sense.”

Still, if trades restrictions -- such as the U.S. and EU sanctions and Russia’s retaliatory measures -- are prolonged and the tax burden rises, capital outflows will intensify. That will push the regulator to shift its focus more toward ensuring financial stability from fighting inflation and use various instruments “including non-standard” means, Nabiullina said.

The central bank’s press service declined to comment. The Finance Ministry isn’t discussing such measures, Svetlana Nikitina, a spokeswoman, said by text message.

US equities gapped lower...

And the Ruble plunged...

• *RUBLE WEAKENS TO BOUNDARY OF RUSSIA CENTRAL BANK'S TRADING BAND
• *RUBLE WEAKENS TO LEVEL WHERE CENTRAL BANK SAYS WILL INTERVENE

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Yuan to Start Direct Trading With Euro as China Pushes Usage

China will start direct trading between the yuan and the euro tomorrow as the world’s second-largest economy seeks to spur global use of its currency.

The move will lower transaction costs and so make yuan and euros more attractive to conduct bilateral trade and investment, the People’s Bank of China said today in a statement on its website. HSBC Holdings Plc said separately it has received regulatory approval to be one of the first market makers when trading begins in China’s domestic market.

The euro will become the sixth major currency to be exchangeable directly for yuan in Shanghai, joining the U.S., Australian and New Zealand dollars, the British pound and the Japanese yen. The yuan ranked seventh for global payments in August and more than one-third of the world’s financial institutions have used it for transfers to China and Hong Kong, the Society for Worldwide International Financial Telecommunications said last week.

“It’s a fresh step forward in China’s yuan internationalization,” said Liu Dongliang, an analyst with China Merchants Bank Co. in Shenzhen. “However, the real impact on foreign exchange rates and companies may be limited as onshore trading volumes between yuan and non-dollars are still too small to gain real pricing power.”

Transactions exchanging yuan for dollars totaled 12.2 trillion yuan in the first half of 2014, dwarfing the 110.4 billion yuan worth of trades for euros and the 251.7 billion yuan for yen, the PBOC said in a monetary policy report last month.

Trading Ties

China’s trade with European Union nations grew 12 percent from a year earlier to $404 billion in the first eight months of 2014, according to data from the Asian nation’s customs department. That compares with just $354 billion with the U.S. during the period.

French and German companies lead among countries outside of greater China in the use of the yuan, according to a July report by HSBC that was based on a survey of 1,304 businesses in 11 major economies that have ties with mainland China. Some 26 percent of French corporates and 23 percent of German companies were using the currency to settle trade, the highest proportions apart from mainland China, Hong Kong and Taiwan.

Last One

China appointed yuan clearing banks this year in Frankfurt, Paris and Luxembourg, and Germany’s financial capital as well as Paris were awarded quotas under the Renminbi Qualified Foreign Institutional Investor program to invest the currency raised offshore in China’s domestic capital markets.

“Given the appointments of renminbi clearing banks in Frankfurt and Paris, today’s announcement is largely expected,” Australia & New Zealand Banking Group Ltd.’s economists led by Liu Li-gang wrote in a research note today. The agreement marks a “significant milestone” in yuan internationalization as the euro is the only G3 currency that has not had direct conversion with the yuan, Liu said.

The European Central Bank is able to draw on a maximum 350 billion yuan ($57 billion) swap line from the People’s Bank of China under the terms of an agreement signed in October 2013. The PBOC can access 45 billion euros ($57 billion) under the terms of the currency swap.

http://www.bloomberg.com/news/2014-09-29/yuan-euro-direct-trading-begins-tomorrow-as-china-promotes-usage.html

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Currency Wars Deepen - Russia, Kazakhstan Buy Very Large 30 Tons Of Gold In August

Russia and ex Soviet States Kazakhstan, Kyrgyz Republic and Azerbaijan continued to accumulate significant gold reserves in August in a trend that we highlighted last month.

Latest official gold reserve data from the International Monetary Fund (IMF) shows that Russia again added to its gold reserves in August, with the Central bank of the Russian Federation purchasing  232,510 ozs (7.23 tonnes) and bringing its total gold reserves to 35.769 million ozs or 1,112.5 tonnes. 

Likewise, the National Bank of Kazakhstan purchased a massive 795,213 ozs or 24.7 tonnes in August bringing its total gold reserves to 5.848 million ozs (181.9 tonnes).

Turkey was also a gold buyer in August and the Turkish central bank adding 96,783 ozs (3 tonnes) to bring its total official gold reserves to 16.45 million ozs (511.6 tonnes), which is the world's 12th largest official gold holding.

According to the IMF data, other countries which added to their gold reserves in August included the central banks of Azerbaijan and Ukraine. 

With the ongoing conflict in Ukraine, its not clear where the official Ukrainian are now stored. There had been reports in March that the Ukrainian gold was flown out of Kiev to the Federal Reserve Bank of New York, but neither central bank would comment on this issue at the time.

Kazakhstan now has the world's 23rd largest holdings, just behind the Philippines which has 194.4 tonnes of gold reserves. 

With 1,112.5 tonnes, Russia remains the world's 6th largest official gold holder, ahead of China (1,054.1 tonnes) and Switzerland (1,040 tonnes).

The Swiss National Bank (SNB) has not been a gold buyer recently but this may change if a Swiss gold referendum to be held in November goes through, which would force the SNB to maintain 20% of its reserves in gold and to repatriate all gold held abroad back to Switzerland.    It is widely believed that China's gold reserves are understated and as David Marsh of the Official Monetary and Financial Institutions Forum (OMFIF) said last week "over the past six or seven years the Chinese authorities probably have been adding to their holdings in different ways."

As we pointed out last month, as well as being a reserve diversification strategy, the ongoing gold accumulation trend by both Russia and Kazakhstan could be part of a coordinated monetary policy since the two countries are members of the Eurasian Customs Union along with Belarus.

Next year the three countries plan to turn this Eurasian Customs Union into a more formal Eurasian Economic Union. Coordinated accumulation of gold reserves would make sense in this context. 

Russia, Kazakhstan and Belarus are also members of larger regional cooperation organisations, namely the Eurasian Economic Community and the Shanghai Cooperation Organisation (SCO). It will be interesting to see what a pooled gold holdings total for Russia, China, Kazakhstan, and other SCO members will look like when China finally does provide the world with an update on its official gold holdings.

UK Treasury plans to criminalise benchmark manipulation

Yesterday, the UK Treasury announced a consultation review into widening UK financial benchmark legislation and make manipulation of key currency, precious metals, and interest rate benchmarks a criminal offence. The only benchmark that is currently regulated is the interest rate LIBOR benchmark. HM Treasury plan to add a further seven key benchmarks to the legislation. 

These benchmarks are the WM/Reuters 4pm London fix (currency), ISDAFix (interest rate), the London Gold Fixing benchmark, the new LBMA Silver Price benchmark, the ICE Brent futures contract (crude oil), and two index swap benchmarks called the Sterling Overnight Index Average (SONIA) and the Repurchase Overnight Index Average (RONIA).

The London Gold Fixing process is in disarray after multiple claims of manipulation and the prosecution of Barclays by the Financial Conduct Authority (FCA) last May for manipulating the gold price in the fixing auction. The London Gold Market Fixing Company (LGMFL) and the London Bullion Market Association (LBMA) are now attempting to 'circle the wagons' on regulatory compliance and investor litigation by moving to a new LBMA Gold Price process modelled on the recently introduced LBMA Silver Price. 

The LBMA Silver Price auction has not really evolved in any way since being introduced on August 15, and its current 'phase 2' stage, by design, only allows bullion banks and brokers to participate due to the lack of a central clearing counterparty and limitations on bi-lateral credit lines for auction participants. 

However, this has not stopped the LBMA ploughing ahead with a similar plan for the gold fixing process which still has the CME Group and Thomson Reuters as the leading contender.

Following up today on the news of the Treasury's benchmark consultation, Bloomberg contacted the four London Gold Fixing banks and the LBMA seeking comment, but reported this morning that "Representatives of the banks that contribute to the London gold fixing declined to comment or didn't immediately return calls and emails seeking comment. The LBMA wasn't immediately available."

With the London gold fixing process being so central to the determination of the world gold price, any moves by the UK authorities to criminalise manipulation of the gold fixing price are welcome.

MARKET UPDATE Today’s AM fix was USD 1,210.50, EUR 950.61 and GBP 742.05 per ounce.  Yesterday’s AM fix was USD 1,224.00, EUR 952.87 and GBP 746.11 per ounce.

Gold fell $5.70 or 0.47% to $1,217.20 per ounce and silver slipped $0.10 or 0.56% to $17.70 per ounce yesterday.

Spot bullion in Singapore slipped 0.3% to $1,213.60 an ounce by 0043 GMT, after losing 0.5% in the earlier session. Gold is close to an 8 1/2 month low of $1,208.36 reached earlier in the week.

U.S. Mint September American Eagle gold coin sales are almost 50,000 ounces, nearly twice its sales in August, with heightened  geopolitical risk and a cheaper bullion price contributing to the interest from investors. 

If further bullish U.S. economic data comes out this week it will strengthen the U.S. dollar and weaken gold’s appeal, as investors think the U.S. Fed will react with an earlier than expected interest rate hike.

by Ronan Manly , Edited by Mark O’Byrne

Download: Currency Wars: Bye, Bye Petrodollar - Buy, Buy Gold

Ukraine Introduces Capital Controls

A few days ago we showed how when Obama said there would be "costs" for Moscow in the Ukraine-Russian conflict, he got the recipient country of said costs woefully wrong, as confirmed by the economic data released by Ukraine which showed its Industrial Production crater at a pace on par with the Lehman collapse, confirming the Ukraine economy was on the verge of a spectacular implosion just in time for the harsh, Gazprom-free winter to finish off what little economic activity is left.

The resulting selloff in the Hryvnia and Ukraine bonds, was therefore, hardly surprising.

Which probably means the news reported by Bloomberg moments ago, which cites Ukraine's Unian news service, that the Ukraine central bank just instituted restrictions on Hryvnia use, i.e., capital controls, should also not come as a surprise, yet for all those expecting Russia to crater first under the weight of western sanctions, to see said cratering take place in western-backed (and IMF guaranteed) Ukraine is probably just a little unpleasant.

The details:

Central Bank forbids companies completing FX payments on import contracts if they don’t actually bring goods into Ukraine, Unian reports, citing Central Bank decree that comes into effect tomorrow.

• FX payments on imports also prohibited if customs registration of goods takes more than 180 days
• Foreign investors forbidden to receive investment return from selling Ukraine securities beyond stock exchange, except govt bonds
• Foreign investors forbidden to receive dividend return on Ukrainian shares not traded in stock exchanges
• Central bank also forbids FX transactions using individual FX licenses, except placing money by cos. on accounts in foreign banks

In other words, the money concentration into a select few government-approved (and controlled) asset classes has begun. For those who are unsure what happens next, please google "Cyprus and March 2013."

http://www.zerohedge.com/news/2014-09-22/ukraine-introduces-capital-controls