Wednesday, January 28, 2015

Greece Begins The Great Pivot Toward Russia

Ten days ago, before the smashing success of Greece's anti-austerity party, Syriza, we noted that Russia gave Greece a modest proposal: turn your back on Europe, whom you despise so much anyway, and we will assist your farmers by lifting the food import ban.
And, sure enough, Greece's new premier Tsipras did hint with his initial actions that Greece may indeed pivot quite aggressively away from Europe and toward Russia in general and the Eurasian Economic Union in particular (as a tangent recall "Russia's "Startling" Proposal To Europe: Dump The US, Join The Eurasian Economic Union").
Today we got further evidence that Tsipras will substantially realign his country's national interest away from the west and toward... the east.
First, as Reuters reported, today the new premier halted the "blue light special" liquidation of Greece to those highest bidders who have the closest access to various printing presses and stopped the privatization of Greece's biggest port on Tuesday, "signaling he aims to stick to election pledges despite warning shots from the euro zone and financial markets."
One of the first decisions announced by the new government was stopping the planned sale of a 67 percent stake in the Piraeus Port Authority, agreed under its international bailout deal for which China's Cosco Group and four other suitors had been shortlisted.

"The Cosco deal will be reviewed to the benefit of the Greek people," Thodoris Dritsas, the deputy minister in charge of the shipping portfolio, told Reuters.
Europe, for one, will be most displeased that Greece has decided to put its people first in the chain of priority over offshore bidders of Greek assets. Most displeased, especially since the liquidation sale of Greece is part of the Greek bailout agreement: an agreement which as the Troika has repeatedly stated, is not up for renegotiation.
Syriza had announced before the election it would halt the sale of state assets, a plank of the 240 billion-euro bailout agreement. Stakes in the port of Thessaloniki, the country's second biggest, along with railway operator Trainose and rolling stock operator ROSCO are also slated to be sold.
And it wasn't just this open act of defiance that marked the new government's anti-European agenda:
In a separate step, the deputy minister in charge of administrative reform, George Katrougkalos said the government would reverse some layoffs of public sector workers, rolling back another key bailout measure. "It will be one of the first pieces of legislation that I will bring in as a minister," he told Mega TV.
The Germans were not happy: A German central banker warned of dire problems should the new government call the country's aid program into question, jeopardizing funding for the banks. "That would have fatal consequences for Greece’s financial system. Greek banks would then lose their access to central bank money," Bundesbank board member Joachim Nagel told Handelsblatt newspaper.
Well, maybe.... Unless of course Greece finds a new, alternative source of funding, one that has nothing to do with the establishmentarian IMF, whose "bailouts" are merely a smokescreen to implement pro-western policies and to allow the rapid liquidation of any "bailed out" society.
An alternative such as the BRIC Bank for example. Recall that the "BRICS Announce $100 Billion Reserve To Bypass Fed, Developed World Central Banks."
And yes, the BRIC are going through their own share of pain right now as a result of plunging crude prices, but remember: crude is only low as long as the US shale sector is still vibrant. Once this marginal producer of crude with a $80 cost-breakeven is out of the picture, watch as Saudi Arabia tightens the spigots and Crude surges to $100, $150 or more. The question is whether Saudi FX reserves can outlast the Fed's ZIRP, which is the only reason - think idiots junk bond investors desperate for any ounce of yield - why the bulk of unprofitable and cash flow-bleeding US shale can still operate with WTI at $45.
Which naturally means that now Russia (and China) are set to become critical allies for Greece, which would immediately explain the logical pivot toward Moscow.
But wait, there's more.
As Bloomberg further reports, "Foreign Minister Nikos Kotzias is due in Brussels on Thursday to discuss possible additional sanctions on Russia over the conflict in Ukraine. Before the cabinet even meets for the first time tomorrow, the Greek government said that it disagreed with an EU statement in which President Donald Tusk raised the prospect of “further restrictive measures” on Russia."
The punchline:
In recent months, Kotzias wrote on Twitter that sanctions against Russia weren’t in Greece’s interests. He said in a blog that a new foreign policy for Greece should be focused on stopping the ongoing transformation of the EU “into an idiosyncratic empire, under the rule of Germany.”
And when it comes to the natural adversary of any German imperial ambitions in recent history, Europe has been able to produce only one answer...

Another Bailout: FXCM To Forgive 90% Of Its Mostly Foreign "Negative Balance" Customers

Two weeks after FXCM was on death's door, and only a last minute vulture investment by Jefferies prevented the company from filing, FXCM has decided that it can't afford to blow up the bulk of its clients who traded the EURCHF on the wrong side, and as the company reported moments ago, will forgive their negative balances. In other words, another bailout for HFTs, and the rich and those habitually addicted to gambling in rigged markets, who just happen to be the lifeblood of companies like FXCM.
From the press release:
FXCM to Forgive Majority of Clients Who Incurred Negative Balances

FXCM Inc.announced today its decision to forgive approximately 90% of its clients who incurred negative balances in certain jurisdictions, on January 15, 2014 as a result of the Swiss National Bank announcement on that date. FXCM will notify the applicable clients and adjust applicable client account statements in the next 24-48 hours.

"FXCM worked diligently to reach this decision and we are extremely appreciative of our clients for their patience and loyalty as we worked through this," said Drew Niv, CEO of FXCM.

The SNB announcement, extreme price movements and the resulting lack of liquidity were exceptional and unprecedented events causing many market participants to incur trading losses. These events were unforeseen and beyond the control of FXCM.

FXCM will also notify certain clients (such as institutional, high net worth, and experienced traders who generally maintain higher account balances) requesting payment of negative balances, pursuant to the terms of the FXCM master trading agreements.  This group represents approximately 10% of clients who incurred negative balances  which comprises over 60% of the total debit balances owed.
Because without whale clients, no exchange can continue to skim off the bid/ask margin while suckering in more "overnight wannabe millionaires" with 200x leverage.
So who are the generous beneficiaries of this Jefferies-funded bailout? For the answer we go to the WSJ:
Retail foreign-exchange broker FXCM Inc. was nearly felled by outsize bets made by foreign customers who aren’t subject to U.S. regulations, according to people familiar with regulators’ review of the firm.

While some U.S. clients lost money when the Swiss National Bank scrapped a cap on the country’s currency, the bulk of the losses were borne by clients at FXCM’s affiliates in London, Singapore and other locations abroad, the regulators said. Those affiliates weren’t subject to leverage caps imposed by U.S. regulators, allowing overseas clients to make bigger bets—and take bigger losses.

As a result, FXCM said its customers owed the firm about $225 million, potentially putting the company in violation of capital requirements and forcing it to take a $300 million rescue from investment firm Leucadia National Corp.

The fallout illustrates both how a firm’s losses abroad can find their way to U.S. shores and that even relatively strict U.S. regulation can’t prevent losses in less-regulated jurisdictions. While regulators don’t believe the firm’s near-collapse posed any broader risks to the financial system, the incident is prompting them to consider whether their capital and leverage requirements are adequate for firms like FXCM, the people familiar with the review said.

In the U.S., the Commodity Futures Trading Commission and the National Futures Association, a self-regulator, currently limit leverage on transactions for retail, or individual, currency investors at 50 to 1. That means an investor can borrow $50 for every dollar put in. This is because currency moves are typically small. Many overseas jurisdictions have much looser limits, particularly in Europe.
It may not be Mrs. Watanabe exactly: meet Monsier Trepreau:
Maxime Trepreau, a 33-year-old engineer from Houilles, France, placed a bet on the euro to rise against the Swiss franc several months ago, after seeing the position recommended by an analyst on Daily FX, an FXCM-owned website. On the morning of Jan. 15, Mr. Trepreau saw the value of his account rapidly declining, despite an automated order he had to exit from the position and keep losses to a minimum if the trade went the wrong way. Currency traders say liquidity evaporated as the euro made a sudden fall, which would make it difficult to execute preset orders.

By the time his order was executed, Mr. Trepreau’s loss of €50,000 (more than $56,000 at today’s rate) had eaten up all of the funds in his FXCM account and left him with a negative balance of €2,000.

Mr. Trepreau says FXCM hasn’t told him whether he is on the hook for that amount. Mr. Trepreau believes he shouldn’t be.
And just like Apple, the bulk of marginal growth when it comes to FX gambling is now in Asia:
In 2014, 41.5% of FXCM’s business by volume came from Asia; followed by 35.9% from Europe, the Middle East and Africa; 13% from the U.S.; and 9.6% from the rest of the world, according to its website.
In shart, thank you Dick Handler: Mrs. Watanabe, and Mr. Trepreau, are most grateful.

Tuesday, January 27, 2015

Medvedev Warns Of "Unlimited Reaction" If Russia Cut From SWIFT

While nations around the world continue to de-dollarize, Russia signed into law its anti-crisis plan today (though details will not be released until tomorrow). Prime Minister Dmitry Medvedev, however, was quite vociferous in some of his threats, warning The West that the "Russian response - economically and otherwise - will know no limits" if Russia is cut off from the SWIFT payments system. Additionally, as Royce, the chairman of the House foreign affairs committee, explains Iran nuclear talks "appear to be stalemated," just days after Iran completes its de-dollarization and news today, that Russia and Iran plan to create a mutual account for bilateral payments in national currencies.

Western countries’ threats to restrict Russia’s operations through the SWIFT international bank transaction system will prompt Russia’s counter-response without limits, Prime Minister Dmitry Medvedev said on Tuesday.

"We’ll watch developments and if such decisions are made, I want to note that our economic reaction and generally any other reaction will be without limits," he said.

In late August 2014, media reports said the UK had proposed banning Russia from the SWIFT network as part of an upcoming new round of sanctions against Moscow over its stance on developments in neighboring Ukraine. However, this proposal was not supported by the EU countries at the time.

After recent shelling of the Ukrainian city of Mariupol some western countries again started calling to disconnect Russia from SWIFT.

SWIFT transaction system

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) transmits 1.8 billion transactions a year, remitting payment orders worth $6 trillion a day. The system comprises over 10,000 financial organizations from 210 countries.

Under the SWIFT charter, groups of members and users are set up in each country covered by the system. In Russia, these groups are united in the RosSWIFT association.
*  *  *
Russia intends to have its own international inter-bank system up and running by May 2015. The Central of Russia says it needs to speed up preparations for its version of SWIFT in case of possible ”challenges” from the West.

"Given the challenges, Bank of Russia is creating its own system for transmitting financial messaging... It’s time to hurry up, so in the next few months we will have certain work done. The entire project for transmitting financial messages will be completed in May 2015," said Ramilya Kanafina, deputy head of the national payment system department at the Central Bank of Russia (CBR).
*  *  *
As Reuters reports, Russia's isolation appears to be shrinking...
Russia and Iran plan to create a mutual account for bilateral payments in national currencies, RIA news agency quoted Mehdi Sanaei, Iran's ambassador to Moscow, as saying.

"Both sides plan to create a mutual bank or a mutual account to make payments in rials and roubles possible," the ambassador said.
*  *  *
Quickly followed by:

Friday, January 23, 2015

Central bank prophet fears QE warfare pushing world financial system out of control

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015.
Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.
"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."
Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel.
He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20pc of GDP higher today. "We are holding a tiger by the tail," he said.

China, Switzerland sign deal on yuan trading in Zurich

The central banks of China and Switzerland have signed a pact to establish a yuan trading center in Zurich. The deal is expected to increase the number of European transactions in yuan.
Switzerland's central bank said on Wednesday it had signed the agreement with the People's Bank of China. The deal was concluded during the visit of Chinese Prime Minister Li Keqiang to the World Economic Forum in Davos.
According to the agreement, Switzerland will receive a quota of about $8 billion (50 billion Yuan).
“It [the arrangement] will promote the use of the renminbi by enterprises and financial institutions in cross-border transactions, and promote facilitation of bilateral trade and investment," the Swiss National Bank said in a statement.
This step comes under the framework of the QFII (Qualified Foreign Institutional Investor) program that allows foreign investment in Chinese securities using foreign currencies. Similar centers already exist in Hong Kong and London.
In July 2014, the central banks of China and Switzerland signed an agreement on a $24 billion (150 billion yuan) currency swap to boost bilateral trade and economic relations.
China, the world’s second largest economy, has been pushing the yuan as a rival to the dollar in the global financial system since 2010. In November 2014, the Bank of China started to operate European yuan clearing in Frankfurt.
The Chinese yuan is traded directly against the dollar, euro, the Japanese yen and Russian ruble among other currencies. Settlement worldwide in yuan reached $485 billion (3.01 trillion yuan) in 2013 compared to $330 billion (2.06 trillion yuan) in 2012.

NFA begins Forex deleveraging

Immediate attention required – Financial Requirements Section 12 – Increase in required minimum security deposit for forex transactions

As you know, NFA Financial Requirements Section 12 requires FDMs to collect and maintain a minimum security deposit of 2% of the notional value of transactions in 10 listed major foreign currencies (including the Swiss franc, Swedish krona and Norwegian krone) and 5% of the notional value of other transactions. Importantly, Section 12 also permits NFA's Executive Committee to temporarily increase these requirements under extraordinary market conditions. Given the events of late last week involving the Swiss franc, the Executive Committee has determined to increase the minimum security deposits required to be collected and maintained by FDMs under Section 12 as follows:
Swiss franc – 5%
Swedish krona – 3%
Norwegian krone – 3%
These increases are effective as of 5 p.m. (CST) on January 22, 2015 and will remain in effect until further notice. FDMs should be aware that the Executive Committee may make additional increases in these currencies or other currencies as warranted by market conditions.
If you have any questions on these requirements, please contact Valerie O'Malley, Director, Compliance ( or 312-781-1290) or Rachel Brandenburg, Senior Manager, Compliance ( or 312-781-1472).

Wednesday, January 21, 2015

The End Of The World Of Finance As We Know It

I’ve said before, and quite a while ago too, – more than once-, that the world of investing as we’ve come to know it is over. It’s still as true as it was then, and I can only hope that more people today understand why it is true, and why I said it in the past. The basic underlying argument then and now is that financial markets have been distorted to such an extent by the activities, the interventions, of central banks – and governments -, that they can no longer function, period.
What we’ve seen since 2008 – not that things were fine and rosy before that – is that all ‘private’ losses were taken over by the public sector, just so the private sector didn’t have to fess up to what it lost, and the appearance of a functioning market system could be upheld. And those who organized this charade were dead on in thinking that as long as Dow and S&P numbers would look good, and they said ‘recovery’ in the media often enough, people would believe there still was a functioning financial marketplace. And they did. But those days are over. Or at least, they soon will be.
What I mean by that is that the functioning marketplace is long gone, and only now people’s beliefs, too, about it are changing, being forced to change, and soon quite radically. The entire idea that ruled the world of finance and kept it -seemingly – standing upright is crumbling fast. And we’re going to have to find a way to deal with that. As of today, we have none, we come up zero. The overriding narrative – which overrides every other thought – is that we’re on our way back to recovery. And then we’ll get back to becoming ever richer, live in ever bigger homes and drive ever bigger, smarter and faster cars. Or something in that vein.
The downfall of finance can be traced back to all sorts of points in history. Think Nixon the gold standard in 1971, for example. But the repeal of Glass-Steagall in 1998, under Bill Clinton, is undoubtedly one of the major ones. Once deposit-taking banks were -again – allowed to use those deposits to ‘invest’ – read: gamble with -, it was only a matter of time before the train went off the tracks in spectacular fashion.
It now seems to stupid to be true, but Alan Greenspan, Bob Rubin and Larry Summers, the guys who had pushed so hard for the repeal – and got it -, were once featured on the cover of TIME as The Men Who Saved The World. While what they did was the exact opposite: they threw the world into a financial abyss. It took a while, sure, but then, 16-17 years is not all that long. Plus, it took just 2 years for the dotcom bubble to burst, and 6-7 more for Bear Stearns, AIG and Lehman to be whack-a-moled.
The rest would have followed, but then the central banks stepped in. And now, 6 years and $50 trillion later, their omnipotence is being exposed as impotence. Which means there’s nothing left to keep up appearances. We’ll all have to leave the theater of dreams and step out into the blinding cold faint light of another morning. No choice. And we’ll figure out at some point that we’ve paid all we had just to watch the show.
No. 1) The Swiss National Bank this week threw in the towel, bankrupted a lot of foreign exchange brokers and investors and destroyed a few hundred thousand Swiss jobs in the process. And that was not the first sign that the game was up, the oil price collapse started it. Or, to be precise, made the collapse visible for the first time to most – even if they didn’t recognize it for what it was-. Central banks are pushing on a string, a concept long predicted: they have become powerless to stop financial markets events from taking their natural course of boom and bust.
No. 2) The Bank of Japan. From Asian Nikkei:
Some in the Bank of Japan are growing anxious about continuing its massive purchases of government bonds, confronted with the program’s negative side effects. [..] The BOJ’s buying of huge amounts of Japanese government bonds has pushed long-term interest rates to unprecedented lows. This has made it impossible for insurance companies to generate sufficient returns on JGB investments to pay benefits to policyholders.

The longer ultralow interest rates continue, the more likely other insurers are to take similar steps. Household finances would suffer. Money reserve funds, used for parking individual stock investors’ unused funds, are another financial product hit by ultralow interest rates. MRFs put money into short-term government bonds and other safe investments. Generating positive returns on the bonds is becoming nearly a lost cause [..]

The BOJ has discussed these costs at its policy board. When the board took up additional easing measures in a late-October meeting, some members raised the specter of hurting earnings at financial institutions and giving the impression that the bond-purchasing program is actually a scheme to enable deficit spending. The board decided to step up the program anyway, judging the benefits to outweigh the costs.

“Since nominal interest rates are already at historically low levels, the marginal impact of more easing aimed at putting upward pressure on consumer prices is not strong,” policy board member Takehiro Sato said in a speech last month, explaining why he opposed additional easing in October. “We have caused tremendous trouble for the financial industry,” a BOJ official says. “I hope we will be able to scale back monetary easing soon by achieving the price stability target as projected.”
All the BOJ can do by now, all that’s left to do, is get out of the way. As it should have done right off the bat, before it started intervening 20 years ago. All central banks should have gotten, and stayed, out of the way. Butt out. They have no role to play in financial markets, and should never have been allowed to assume one. They can only do harm. Free markets may not be ideal, but central bank intervention is a certified lot worse.
No. 3) The Fed:
Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility. The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad – just as a put option protects against a drop in stock prices.
“The succession of Fed puts over the years has led to a wide range of distortions in financial markets ,” said Lawrence Goodman, president of the Center for Financial Stability. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.”

“Let me be clear, there is no Fed equity market put,” William C. Dudley, president of the New York Fed, the central bank’s watchdog on financial markets, said in a Dec. 1 speech in New York. “Because financial-market conditions affect economic activity only slowly over time, this suggests that we should look through short-term volatility.”

The concept of a Fed put took hold under Greenspan, who in 1998 cut the benchmark federal funds rate three times in response to market stress arising from a Russian bond default and the failure of hedge fund Long-Term Capital Management. The economy expanded 5% that year and 4.7% in 1999, and critics say the rate cuts helped extend a bubble in technology stocks. The Nasdaq rose 40% in 1998 and 86% in 1999 before plunging almost 40% in 2000. Greenspan said in an interview that he regarded the notion of a Fed put as a “joke.”

Bernanke told Fed officials in an Aug. 16, 2007, conference call as they prepared to cut the discount rate, according to transcripts. Bernanke recommended resisting a cut in the fed funds rate “until it is really very clear from economic data and other information that it is needed. I’d really prefer to avoid giving any impression of a bailout or a put, if we can.”

“The put is there – it is just further out of the money,” said Michael Gapen, chief U.S. economist at Barclays. As the central bank raises rates, “there could be more volatility and the Fed could be OK with it.”
No. 4) The ECB. Which is supposed to come with a $1 trillion or so QE package this week. Which has long been priced in by the markets and will have no other effect than to bring down the euro further. QE everywhere is always only a game that shifts wealth from the public to the private sector, which is another way of saying from the poor to the rich. But then you end up with the poor getting so much poorer, you don’t have a functioning real economy anymore, and therefore no functioning financial markets either.
The problem today is not one of lending, but of borrowing. Banks, even if they would want to, cannot lend to people too poor to borrow. Or spend, for that matter. And if people in the real economy, which accounts for 60-70% of GDP in developed nations, don’t spend, because they simply either don’t have the money or have no expectations of getting any, deflation sets in and central bankers are revealed as the impotent old farts they are.
*  *  *
But that will by no means conclude the story. The effects of the ill-fated megalomaniac central bank policies will reverberate through our societies for decades, if only because $50 trillion is a lot of money. Much of it may have gone somewhere, in some zero sum game, but most of it just went up in the thin air of wagers like the ones the forex trade is made of. People keep asking where did the money go, well, nowhere, or rather it went back to the virtual state it came from.
The difference between the past 6 years and today is that central banks can and will no longer prop up the illusionary world of finance. And that will cause an earthquake, a tsunami and a meteorite hit all in one. If oil can go down the way it has, and copper too, and iron ore, then so can stocks, and your pensions, and everything else.
Perhaps Yellen et al are not all that crazy for cutting QE, and soon raising interest rates. Perhaps that’s the only sane thing left to do, as sane as the Swiss cutting their euro-peg. That doesn’t mean the Fed understands what’s going to happen to the US economy because of it, but it may just mean they have an inkling of the lack of alternatives.
Japan is gone, it’s borrowed itself into oblivion. China’s ‘miracle’ was debt-financed to a much larger degree than anyone wishes to admit. Europe will end up seeing its union falling apart, because it could only ever be held up in times of plenty, and those times are gone. And the US won’t make it too long either on people making a ‘living’ flipping their neighbor’s burgers.
But the central bank bills will still come due all over. That’s the bummer about deflation: your wealth evaporates, but your debt does not.

Interest rate cut sparks warnings on Denmark ditching euro peg

Denmark dampened a rally in European financial markets on Monday after a cut in interest rates sparked warnings that it could follow Switzerland’s lead and end the krone’s peg to the euro.
The Danish central bank shaved 0.15 percentage points off its base rate to discourage investors from switching their funds out of eurozone banks ahead of the European Central Bank’s expected launch of quantitative easing this week.
The warning of a swift climbdown by Copenhagen undermined a strong surge in European shares which hit a seven-year high earlier in the day. The FTSE 100, which had climbed 78 points in mid-afternoon, finished the day up on 35 points at 6585. The Paris-based Cac following a similar path, finishing up 50 points before falling back to close only 30 points ahead.
The French prime minister François Hollande, anxious for the ECB to begin flooding the eurozone economy with extra funds, was forced to backtrack after appearing to announce that the central bank was ready to start buying eurozone sovereign debt.
“On Thursday, the ECB will take the decision to buy sovereign debt, which will provide significant liquidity to the European economy and create a movement that is favourable to growth,” he said in a speech to business leaders at the Élysée Palace.
Later, a spokesman said he was only talking theoretically and referring to QE as a “hypothesis”.
Speculation that the ECB will kick off a major spending spree has sparked increasing volatility in financial markets, especially since a European court of justice ruled that it was legal under EU law.
Last week, and only two days after the court ruling, Switzerland’s central bank chief blamed an imminent QE bonanza for his decision to cut rates to -0.75% andend a longstanding policy of tracking the euro. In a frenzy of trading on international currency markets, the Swiss franc jumped 30%.
Investors have sold the euro heavily in advance of QE, switching their allegiance to the fast-growing US economy and the dollar. In the last seven months the euro has lost 20% of its value against the dollar and could lose another 10% or 20% once QE takes effect.
Under QE, the ECB is believed to be ready to supplement its existing purchase of corporate bonds with tranches of government debt following a meeting of its governing council on Thursday. Some analysts believe only a programme worth €1tn (£767bn)will convince markets that the ECB is serious about tackling low inflation, while others say €750bn would be enough.
Foreign exchange dealer Clear Currency said: “Markets are expecting [the ECB] to announce a QE programme, €500bn would be at the low end of expectations with a programme of €750bn probably enough to appease markets.”
One plan believed to be under consideration would restrict the Frankfurt-based central bank to buying the debt of countries such as Germany and Finland, which are considered a safe bet. However, Mario Draghi, president of the ECB, has come under intense pressure from the leaders of southern European states to spread his net wider and buy government bonds from all 19 member treasuries. They are keen for cheaper funds to spur business lending and growth.
A steep fall in inflation in recent months has also raised the spectre of declining prices, which the ECB must avoid or risk deflation and a fall back into recession. European politicians from Paris to Vienna were shocked this month when figures showed with prices in December falling 0.2% prices falling 0.2% in December.
But the German chancellor Angela Merkel remains opposed to QE and has lobbied against Thursday’s announcement. Berlin has argued that the fall in inflation follows steep falls in oil prices, which may prove temporary. It has also stressed that the risks of sovereign bond purchases from the treasuries of weaker countries should be underwritten by the national central banks of those states.
Analysts at Morgan Stanley said a compromise is the likely outcome, limiting the impact. “A workable compromise for the ECB would be a hybrid programme with a core component in which financial risk is shared across the eurosystem, and an optional component relating to national central bank risk,” said the investment bank’s European economist, Elga Bartsch.
“We remain sceptical on the impact of sovereign QE because of the dissent inside the ECB, the potential political backlash, the legal uncertainties on government bond buying, and the Greek situation and its complex execution.”
To emphasise the extent of dissent inside the eurozone, the Irish finance minister Michael Noonan said buying Irish bonds and making the Irish central bank take the risk for their failure was self-defeating.
“If [QE] is going to be renationalised and if monetary policy becomes a function of national central banks acting as agents of Frankfurt I think it will be ineffective,” he said.

Russian Central Bank Bans Western Ratings Agencies

On the heels of last week's downgrades by Fitch and Moody's to just above junk status, The Central Bank of Russia (CBR) has issued a statement that it will no longer use credit ratings from Standard & Poor’s, Fitch, or Moody’s that were assigned after March 1, 2014. All credit ratings will now be at the discretion of the Board of Directors of the Bank as regulators assess whether or not the ratings made after March are accurate. Sounds like Spain, Greece, and USA's previous derision over ratings agencies proclamations is heading east.
The Central Bank of Russia will no longer use credit ratings from Standard & Poor’s, Fitch, or Moody’s that were assigned after March 1, 2014.

All credit ratings given to Russian companies and banks will now be at the discretion of the Board of Directors of the Bank,according to a press statement Monday. The regulator will assess whether or not the ratings made after March are accurate.

The decision comes after Fitch and Moody’s downgraded Russian sovereign debt to just above junk status. Standard & Poor’s will decide whether it cuts Russian debt to junk level by the end of January after cutting it last April, after Crimea rejoined Russia and the West began to levy sanctions against Moscow.
*  *  *
On dates of credit ratings’ use for the purpose of Bank of Russia regulations

In line with scope of authority established by Bank of Russia Ordinance No. 3453-U, dated 25 November 2014, ‘On the Specifics of Credit Ratings’ Use -to Implement Bank of Russia Regulations’, the Bank of Russia Board of Directors determined the dates when credit ratings shall be assigned to implement Bank of Russia regulations.

Under this Ordinance, should any Bank of Russia regulation contain information on credit rating assigned by Standard&Poor’s or Fitch Ratings or Moody’s Investors Service to credit institutions or other Russian legal entities, constituent territories, municipal entities, their issued securities or other financial instruments, the date when the mentioned rating is assigned (hereinafter, the rating date) may bedetermined by the decision of the Bank of Russia Board of Directors in the corresponding regulation.

According to Bank of Russia Board of Directors’ decision, the rating date for credit institutions and their issued financial instruments, including securities, to implement Bank of Russia regulations, shall be 1 March 2014; as for other entities, listed in the Ordinance, and their issued securities, this rating date shall be 1 December 2014.
*  *  *
“They’re private companies, so we assume that they’re completely independent and not subject to political pressure.

However, they do exist in an American context and are subject there to the international media’s reporting which tends to give a single narrative – a very negative narrative when it comes to reporting – particularly the Russia story,”
All sounds very similar to the responses that troubled and over-indebted western nations had when the ratings agencies dared to downgrade them.

Monday, January 19, 2015

SNB - Post-Mortem

The Swiss National Bank move to eliminate the 1.2 EURCHF Peg has proven to be a big market/media event. Follows a few random thoughts on how this story played out. Caveat - Some of this is wonkish, some guesses on my part.

The Weekly FX Flows
The FX market has two different types of risk profiles depending on what day it is. The two risk periods are:
Monday through Friday
Friday night through Sunday night
There are risks that the FX market participants face every second of the week. But the risks of the weekend roll are much higher than the Monday through Friday trading period
The developments during any given week may cause wild gyrations in FX pricing, but there is also a very active FX market to lay off, or take on risk. The FX market runs 24/7 from Monday morning in Asia until the close in NY on Friday. From Friday night to the next opening in Asia there is no market to lay off risk.
The fact that there are two different risk periods creates two classes of participants in the FX market. Short-term players who are trying to make a buck, but have no interest in taking positions over the weekend. And those who are taking a long-term view of the world, and are happy to take the risks associated with liquidity over the weekend. For every player who takes a long view there are 20 who only dance from Monday through Friday. The bulk of the actors are squared up for the weekend.
There is a very logical reason for this. Over the past twenty years the vast majority of "surprise" critical steps taken by government authorities have been taken on Sunday evenings. (Devaluations/revaluations, Fannie and Freddie going bust, TARP etc., Plaza Accord, Louver Accord) If you're in the FX Biz you pay very close attention to what surprises may have been released when the markets have gone dark. And depending on your risk profile you want to be square for the weekend.
The SNB broke the "rules". It dropped its bomb on a Thursday. It did it at a time that insured that the NY market was still asleep.
The SNB could have held off for a few days and made their big announcement on Sunday. The amount of gross positions outstanding on Sunday would have been a fraction of the positions that were outstanding on Thursday morning. Obviously, the timing by SNB was very deliberate. They acted in what I consider to be a hostile manner - the SNB was a predator to the market participants. Not very sporting at all.
If the SNB had acted in a manner consistent with how Central Banks/Government make announcements of key changes to policy, the losses incurred by the market would have been far less than what they were. The retail accounts that have been blown away this week would not have suffered anywhere near the losses they did. I would add to this that if the announcement had come over the weekend there would not have been a 20% move in the CHF. The adjustment would have been closer to 10%.
My conclusion is that the SNB deliberately screwed the market, and in the process shot itself in the foot for 30-50 billion dollars. What were they thinking?

Did the 2014 Profits Play a Role in this?
Every January the SNB produces its annual profit and loss results. The surprise in 2014 was the size of the gains the SNB reported (CHF38B) . The headline from this year's profit report:
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38B Francs is a huge amount of money. This treasure chest is equal to about half of the losses the SNB incurred when it floated the franc. My question is did the folks at the SNB already know that they were going to pull the plug on the peg on January 9 when they released the profit report?
The huge profit report plays into the story, but I'm not sure if the way it was introduced allows for a definitive conclusion that the decision to float had been made six days before the actual event. My read of these tea leaves is that the SNB was, at a minimum, considering the float on January 9,but had not yet made a final decision on when to act. The "profits" gave the SNB the ammo to take the huge loss. My question - Were the 2014 "profits" pumped up so that it would be "easier" for the SNB to act? I think there is a real possibility that those big gains were largely fluff.

On the SNB communication of January 6th
A very curious element in this is that three days before the float an SNB spokesperson, Jean-Pierre Danthine, had this to say:
"We took stock of the situation less than a month ago, we looked again at all the parameters and we are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy,"
What to make of this? Was Jean-Pierre lying through his teeth when he said these words? Had the decision to float already been made?
I'm 100% convinced that the decision to float was made prior to the time that J.P. spoke. In other words J.P. lied; he was part of a deliberate effort to set the market up to be short the CHF and to cause the maximum amount of pain to the market participants.
I doubt we will ever know the facts on this. However if JP was tied down and water boarded he might fess up to being the guy who deliberately set up the market. I'm as certain as I can be that good old J.P. would not have said these words without the blessings of the head of the SNB, Thomas Jordan. So it is quite possible that this critical lie was set up by the guy who is running the show.
If this is correct, it is a heinous act. I would think that there would be lawsuits if it could be proven that the SNB deliberately set up the market - billions were lost as result of the J.P. statement. (where is that water-board when you need it?)

Jordan Acts Old School Style
Jordan must have read from Paul Volker's playbook. Volker was famous for his "surprises". During those years I was on an FX trading desk. We were always afraid of the "Volker Factor". Markets were under siege by the Fed. As a result positioning was kept light, and market liquidity suffered. The "fear factor" worked to Volker's advantage, but even he would would admit that he was responsible for a great sucking noise in the markets. Volker succeeded, but the costs were very high.
Central Bank communication policy has morphed over the past 20 years. The changes were led by Greenspan who established the concept of 'guidance'. The Fed became more open as a result. By communicating its intentions the Fed was able to steer capital markets in a way that suited it. The strategy of communication was designed to minimize the market shocks of unanticipated policy changes. For the most part, the policy of providing forward guidance has worked. Ben Bernanke took another leg up on the idea of communication as a means of guiding markets. Most other central banks have followed this policy.
But the SNB went entirely in the other direction. On Tuesday it said, "That will not happen", three days later it happened. Thomas Jordan and his merry men at the SNB turned the clocks back 40 years.

There was No Crisis on Thursday
When the SNB established the Peg in 2011 there was a true market crisis going on. In a short period of time the EURCHF fell from 1.5 to parity. The SNB introduced the Peg in the same manner that they have taken it off. It came as a surprise to the market, it caused an immediate 20% jump in the EURCHF. Pretty much the exact opposite of what happened on Thursday. One could argue that if the SNB went "Shock and Awe" when the peg was established, it is equally fair that they took it off with the same Shock and Awe.
BUT - There was no market panic last Thursday. There was no crisis that forced the SNB to act on that day. The EURCHF was trading above the peg, it had been for days prior. The SNB had some bids in the market to ensure that there was no move to the 1.2000 level. The intervention required to maintain the Peg in the days just prior to the float was very small - under 10b CHF.
My point is that there was no compelling reason to act on a Thursday. Therefore the only conclusion I can draw is that the SNB acted in a malicious way. It took actions with the express intent of hurting the markets. It achieved its objectives. In the process the SNB incurred losses that are 50% higher then they might have otherwise taken.

What are the Other CBs Thinking?
As of last Tursday every Central Bank on the globe hates the SNB. Not only did the SNB destroy its own credibility, it undermined the credibility of every other CB. How many headlines like this have we seen the past few day? (hundreds).
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I'm convinced that the SNB move has put the ECB (Mario Draghi in particular) in a very difficult position. I expect that we will see markets converging on the ECB in the not too distant future. The empty promises of Uncle Mario are now just that - empty promises. Draghi's job has just become incredibly more difficult - if not impossible.
The Japanese CB is now quaking. They have just observed first hand what happens when CBs take a U-turn. The BoJ has made more promises than any other CB. If the markets come to doubt the resolve and promises of the BoJ then you can kiss off any chance that the BoJ will succeed. A loss of confidence means that Japan will soon slip into another lost decade.
Any CB who is now managing a fixed currency is at risk. Hong Kong, China and Korea come to mind. If (when) any of these CBs come under attack they will face the same fate as the Swiss. The reality is that the global markets are much larger and more powerful than the CBs. What happened in Switzerland will be repeated elsewhere. It's likely that these attacks will happen fairly soon.

What About the Players?
I do feel a bit sorry for those who lost big on the CHF move. I think they were set up, and lied to by the SNB. If the SNB had acted on a Sunday we would not be reading about all of the retail losses. The same is true for the big banks that got whacked (JPM, Citi, Deutsche, Barclays, and the many more will soon be fessing.
But - The losers were idiots! What were those thousands of retail investors thinking? In any market a player must think about risk and reward. The "reward" of being long the EURCHF on Thursday was maybe 25BP. This was obvious as the EURCHF had traded the last three days a few ticks away from the intervention zone. There were caution flags flying. Anyone who thought there was some free money on the table made a huge mistake. The downside risks of the short CHF was at least 100Xs what might have been realized if the SNB had not acted. YOU NEVER DO THIS! Never take a 100 to one shot. To bet $100 to make $1 is just stupid.
The retail brokers providing FX executions for retail have been buried with losses. I couldn't be happier with this result. These clowns were providing 50X leverage to unsophisticated investors who did not understand the risks? They deserve to be wiped out.
There might be a few of these brokers left standing in a week - but I promise you the the days 2% margins on retail FX are over. Want to play in the FX sandbox? Be prepared to put 20% down. There are no profits left with that leverage, so the retail FX biz will disappear for a few years. (It will come back - greed trumps logic every time.)

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