The Daily Prophet: What Does CME Know That Jamie Dimon Doesn't?

Connecting the dots in global markets.

Bitcoin, the cryptocurrency that JPMorgan's Jamie Dimon called "a fraud" and BlackRock's Larry Fink said was mostly used by criminals, is about to go legit. CME Group, the owner of the world’s largest exchange, said it plans to introduce bitcoin futures by the end of the year, only a month after dismissing such a plan. While the growing legion of cryptocurrency backers will point to this news as a seminal moment in the industry's relatively short history, some say it underscores what is wrong with Wall Street.

At its core, a functioning derivatives market could help professional traders and investors access the incredible volatility inherent in bitcoin without having to trade on unfamiliar venues that may risk anti-money laundering and know-your-customer rules, according to Bloomberg News' Nick Baker and Matthew Leising. What rubs some people the wrong away, though, is that an august markets operator such as the CME is giving bitcoin its imprimatur despite the fact that cryptocurrencies lack any regulation. To them, CME's decision is less about fostering a budding market than about making a quick buck in a manner reminiscent of the subprime mortgage frenzy that facilitated the last financial crisis.



"Placing a 'futures' market wrapper on an unregulated market to generate volume seems like a profit-oriented move," Joe Saluzzi, a partner at Themis Trading, said on his Twitter feed. "Remember the CDO wrapper around all those crappy mortgages during the financial crisis? Placing a wrapper doesn't make it safe." CME's announcement comes one day after bitcoin's total value topped the $100 billion mark. The price of bitcoin surged $254 to $6,354 on Wednesday, and is up from about $700 a year ago.

MARKETS ARE GOING TO MISS YELLEN
President Donald Trump plans to announce his choice for the next Fed chairman on Thursday, and Bloomberg News reports that he is leaning toward current Fed Governor Jerome Powell to lead the U.S. central bank. If true, the current two-day Fed meeting that ends Wednesday could be the last for Chair Janet Yellen. So, now is as good time as any to look at how major U.S. markets have performed during her tenure. The results are pretty amazing, given that she has overseen four interest-rate increases since the end of 2015 and started the process of shrinking the Fed's $4.5 trillion balance sheet -- events that many have said would tank the markets. The Standard & Poor's 500 Index has risen about 39 percent since she took over as chair in February 2014, compared with a gain of just 6 percent for the MSCI All-Country World Index that excludes U.S. shares. The U.S. bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, has delivered a return of 10 percent, versus 2.69 percent for the Global Aggregate Index. The greenback has enjoyed a renaissance, with the Bloomberg Dollar Spot Index surging 16 percent. There is no major currency the dollar hasn't appreciated against.



COMMODITIES ARE ON THE MOVE
The market for raw materials snapped a five-year losing streak in 2016, as the Bloomberg Commodities Index jumped 11.4 percent for its first annual gain since 2010. As such, traders were optimistic that the rebound would continue into 2017. Alas, that didn't happen: The gauge resumed its slide to fall 3.49 percent through the first nine months. But once again, traders are whispering about the potential for a new rally with the index gaining a respectable 2.09 percent in October. It has now risen in three of the past four months. In what may be a sign of better days ahead, Goldman Sachs has hired a slate of traders from rivals to turn around its commodities business after it suffered the worst quarterly performance in the firm’s history as a public company, according to Bloomberg News' Dakin Campbell. The October stars of the commodities markets are oil, gasoline and other energy-based products. Also, metals such as copper, aluminum and palladium are in the midst of an impressive upswing. The losers continue to be agriculture products, with wheat, corn and coffee leading that part of the market lower. One exception -- at least for October -- is sugar, which has gained almost 9 percent. That's little solace for traders who have seen sugar drop 17 percent his year amid a global supply glut.



WHAT WERE THEY THINKING?
That’s' what currency traders must be saying about the Bank of Canada and it's two rate hikes last quarter after a government report Tuesday showed that the nation's economy unexpectedly contracted in August. The latest disappointment adds to signs the process of cooling is well underway, from the blistering pace of growth in the 12 months through June, according to Bloomberg News' Theophilos Argitis and Erik Hertzberg. If the economy fails to expand in September, third-quarter annualized growth would be on pace for a sub-2 percent increase, after a gain of 4.5 percent in the second quarter. The economy's poor performance of late is a big reason why the Canada dollar fell in October against a basket of its major peers for the first time since May even though oil prices have jumped. Even before the GDP report the strategists at Goldman Sachs were pushing back their estimate for when the Bank of Canada raises rates again to March from December, and lowered its targets for the local dollar. Rather than strengthening to 1.25 per U.S. dollar over next three months, the firm now sees it only gaining to 1.28 from the current 1.29 in late Tuesday trading.



SOUTH KOREA EXITS OCTOBER LOOKING STRONG
Perhaps the biggest surprise in markets during the month of October was the strength of South Korean markets despite saber-rattling over nuclear warheads between North Korea and the U.S. The won surged 2.23 percent against the dollar, more than any of the other 30 major currencies tracked by Bloomberg. The benchmark Kospi index of equities jumped 5.39 percent, one of its best monthly performances in years. Analysts are even raising their growth forecasts after the economy grew at a 3.6 percent annualized pace in the third quarter on the back of firm external demand and the government's fiscal spending. Bloomberg News reports that the Kospi is now poised to outperform every other major Asian equity benchmark over the next 12 months, based on the aggregate of 12-month price targets for every member of a given index in the region. Those forecasts imply about a 19 percent gain in the Kospi. South Korea and China on Tuesday agreed to move beyond a year-long dispute over Seoul’s decision to deploy a U.S. missile shield, paving the way for closer ties between two of Asia’s biggest economies. Later in the day, South Korean President Moon Jae-in called upon North Korea to take part in the Winter Olympics being held in his country early next year.


TEA LEAVES
If this really is Yellen's last Fed meeting as chair, she will be going out on a high note based on the recent economic data. The unemployment rate is the lowest since 2001, inflation is subdued and the Citi Economic Surprise Index -- which measures data that exceed forecasts relative to those that miss -- has rebounded from a mid-year swoon, rising to its highest level since April. U.S. consumer confidence is at its highest in almost 17 years. Although almost no one is expecting the central bank to announce Wednesday that it's raising rates, the consensus is that it will reinforce suggestions that one is coming in December, according to the economists at Bloomberg Intelligence. They say in a research note that the tone of the post-meeting statement will stress that underlying economic performance has proved resilient despite the disruptions from the Hurricanes Harvey and Irma, and perhaps even suggest a modest strengthening. There is no post-meeting press conference scheduled, nor will economic or interest-rate projections be updated, thereby leaving the limited framework of the statement to convey policy guidance.

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