Bank of England

A look at the investment climate through the currency market and upcoming events and data.

Gold has held firmly above $1300 for over two weeks, confounding those who said it would never see that key level again, but as the constantly-bearish SocGen explains in this 'astounding' report, gold's downturn is set to return... except their reasoning has a fatal flaw - it's entirely factually incorrect.

India’s gold policy over the last several years is about as dysfunctional as any government policy we have ever seen, and that’s saying a lot. In a nutshell, Indians were buying too much gold for their government’s comfort, so the “authorities” stepped in with duties and import restrictions in an attempt to stifle the trade. So smuggling soared. Fast forward to today. It appears the government has finally realized they can’t stop their citizens penchant for gold, so they have decided to dump central bank gold onto the market. They are justifying this act with a so-called 'swap' into phantom gold at the Bank of England - the favored global hub of shady, rent-seeking, banker oligarchs. This begs the question of who really needs the gold, the RBI, or London bankers?

• Ceasefire over, Ukraine forces attack rebel positions (Reuters)
• No Good Iraq Options for Obama as Russia, Iran Jump In (BBG)
• Japan’s Cabinet Agrees to Allow Military to Help Defend Allies (BBG)
• Obama says to reform immigration on his own, bypassing Congress (Reuters)
• South Stream Pipeline Project in Bulgaria Is Delayed (NYT)
• Foreign Banks Still in the Dark About Missing Metals in China (WSJ)
• Quelle indignity: several bankers at French bank BNP Paribas will face demotions and cuts to their pay and bonuses (FT)
• Symantec Warns of Hacker Threat Against Energy Companies (BBG)
• Shrinking Office Spaces Slow Recovery (WSJ)
• Rand Paul Slams ‘Fat Cats’ With Hedge Fund in Top Donors (BBG)

The holiday shortened, and very busy, week includes the following highlights: [on Monday] US Chicago PMI; [on Tuesday] US ISM Manufacturing, Construction Spending, and Vehicle Sales, in addition to a host of PMI Manufacturing in various countries; [on Wednesday] US ADP Employment, Factory Orders; [on Thursday] US Non-farm Payrolls and Unemployment, MP Decisions by ECB and Riksbank, in addition to various Services and Composite PMIs; [on Friday] US holiday, Germany Factory Orders and Sweden IP.

It is the last day of not only the month but also the quarter, not to mention the halfway point of 2014, which means that window dressing by hedge funds will be rampant, as they scramble to catch up some of the ground lost to the S&P 500 so far in 2014. Most likely this means that once again the most shorted names will ramp in everyone's face and the short side of the hedgie book will soar, further pushing hedged P&L into the red, because remember: in a market in which all the risk is borne by the Fed there is no need to hedge.

One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later. In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath - a century of drift toward statism, militarism and fiat money - that was actually triggered by the events at Sarajevo.

• Yellen Spending Recipe Lacking Key Ingredient: Bigger Wage Gains (BBG)
• Ukraine signs trade agreement with EU, draws Russian threat (Reuters)
• GM Documents Show Senior Executive Had Role in Switch (WSJ)
• Australian Report Postulates Malaysia Airlines Flight 370 Lost Oxygen (WSJ)
• World’s Biggest Debt Load Lures Distressed Funds to China  (BBG)
• GPIF Rushing Into Riskier Assets Before Ready, Okina Says (BBG)
• Japan Prices Rise Most Since ’82 on Tax, Utility Fees (BBG)
• Italian Debt Swells to Rival Germany as Bond Yields Slide (BBG)
• China’s Manhattan Project Marred by Ghost Buildings (BBG)
• BOE's Carney Says Rates Won't Rise to Levels Previously Considered Normal (WSJ)

• Minorities Seen Driving U.S. Household Growth (Reuters)
• GM prepares to recall some Cruze sedans with Takata air bags (Reuters)
• PBOC Halts Repos as China Money Rate Climbs to Seven-Week High (BBG)
• Ukraine Optimism Wavers on Peace as Cease-Fire Winds Down (BBG)
• Economic Rebound Seen Undercut by Weak Pay as Vote Winner (BBG)
• Cracks Open in Dark Pool Defense With Barclays Lawsuit (BBG)
• The Survivor: How Eric Holder outlasted his (many) critics (Politico)
• IBM, Lenovo Tackle Security Worries on Server Deal (WSJ)
• Militants take Iraqi gas field town, president calls parliament session (Reuters)
• Carney Surprises Confounding Markets as BOE Manages Guidance (BBG)

• Obama Administration Widens Export Potential for U.S. Oil (BBG)
• WTI Pares Gains as U.S. Export Ruling Seen Limited (BBG)
• Senator Cochran defeats Tea Party rival in Mississippi Republican runoff (Reuters)
• Militants attack Iraq air base, U.S. assessment teams deploy (Reuters)
• Maliki rules out national emergency govt (AFP)
• Koch to Start EU Power Trading as It Plans LNG Expansion (BBG)
• Obama Said to Ready Sanctions on Russian Industries (BBG)
• Ghana Sends Plane With $3 Million to Calm World Cup Team (BBG)
• Ghana’s First Hedge Fund Planned by Ex-Exchange Regulator (BBG)
• SEC Is Gearing Up to Focus on Ratings Firms (WSJ)
• Abe Declares Deflation End as Growth Plan Confronts Skeptics (BBG)

Euro area monetary policy and Anglo-Saxon monetary policy are taking different directions — radically so. It has been a decade since the Fed last embarked on a tightening cycle, and Euro area rates have never gone negative before. With the expectations and the reality of the direction of interest rates diverging in this manner the instinct of most in financial markets is to assume that the Euro will weaken against the US dollar. A weaker Euro has been forecast by financial markets for some time — and financial markets have been spectacularly wrong in their forecasts. The Euro weakened a little in the wake of the nudges and hints on policy from ECB President Draghi, but it still remains at a high level. How can this be explained? How is it that the Euro is not behaving the way everyone says it should?

This week brings PMIs (US and Euro area ‘flash’) and inflation (US PCE, CPI in Germany, Spain, and Japan). Among other releases, next week in DMs includes [on Monday] PMIs in US (June P), Euro Area Composite (expect 52.8, a touch below previous) and Japan; [on Tuesday] US home prices (FHFA and S&P/Case Shiller) and Consumer Confidence (expect 83.5, same as consensus), Germany IFO; [on Wednesday] US Durable Goods Orders (expect -0.50%, at touch below consensus) and real GDP 1Q anniversary. 3rd (expect -2.0%) and Personal Consumption 1Q (expect 2.0%), and confidence indicators in Germany, France and Italy; [on Thursday] US PCE price index (expect 0.20%), Personal Income and Spending, and GS Analyst Index; and [on Friday] Reuters/U. Michigan Confidence (expect slight improvement to 82, same as consensus), GDP 1Q in France and UK (expect 0.8% and 0.9% yoy, respectively), and CPI in Germany, Italy, Spain and Japan.

• The Man Who Broke the Middle East (Politico)
• Kerry presses Maliki as Iraq loses control of Syrian, Jordanian borders (Reuters)
• Hank Paulson takes on global warming next: The Coming Climate Crash - Lessons for Climate Change in the 2008 Recession (NYT)
• In Yellen We Trust Is Bond Mantra as Inflation Threats Dismissed (BBG)
• After port fraud, China's vast warehouse sector under scrutiny (Reuters)
• Draghi Says Unlimited Cash Through 2016 Is Rate Signal (BBG)
• Tapes Said to Reveal Polish Minister Disparaging U.S. Ties (NYT)
• CDC reassigns director of lab behind anthrax blunder (Reuters)
• BNP set to receive ban to transact in USD as part of $9 billion settlement (WSJ)
• GE Clears Last French Hurdle to Clinch Alstom Deal (BBG)
• Al Jazeera journalists jailed in Egypt, supporters stunned (Reuters)
• ISDA Asked to Rule If Argentina Credit-Default Swaps Triggered (BBG)

Following last night's laughable (in light of the slow motion housing train wreck that is taking place, not to mention the concurrent capex spending halt and of course the unwinding rehypothecation scandal) Chinese PMI release by HSBC/Markit (one wonders how much of an allocation Beijing got in the Markit IPO) which obviously sent US equity futures surging to new record highs, it was almost inevitable that the subsequent manufacturing index, that of Europe, would be a disappointment around the board (since it would be less than "optical" to have a manufacturing slowdown everywhere in the world but the US). Sure enough, first France (Mfg PMI 47.8, Exp. 49.5, 49.6; and Services PMI 48.2, Exp. 49.4, Last 49.3) and then Germany (Mfg PMI 52.4, Exp. 52.5, Last 52.2; Services 54.8, Exp. 55.7, Last 56.0), missed soundly, leading to a broad decline in the Eurozone PMIs (Mfg 51.9, Exp. 52.2, Last 52.2; Services 52.8, 53.3, Last 53.2), which meant that the composite PMI tumbled from 53.2 to 52.8: the lowest in 6 months.