BOE

A high level overview of the drivers of the capital markets.

When all this began, we were reassured that extraordinary balance sheet expansion and the ZIRP environment were merely temporary and only to get us through the short-term emergency. The following chart and table covering the monetary-policy-on-steroids of the Fed, ECB, BoE, and BoJ suggests this is a long-emergency indeed... and the current disconnect between the 'planned' expansion of central bank balance sheets and gold suggests that Cyprus' central bank head may just replace UK's Gordon Brown as the worst market-timer ever.

One more domino in the dollar reserve supremacy regime falls. Following the announcement two weeks ago that "Australia And China will Enable Direct Currency Convertibility", which in turn was the culmination of two years of Yuan internationalization efforts as summarized by the following: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", and "The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap", China has now launched yet another feeler to see what the apetite toward its currency is, this time in the heart of the Eurozone: Paris. According to China Daily, as reported by Reuters, "France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London." As a reminder the BOE and the PBOC announced a currency swap line back in February, in effect linking up the CNY to the GBP. Now it is the EUR's turn.

Update, and sure enough: PANICOS DEMETRIADES SAYS CYPRUS CENTRAL BANK INDEPENDENCE UNDER ATTACK. As a reminder, Panicos hold the now obsolete position of head of the Cyprus Central Bank.

As was noted two days ago (so certainly not the news catalyst for today's gold sell off as some are trying to make it appear) as part of its bailout expansion by 35%, Cyprus announced, then refuted, then re-admitted, it would need to fund a portion of the incremental €7 billion in cash demands by selling €400 million, or nearly all 13.9 tons, of its central bank gold. Today, we learn that this demand came from none other than the head of the ECB Mario Draghi. Bloomberg reports: "European Central Bank President Mario Draghi said the profits of any gold sales by the Cypriot central bank must be used to cover losses it may sustain from emergency loans to Cypriot commercial banks."

Several months ago we pointed out something not fully grasped by the broader public: the Chinese corporate debt bubble is the largest of any developed and developing country, and at 151% of GDP (and rising rapidly) is the biggest in the world. What is better known is that corporate debt is just one part of the total debt picture, which also includes consumer loans, government debt and other "shadow debt" credit in the case of China. So how does China's true debt picture as a percentage of debt look? As the chart below from Goldman shows, in 2013 the total credit outstanding in China is expected to rise to a whopping 240% of GDP, and continue rising from there at an ever faster pace.

• Obama to report to his bosses today: Obama Meets With Blankfein, Dimon and Moynihan Today (BBG)
• 2007 is here all over again: Seeking Relief, Banks Shift Risk to Murkier Corners (NYT)
• Kuroda Calls BOJ Inflation Target 'Flexible' (WSJ)
• Lagarde warns over three-speed world (FT)
• N. Korea’s Retro Propaganda Calls U.S. Boiled Pumpkin (BBG)
• Luxembourg To Ease Bank Secrecy Rule, Share Data In 2015 (BBG)
• Bank of Korea Keeps Policy Steady (WSJ)
• BOE Stimulus Dilemma Persists as Inflation Seen Higher (BBG)
• EU Sounds Alarm on Spain (WSJ)
• Qatar gives Egypt $3bn aid package (FT)
• RBNZ Says Deposit Insurance May Increase Risk of Bank Failure (BBG)
• Plosser Calls for Reducing QE Pace Citing Gains in Labor Market (BBG)
• Obama budget aims to kick start deficit-reduction talks (Reuters)

A big picture look at the drivers of the global capital markets.

Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.

Economic conditions in Italy are as depressed as they've been since the end of WWII, the economy is still contracting, Italy's banks are in terrible shape, private sector lending is very strained, and the ECB's policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. Bersani, the top vote getter in the recent elections, has been unable to form a government, new elections this year are increasingiy likely, and recent polling suggests a dead heat among Bersani, Berlusconi and the anti-establishment party of Grillo. Surge in support for Grillo creates a risk because it is not entirely clear what he would do if he came to power. He has made a clear promise to put the euro to a vote and generally thinks that the European fiscal and monetary policies have been a bad deal for Italy. Obviously, an attempt to revisit those policies by a country as systemically important as Italy could destabilize things fast, and the risk of a radical outcome is growing. And over the past few months there are indications of that risk getting priced in and putting pressure on Italy, particularly on its banking system. Italian banking spreads are up; there has been a modest pullback in banks' wholesale funding, a modest increase in their ECB borrowing and no bond issuance.

The Bank of England's Financial Policy Committee (BoEFPC) warns there is "evidence of the re-emergence of... behavior in financial markets not seen since before the financial crisis," citing the increased issuance of synthetic products and added that banks have "little margin for error against a backdrop of low growth in the advanced economies," despite what we are told about their 'fortress balance sheets. Bloomberg Businessweek adds that the BoE were careful not to scare the public, they add, events currently "did not appear indicative of widespread exuberance in markets. But developments would need to be monitored closely." This following the Fed's warnings of 'froth' in the credit markets suggests central bans are considerably more concerned at blowing bubbles than they want to admit in public. ECB's Weber recently commented that he feared, "the recent rally in financial markets could be a misleading signal," which appears confirmed by the BoEFPC noting that equity performance since mid-2012, "in part reflected exceptionally accommodative monetary policies by many central banks... But market sentiment may be taking too rosy a view of the underlying stresses."

• George Soros: 'What Japan is doing is actually quite dangerous because" (BBG)
• North Korea lacks means for nuclear strike on U.S., experts say (Reuters)
• Yellen latest to hint about slowing of QE3 (FT)
• Hollande approval rating hits new low (FT)
• Hollande Dismisses Reshuffle as Crisis Hits Popularity (BBG)
• Japan Upper house approves full 5 year term for BOJ gov. Kuroda (BBG)
• US: Plan to Cap Tax Breaks Is Gaining Steam (WSJ)
• BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stress (BBG)
• Kiwis Say ‘Ni Hao’ as China Ties Trump Australia Sales (BBG)
• Obama Avoids Trading Threats With North Korea’s Kim (BBG)

With all three major non-Fed central banks on the tape today, all economic data will be merely "noise" as the market digests what the central-planners' intentions are. The BOJ came and went, and following its substantial balance sheet expansion announcement, which many called "shocking and awing" the USDJPY has pushed higher by 2.5 big figures, although not reaching the 96 levels seen prior to Kuroda's actual announcement. In fact, from this point on there is likely downside as Japan's biggest export competitor, South Korea, has no choice but to join the race to debase which in turn will be JPY-positive. The Bank of England is next, which as expected did nothing moments ago, and will keep doing nothing until Carney joins officially this summer. In some 45 minutes, the ECB headlines will hit the tape where Draghi may bur more likely may not lower deposit rates, and instead will focus on recent deterioration in the economy. None of this will be surprising, and the EUR continues to trade sufficiently weak in line with sub-200DMA levels seen in the past few weeks. What we look forward to the most will be Draghi once again discussing the legal term-sheet details of the ECB's OMT program. His answer will be amusing as there still is no answer, and the OMT is for all intents and purposes the biggest straw man ever conceived by a central bank.

Earlier this morning the BoJ introduced a comprehensive change to its monetary policy framework. The asset purchasing program will be merged with the outright JGB purchase program (rinban), and JGB purchases will be expanded to include all maturities, including 40-year bonds. The pace of JGB purchases by the BoJ will be accelerated to ¥7trn per month from just under ¥4trn currently (on a gross basis), and purchases of ETFs and J-REITs will also be increased. The main operating target for money market operations was changed to a monetary base control (a quantitative index) from the uncollateralized overnight call rate.

After months of posturing, promising, prevaricating, and proclaiming; the time is rapidly upon us where the central planner of the world will have to actually make actions rather than words. As SocGen notes, Central Bank decisions at the BoJ, ECB and BoE will take centre stage tonight/tomorrow but it is the BoJ announcement that is most highly anticipated after the epic jawboning. SocGen’s Sebastien Galy: "Only the truly brave can feel confident trading into the BoJ event"; adds, "It is not completely clear what economic consensus is expecting in terms of BoJ decision apart from broad outlines." Given positioning, the risk of disappointment and short JPY covering cannot be underestimated should Kuroda underdeliver.