Thought for the weekend

My family bought and invested heavily in The Independent because we believe in world-class quality journalism, and this move secures the future of these vitally important editorial values.

Evgeny Lebedev, announcing the closure of The Independent newspaper

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Guest post: Argentina’s debt offer — don’t pop the champagne just yet

Charles Blitzer, an economist, former senior IMF staffer, and expert on sovereign debt management and restructuring, analyses Argentina’s recent offer to its debt holdouts — and advises a course correction for the government.

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Cut out and keep: European bank AT1 coupon risk

The following chart from CreditSights might be handy to keep by your desk as European bank stocks swing between imminent doom and TGIF optimism:

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Markets Live: Friday, 12th February, 2016

Live markets commentary from 

Kill the €500 note, weaken the euro

If all of those criminals and hoarders using it have to swap out into USD or CHF then that’s presumably what will happen. We mean, it represents almost 30 per cent of the total euros in circulation and it’s now under threat.

As the ECB’s Benoit Coeure said menacingly to Le Parisien newspaper last week: “the ECB is assessing the fate of the €500 euro banknote, as concerns about its use in money laundering and crime grow and its usefulness for large payments comes into question.”

And from BofAML’s Athanasios Vamvakidis: Read more

What in the name of leverage ratios is going on?

It’s all a bit messy at the moment — European banks, Japanese banks post the BoJ’s move negative, er other stuff — but it’s not really clear what’s actually going on.

This seems like a decent list of possibilities, from Citi’s Steven Englander:

We think the following concerns are weighing on the market.

1. US economic fragility means there is no one to depreciate against

2. Too many simultaneous issues and policy coordination unlikely.

3. QE/negative rates have lost their financial market impact,

4. QE/negative rates have lost their economic impact

5. QE/negative rates are constrained by bank profits

But his colleague Matt King has a somewhat more involved, if not entirely separate, explanation for what he says is, at the surface, an orderly sell-off but which hides a number of indicators under “extreme stress”.

Basically, it’s all about bank balance sheets coming under pressure. Less basically, he suggests these dislocations “raise awkward questions about the entire narrative which led to the wave of post-crisis bank regulation.” Read more

Alphachat: the legacy of China’s one-child policy; and the fall of Theranos

Alphachat is available on Acast, iTunes, and Stitcher. Read more

Sweden’s central bank Riks-rolls the market

Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be:

  • Worried about the costs of a (slightly) higher exchange rate?
  • Concerned by the slow rate of (headline) inflation?
  • Cutting interest rates deeper into negative territory?

If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis): Read more

Further reading

Elsewhere on Friday,

- Tired of NIRP? Try intervention.

- Pimco: NIRP may be part of the problem.

- AEP: “This is a global stock market rout worth celebrating”

- Nationalising banks “would act as a circuit-breaker, preventing blow-ups at banks from damaging the rest of the economy.”

- Rescuing a SIFI, halting a panic: the Barings Crisis of 1890.  Read more

FirstFT – Global market turmoil, Einstein vindicated and the enduring popularity of personality tests

Investor fears rose over the cost to banks of negative borrowing rates imposed by central banks desperate to stimulate flagging economies Read more

The curious state of UK “peer-to-peer” lending

The UK’s peer-to-peer lending industry took fire yesterday from none other than former FSA chief Lord Adair Turner, who predicted that “the losses which will emerge from peer-to-peer lending over the next five to 10 years will make the worst bankers look like lending geniuses”.

One way to respond to that kind of criticism would be to say, ‘ha, what would a former FSA boss know?’ And lo, via City A.M.: Read more

On the absurdity of today’s safe haven flows

From the FT’s Jamie Chisholm on Thursday:

Gold and the yen are surging to multimonth highs while stocks and the dollar are in sharp retreat after Federal Reserve chair Janet Yellen warned that global financial market turbulence could hurt US growth.

Yes indeed. But it’s also an entirely absurd and inefficient market reaction.

If you tell people you’re going to tax them just for the privilege of having them lend you their spare capital, those people are in turn supposed to treat you like an ungrateful entity and walk away to find more grateful recipients elsewhere or — at the very least — spend the tax differential on people or causes who might in the end benefit from the spending and show you some non-monetary gratitude even if they’re unlikely to ever pay the sum back directly. Read more

The security/access paradox and digital lenders

The following advert from Quicken Loans may have given you the impression that money grows on trees and that there are no downsides to providing credit instantly with a one-click process.

Markets Live: Thursday, 11th February, 2016

Live markets commentary from 

Eurodollorous carnage as banks meet NNIM

What drove the 2008 banking crisis were fears of capital insolvency.

What seems to be driving the 2016 bank stock sell-off is a re-evaluation of how equity markets account for the book value of financial institutions in a world of NNIM (negative net interest margins) and eurodollar outflows.

But also, we should think, the degree to which NNIM itself is influenced by the sound of a giant vacuum cleaner sucking petrodollars out of the non-US banking system, the commodity-credit feedback loop of hell and the general subpriming of commodities through the repo collateral markets.

To cut a long story short: if we’ve arrived at a point where commodity collateral is no longer considered safe, that’s one less safe asset in the system, and a helluva lot more pressure on the remaining safe assets (government bonds) to protect par value. Read more

JPY, it wasn’t meant to be this way

What must the BoJ be thinking as the yen keeps getting stronger post the Japanese central bank’s announcement of negative rates?

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How negative is negative? Try 4.5 per cent negative

The Riksbank cut its main repo rate by 15 basis points to minus 0.5 per cent as it felt forced to act by “weakening confidence” in achieving its inflation target of 2 per centFT, just now

So this seems an appropriate time to rediscuss the idea of a lower bound.

First a quick summary: Negative rates might be destroying the banking system. They might, as Kocherlakota says, be “a sign of a terrible policy failure by fiscal policymakers.” They might simply be a experiment being played out in real time which we are as yet unfit to judge. Read more

“The business model of Wall Street is fraud”? Kind of

American senator and presidential candidate Bernie Sanders has repeatedly argued “the business model of Wall Street is fraud”. Critics were quick to claim this was “nonsense”, with some going so far as to call it “slander”.

Taken literally, they have a point. After all, widespread criminality across a range of business lines — just in the past decade many of the big financial firms have gotten into trouble for price fixing, bid rigging, market manipulation, money laundering, document forgery, lying to investors, sanctions-evading, and tax dodging, among other things — isn’t the same as actually having fraud as the core of the business. More generally, the financial sector contains many parts, often with competing economic and policy interests, so it doesn’t make much sense to talk about “Wall Street” as a unified entity.

Still, there is an essential truth in what Sanders said: from a certain point of view, banking is an act of fraud. Read more

FT Opening Quote

Rio Tinto is dropping its progressive dividend policy, SocGen is the latest large bank to miss expectations, Google is facing a grilling from MPs. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Further reading

Elsewhere on Thursday,

- Turbulent exit redux.

- Of neg rates: “At this juncture the impact upon banks should be fairly clear, but what about pension funds with liabilities discounted by long-term rates?”

- Kocherlakota: “the FOMC’s policy moves will be inappropriately insensitive to adverse information about the evolution of the economy. ”

- Cruise Conspira-Sea markets in everything.

- I[gor], Robot (hater).  Read more

FirstFT – Yellen warns on global turbulence, Christie ends White House bid and how your ‘smart’ devices could spy on you

The Federal Reserve chair says that financial conditions had become ‘less supportive’ of US growth Read more

On unicorn imperialism

It may have been a slip of the keyboard, but Marc Andreessen’s pro-colonialism Tweet on Wednesday (later retracted) arguably told us more about the mindset of Silicon Valley insiders than anything ever uttered at a TechCrunch disruptor conference.

Nor should it strike any of us as surprising. The parallels between unicorn imperialist ambition and the British Empire run deep. (And no, we won’t dwell on the shared fondness for unicorn insignia.)

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Macro Live, Yellen testimony

Live markets commentary from 

Macro Live, Yellen testimony special edition starting at 10am

Cardiff and Matt will be live-blogging Janet Yellen’s testimony before Congress. You can find us at the usual place, and we’ll kick things off at 9:58am, just a couple of minutes before the hearing begins.

Her opening remarks are here, and the FT’s Sam Fleming previews the testimony hereRead more

A brief look at Metro Bank’s offer document

All companies and people like to be seen in the best possible light, even if that means a little historical tweak here or an omission there. The question for any reasonable observer, or indeed investor in an unusual private placement/float combo, is what constitutes a bit of acceptable revisionism, and what counts as an error that probably needs correcting.

And so to Metro Bank’s offer document, which was circulated to shareholders late last month but not to the general investing public, who will have to wait until after the shares have begun trading to see a prospectus. (*Cough*.) Read more

Markets Live: Wednesday, 10th February, 2016

Live markets commentary from 

On the hypothetical eventuality of no more free internet

This is the first in an occasional series lamenting the hypothetical eventuality of a world without a free internet* and the extraordinary implications this could have for markets and companies. A tragedy of the web commons if you will.

It is inspired both by India’s ruling to bar Facebook from subsidising internet availability with Free Basics packages (see Kadhim’s series of posts for more on that) but also Balaji Srinivasan (he of 21 Inc toaster fame), and his attempts — including a Stanford Bitcoin course — to convince the world the web should in fact be a paid-for luxury product of scarcity.  Read more

FT Opening Quote

Chip designer Arm has etched out a 24 per cent rise in profits, Tullow Oil has shrunk losses, Janet Yellen is to testify to Congress. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Further reading

Elsewhere on Wednesday,

- Bonds on the run.

- Kocherlakota: “going negative is daring but appropriate monetary policy. But it is a sign of a terrible policy failure by fiscal policymakers.”

- Goldman’s top trades for 2016 aren’t looking great.

- “Bernie Sanders is seeing Kim Jong-un levels of support among millennials.” Read more

FirstFT – Trump and Sanders win primaries, a cure for jet lag and why contemplating death changes how you think

Mr Trump had secured 34.4 per cent, while Mr Sanders led Mrs Clinton by a commanding 59.5 per cent to 38.8 per cent in the New Hampshire primaries Read more