Sberbank chief hits out at ECB regulation - Financial Times

January 3, 2016 11:51 am

Sberbank chief hits out at ECB regulation

Martin Arnold in London

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The head of Russia’s biggest bank has criticised the European Central Bank for forcing its eurozone subsidiary to be supervised by officials in Frankfurt and making it raise more capital.

Herman Gref, chief executive of Sberbank, told the Financial Times in a recent interview that “European banking will have a very, very difficult period of time now” because “the regulatory policy is quite difficult”.

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“I can’t understand what they are doing, frankly,” said Mr Gref, a former Russian economics minister who has run Sberbank since 2007. The ECB declined to comment.

Sberbank’s Austrian subsidiary was subjected to a stress test by the ECB in 2015 after being added to the list of banks considered systemically significant along with that of Russia’s VTB and a number of other lenders. 

Sberbank and VTB had to inject an extra €240m and €200m into their Austrian units, respectively, after they both failed the ECB stress tests by falling below the minimum capital required under the adverse scenario.

“If you have the push from the market, a squeeze from the regulator and bad macroeconomic conditions, you know, it does affect your health quite badly,” said Mr Gref, arguing that Europe’s tough regulatory stance was handing US banks a big advantage.

“The banking system is in its most dramatic period of its history,” he said. “If you look into the future of the European banks, we think it will be quite a difficult one. American banks have quite a different macroeconomic situation and their regulation is different.”

Sberbank, which is listed in Moscow and London but still majority owned by the Russian government, bought Volksbanken International, a network of branches in eastern Europe including Hungary and Croatia, as part of an acquisition spree in 2012. 

It is now slimming down in the region and recently sold its Slovakian operations.

Russia’s biggest lender with assets of Rbs25.9tn ($353bn) has faced “three black swans” this year, according to Mr Gref, a noted proponent of liberal market reforms who was a minister during Vladimir Putin’s first two terms as Russian president.

He said Russia’s three main problems were the drop in the oil price, western sanctions and the slow pace of structural reform. 

The rouble fell to its lowest level in more than a year last week as Russians faced a second year of recession in 2016.

But Mr Gref said interest rates and inflation were falling and Sberbank has started to increase its lending to corporate clients. 

The bank, which was hit by international sanctions, suffered a sharp outflow of deposits when the Ukraine crisis first erupted two years ago but that has reversed recently as customers of weaker Russian banks moved money to bigger rivals, he said.

In a meeting with investors in London in November, Mr Gref lowered its 2018 profitability and growth targets. But investors focused on his promise to beef up cost-cutting plans and shares in the bank are up 84 per cent this year.

The main reason that the ECB gave for taking over supervision of Sberbank Austria was its “significant cross-border assets”. 

But Mr Gref argued that it should have been excluded as it has only €12bn of assets — below the €30bn threshold that the ECB uses when deciding which banks to supervise.

“We had two months of discussions with them and they were very tough,” he said. “We are a small bank in Europe . . . but they still made us a systemically important bank that deserves this check and all the buffers were applied.”

S&P 500 sees first annual loss since 2008 - Financial Times

Last updated: December 31, 2015 10:47 pm

S&P 500 sees first annual loss since 2008

Eric Platt and Michael Hunter

©Getty

US and European equities slid on the final trading day of 2015 in thin and choppy trade, with the benchmark US equity index closing out the year with a loss after three years of double-digit gains.

The S&P 500 declined 0.9 per cent to 2,044 on Thursday, as selling pressures materialised in the final hour of the New York trading day. The index finished 2015 with a loss of 0.7 per cent, its worst annual performance since the financial crisis in 2008 when it declined 38.5 per cent.

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The blue-chip Dow Jones Industrial Average fell 1 per cent on Thursday to 17,425; since the year began the index has declined 2.2 per cent.

Volatile crude prices and an unexpected jump in initial jobless claims in the US weighed on sentiment.

Market performance for 2015 in figures

With the final whistle blown on 2015 trading, here is the year’s scorecard for markets.

Thursday’s figures from the US Department of Labor showed first-time claims for unemployment benefits had risen by 20,000 to 287,000 — the highest level since July. Economists cautioned that the rise could have been caused by difficulties in seasonally adjusting the data, instead of weakness in the labour market.

“For now we think that this latest jump up in claims represents noise in the data rather than a sudden deterioration in the underlying trend,” JPMorgan’s Daniel Silver said. “It does look like the trend in claims has softened somewhat since October.”

Oil’s steep slide has overshadowed markets during the year, stoking concern not just about its immediate implications for stocks in the energy sector, but also about the outlook for inflation in developed markets. 

Brent crude, the international marker, reversed early losses on Thursday to settle 2.3 per cent higher at $37.28 a barrel after a report published midday showed US crude oil production falling in October. West Texas Intermediate climbed 1.2 per cent to $37.04.

For the year, Brent has slid 35 per cent — on top of a 48 per cent decline in 2014. WTI has closed the year roughly 30 per cent below its start.

European oil majors were left exposed as bourses closed for the year before the midday bounce in crude prices. Shares in Royal Dutch Shell fell 1.2 per cent on Thursday. BP was down 0.3 cent, while France’s Total slipped 0.7 per cent. 

Technology and consumer companies were among the steepest decliners in the US on Thursday. Shares of the Gap, Apple and Amazon each fell more than 1 per cent.

In London the resource-heavy FTSE 100 closed 0.5 per cent lower, which left its decline for the calendar year at 4.9 per cent, underperforming its European peers, which largely remain positive. 

The CAC 40 in Paris fell 0.9 per cent, trimming its wider gain since January to 9.5 per cent. Frankfurt’s Xetra Dax 30 remained closed for the New Year’s eve public holiday, leaving it up 9.6 per cent for 2015. 

The Europe-wide Euro Stoxx 600 slid 0.5 per cent. 

On currency markets the dollar was broadly stronger, with the dollar index up 0.4 per cent on the day at 98.641. 

The euro’s brisk showing in late December left its rally looking tired. The shared currency fell 0.6 per cent to $1.0863, while the pound declined 0.5 per cent to $1.4743. 

In Asia the tone of the final session of the year was steady, with China’s main indices mixed. 

The Shanghai Composite fell 0.9 per cent, trimming its gain for 2015 to 9.4 per cent after a year of volatility marked by a sharp slide in August and then a steady recovery from lows. Hong Kong’s Hang Seng ticked up 0.2 per cent, leaving it down 7 per cent since January.

Forecasting the world in 2016 - Financial Times

December 30, 2015 5:49 pm

Forecasting the world in 2016

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FT writers indulge in a feast of predictions — from the price of oil to Vladimir Putin’s next moves

©Sarah Hanson

A

New Year beckons and the Financial Times once more indulges in the ritual of forecasting the 12 months ahead. Our experts and commentators set caution to one side and predict what will happen in everything from the US presidential election to the Euro 2016 football tournament.

A quick judgment on how they did last year. Ed Crooks correctly forecast that the oil price had further to fall, a brave claim at the end of a year in which it had already halved. Martin Wolf said the ECB would adopt full quantitative easing, which it did. Clive Cookson rightly opined that Ebola would be eliminated in west Africa by the close of 2015. Gideon Rachman said Vladimir Putin would annexe no further territory in Ukraine and Europe. Not many at the end of 2014 were saying that.

We got one wrong. Jonathan Ford was among many who assumed the British general election would end in a hung parliament (he went so far as to predict a national government). Otherwise, the fault last year lay not with the answers we gave but the questions we failed to ask. We did not foresee a surge of Isis-sponsored terrorism in France; that Russia would take military action in Syria; and that the migrant crisis would become a grave threat to the EU. In 2016 too, events will happen that are as yet beyond our imagination. 
James Blitz

Will Hillary Clinton win the US presidential election?

©Sarah Hanson

Yes. It will be a rollercoaster election — and the nastiest in memory. Mrs Clinton will be pilloried by her Republican opponent, Ted Cruz, for her character flaws and weaknesses in the face of America’s enemies. A large chunk of the electorate will hold up the Clinton name as an emblem of all that is wrong — and corrupt — about today’s America. But elections are still won in the centre, or what is left of it, and Mr Cruz will be too far to the right of the median voter to make it to the White House. Despite uncomfortably close polls, Mrs Clinton will win the electoral college by a landslide. Democrats will take back the Senate. But she will start her term in a very polarised Washington. There will be no honeymoon. 
Edward Luce

Will Britain leave the EU in the referendum expected in 2016?

In depth

Britain’s EU referendum

David Cameron is under pressure from all sides and faces a delicate balancing act in attempting to renegotiate an acceptable UK membership settlement with the EU

Further reading

No. Britain will vote to stay in the European Union. Not with any sense of enthusiasm or excitement but because the innate common sense of British voters ultimately will prevail. Forget the technical arguments about whether David Cameron manages to secure a good deal in his renegotiation or whether the UK gets back its contribution to Brussels in increased investment and trade. Consider instead the protagonists on both sides. In the end voters will choose between the calm logic of former prime minister John Major and the populism of Ukip’s Nigel Farage. My money is on Mr Major. If I am wrong, Britain faces truly turbulent times.
Philip Stephens

Will Bashar al-Assad still be in power 12 months from now?

Yes. Assad will remain nominally president of Syria in 2016, even if in reality he has already been reduced to the status of the biggest warlord rather than the ruler of a state. Militarily, he has been bolstered by the Russian military intervention that has targeted his rebel enemies. Politically, a US-Russian plan agreed in recent weeks envisages an 18-month transition and is fraught with risks. Even in the event that a peace process gains traction, Mr Assad will do his best to stall and hold on to his seat of power in Damascus.
Roula Khalaf

Will the Bank of England finally raise interest rates next year?

No. The Bank of England will flirt with rate rises through much of 2016, it will tease, but in the end it will not put its money where its mouth is. It has good reasons to avoid a decision. Inflation will lift off from zero very slowly, wage growth is weak; oil prices are weaker; and deficit reduction will prevent a boom. The BoE is keen to try its new powers to limit credit first before thinking about interest rates. The consequences of a spell of higher than target inflation are also limited. Later in the year, the BoE might decide to act, but even if it did, it would not make much difference. As far as interest rates are concerned, Britain is in what governor Mark Carney says is a “low for long” world for some time longer than 2016. 
Chris Giles

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Will at least one member of the group of 20 leading economies request an IMF assistance programme in 2016?

Yes. Within the G20, no developed member will need a rescue. The only conceivable candidate is Italy, given its high public debt. But the European Central Bank’s support, including quantitative easing, protects it. 

The G20 also contains 10 emerging economies. Some are being buffeted by sharp falls in commodity prices (Argentina, Russia and Saudi Arabia are prime examples). Some run significant current account deficits (Saudi Arabia again springs to mind, along with Brazil and South Africa). Both India and South Africa have fairly large fiscal deficits. Others, such as Brazil, have a smaller deficit but a sizeable burden of public debt. The countries that tick all the boxes for instability are Argentina, South Africa and Brazil. Under stress, those countries have recently changed finance ministers. Argentina has a new government that promises a new approach. The IMF stands ready. Will at least one of these countries call upon it? It seems likely.
Martin Wolf

Will Brazil’s Dilma Rousseff be impeached before the Olympic Games begin in Rio?

©Sarah Hanson

No. But it will be a close-run thing. For now, Ms Rousseff probably has enough support in Congress to stop the process. But the more time passes, the worse the country’s recession and the weaker her political support becomes. Impeachment proceedings, even if the House of Representatives votes for them to go ahead, will probably only begin on February 10. Assuming the process’s complex sequencing then takes its full 180 days, Ms Rousseff could be impeached in mid-August. That would be after the Olympics officially starts on August 5 — phew — but, still in time for the high-jump final on August 16.
John Paul Rathbone

Will Angela Merkel still be German chancellor at the end of the year?

No. Although 2015 ended with Ms Merkel receiving a standing ovation at the conference of her ruling Christian Democratic Party (CDU), 2016 is likely to see the end of her long reign as chancellor. That ovation looked like conclusive proof that her job is safe — despite the pressures caused by the arrival of about 1m refugees in Germany in 2015. But Ms Merkel has now promised to reduce refugee flows next year. This is likely to prove undeliverable as desperate migrants, aided by people smugglers, continue to flow in. 

Admiration for the chancellor’s courage and moral leadership will give way to uncertainty and discontent. The cracking point could be a revolt from local governments, who pronounce themselves unable to cope with the numbers. That, in turn, would finally provoke a challenge to the chancellor from within the CDU, making her position untenable.
Gideon Rachman

Who will win the Euro 2016 football tournament?

Belgium, the best team in the world, according to recent Fifa rankings. That arcane coefficient overstates Belgium’s quality, but not by an exorbitant margin. Through an advanced system of scouting and coaching — and a liberal naturalisation policy for immigrants — this small nation under a rickety state has produced a torrent of elite players. Belgium can field an attacking trio of Eden Hazard, Kevin de Bruyne and Romelu Lukaku, Premier League stars whose combined market value would touch £150m. The German squad is more seasoned, Spain’s more cohesive, but Belgium lacks little in sheer technical quality. With France playing host, there is also something akin to home advantage. 
Janan Ganesh

Will China devalue the Renminbi significantly next year?

In depth

China tremors

China has been roiling global markets all summer as its authoritarian leaders try to stop a huge stock bubble from bursting and its slowing economy from stalling

Yes. China has good reasons to want to keep the renminbi stable against the US dollar in 2016 — a strong merchandise trade surplus, massive foreign exchange reserves and a desire to show the world that the “redback” is a worthy reserve currency. But the renminbi is still likely to depreciate to about Rmb7 to the US dollar, down from about Rmb6.48 currently. The flagging Chinese economy is likely to need at least two interest rate cuts next year while the US dollar is supported by continued Fed tightening. That should keep capital outflows from China at a high level, putting downward pressure on the currency. The renminbi’s trajectory is unlikely to be smooth. This may well be the most volatile year ever for the Chinese currency.
James Kynge

Will Jeremy Corbyn still lead Britain’s Labour party a year from now?

Yes, and for several reasons. The first is that a majority of the party, if not its MPs, want him to. Despite Labour’s weak showing in the opinion polls, the rank-and-file seem happy with the direction the party is taking. Then, there is the congenital loyalty of Labour MPs. Unlike the Tories, the party has never excelled at assassinations. And in any case if, as now seems likely, Mr Corbyn tweaks the party’s unclear leadership election rules to ensure that the incumbent is on the ballot come what may, any challenge would be quixotic at best. It took the full rhetorical force of Ernest Bevin to hound Labour’s last pacifist leader, George Lansbury, into retirement in 1935 when the then union boss persuaded the party to stand up to fascism. Today’s Labour is still waiting for its Bevin. They seem unlikely to show up next year.
Jonathan Ford

Will Abenomics fail in 2016?

No. The record of Abenomics is mixed, but on balance, it has done Japan’s economy more good than harm. That will continue in 2016. True, the central goal — to get inflation to 2 per cent — has been missed. Because of the oil price collapse, inflation, as normally measured, is still hovering around zero. Shinzo Abe’s government compounded the problem by prematurely raising consumption tax, taking money out of people’s pockets just when it wanted them to spend. Yet the broader reflationary goals of Abenomics are working. Stripped of energy prices, inflation is about 1 per cent. Public debt has stopped rising as a percentage of nominal output. Japan’s companies are making record profits. Mr Abe’s problem is that he has pledged to raise the consumption tax again in 2017. That is when the crunch could come. 
David Pilling

Will Russian athletes compete in the 2016 Olympics?

Yes. There is no political will to punish Russia for resurrecting the mass doping of the Soviet era. Last month, it became the first country in history to be suspended indefinitely from athletic competition until it can prove it is clean. But Moscow and the west are keen to minimise the embarrassment of an independent report that listed some of the worst abuses the sport has seen. To compete in Rio, Russia will have to fire any officials that have been part of doping programmes, resolve all pending disciplinary cases, investigate its doping culture and demonstrate that it has changed its ways. The Russians say this will take three months.
Malcolm Moore

Will sales of cars with diesel engines fall in Europe in 2016?

In depth

Volkswagen emissions scandal

The German carmaker is engulfed in the worst scandal in its 78-year history after it admitted to manipulating emissions test data on its diesel vehicles in the US and Europe. The deepening crisis has wiped billions of euros off the company’s shares and rocked the European car industry.

All the news and analysis

Yes. European car buyers were already growing less enamoured with diesel engines, and the autumn revelation that Volkswagen had installed software to cheat on emissions tests in 11m diesel vehicles worldwide will exacerbate the decline. Diesel’s penetration among new European cars peaked at 55 per cent in 2010 and has been dropping fast in France, where subsidies have been reduced and scepticism about the environmental impact has risen. VW is a particularly big maker of diesel engines and its sales dropped more than 20 per cent in key markets in November after the scandal. In 2016, diesel’s share will shrink so fast that it will outweigh the growth in the overall car market.
Brooke Masters

Will Brent crude end the year over $50?

Yes. The oil market in 2015 was brutal for anyone trusting in a rapid rebound from the previous year’s crash. The tenacity of the US shale industry and surges in output from Iraq and Saudi Arabia meant the world was awash with crude. Next year, the lifting of sanctions on Iran could bring yet more oil to the market. Still, the financial torments of oil producers worldwide are forcing them to cancel projects and cut drilling programmes, curbing future supplies, and the impact will become apparent. Brent crude below $50 per barrel is too low for the industry to make the investments needed to meet growing global demand. Providing the world economy does not skid into recession, this looks like being the year that the oil price heads back to more sustainable levels.
Ed Crooks

Will George Osborne scrap tax relief for pensions in his March Budget?

Yes. The UK chancellor put off making a decision on the matter at November’s Autumn Statement. But he sent a strong signal that far reaching change is coming. Upfront tax relief on pension contributions currently costs the exchequer nearly £50bn a year. A mooted “Pensions Isa” would slash this bill as workers would accumulate savings out of their taxed income instead, with the guarantee of withdrawing it tax-free upon retirement. The change would take years to implement. Taxpayers could prepare by making maximum contributions into pensions before the end of the tax year in April. 
Claer Barrett

Will 2016 be the year virtual reality finally takes off?

No. But it will be the year in which many experience for the first time what may one day be the most transformative of all technologies. The first view through a VR headset — the chunky goggles used to view alternative 3D versions of reality — is, for most, unforgettable. But great demos don’t make an industry. While VR games are starting to appear, there is a shortage of content for the devices. And the applications that will push it into the mainstream — like visiting a doctor or holding an office meeting in virtual space — are more dream than reality. Still, the technology is set to captivate the public imagination. Physical reality will never seem the same again.
Richard Waters

Uber Is About to Make Traveling Much Easier - Business Insider

Uber Is About to Make Traveling Much Easier

Posted: 30 Dec 2015 12:07 PM PST

Uber isn’t only about booking cars. It looks like it’s thinking of becoming a travel agent.
On December 24, Uber secured a new patent that could be used to plan trips.
Called “Uber Travel” in the images, it looks like a normal flight search like you would see on Expedia, but it adds Uber cars into the mix.
A traveler could input their start location, date, and time, alongside a destination, and Uber would recommend an itinerary for them. The “magic” as Uber calls it in the diagram is being able to also incorporate plans for transportation.
It’s a deviation from how conventional travel is typically booked segment by segment now. You start with booking your flight, then choose a hotel, then eventually a rental car or some other transit.
Uber’s idea, according to the patent, is to take the trip information and show a recommended flight, hotel, and the cost of an Uber to get you from point A to point B all-in-one.
In the whole process, Uber is acting as the facilitator, much like a Kayak.com, rather than the provider. These deals will probably be orchestrated by a team overseen by the patent’s author, Howard Jaffe, who is the head of Uber’s global procurement and supply chain.
In the patent, Uber states that it will tap into the network of airlines, looking at things like the planes’ on-time performance and an individual’s preference for aisle and window seats. It will also work with traditional hotels and “shared-economy systems” that allow people to rent out their apartments, likely Airbnb.
 US PTOThe patent also covers a way to make travel so much easier.

Once Uber knows your scheduled flight, the patented system is designed to know when a flight actually lands at the airport so it can start calculating when you should call an Uber, taking into account customs and baggage times.
“The information may include a location at the airport where the user can be picked up in connection with receiving the on-demand transportation service, and a timing indicator to indicate when the user should make a request to receive the on-demand transportation service based on a real-time determination of a number of available service providers in a vicinity of the airport,” the patent states.
Essentially, Uber is taking the guesswork out of when to call for a ride when a traveler lands by pre-emptively notifying them when they should.
It’s an interesting move for a company that hasn’t been welcomed by airports with open arms. Many airports still forbid Uber for operating on their property, often levying heavy fines on the drivers themselves who respond to pick-up requests. Uber has been working hard to change this, and in early December, Uber finally was granted permission to operate at Las Vegas’ McCarran International Airport.
Uber declined to comment.
This article originally appeared on Business Insider.

Goodbye, 2015, the Year Before the Campaign Storm - New York Times

Goodbye, 2015, the Year Before the Campaign Storm  By MAGGIE HABERMAN

Good Wednesday morning. As we will not be publishing on New Year’s Eve or New Year’s Day, we have come to the last newsletter of 2015. After several debates and months on the trail, the candidates have only a few weeks before the actual voting begins, time enough for a fond look back and a renewed focus on the frenzied weeks ahead. This year, there were 17 Republican presidential candidates, six Democrats, and a race that was upended by the presence of one flamboyant New York billionaire, Donald J. Trump. As 2015 draws to a close, there are 12 Republican candidates and just three Democrats. And Mr. Trump remains, as the race heads into a new, uglier phase of engagement among the candidates, particularly among the Republicans. The race on the Republican side has hinged on fears of an increase in immigration, as well of the terrorist threat posed by the Islamic State. But undergirding it all is the fear of a dwindling working class and an anger over the financial crisis of 2008. A sense that no one was properly punished has pervaded. That is also true among the Democratic base, which has given Senator Bernie Sanders of Vermont a lift in the race against Hillary Clinton, who has led national polls for months. Mrs. Clinton has tried to forge lasting connections with Hispanic voters and to re-establish old ones with black voters, whose support she will need in the primaries beyond the first two contests in the heavily white states of Iowa and New Hampshire, as well as in a general election. As January draws near, the Republican candidates competing in the establishment lane are taking aim at one another. With four weeks until the Iowa caucuses and five until the New Hampshire primary, there is little time to spare. The candidates need to draw contrasts and pick up scraps of support, and they are doing their best to paint themselves as the best choice. At the same time, Mr. Trump is vowing to spend millions on television ads in the early states in the final weeks. In reality, that is on a par with what others are already spending. Mr. Trump has only recently tried to mobilize voters and use the Republican National Committee voter file to establish which supporters to turn out. Because, at the end of the day, it all comes down to turnout.

ETFs to play main role in the next crisis - Financial Times

http://www.ft.com/intl/cms/s/2/53b5b728-a9ae-11e5-9700-2b669a5aeb83.html#axzz3vi7Yz816

The next financial crisis will be played out in indexes and exchange traded funds. That is inevitable given the huge share that ETFs now take of investor fund flows, and their popularity as hedge fund trading vehicles. 

What is less clear, and deeply controversial, is whether the structure of ETFs will itself contribute to the next crisis, or even cause it. Regulators, worried by past incidents when untested financial innovations helped exacerbate financial crises, are worried that it could. 

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ETF providers indignantly counter that they make the market more liquid, and less prone to sudden stops. Indeed, they complain that well-intentioned regulations exacerbate a problem they were meant to cure. 

The scale of the ETF industry is not in question. They now hold more than $3tn in assets. But this raises the question of whether they have come to lead the market rather than follow it. This operates at two levels. First, there is a concern that the power of the indexes distorts markets over time, and second, there is the possibility that the structure of ETFs and index funds worsens market shocks when they happen.

Indexes’ influence spreads to virtually all institutionally managed funds. Benchmarking by the consultants on whom institutions rely when choosing fund managers is so widespread, that active managers have no choice but to watch the index they are compared to very closely, and are obliged to follow any major changes in its composition. 

Examples are easy to come by. When the Russell indices — highly popular among US fund managers — are updated each year, they often drive the heaviest trading of the year. In June this year, Chinese A-shares peaked and began to fall shortly after MSCI, the most important index provider for emerging markets, decided to delay including them in its flagship index. This came as a surprise. Showing the importance of indexers, Chinese authorities had lobbied hard for inclusion, as this would have driven capital into the A-shares market. Many investors at the time said that the subsequent sell-off could in part be attributed to the knock to confidence that came with MSCI’s decision. 

Indexers do their best to limit their impact on the market. Russell makes its methodology very public, so investors can see weeks in advance what changes are likely to its indices. MSCI conducts public consultations.

But while indexing and benchmarking remain so prevalent, the problem of overpowerful indexes seems impossible to avoid. It can merely be mitigated. For passive investors, rules for indexes must remain as clear as possible. For active managers, the solution may be to change benchmarking. Rather than looking at past performance, which does not predict the future, consultants could look at investors’ past behaviour, or rate them on their degree of style discipline. If clients show that they are more interested in highly concentrated funds taking contrarian positions, and not in funds that merely shadow an index, then the industry would adjust to meet the demand, and the systemic problems caused by indexes should reduce.

Then there is the issue of market structure. Two incidents in 2015 raised concern. First, there was August 24, when US share prices gapped downwards at the opening in New York, and ETF prices were not available for a while. Second, in December, a gradual sell-off in high-yield bonds turned into a rout for ETFs holding high-yield bonds.

FT series

Market Shocks 2015

Was this due to liquidity mismatches? It is a fair question. ETFs only offer prices throughout the trading day because market makers trade to ensure that there is no gap between the market price and the underlying price of the securities in the index they track, so this has to be a risk — especially when, as in the case of high-yield bonds, the underlying security is fundamentally less liquid.

There are two theories. One, held by the industry, is that the problems were driven if anything by regulations. Mandatory trading pauses following the 2010 “flash crash” made it harder for ETF managers to get a handle on the underlying price of their securities, and created problems. The other theory: there is indeed a mismatch.

Debate is healthy. The echoes of credit derivatives, which in 2008 helped to turn a serious housing downturn into a near-collapse of the world financial system, are clear enough. Without a major market disruption — and 2015’s turbulence barely ranks compared with the events of 2008 — it is hard to test whether new financial instruments will work as intended when under stress. Better for everyone, including ETF providers, to err on the side of caution.

john.authers@ft.com

5 Reasons Why the Fed’s Rate Hike Is a Good Thing - TIME

5 Reasons Why the Fed’s Rate Hike Is a Good Thing Posted: 16 Dec 2015 11:40 AM PST Investors will complain. Markets will react. But America’s central bankers are doing the right thing to raise interest rates Wednesday. Here’s why. There’s nothing more the central bank can do to goose the real economy. This is the fundamental thing to understand: The Fed is extremely powerful, but it can only stimulate demand; it can’t create it out of thin air. The reason that the Fed’s program of quantitative easing and low rates has done so much for asset prices — which are near record highs in many categories — but much less for the well-being of Main Street consumers is simple: Throwing a lot of money into financial markets and encouraging people to take on debt will, by definition, raise asset prices. Putting more money and leverage into the system always does that. But the Fed can’t create new inventions that result in real world jobs, or factories that employ people here in the U.S., or more skilled workers to populate them. That only happens at the ground level. The Fed isn’t in charge of that – politicians and businesspeople are – and we need to cut the morphine drip of easy money that has made us believe it could be otherwise. It’s possible the markets will correct after the rate hike. But that’s not a bad thing either. The last time the Fed hiked interest rates, back in 2006, Main Street was actually doing better than Wall Street (as measured by workforce participation, compared to a weighed index of asset prices in major markets). This time around, there’s never been a bigger divide. Wall Street is doing better than ever before in history, while Main Street’s workforce participation is as low as it’s been since the 1970s. Eventually, all things revert to the mean. If the Fed were to delay a rate hike and let the market bubble continue to brew — and the disconnection between finance and the real economy to grow — it would only mean more pain for all of us later. Rates are going to rise slowly. That means there’s still a chance to have a real conversation about tax reform that would favor equity over debt. One of the reasons that we still have a record amount of debt in the global economic system ($57 trillion more than before the financial crisis) is because we have a tax code that subsidizes it. We need a tax code that rewards savers rather than borrowers. That will mean giving up deductions for interest payments on McMansions. But it would also mean a financial system that isn’t structurally set up to reward risk and brew dangerous bubbles every five to 15 years. As interest rates go up, debt will get more expensive and painful, and nobody will want to talk about taking away tax deductions for it. The time to have the tax reform conversation is now. The Fed’s indication that rates will rise slowly is giving us our last, best breathing room to reform our tax system. A more prolonged period of low interest rates will make it even harder for many of us to retire. As a new S&P study shows, multiple years of low rates means that anyone who has had their money in fixed income products now needs a seven figure 401(k) to retire, assuming even a modest yearly payout. Savers have given up trillions of dollars in interest payments, while stock prices (buoyed by the Fed rather than fundamentals) have soared. This isn’t desirable — or sustainable. Corporate America needs to figure out how to create real, sustainable economic growth. A rate hike that officially ends the sugar high of easy money and the easy stock spikes that come with it is just the kick in the pants that the private sector needs. Nearly every smart investor I know thinks that equity prices have been disconnected from the real world for some time now. Yet when CEOs can just take on low interest debt and do buybacks to kick up their share prices — as has been the case thanks to the last few years of monetary policy — there is little impetus to invest in the Next New Thing, let alone workers. That’s why you have lower research and development spending relative to stock buybacks as well as stagnant wages. This isn’t a sustainable paradigm. We need a private sector focused on business models that create real economic growth, not goosing share prices. None of this is to say that Janet Yellen and the other Fed governors haven’t done the right thing by trying to buoy the real economy in lieu of fiscal stimulus from Congress or more responsible corporate governance (meaning a focus on the long term rather than the quarter) in the private sector. But they can’t do any more to help. The party has been over for some time. It’s time to turn off the music.

What Russia is up to in Ukraine - Economist

http://www.economist.com/blogs/economist-explains/2015/02/economist-explains-10?fsrc=scn/tw/te/bl/ed/whatrussiaisuptoinukraine

MANY Westerners find Vladimir Putin’s war in Ukraine mystifying. It has brought Russia economic woe (sanctions and a shattered credit rating) and international isolation. Why fight so hard for a slice of another country’s rust-belt? Is it part of a sinister strategy to divide and weaken the West, an irrational outbreak of paranoia about an imagined outside threat to Russia, or a desperate attempt to distract domestic opinion from the regime’s political and economic failure?

The Kremlin has annexed the Crimean peninsula (the site of an important Russian naval base) and stoked a separatist rebellion in two of Ukraine’s easternmost provinces, Lugansk and Donetsk. The rebels, with strong Russian military and intelligence backing, have proclaimed “people’s republics” there and have continued to advance into the rest of Ukraine, in defiance of a ceasefire agreed in Minsk in September. Ukraine is losing the war and is desperate for financial and military help from the West. America is mulling arms deliveries, but holding back to see if a last-ditch Franco-German diplomatic deal can bring a truce. Few outside Russia believe the Kremlin’s justification for the war. Russians in Ukraine were not being persecuted. The government in Kiev is not “fascist” (extreme-right parties fare worse in Ukraine than they do in Western Europe). Far from menacing Russia, NATO countries have slashed defence spending, just as Russia is rearming. The three main theories about Vladimir Putin’s motivations could be summed up as “bad”, “mad” or “sad”.

Russian timeline: The road to 2015

Advocates of the “bad” theory think that Russia is exploiting, and accentuating, Western weakness and over-stretch. Europe is divided, America distracted. This is a good time to re-establish a soft hegemony, based on energy, bribery, propaganda and subversion, over a large chunk of the former Soviet empire. The supporters of the “mad” theory think this is too complacent. Mr Putin, like many autocrats before him, has concocted a toxic ideological cocktail of ethno-nationalism, Soviet nostalgia and Russian imperialism, and drunk it. He is countering an invented Western threat with increasing recklessness. The “sad” camp thinks that the fundamental point about Russia is its weakness. A stagnant economy, endemic corruption, crumbling infrastructure and disillusion from the elite to the grassroots are insoluble problems for the Russian leader. He came to power on a surge of oil and gas revenues but as that tide runs out, he is stranded. Propaganda and sabre-rattling are no substitute for what matters: economic strength. The West needs to be firm and patient, but not to exaggerate the threat from Russia.

These approaches are not mutually exclusive: all three have elements of truth. They have one big thing in common. They offer little hope to Ukraine. Whether Mr Putin is cynically destabilising the country to humiliate the West, or because he truly fears that it might one day be a European-style success story, or simply to feed the mob at home, does not greatly matter for the families of the thousands of dead, or for the millions who are now facing poverty and misery.

Online Buying Booms as Christmas Shoppers Avoid Stores - Fortune

Online Buying Booms as Christmas Shoppers Avoid Stores

Posted: 24 Dec 2015 08:18 AM PST

In the final weekend before Christmas, a growing number of Americans went online rather than to stores to wrap up their shopping.
According to RetailNext data cited by the Wall Street Journal, sales at physical stores fell 6.7% over the most recent weekend, while traffic declined 10.4% compared to a year earlier. RetailNext tracks shopper traffic via software it provides clients.
These results are worrisome for brick-and-mortar retailers and malls given that the weather almost everywhere in the United States last weekend was conducive to shopping, with few disruptions from snow or ice.
And therefore, the past weekend’s trends are yet another signal this holiday season that show how e-commerce is hitting an inflection point in how Americans shop: A NRF survey last month found more shoppers (103 million) went online than to stores (102 million) over the Thanksgiving/Black Friday weekend.
This past weekend included Super Saturday, a day that year in, year out, runs neck and neck with Black Friday as the top shopping day of the year. So it was key to retailers looking for improve what is shaping up to be a so-so holiday season, in part because of record-setting warm weather.
The National Retail Federation said last week sales have been below expectations so far but said it had to do with the lower prices retailers are charging. The NRF still expects total sales to be up 3.7% for the season. (Next week is a big shopping too, so retailers, buck up- there is still time.)
Meanwhile, e-commerce has continued to soar this season. On Cyber Monday, shoppers spent $3 billion.
And on Monday this week, online sales rose 27% on a day that had until this year never really been a major online shopping day, according to Slice Intelligence.
Many retailers like Walmart, Target and Macy’s have spent billions in the last few years to raise their e-commerce game, to some success.
But again, Amazon has been dominant: Slice said Amazon accounted for 55% of all online sales on Monday.
Traditional stores like to say that 90% of sales still happen in store when seeking solace from the e-commerce boom. But with each passing holiday season, that will become less true.
This article originally appeared on Fortune.com.