Yen

Macro perspective of this week's events.  Hint:  the ECB meeting may be the most interesting.  

The gaps between markets (credit, equity, and volatility) and economic (macro- and micro-) reality have seldom been larger. What is just as concerning as this yawning chasm is the similarity of a number of activities to the 'bubble' in credit in 2007 - from record CLO issuance to covenant-lite loans resurgence. As Citi's Matt King notes, the past fortnight’s virtual melt-up in all things high yielding has been accompanied by a growing sense that markets are breaking out of the patterns of the past few years. In the near term, there is no reason in principle why the moves cannot go further; but unless more of the central bank stimulus finds its way through to the economy, this opens up the risk of sudden corrections as markets fall back to earth. How long will it take for that to occur, and for markets to become scared once again? It is hard to tell, and yet, as we have noted numerous times, we have been in this situation before. In 2009, the divergences took 6 months before stocks corrected, in 2011 it took 4 months, and in 2012 it took just 1 month. It's not different this time.

Using cheap debt to buy assets makes a lot of sense right now, but only if it's done right. That wasn't the case with the world's largest retail M&A deal this year.

Overview of the price action in foreign exchange and outlook for the week ahead.  

Bulls are still in charge of markets despite the shallow 2 to 3% correction the previous week. The conundrum for most investors remains, where else are you to put your money despite obvious risks and deceptive conditions? The Fed is forcing people into stocks, period.

• Reinhart and Rogoff: Responding to Our Critics (NYT)
• Differences with centre-right delay Italy's Letta (Reuters)
• Italy's Letta moves forward to shape government (Reuters)
• China’s leaders warn on financial risks (FT)
• Norway oil fund makes big move from bonds to stocks (FT) - worked wonders for the Bank of Israel
• Smuggling milk is the new smuggling heroin in HK: Milk Smugglers Top Heroin Courier Arrests in Hong Kong (BBG)
• RenTec's mean reversion models fail on BOJ lunacy: Yen Bets Don't Add Up for a Fund Giant (WSJ)
• From 'Fabulous Fab' to Grad Student (WSJ)
• BOJ in credibility test as divisions emerge over inflation target (Reuters)
• Boston Bombing Suspect Moved from hospital to prison (WSJ)
• Provopoulos Says ECB May Never Need to Use Bond-Buying Program (BBG) which is good because, legally, it doesn't exist

While the main, if completely irrelevant, macroeconomic news of the day will be the first estimate of US Q1 GDP due out later today, perhaps the best testament of just how meaningless fundamental data has become was the scheduled BOJ announcement overnight in which Kuroda's merry men simply stated what was expected by everyone: the Japanese central bank merely repeated its pledge to double the monetary base in two years. The lack of any incremental easing, is what pushed both the USDJPY as low as 98.20 overnight (98.60 at last check), over 100 pips from the highs, and has pressured the Nikkei into its first red close in days, and shows just how habituated with the constant cranking up of the liqudity spigot the G-7 market has truly become.

The crypto-currency Bitcoin is still merely a speck on the global monetary landscape. It is young, experimental, and for all we know, it may ultimately fail to break into the monetary mainstream. However, on a conceptual level some are willing to call it a work of genius and arguably the most exciting development in the field of money for more than 130 years. The outcome is probably binary: Either Bitcoin ultimately fails and the individual Bitcoins end up worthless. Or Bitcoin takes off and Bitcoins are worth hundreds of thousands of paper dollars, paper yen, paper euros, or paper pounds. Maybe more. Those who buy Bitcoin as a speculative investment should consider it an option on the future success of the crypto-currency. We still consider gold to be the essential self-defense asset in the ongoing paper money crisis. The brand-new crypto-currency Bitcoin has to first earn its stripes as a monetary asset by proving itself as a ‘common’ medium of exchange. That is why we view Bitcoin very differently from gold, although the attraction of both has its origin in the demise of entirely elastic, politicized state fiat money. In the meantime, the debasement of paper money continues.

When tin-foil-hat wearing digital dickweed blogs first suggested that Central Banks were actively buying stocks, the mainstream media scoffed at the idiocy and un-independence of such an idea. However, it is clear the central banks themselves are now not only actively buying stocks but are activley encouraging it and propagandizing their efforts to lever this last policy tool left in the toolbox. As Bloomberg reports, 23% of central bankers surveyed said the bank owns shares and plans to buy more. From the Bank of Japan to the Bank of Israel and with the SNB and the Czech National Bank now at over 10% allocation of reserves to stocks, is it any wonder there is an inexorable bid under the 'free' markets. Rick Santelli is rightly concerned that, "there is a danger that everyone is loaded in the same direction," asking what happens if all the Central Bank pump-priming does not work, given these equity valuations, "who gets caught holding the bag? What chairs are left when the music stops?"

Since reams of Powerpoint presentations, or pages of PDFs seem to pass most 'investors' by these days, PIMCO's Bill Gross' new chosen media appears to be Twitter's 140 characters. He is on a roll of soundbite superbness. Today's headline suggests just four little words we should all be aware of: "Bubbles are getting Bubbly."

Gross: #Yen carry trade driving all asset prices higher. Bubbles getting more bubbly. Will #QEs produce growth?

— PIMCO (@PIMCO) April 24, 2013

As we have discussed numerous times over the past year, there is a quiet movement among the world's central banks to diversify their reserves away from the pejorative USD. Whether it is direct trade linkages, hording physical precious metals, or simply buying foreign sovereign debt, there is a trend emerging. The latest defection, as BusinessWeek reports, is Australia's plan to invest about 5% of foreign currency reserves in China. The decision "represents the first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan," the country's deputy governor noted, adding that this step was an "important milestone" to "stronger financial linkages" leaving Australia "better positioned to benefit from the shift in global economic growth towards Asia." Of course, palling up to its closest trade partner is a big driver, but in a somewhat barbed comment on the strength of the AUD, Lowe noted, "quantitative easing that has taken place in a number of countries is having a significant effect on exchange rates of freely floating currencies... which is clearly making for difficult conditions in certain parts of the Australian economy."

Asia is seeing a new gold rush. Demand for gold bars, coins and jewellery has soared as bargain hunters try to capitalize on the dip in prices. In Hong Kong and Beijing customers lined up outside banks and jewellery shops to make purchases and in some instances there was not enough physical metal to meet the demand. The Shanghai Gold Exchange’s cash contract hit a new record high yesterday (43 metric tonnes, up from 30.4 on April 19th) while gold coin sales at the U.S. Mint have nearly tripled in April against last month’s figures.  Joni Teves of UBS research said, “Physical markets have responded to the much cheaper gold price levels,” and “our physical flows to Asia have been particularly elevated this week.” Asian investors demand for the physical yellow metal has supported the gold price, rallying it up 8.1% from last week’s low.

"While I think this policy is fundamentally right, I think [austerity] has reached its limits," was EU President Barroso's firestarter comment yesterday. As the WSJ reports, the IMF also said last week that  the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing that its belt-tightening is holding back the global economic recovery and could end up being self-defeating. Of course, the beggars are once again trying to be choosers as Spain's de Guindos pushes his agenda along this 'growth vs austerity' path, "What we are going to do now is strike a better balance between deficit reduction and economic growth," but it is the bagholders (or money-men) of Europe that has the last word. As we noted yesterday, Merkel's expectations are no more money without ceding sovereignty, this morning it is German MPs who are up in arms as Nobert Barthle condemns Barroso's statements on austerity and Hans Michelbach flatly rejects this path of no resistance as it "undermines fiscal consolidation efforts." Perhaps the most clear message was from Volker Wissing who added, "demanding more money or time would send a 'fatal' signal to financial markets on reforms." With German PMIs so bad this morning, we are reminded of Bill Blain's comment, that ultimately growth is about confidence - and right now, Europe is a very unhappy place.

The week ahead brings key leading indicators of global activity. The flash PMI's in China and Euro area will be published on Tuesday. Bloomberg consensus expects the China flash to be slightly lower than the previous reading and that the Euro area flash releases for manufacturing and service activity will rise slightly. In addition, Korean 20-day export data for April will provide a good guide to both the external sector in Korea and the likely momentum of Asian exports more broadly. For the same reasons, Taiwan export orders are worth a look as well.  The week ahead also provides Q1 GDP prints in US, UK, and Korea. Goldman expects US GDP to rise by 3.2%. The Australia CPI print may open the door to an RBA rate cut as soon as May and Japanese CPI is likely to underscore why the BoJ policy has shifted aggressively. Friday also brings an update of the BoJ's outlook, along with the next BoJ meeting (unchanged policy expected).

The state of Arizona may become the second state to use gold and silver coins as legal tender.  Last week, Arizona lawmakers passed a bill that makes precious metals legal tender. Arizona is the second state after Utah to allow gold coins created by the U.S. Mint and private mints to be used as currency. Utah has had the law on the books for the past 2 years and is working on a system for using the precious metals as currency. The Arizona Senate Bill 1439 would allow the holder of gold or silver coins or bullion to pay a debt. However, the coins must be issued by the U.S. government or approved by a court, like an American Eagle Coin. Oddly the government does not require that persons or business must use or accept gold or silver as legal tender in contravention of the U.S. Constitution. The sponsor of the bill, Republican Sen. Chester Crandell, would need a final state Senate vote after approval by the House, and if passed the law would not take effect until 2014. Crandell said, "The whole thing came from constituents".