VIX Rises Above 16.83, Euro Closes Above 109.29

The Banking Index was repelled at mid-Cycle resistance at 74.74. BKX made it Pivot on Tuesday, just one day later than expected. There are about three weeks to the next Master cycle lowA loss of near-term supports may induce a challenge of the October 2 low.

(WashingtonExaminer) Federal Reserve Chairwoman Janet Yellen and the rest of the central bank will face new risks of populist criticism in 2016 and beyond, as it aims to raise interest rates by paying potentially hundreds of billions of dollars to banks for holding reserves at the Fed.

The Fed has paid banks to hold excess reserves at the central bank since 2008, but the payments have not attracted much political attention, partly because the rate it paid, 0.25 percent, was close to zero. In December, however, the central bank raised the rate to 0.50 percent as part of its effort to lift its interest rate target from zero. Current projections from the Fed's monetary policy committee members have the rate rising above 3 percent in the next three years.

In that scenario, the Fed could be paying banks close to $100 billion annually for keeping reserves at the Fed. That, in turn, would pose special political risks to the central bank and its independence, just one of many difficulties that Yellen and company must navigate in the years ahead in trying to return the country's monetary policy to normal.

(WSJ) Investors who keep an eye on their bank statements in the coming year are likely to get a preview of how the Federal Reserve’s higher interest-rate target will affect bank earnings.

Traditionally, banks benefited from rising interest rates because they held off on raising deposit rates while quickly lifting rates charged on many loans. In earlier periods of rate increases by the Fed, deposit rates moved up by about 0.25 percentage point while the prime rate rose much more. This boosted their net interest margins and flowed directly through to the bottom line.

Anyone counting on this to happen in this rate cycle, however, is probably in for a shock. New banking and money-market fund regulations have dramatically altered the demand for cash in ways that are likely to benefit the retail customers of banks—and weaken bank profits.

(ZeroHedge) One of the biggest quandaries of this cycle for the US economy has been the amount and growth of commercial bank loans. Virtually non-existent for the first three years of the centrally-planned new normal, something changed in 2012 at which point US bank loans, led by Commercial and Industrial or C&I lending growing at a double-digit pop, started to rise at an impressive pace, asking many to wonder: maybe the biggest driver for a sustainable economic recovery is in fact present,because where there is loan demand, there is velocity of money.

A few years later, as the loan growth persisted with virtually no flow through to GDP growth, we - and others - wondered: we know there is a "source of funds", but what about the "use of funds" - how can banks be creating tens of billions in loans if virtually nothing was ending up in the broader economy?

Written By: Anthony M. Cherniawski