BOE

There are deepening concerns in Switzerland about the debasement of the Swiss franc. The SNB has pegged the franc to the euro and is engaged in the same ultra loose monetary policies as the Federal Reserve, BOE and the ECB. The SNB won't allow the franc to rise above an arbitrary “ceiling” against the euro Walter Meier himself said on April 5 that the SNB is ready to buy foreign currencies in "unlimited quantities." Meier’s comments regarding the vastly depleted Swiss gold reserves came after Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland, called on the SNB to disclose where its gold is stored, in a letter published in the respected Swiss publication Finanz und Wirtschaft. Meier said that the SNB holds its physical gold reserves “domestically and internationally, with provisions for a crisis scenario being a main factor in the decision for this decentralized storage”.  “The criteria for the storage countries are: appropriate regional diversification, exceptionally stable economic and political environments, immunity for central bank investments, access to a gold market where stocks could be liquidated if necessary,”  he continued. He concluded by saying that “such a decentralized storage is still preferable to an exclusive storage in Switzerland. The listed factors can change over time and that’s why the central bank is reviewing and adapting the storage locations periodically.” The SNB’s monetary policies have been imprudent in recent years and their gold sales have lost the Swiss people a lot of money. 

European equities are trading higher at the midway point, with modest risk appetite observed ahead of the ECB rate decision and subsequent press conference. A large volume of corporate earnings has helped European stocks from the open, with the large cap names such as SocGen and BMW posting a strong set of results. A smooth set of auctions from both Spain and France have helped tighten the European government 10-yr bond yield spreads against Germany. The French results saw a reduction in borrowing costs and solid demand across all lines, with the Spanish auction selling to the top of the indicative range, albeit with an increase in yields. Elsewhere, Services PMI data from the UK has disappointed to the downside, however the figure still indicates growth in the services sector with the figure coming in at 53.3. A breakdown in the data has shown that clients do remain cautious, but optimism is on an upward trend. Looking ahead in the session, market focus will be on Barcelona as ECB’s Draghi prepares for his press conference at 1330BST/0730CDT.

Simultaneous Global Printing Is Failing Miserably

• Only the cattle cars are missing: Greece opens detention camp for immigrants as election looms (Reuters)
• China really wants that Iran oil - China mulls guarantees for ships carrying Iran oil (Reuters)
• U.S. eyes testy China talks, Chen backer expects Chinese decision (Reuters, FT)
• Possible arsenic poisoning probed in death of coroner's official (LA Times)
• Europe’s Anti-Austerity Calls Mount as Elections Near (Bloomberg)
• Law firm Dewey dumps executive; talks with rival end (Reuters)
• Greek bank appeals for fresh equity (FT)
• Banks seek to put pressure on small rivals (FT)
• Obama falls short of meteoric expectations abroad (Reuters)

Two weeks ago we reported the somewhat surprising news that according to the FT, current Bank of Canada head, and former co-head of sovereign risk at Goldman Sachs had been "informally" approached by the Bank of England to be Mervyn King's replacement when the latter's contract runs out in June 2013. Once the news broke, the tenuous arrangement to have a former-Goldmanite at virtually every single developed world central bank seemed to have hit a snag as both the Bank of Canada and Carney himself were forced to deny that any interest by the BOE had been expressed. Of course, what was missing from the public discourse is that this was likely one of those "reverse inquiry" type of career moves, whereby the candidate himself, or rather the employing firm - in this case Goldman Sachs, makes the decision whether or not the candidate would be suitable to head the Goldman subsidiary known as the Bank of England. Which is why it is with even less surprise that we now learn that it is none other than the firm's most permabullish strategist Jim O'Neill, who after coining the globalist wet-dream term "BRIC" was sent in exile to chair the firm's worst performing division, GS Asset Management, that is rumored to be the latest replacement for Mervyn King.

For anyone who may have been concerned that the BOE was serious in its recent "admission" that it just may not ease further, or engage in more QE for that matter, we have good news: the UK economy just double dipped for only the first time since the 1970s, following a stunning Q1 GDP release which came in far weaker than expected at -0.2% while the consensus was looking for a 0.1% rise. In other words, the UK has just followed such other pristine example of economic success as Spain and Greece into double dipping. Bloomberg economist Niraj Shah brings even more bad, pardon good, news: 2Q GDP may also contract as a result of additional bank holiday in June. Construction output knocked 0.2 ppt off of quarterly GDP growth. Per Shah, the BOE may point to drop in construction as a possible aberration in data, concerns will remain over the strength of the service sector as output there rose only 0.1% Q/Q. The U.K. has contracted 9 quarters since first falling into recession in 2Q 2008. All in all this is great news for those desperate for bad news and explains why futures, and the EURUSD are spiking.

It's not as if this should come as a major surprise to ZeroHedge readers, but to hear officials from the Bank of England pointing out the sub-optimal nature of the financial system's information asymmetries is refreshing. Be it via any one of Andrew Haldane's three so-called arms-races (Returns - the past, Speed - the present, and Safety - the future), analogizing to the winner-takes-all 'sex-fest' blubberiest-optima of elephant seals and their 'extinction' implications, these socially 'bad' financial system outcomes (Leverage, HFT, and collateral and encumbrance) are channeled superbly by the comedic Brit. A must-watch to reassure one's self that some central bankers really get it as, unlike before, when nobody would touch on topics covered by ZeroHedge with a ten-foot-pole, at least they do now, if with a one-year delay.

Over the past month, the world has finally awakened to the reality that when it comes to easing, there is more than just one central bank (i.e., the Fed). in fact, as we have been showing since early this year, the bulk of the easing over the past 5 months has happened elsewhere, primarily in Europe with LTRO 1+2, and subsequently at the BOE, and more recently at India and Brazil. Yet some holdouts still remain. One of these naturally is China, which everyone would love to see cut RRR or even the benchmark rate, yet which as recent CPI data has shown still has lingering packets of inflation precisely where it hurts: food (and of course recall China's Schrodinger economy). Which leaves Japan, which already eased more a few months back when it expanded its LSAP program... but it is never enough. Needless to say strategists, in their quest to shake any and every central banker here or there for some free money, have been seeing imminent BOJ easing in the form of yet another Y5 trillion LSAP any second now. Yet it is one thing for bankers to do what they are programmed to do, which is demand more free money, it is something very different when politicians step in and defuse the myth that any central bank is even remotely independent, especially when reelection is at stake. As Bloomberg points out this morning, the fight for the BOJ's "independent" balance sheet is starting to get lethal.

When liquitidy burns, or too much of a good thing is really bad...

As Europe approaches the halfway point of the week, equities are suffering losses on the day as North America comes to market, with underperformance observed in the CAC and peripheral bourses. Markets have been weighed down upon from the open with commentary from the Portuguese PM garnering attention in the press, saying that there are ‘no guarantees’ that Portugal will return to the financial markets as planned. A Bank of Spain release has shown the bad loan ratio for the country’s banks has increased to 8.16%, further weighing on sentiment. There was also market talk of stop-loss buying of German Bunds at the cash open, the security had sold off since then but safe haven flows have kept the Bund in positive territory.

Following a blistering two days of upside activity in Europe and a manic depressive turn in the US in the past 48 hours, the rally is now be running on fumes, and may be in danger of flopping once again, especially in Spain where the IBEX is tumbling by over 3% to a fresh 3 year low. Still, the Spanish 10 year has managed to stay under 6% and is in fact tighter on the day in the aftermath of the repeatedly irrelevant Bill auctions from yesterday, when the only thing that matters is tomorrow's 10 Year auction. Probably even more important is that the BOE now appears to have also checked to Bernanke and no more QE out of the BOE is imminent. As BofA summarizes, "The BoE voted 8-1 to leave QE on hold at their April meeting: a more hawkish outturn than market expectations of an unchanged 7-2 vote from March. Adam Posen - the most dovish member of the BoE over the last few quarters - took off his vote for £25bn QE, while David Miles judged that his vote for £25bn more QE was finely balanced (less dovish than his views in March)." Even the BOE no longer know what Schrodinger "reality" is real: "The BoE judged that developments over the month had been relatively mixed, with a lower near-term growth outlook, but a higher near-term inflation outlook. However, they thought that the official data suggesting very weak construction output and soft manufacturing output of late were “perplexing”, and they were not “minded to place much weight on them”." Naturally, this explains why Goldman's Carney may be next in line to head the BOE - after all to Goldman there is no such thing as a blunt "firehose" to deal with any "perplexing" issue. Finally, the housing market schizophrenia in the US continues to rule: MBA mortgage applications rose by 6.9% entirely on the back of one of the only positive refinancing prints in the past 3 months, which rose by 13.5% after a 3.1% drop last week. As for purchases - they slammed lower by 11.2%, the second week in a row. Hardly the basis for a solid "recovery."

• First Japan now... Australia Ready to Help IMF (WSJ)
• "Not if, but when" for Spanish bailout, experts believe (Reuters)
• Spain’s Surging Bad Loans Cast New Doubts on Bank Cleanup (Bloomberg)
• Spain weighs financing options (FT)
• Spanish Banks Gorging on Sovereign Bonds Shifts Risk to Taxpayer (Bloomberg)
• Spain and Italy Bank on Banks (WSJ)
• Chesapeake CEO took out $1.1 billion in unreported loans (Reuters)
• China preparing to roll out OTC equity market – regulator (Reuters)
• Angry North Korea threatens retaliation, nuclear test expected (Reuters)
• North Korea Breaks Off Nuclear Accord as Food Aid Halted (Bloomberg)

European markets are seen trading higher as North America comes to market, with some momentum seen following the release of the forecast-beating German ZEW Survey. An economist from the institution commented that downside risks have decreased significantly over the past month, prompting some risk-appetite in Europe during the morning. Participants were also looking towards the Spanish T-Bill auction with particular focus, but it did not confirm the nation’s worst fears as the auction passed with strong bid/covers, selling to the top of the indicative range. Yields, however, did increase over both lines. As such, the Spanish 10-yr yield has fallen below the key 6% mark and remained below that level for most of the session. Peripheral 10-yr spreads against the German Bund are seen tighter throughout the day, amid some market talk early in the session of domestic accounts buying the paper, however this remains unconfirmed.