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ECB defends QE plan
Capital Markets
<p>Christian Noyer, a senior European Central Bank Council member, says that the quantitative easing program was "well calibrated" and doesn't need adjustment, reports Reuters. Analysts on the other hand are skeptical that the QE was implemented at the right time, and doesn't need some fine tuning. Looks like the game of "Central Bank wait-and-see" continues.<br /> Photo: jam_90s </p>
Charles Schwab continues ETF ascent
Asset Management
<p>Charles Schwab Corp. (NYSE: SCHW) was a late entrant to the exchange traded funds business, debuting its first ETFs six years ago, but the California-based brokerage giant is making up for lost time.</p> <p>At the end of the third quarter, ETF assets custodied at Schwab climbed 10 percent on a year-over-year basis to $237 billion, according to Schwab Third-Quarter Snapshot. Bond funds have been prolific asset gatherers this year with fixed income ETFs listed around the world now home to combined $500 billion in assets under management. Schwab is getting a piece of that action as more than half of the company's third-quarter ETF inflows went into bond funds with a third going into U.S. equity products, according to Schwab data.</p> <p>“RIA Clients captured 49% of the 12-month ETF flows, up from ...</p> <p>Full story available on<br /> Photo: Got Credit</p>
Dodgy bitcoin rustling DEA gets over 6 years
<p>Another Bitcoin case has come to a close and another name has been added to the crytopocurrency's hall of infamy: Carl Force. The dodgy DEA agent – whose nefarious misdealings during the Silk Road investigation were uncovered earlier this year – has been sentenced to 78 months in prison.</p> <p>Reuters reports that Force 'fessed up to charges of extortion, money laundering and obstruction of justice. U.S. District Judge Richard Seeborg said the scope of his betrayal was "breathtaking."</p> <p>Force was part of the team looking into Silk Road, the shady darknet drug marketplace that was shut down in October 2013,</p> <p>He told the judge:  "I'm sorry, I lost it and I don't understand a lot of it." When it comes to bitcoin he is probably not the only one. Which is why it's more than likely we see a few more scandals on the horizon.<br /> Photo: Vincent Diamante</p>
Fidelity ramps up expansion efforts in Shanghai
Asset Management
<p>Continuing its drive to expand in the mainland, Boston-based Fidelity announced the establishment of its wholly foreign-owned enterprise (WFOE) in Shanghai.</p> <p>The enterprise, according to Pionline, is meant to “facilitate future expansion plans in the world's second-largest economy,” adding that Mark Talbot, the firm’s Asia-Pacific ex-Japan managing director, said that “the WFOE could open the door for Fidelity to offer domestic investment capabilities to local institutional investors the firm already serves for their offshore investment needs.”<br /> “[It] provides us with another channel should we gain approval to offer additional capabilities in the future.”<br /> Fido already has a sizable presence in the region. Aside from its office in Beijing, the investment leviathan also has equity and bond analysts stationed in Shanghai, not to mention an over 350-strong ops team based in Dalian.<br /> Photo: David Almeida</p>
For those of us sick of the squash court, there are alternatives
Lifestyle, 4:01
<p>If Saturday morning soccer is getting old, or you are finding the humdrum of Wednesday night squash a little too repetitive, why not try something else?</p> <p>Business Insider has thrown together this intriguing list of sporty pastimes from around the world. Food for thought when organizing that next office team exercise. That said, it will take some convincing to get the finance department to clear that expense claim for half a dozen racing goats.<br /> Photo: Peter Grima</p>
Knight in shining armour: Alibaba's $3.5B bid for Youku Tudou
Venture Capital
<p>It looks like Alibaba could add another string to its bow with a bid to buy US-listed Youku Tudou. For the ailing Chinese video site the timing could not be better.</p> <p>Alibaba says it's offering to pay $26.60 per American depositary share to acquire the 82% it doesn't already own. The offer represents about a 30% premium on Youku Tudou's last closing price prior to the bid going public and values the company at $5.1 billion. Tech Crunch reports that total offering is worth $3.5 billion, when taking the cash already on Youku's book already into account.</p> <p>Its a welcome development for the one-time venture capital-backed Youku which, despite its dominance as China's answer to YouTube, has had a miserable loss-making run on US public markets. Its chairman and CEO Victor Koo has already pledged his shares in support of the deal.</p> <p>Alibaba already holds an 18% stake having made a strategic investment in May 2014. The decision to gobble up the rest may be fairly opportunistic but it's a large leap for Alibaba as it looks to spread its e-commerce empire to include digital content. Daniel Zhang, chief executive officer of Alibaba Group, said this:</p> <p>"We believe that the proposed transaction, with tighter integration of our resources, will help Youku achieve exciting growth in the years ahead by leveraging Alibaba's assets in living-room entertainment, e-commerce, advertising and data analytics. Digital products, especially video, are just as important as physical goods in e-commerce."</p> <p>With Baidu’s iQiyi and Tencent’s QQ video services already operating in this space its is yet another front on which the China's internet giants are battling fiercely for dominance.<br /> Photo: Hans Splinter</p> <p>&nbsp;</p>
Boaz Weinstein is on the warpath
Hedge Funds
<p>In the latest twist on the Saba Capital vs. Public Sector Pension Investment Board (PSP) saga, Saba’s Boaz Weinstein essentially told Forbes that he’d rather slash his wrists than give PSP a single cent:<br /> “PSP recklessly and maliciously attacked me and my firm. Read our motion to dismiss – it shows that we did absolutely nothing wrong and that is why we will not settle this suit for 1 cent.”<br /> The man has a point though. Taking a quick gander at PSP’s complaint, it seems that the Canadian pension may be making something out of nothing here:<br /> “to calculate the NAV of the Class A shares of the Fund in satisfaction of the pending requests to redeem those shares as of March 31, 2015, defendants deviated from their past practice by using for the first time a different method for valuing the MNI bonds in the Master Fund's portfolio, namely, they used a bids-wanted-in-competition ("BWIC") process that purportedly produced materially depressed bids reflecting a significant liquidity/blockage discount from the values previously assigned by defendants to the Master Fund's holdings of MNI Bonds.”<br /> Given that a) PSP’s supposedly one of Saba’s largest clients (and thus a large chunk of capital) and that b) Saba’s would be selling a big block of bonds into a depressed market, doesn’t this method sound – at least – a rational thing to do?</p> <p>Also, there’s this little nugget from Saba’s motion to dismiss which, if true, might prove to be more than just a pebble in the shoe for PSP:<br /> “the valuation process PSP describes in its complaint is entirely consistent with the governing documents—indeed, they required it under the circumstances. The Investment Manager was not obligated to continue using a valuation methodology under conditions in which it did not generate reasonable, reliable and accurate valuations for the bonds at issue. Saba turned to a methodology that did achieve such valuations. In any event, PSP cannot sue the Fund itself for breach of contract, because the governing documents demonstrate that the Fund plays no role whatsoever in the determination of the NAV.”<br /> This thing could go a long way though, so stay tuned.<br /> Photo: Andy Maguire</p>
No rate cut down under
Capital Markets
<p>The RBA minutes painted a pretty picture of Australia’s economy today, citing controlled inflation, a “rebalancing” away from the mining sector, and a surge in exports. More importantly, it telegraphed that the RBA currently is in no rush slash rates again. Still, the members seem to be pretty worried about “the key domestic sources of risk to financial stability,” the nation's local property markets:<br /> “Members further observed that the risks in commercial property and the property development sector were rising. Building approvals for new apartments remained very strong over 2015, even though rental markets appeared soft in some areas. The divergence between commercial property valuations and rents had widened further, with strong domestic and foreign investor interest for new and existing office buildings in particular, even though vacancy rates were quite high…The key domestic sources of risk to financial stability, and stability of the Australian economy more broadly, revolved around developments in local property markets. Members noted that growth in lending for housing had been steady over recent months and that there were some signs of an easing in the strong rate of increase in dwelling prices in Sydney, in particular, although trends had been more varied in a number of other cities.”<br /> AUD/USD climbed as high as $0.7276 following the release, however, swaps – still spooked by China – are still pricing in a 58% chance of a November rate cut.<br /> Photo: Michael McDonough</p>
What are the credit markets telling asset allocators?
Asset Management
<p>What Are The Credit Markets Telling Asset Allocators? by Toby Nangle, Columbia Threadneedle Investments</p> <p> Credit spreads can contain important information about investors’ expectations regarding risks to corporate solvency, and the economic cycle more generally.<br /> Rising credit spreads can also reveal strains in the financial system that are only later reflected in equity market valuations.<br /> We explain what the signals in the recent sell-off tell investors and what we are doing with this information in portfolio construction decisions.</p> <p>Credit spreads – the additional yield promised to investors over and above the yield offered by similar maturity government bonds – can contain important information about investors’ expectations regarding risks to corporate solvency, and the economic cycle more generally. Rising credit spreads can also reveal strains in the financial system that are only later reflected in equity market valuations. As such, it is worth asking what the substantial rise in Investment Grade and High Yield credit spreads over the past 18 months (figures 1 and 2) means for investors.</p> <p>Credit spreads compensate investors for a combination of underlying corporate credit risk and illiquidity risk. We have written before about a technique that is used by our investment team and the Bank of England to split credit spreads into these two components. Our analysis suggests that there has been neither an increase in theoretical liquidity risk premia embedded in credit spreads, nor an increase in empirical measures of illiquidity over the past 18 months.1 As such it would seem by process of elimination that the increase in credit spreads really is about an increase in perceived credit risk.</p> <p>The increase in credit spreads has come at a time when many energy companies have experienced a very marked deterioration in their prospects. Energy is an important part of the US high yield market, accounting for around 16% of the face value of the market.</p> <p>Figure 3 compares the distribution of spreads for US high yield non-energy company bonds at the end of July 2014 when the oil price stood at $98 a barrel and September 2015 by which time the oil price had fallen to c$45. We can see that substantial distress has been priced into energy company debt when we repeat the exercise for energy companies, the results of which are shown in Figure 4. This shows that we have moved from a situation where virtually no US energy company bonds traded with an option-adjusted spread above 1,500 basis points to one in which more than 15% of energy company bonds (by face value) traded with this risk premium.</p> <p>Importantly, the centre of gravity for both energy and non-energy high yield bonds has also shifted higher over the period, reflecting the fact that almost every sector of the market has been repriced (downwards). And interestingly, we find that the European high yield market has also been largely repriced despite its much lower exposure to energy (as shown in figure 2). It appears to be a victim of contagion in credit markets, and while we expect the default rate to spike higher in the US market,</p>
Daily Scan: Chinese shares rebound; Canada elects new PM
Capital Markets
<p>Updated throughout the day</p> <p>October 20</p> <p>Good evening everyone. A weird combo of stimulus bets, services sector growth, and margin lending increases helped Chinese shares out of their rut Tuesday with the Shanghai and Shenzhen Composites ending the session up 1.4% and 1.97%, respectively. Hong Kong however was a lot more subdued with both the Hang Seng and the Hang Seng China Enterprises Index tanking 0.37%. As for the rest:</p> <p> Nikkei 225: +0.42%<br /> Straits Times Index: +0.09%<br /> Kospi: +0.45%</p> <p>The European markets meanwhile seem to have taken a hit largely thanks to the China-fueled commodity rout. The FTSE 100 is currently down 0.1%, the DAX down 0.2%, and the CAC down 0.3%.</p> <p>Here’s what else you need to know:</p> <p>Canadian liberals make shock election win. Canada's Liberal leader Justin Trudeau rode a late surge to a stunning majority election victory on Monday, toppling Prime Minister Stephen Harper's Conservatives with a promise of change and returning a touch of glamor, youth, and charisma to Ottawa. Reuters</p> <p>Moody’s: Gulf states to run deficits in 2015-2016. They may be late for the “low oil is bad for the Gulf” train, but ratings agency Moody’s sure makes up for it with a little bit of shock and awe. The agency says that Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE – which all ran surpluses from 2010 to 2014 – are set to run a near 10% deficit in 2015 and 2016. Financial Times (paywall)</p> <p>Divided families reunite in North Korea. Hundreds of South Koreans have begun meeting family members in the North in a rare reunion event for families separated by the Korean War. The reunion, comprising a series of meetings over a week, is being held at a Mount Kumgang resort, at the border. BBC</p> <p>Chinese new home sales disappoint. Expecting a “golden September,” developers and investors were instead met with a broad drop in home prices in China’s tier-1 cities. Compared to August, primary home prices in Shanghai fell 0.9% in September, while Shenzhen and Guangzhou did far worse by tanking 3.5% and 5.6%, respectively. Beijing home prices continued to post gains, climbing 7.1% in September from the month before. SCMP (paywall)</p> <p>China to invest billions on British nuclear plant. In a landmark deal set to be announced on Wednesday, China is to take on a 33.5% share in the proposed $37 billion, French-led Hinkley Point nuclear power station in Somerset. The deal, which took months of negotiations with France’s EDF, is set to be Chinese Premier Xi Jinping’s “commercial centerpiece” during his visit this week. Financial Times (paywall)</p> <p>U.S. Treasury: Chinese capital outflows surged nearly 1000%. In its latest report to congress, the U.S. Treasury Department said that capital outflows from mainland China surged to $250 billion in the first half of the year, a massive jump from the $26 billion posted in the same period in 2014, adding that in July alone outflows may have reached $80 billion, and may have spiked as high as $200 billion in August. U.S. Treasury</p> <p>Deutsche accidentally paid hedge fund $6 billion.</p>