Thursday 11th February 2016
NEWS TICKER: February 11th 2016: The Lyxor Hedge Fund Index was down -0.9% in January. 5 out of 11 Lyxor Indices ended the month in positive territory. The Lyxor CTA Long Term Index (+2.2%), the Lyxor Global Macro Index (+0.7%), and the Lyxor Fixed Income Arbitrage Index (+0.7%) were the best performers, says the ETF major. Hedge Funds displayed esilience in January. Both markets and analysts started the year with reasonable growth expectations. These were aggressively revised down, triggered by the release of the disappointing Chinese PMI and the CNY depreciation. Strikingly, investors started to price in more serious odds for a Chinese hard landing, the growing central banks’ impotence, the risk of a US recession, and the return of global deflation. Lyxor says, in that context, CTAs thrived on their short commodities and long bond exposures. FI Arbitrage and Global Macro funds exploited monetary relative and tactical opportunities. To the exception of the L/S Equity Long Bias and Special Situations funds – hit on their beta - the other strategies managed to deliver flat to modestly negative returns - Why did investors think that the US Fed would raise rates in this jittery global market? Investors shed stocks in Asia today, on the back of what was a reasonable statement to the House of Representatives Finance Committee, that the US central bank would remain cautious on future rate hikes. According to Swissquote analysts, “Recent market turmoil and uncertainties surrounding China’s growth prospect could weigh on US growth if proven persistent. A few days ago, Stanley Fisher, Fed Vice Chairman, also delivered a cautious speech reminding us that Fed policy will remain data dependent and that it was too soon to tell whether the current market conditions will prevent the Fed from moving on with its rate cycle”. The global mood among central banks is towards an accommodative rather than tightening monetary policy: this was a theme that investors applauded last year and only last month as the ECB signalled a continuation of its policy, but it wasn’t what Wall Street wanted to hear and early gains lost out to negative sentiment and the US markets ended lower for four days in a row. The real worry of course is that ultra-loose monetary policy signals the fears of central bankers that the global economy continues to wind downwards and that consideration is fueling investor fears. Asia’s trading story has been writ in stone for the last few weeks with havens such as gold, the yen and government bonds the main beneficiaries of continued investor jitters. In commodities, Brent crude oil was down 1.3% at $30.43, while WTI crude futures fell 2.7% to $26.70, despite a drawdown in US stockpiles. Hong Kong's Hang Seng Index fell 3.9%, catching up with the week's selloff as the market reopened from a holiday. South Korea’s Kospi ended the day down 2.93%, while in Singapore the STI fell 0.77%. Japan's market and China's Shanghai Composite Index were both closed. The dollar was down 1.8% against the yen at ¥ 111.28, a sixteen-month low for the dollar against the Japanese currency. In other currencies, the euro was up 0.4% against the dollar at $1.1325, its highest since October. Spot gold in London gained 1.1% to $1218.18 a troy ounce, its highest level since May. In focus today, will likely be the Swedish Riskbank policy decision, with expectations for already negative rates to go even lower. “Markets may like cheap money for longer but they definitely don’t like the idea of a major market turn-down and another recession, hence discussion about need for US negative rates sapping risk appetite overnight. Note Janet Yellen testifying again today, although yesterday likely saw the most important information already discussed,” says Accendo Markets analysts.

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Volcker Rule likely delayed until after US presidential elections

Monday, 16 April 2012
Volcker Rule likely delayed until after US presidential elections As mandated by the Dodd-Frank Act, the Volcker Rule—named for its author, former Federal Reserve Chairman Paul Volcker—prohibits commercial banks from using their own capital to invest in hedge funds and private equity funds, unless such activity is deemed “systemically important” (that is, is related to market making, securitisation, hedging, and/or risk management) and is limited to a three-percent ownership stake. With nary a fan on either side of the pond, the much-maligned Volcker Rule could be ripe for modification—though any change is more likely to happen later than sooner. David Simons reports. http://www.ftseglobalmarkets.com/

As mandated by the Dodd-Frank Act, the Volcker Rule—named for its author, former Federal Reserve Chairman Paul Volcker—prohibits commercial banks from using their own capital to invest in hedge funds and private equity funds, unless such activity is deemed “systemically important” (that is, is related to market making, securitisation, hedging, and/or risk management) and is limited to a three-percent ownership stake. With nary a fan on either side of the pond, the much-maligned Volcker Rule could be ripe for modification—though any change is more likely to happen later than sooner. David Simons reports.

Regulators had hoped to have the Volcker Rule finalised by mid-July. However, ironing out the increasingly complex proposal—which includes newly added exemptions needed to placate the bill’s many opponents—will likely take much longer.

Retiring Massachusetts congressman Barney Frank, head of the House Financial Services Committee and co-author of the 2010 Dodd-Frank Act, has suggested something of a compromise; that regulators work towards completing a simplified version of the law by early September. "The agencies [have] tried to accommodate a variety of views on the implementation,” says Frank, “but the results reflected in the proposed rule are far too complex, and the final rules should be simplified significantly.”



Financial institutions may be struggling to regain public trust in the wake of the 2008 credit meltdown; however that has not stopped officials from taking aim at the proposed Volcker legislation during the SEC’s comment period which closed on February 13th. Speaking on behalf of the Securities Industry and Financial Markets Association (SIFMA), Tim Ryan, SIFMA’s president and chief executive officer called the proposed regulations “unworkable” and “not faithful to Congressional intent”. Moreover, Ryan says they will have negative consequences for US financial markets and the economy.

Echoing a common theme among Volcker critics, Ryan contends that the new law could result in drastically reduced market liquidity for investors, and make it more difficult for companies to raise capital. SIFMA’s five-part comment letter includes proposed modifications to proprietary trading restrictions and hedge fund/private-equity fund investment activity under Volcker, and expresses concern over Volcker’s impact on municipal securities and global securitisation.

Like almost everything else drafted by the Obama White House, the Volcker Rule has virtually no support in the GOP, and includes among its detractors Daniel Gallagher and Troy Paredes, the two Republican members of the Securities and Exchange Commission (SEC). Speaking at an Institute of International Bankers conference held in Washington last month, Gallagher suggested that regulators re-examine their initial efforts and, if necessary, “go back to the drawing board to make sure we regulate wisely, rather than just quickly.”

Not that all of the criticisms have had political overtones. An exception to the rule allowing US banks to continue trading treasuries and municipal bonds has drawn fire from state and local government agencies, which have demanded that they receive the same exemption. The Municipal Securities Rulemaking Board (MSRB), the US-based firm charged with protecting investor interest in the municipal-securities space, has urged regulators to expand the rule’s proprietary trading exemptions to include municipal-bond brokers. It’s an effort to avoid “bifurcation” within the municipal securities market, says MSRB, warning current exemptions “are not useful in the municipal securities market,” and unless modified will “prevent a free and open market from prevailing.”

Nor has Volcker venting been limited to the US. In a comment letter issued in February, the European Fund and Asset Management Association (EFAMA), the representative association for Europe’s investment-management community, argued that exemptions favouring US institutions pose a serious threat to European funds due to the potential shift in the balance of power. Accordingly, regulators should take the necessary steps to prevent any negative impact on liquidity and operational efficiency abroad, said the group.

Meanwhile, Oregon’s Democratic Senator Jeff Merkley, who along with Senator Carl Levin of Michigan helped draft some of the Volcker provisions, bristled at suggestions that substantial modifications would be required. If anything, said Merkley, the rule needs to be tougher, though not “as vague or complex as regulators are making it.” Also in favour of a stronger Volcker is former Citigroup chief executive officer John S Reed, who has argued that in its present form the rule “does not offer bright enough lines or provide strong enough penalties for violation."

Having made regulatory reform one of its chief priorities, the Obama administration is unlikely to cede any ground in the months leading up to the US presidential elections in November. Hence, even the most vocal of Volcker opponents admit that change is unlikely to happen until after the new Congress convenes in January of next year.

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