India

Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.

I'm not a very good hedonist, I guess.

Here I am in Las Vegas, and to my way of thinking, everything I hate about the human race is conveniently compressed into one tidy package.

And I ask myself: what's my problem? Why do I let places like this get to me so much? I mean, after all, why should I care what other people do with their time and their lives? What business is it of mine?

As gold strengthens on the back of the extreme experimentation of the world's (now-sheep-like) central bankers' easing and printing protocols, it does no real harm to the world, but as John Burbank (of Passport Capital) notes, the painful unintended consequence of all this liquidity is energy costs skyrocketing - and it won't stop until the economy breaks. The negative feedback loop, that we pointed to yesterday as potentially the only thing to stall a magnanimously academic response to the insolvency we see around the world (and the need for deleveraging at this end of the debt super-cycle), of oil prices into the real economy will be devastating not just for US but for EM economies, though as the bearded-Burbank reminds us - Saudi benefits greatly (and suggests ways to trade this perspective). Flat consumer incomes while costs are rising is never a good thing and while we make new highs in oil in terms of EURs and GBPs, he warns we may soon in USDs also. Summing up, his perspective is rising tensions in the Middle East combined with central bank liquidity provision are a huge concern: "We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good. It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."

The better tone in risk markets is largely being driven by encouraging economic data from the US and Europe, which as a result saw Bunds trade in negative territory. Of note, ECB’s Liikanen has said that inflation is not a particular concern in Europe, adding that the ECB has never said that there is an interest rate floor. On the other hand, Gilts are being supported by comments from BoE’s Fisher, as well as less than impressive GDP report. Nevertheless, EUR/USD took out touted barrier at the 1.3400 level earlier in the session, while USD/JPY is trading in close proximity to an intraday option expiry at 80.60.

Chuckles, no laughs.

The softer PMI reports have weighed on risk markets, which as a result saw equities trade lower throughout the session. In addition to that, market participants continued to fret over the latest Greek debt swap proposals, which according to the Greek CAC bill will give bond holders at least 10 days to decide on new bond terms following the public invitation, and the majority required to change bond terms is set at 2/3 of represented bond holders. Looking elsewhere, EUR/USD spot is flat, while GBP/USD is trading sharply lower after the latest BoE minutes revealed that BoE's Posen and Miles voted for GBP 75bln increase in APF. Going forward, the second half of the session sees the release of the latest Housing data from the US, as well as the USD 35bln 5y note auction by the US Treasury.

Crude oil spiked to nine-month high primarily on investors fear of potential conflict over the escalating tensions between the US, Europe, Israel, and Iran.  Right now, it seems Iran could be the one blinks first (war or peace).

Just when we thought that when it comes to nonsensical announcements Europe is second to none, here comes the White House and takes the cake:

• WHITE HOUSE SAYS RISE IN GASOLINE PRICES CAUSED BY VARIETY OF GLOBAL FACTORS, INCLUDING UNREST IN SOME PARTS OF WORLD, FAST GROWTH IN OTHERS - RTRS

Uhm, would the "unrestful" parts of the world be those that have an above average US drone presence. At least we know that said price surges have nothing to do with the following chart:

We have lived through a long period of financial management, in which failing financial institutions have been propped up by emergency intervention (applied somewhat selectively). Defaults have not been permitted. The result has been a tremendous build-up of paper ripe for burning. Had the fires of default been allowed to burn freely in the past we may well have healthier financial institutions. Instead we find our banks loaded up with all kinds of flammable paper products; their basements stuffed with barrels of black powder. Trails of black powder run from bank to bank, and it's raining matches.

• Spiegel: Stop the 130-billion bank transfer! (Spiegel)
• Greece Wins Bailout as Europe Chooses Aid Over Default (Bloomberg)
• Greek pro-bailout parties at all-time low, poll shows (Reuters)
• Eurozone agrees €130bn Greek bail-out (FT)
• Top Banks in EU Rush for Safety (WSJ)
• Medvedev Adviser Says Kudrin Would Be Better Prime Minister (Bloomberg)
• US and Mexico in landmark oil deal (FT)
• McCain calls for US to support Syria rebels (FT)
• Coal Shipments to India Overtaking China on Fuel Shortage (Bloomberg)
• Gillard Shrugs Off Ousting Threat (WSJ)

There is nothing new in this interview of Spiegel magazine with Ken Rogoff, but it is refreshing to listen to a person who has at least some standing in the arena of grand self-delusion (i.e., economics and capital markets), telling it like it is. While he rehashes all the old points, these bear reminding as the key one is what happens to Germany as the can kicking becomes a new default exercise in preserving bank "solvency" at the expense of the last stable economy: when asked if in 2015 the Eurozone will be the same, his response: "It may well be the case that all current members remain in the euro zone, and that Germany keeps on shouldering the ever-increasing debts of other countries. But the price of such a scenario is very high for all involved: southern Europe would become embroiled in permanent stagnation and the German economy would eventually be dragged down to a slower growth trajectory." So even though everyone knows that Europe is doomed in its current configuration, let's all just pretend things shall be well, and keep the even more doomed banks alive for a few more quarters? Is the loss of a banker bonus truly such a great catastrophe to society that countries have to remain in a state of perpetual misery until it all finally unwinds? Judging by today's market action the answer is yes.

A lesson to be learnt from the individuals who continue to buy European Debt

It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.

The drums of war are beating louder and louder ... What's really going on?

Of course, if only one had seen that there is absolutely nothing different or new about the gold "story" at all since March 2009, there would have been no need to strengthen positions. Otherwise, more or less as has been said here all along. Furthermore, below are some pretty charts from the latest World Gold Council demand trends letter, presented below.