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JLN Financials: China’s PBOC Uses Repos for First Time in 8 Months; Emerging Markets at Risk From Carry Trade Unwinding, BofA Says; Question Marks Over Abenomics

First Impressions

Decisive Role: China making major moves on its economy
Jim Kharouf, JLN

China always is on the financial market radar. It is also on the radar screen of economist David Hale, chairman of David Hale Global Economics, who just finished a report on China called “China’s New Dream.” (It can be found here in a PDF.)

What is notable to Hale is that the plenary session of the Communist Party Central Committee in November 2013 announced major reforms to help boost China’s economy over the next decade. That means that market forces, and market structures, will now play a “decisive role” in re-shaping China’s economy, which is considered a substantial upgrade in language from prior communiques which said market forces will play a “basic role.”

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Quote of the Day

“We’re very positive on U.S. growth. On the other hand, we’ve already seen a doubling in U.S. Treasury bond yields. When we get to yields of 3 percent, which we got to not so long ago, you have to say that that’s not a million miles away from fair value.”

Jim Leaviss, head of retail fixed interest at M&G Investments in the story, “Treasuries Are Biggest Losers as Growth to Improve With Weather”.

Lead Stories

China’s PBOC Uses Repos for First Time in 8 Months
MoneyBeat – WSJ
China’s central bank used a tool it hasn’t touched in eight months to lock up cash Tuesday, the second week it has drained money flowing back into the financial system after the Chinese New Year holiday. But liquidity remains ample after the country’s bank lending jumped more than expected in January.
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***DA: Is this a sign that the PBOC thinks it might need to add liquidity sooner?

Emerging Markets at Risk From Carry Trade Unwinding, BofA Says
Fion Li – Bloomberg
Emerging-market assets are at risk as the tapering of the Federal Reserve’s stimulus program will probably trigger a reversal of $2 trillion in carry trades, according to strategists at Bank of America Merrill Lynch.
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***DA: Repeat after me: A taper. Is not. A rate hike.

Question Marks Over Abenomics – Macro Horizons
Michael J. Casey, Alen Mattich and Michael Arnold – MoneyBeat – WSJ
There are question marks are growing over Abenomics after some disappointing Japanese growth numbers for the end of the year. So far, though, investors have shrugged off the data, with Asian markets tracking higher on the back of stronger U.S. equities at the end of last week and Chinese loan data from the weekend, while European equities also opened strongly. Momentum is likely to be limited with the U.S. shut for Presidents Day, a public holiday.
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Treasuries Are Biggest Losers as Growth to Improve With Weather
Lucy Meakin and Wes Goodman – Bloomberg
Treasuries fell to last place among the world’s bond markets in the past year as investors bet the U.S. economy will improve as winter weather conditions ease, while the Bank of Japan increased efforts to spur growth.
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Banks review rules on forex traders betting own money
Daniel Schäfer in London – FT.com
Lenders including Deutsche Bank, Royal Bank of Scotland and UBS are reviewing rules on currencies traders making bets with their own money, in another sign of how investigations into the forex market is prompting a crackdown on trading floors.
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***DA: No stone left unturned in this hunt.

Bond markets weigh risks of eurozone QE
David Oakley – FT.com
At last, after resisting for so long, the European Central Bank looks closer to implementing its own version of quantitative easing to spark growth across the eurozone. But will it dislocate the bond markets?
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***DA: For the ECB’s sake, it better hope so.

Wall Street Bond Dealers Renounce Treasuries That Lure Pimco
Cordell Eddings – Bloomberg
The world’s biggest bond dealers are showing almost no confidence in the best annual start for Treasuries (BUSY) since 2008.
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Time to stop obsessing about central banks
Izabella Kaminska | FT Alphaville
George Magnus, former chief economist at UBS, writing in a private capacity on his blog, says central banks can’t do much more to support the economy and it’s time to stop obsessing about their every policy manoeuvre because it’s counterproductive.
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***DA: Shhh. Don’t tell the central banks that. You might hurt their feelings.

Which macroeconomists missed the Global Financial Collapse and when did they miss it
Karl Smith | FT Alphaville
Noah Smith argues that professional macroeconomists have done a fine job since the Global Financial Crisis of incorporating finance into their models. Nonetheless, it would have been even nicer if macro had picked up on the finance thing more strongly before 2009.
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***DA: I am more concerned about who will miss the next one.

Transaction tax would cost UK savers 3 billion pounds
Reuters
A planned tax on financial transactions in 11 euro zone countries would cut the value of household savings in non-participating Britain by 4.4 billion euros (3 billion pounds), a report for the UK financial sector said on Tuesday.
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***DA: So what? Name one authority anywhere that has cared a whit about the interests of savers. Except Germany, of course.

Central Banks

Bank of Japan holds fire despite soft GDP, expands loan programs
Reuters
The Bank of Japan maintained its expansionary monetary policy on Tuesday and extended special loan programs to help buoy economic growth, signaling its resolve to keep the positive mood generated by premier Shinzo Abe’s reflationary policies from fading.
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***DA: It’s all about the mood.

Bank of Japan boosts loan support programme
Ben McLannahan in Tokyo – FT.com
The Bank of Japan has stepped up its efforts to boost the flow of cash around the world’s third-largest economy, tweaking its loan-support programme in the hope of encouraging debt-wary companies and households to overcome their aversion to borrowing.
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***DA: Like I always say, in for a yen, in for, um, a lot more yen?

Miles Says U.K. Economic Slack May Exceed BOE Main Forecast
Emma Charlton and Jennifer Ryan – Bloomberg
The U.K. economy probably has more spare capacity than the Bank of England’s main calculations show, policy maker David Miles said, highlighting a key area of divergence among officials.
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BOE Can’t Do Much About Foreigners Buying London
Alen Mattich – MoneyBeat – WSJ
Bank of England Governor Mark Carney admitted at the weekend that foreign cash buyers have put London’s property market beyond the central bank’s control. Does this matter?
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Dutch Central Bank Decides it’s Time to Sell the Luxury Mansion
Maarten Van Tartwijk – MoneyBeat – WSJ
The global financial crisis has forced many banks to downsize. Now one of their supervisors is pursuing a more sober lifestyle too.
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ECB’s Praet says reforms could see euro zone growth surprise on upside
Reuters
The European Central Bank has played a key role in stabilizing the euro zone but governments must now keep up economic reforms to allow growth in the bloc to “surprise on the upside”, a top ECB policymaker said on Tuesday.
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Bundesbank unfazed by emerging markets, Nowotny cool on rates
Reuters
The turbulence experienced in emerging markets early this year is insufficient to derail a recovery in the global economy, which could strengthen during 2014, Germany’s Bundesbank said on Monday.
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Currencies

FX volumes rise above $5 trillion in January – CLS
Reuters
Average daily volumes in the foreign exchange market rose by more than 20 percent in January from a slow December, data from FX settlement system CLS showed.
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Asia Has Crisis to Thank for Gains in Emerging Rout: Currencies
Yumi Teso and Lilian Karunungan – Bloomberg
A decade and a half of good housekeeping is spurring Asian currencies from Indonesia’s rupiah to Thailand’s baht as investors increasingly differentiate between emerging-market assets.
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Canada Sees Active Work on Currency Benchmarks Amid G-20
Paul Badertscher – Bloomberg
Policy makers including the Financial Stability Board are working actively on the issue of currency benchmarks and the need for alternatives to rates such as Libor, a Canadian government official said before this weekend’s Group of 20 meeting.
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Guest post: Back to the future with Scottish currency
Chris Cook | FT Alphaville
The rejection by all the Westminster parties collectively of the SNP’s Plan A for a post-independence UK currency union has elicited a string of possible Plan B solutions, several of them already considered and rejected as inferior to Plan A by the SNP’s expert group of ‘wise men’. But the current debate is ill-founded, since the UK can have no more control over who uses the £ symbol as a unit of account, than they can have control over the use of metres and kilogrammes.
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Regulators and Hackers Put Bitcoin to the Test
NATHANIEL POPPER – NYTimes.com
Bitcoin is facing significant growing pains as it struggles to move beyond a stormy adolescence. After months of hype and hysteria that have driven up its price at a dizzying pace, Bitcoin recently encountered several hurdles that are likely to determine whether it makes it out of its early speculative phase to become a currency that people actually use, is supplanted by a rival or falls apart altogether.
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Bitcoin’s Crisis Is Turning Point for Currency
Francesco Guerrera – MoneyBeat – WSJ
After weeks marked by technological breakdowns, regulatory issues and general questions over its viability, bitcoin is in the midst of the worst crisis since it was proposed in a white paper in 2008. The turmoil is a watershed.
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Options cutting costs for some cross-currency swaps
Matt Cameron – Risk.net
Dealers found a way to protect some cross-currency swaps from heavy new capital requirements last year, by adding foreign exchange options into the structure – but the powers of the technique are limited.
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Indexes & Index Products

Empire State index retreats in February
Greg Robb – MarketWatch
Manufacturing activity in the New York region gave up most of the strong gains made during the prior month although it remained in positive territory, according to data released Tuesday.
The report fits a picture of a manufacturing sector struggling with severe winter weather.
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Nasdaq OMX files with SEC to permit listing and trading of non-transparent ETFs
ETF Strategy
The Nasdaq OMX Group has filed with the US Securities & Exchange Commission (SEC) for a proposed rule change to permit the listing and trading of exchange-traded managed funds (ETMFs).
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HKEx Welcomes First International ETF On Mainland China’s Onshore Bond Market
Hong Kong Exchanges and Clearing Limited (HKEx) welcomes the listing set for tomorrow, 19 February 2014 of the CSOP China 5-Year Treasury Bond ETF, which will be the first Exchange Traded Fund, or ETF, outside Mainland China that tracks the Mainland onshore bond market.
jlne.ws/1eMh5RH

Gold

Net gold demand slid 15 pct in 2013 on heavy selling -WGC
Jan Harvey – Reuters
Net gold demand fell 15 percent in 2013 as huge outflows from physically backed investment funds outweighed record consumer demand but that disinvestment is tailing off this year, the World Gold Council said on Tuesday.
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Top Two Gold Forecasters Remain Bearish After 2014 Rally
Nicholas Larkin, Glenys Sim and Debarati Roy – Bloomberg
The two most-accurate gold forecasters are holding to their bearish forecasts for 2014 even after the metal posted its best start to a year since 1983.
jlne.ws/1mrbfPN

China Overtakes India as Top Gold Consumer
The Wall Street Journal
Gold’s wild ride has shaken investors. But in China, buyers just keep stepping up to the plate.
Chinese demand for gold bars, coins and jewelry soared by 32% to record levels in 2013, even as the price of gold slumped 28%.
jlne.ws/1mraINK

Fears of looming China credit crunch spark new gold rush
Andrew Critchlow – The Sydney Morning Herald
China’s “unfolding credit crunch” is having an unforeseen and dramatic impact on gold prices as investors urgently stock up on the precious metal as a form of financial protection against a sharp correction in the world’s second-largest economy.
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Funds dumped $40 billion in gold in 2013
Mark Thompson – CNN Money
Investment funds dumped nearly $40 billion worth of gold in 2013 as the brighter world economic outlook encouraged a switch into riskier assets.
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The FRRP is not enough
Izabella Kaminska | FT Alphaville
Gold has been rising steadily since the start of the year. Given the US taper, this might seem counterintuitive, especially if you believe that “money printing” should always justify higher gold prices. But, as usual, everything is relative.
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About Author

Bergstrom is chief information officer of John J. Lothian & Co. He edits MarketsWiki and JLN Options.