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22% of the Q1 earnings season (by market cap) is over, and anyone listening merely to soundbites and reading media headlines would likely think that stocks have soared as a result of a relentless parade of beats. One would be mistaken. In fact, as the chart below shows, there is something very wrong with this earnings season...

Maybe it is the activity in Europe that made the markets feel more volatile than the weekly changes show. Or maybe it was that the futures traded in an almost 3% range – from 1,359 to 1,390 with several 0.5% swings during the course of most days. Market darling Apple isn’t helping calm the market either. That can reverse on a moment’s notice, or a great earnings release, but the momentum that was dragging more and more hedge funds into the trade, is now working in reverse as stop losses are being triggered. So often lately, the bulls are able to point to a decent tape in face of weak data and no stimulus, and this week ended with the opposite. Bulls will be nervous that decent earnings and a mega-plan from the IMF failed to provide strength to the market. So, it was a strange week that was more volatile than the weekly changes show, and where some real cracks are being exposed.

All morning we have been blasted with 2011 deja vu stories how the IMF panhandling effort has finally succeeded, and how Lagarde's Louis Vuitton bag is now full to the brim with $400 billion in fresh crisp US Dollars bills courtesy of BRIC nations, and other countries such as South Korea, Australia, Singapore, Japan (adding $60 billion to its total debt of Y1 quadrillion - at that point who counts) and, uhh, Poland. From Reuters: "The Group of 20 nations on Friday were poised to commit at least $400 billion to bulk up the International Monetary Fund's war chest to fight any widening of Europe's debt crisis." We say deja vu because it is a carbon copy of headlines from EcoFin meetings from the fall of 2011 in which we were "assured", "guaranteed" and presented other lies that the EFSF would surpass $1 trillion, even $1.5 trillion on occasion, any minute now. Alas, that never happened, and while we are eagerly waiting to find out just what the contribution of Argentina will be to bail out Spanish banks (just so it can expropriate even more assets from the country that rhymes with Pain), we have one simple question: does the I in the IMF stand for Idiots? Why? Because this is merely yet another example of forced capital misallocation, only this time at a global scale.

A sea of red is flowing from European equity markets and it seems they are unable to stem the flow as IBEX (the Italian Spanish equity index) nears March 2009 lows (down 18% YTD) but dispersion across European indices is very high from the DAX +14% YTD to Italy, Greece, and Spain very much in the red YTD. However, for the second week in a row, European equity markets (as tracked by the narrow Dow-equivalent Euro Stoxx 50) close with a negative return year-to-date -0.3%. The broader BE500 index is still up around 5% (compared to over 10% YTD gains in the S&P 500). European high yield credit is back at 3-month lows and investment grade credit at 2-month lows. This week, however, followed the exact same path as last week with equity and credit trading in a wide range but notably this week credit markets dramatically underperformed the ever-hopeful equity market with financials underperforming the heaviest. European sovereigns are generally wider close-to-close on the week but just like corporate credit and equity, they generally followed a similar path to last week with a broad range trade - though a clear trend generally wider overall. Italy underperformed Spain on the week and Portugal, as we noted earlier was the big winner on what looked like basis trade-driven flows as opposed to whole new world of relief. Ahead of the G-20 meetings, it did not seem like there was much hope in sovereign credit - even as financials and corporates did lift a little off their multi-month lows and having seen the headlines of the G-20 draft, it appears there is no magic bullet there anyway - no matter how big they think their bazooka is.

Japanese Finance Minister said an IMF funding increase to USD 400bln is "coming into sight", and that he expects the BRIC nations to offer funds to the IMF at the appropriate time. The finance minister sees funding figures to be released as early as tomorrow. (Sources) The IMF looks set to reach or pass that target, with USD 320bln secured yesterday and many of the largest emerging economies still to contribute. ECB’s Knot and EU’s Rehn have said IMF commitments may have to be up to USD 500bln, and expects China to boost resources.  Brazil’s finance minister has said his country is still not ready to give numbers on their IMF contribution. The Indian finance minister has said he will take time to provide an answer to the funding question for the IMF. China also remains undecided on an increased IMF contribution.

When in doubt how to cause an algorithmic buying spree, go for the lower common denominator: issue bills, or have a confidence index beat expectations. We had Spanish Bills cause a 200 point DJIA melt up earlier in the week, which means today we get confidence, specifically that of Germany's Ifo Business Survey. While Germany's various PMI may still be declining, and the market going nowhere in a hurry, not to mention international trade especially involving China sliding, if there is one thing German manufacturers have in copious amount, it is confidence. In April, the Ifo index edged higher in April to a level of 109.9 after 109.8 in March, defying consensus expectations of a decline to 109.5, and climbing to the highest level since last July. The assessment of current conditions also increased slightly to 117.5 after 117.4 (close to two standard-deviations above the long-term average). Business expectations remained stable at 102.7 (0.6 standard deviations above historical average).  And since algos only care about headlines on the margin this was enough to light a rocket under the EURUSD, however briefly and send it, and the US futures by implication, over 1.3200. Once again, even Goldman warns against reading much into these data: "The somewhat more muted signals coming from the PMI surveys caution against taking the Ifo at face value and there are not enough hard data available for Q1 that show which survey is the better guide at this point to the underlying momentum of the German economy." That's ok, A desperate for any good news Europe will take it.

What do you get for $50 billion? Happy Talk...

Oh, the ignominy of thinking that China's widening of the Yuan trading band was anything other than uber-bullish and indicative of as soft a landing as can be imagined as the mainstream herd promptly, in a desperate attempt to seek affirmation from other members of the herd as always happens (see Jeremy Grantham for more), said this would be a move that guaranteed no hard landing. Albert Edwards takes the 'massive over-confidence in the ability of the Chinese authorities to achieve a soft landing' to task and furthermore indicates that between a rapidly diminishing current account surplus, a real effective exchange rate that is arguably (thank you IMF) not undervalued anymore, and the velocity with which nominal GDP has slowed recently (akin to 2007), the very fact that they widened the trading band suggests it is now a lot easier for them to achieve significant devaluation of their currency (to escape the hard landing) both technically and politically. Since widening the band, the PBOC has already devalued two days-in-a-row. Ironically, the bilateral imbalance with the US is reaching new records (seasonally adjusted) and will peak (seasonally unadjusted) just in time for some temperamental headlines right before the US election.

Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation. Neither has occurred, and the question is, why not? The answer is a 'cold' inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation. If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation. Surely, this is an outcome that sovereign bond markets and stock markets are completely unprepared for. Indeed, by continually framing the inflation vs. deflation debate in extreme terms, market participants have created a blind spot: the risk of a conventional, but 'hot,' inflation.

Within the last few minutes, Bloomberg has popped up a few rather disturbing headlines - that for all intent and purpose have been totally ignored by the trading public at large (we assume WWIII is priced in). So Asia in general is in major sabre-rattling mode tonight with the following comment: South Korea’s military will firmly and thoroughly punish North Korea for any reckless provocation, Yonhap cited Shin as saying. We choose 'not to play'.

• India Test Fires Long-Range Missile Agni-V, CNN-IBN Says
• *INDIA MISSILE TEST FLIGHT `IMMACULATE,' DEFENSE MINISTRY SAYS
• S.Korea Deploys Missiles in Case of N.Korea Provocation: Yonhap 
• *N.KOREA'S KIM JONG UN CALLS FOR STRENGTHENED MILITARY, NHK SAYS

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.

Flashing headlines to conclude tax day:

• BUFFETT DIAGNOSED WITH STAGE I PROSTATE CANCER
• WARREN BUFFETT SAYS NO INCIDENCE OF CANCER ELSEWHERE
• BERKSHIRE SAYS CONDITION ISN'T 'REMOTELY LIFE-THREATENING'
• BUFFETT: TESTS SHOW NO INCIDENCE OF CANCER ELSEWHERE IN BODY

CNBC adds that Buffett will start a two-month treatment course in July.

As clearly indicated well over 2 yrs ago, Italy will first default on its over optimistic promises (check), then look to actually default on (restructure) its debt (next).

Gold has moved rather rapidly in the past few minutes and many are scrathcing their heads just why this is happening? The reason is simple: central planning script 101, page 1. As we noted earlier, the RBI did a  surprising overnight rate cut from 8.5% to 8.0%, in other words it has just joined the global central planning cartel in attempting to stimulate the economy nominally, even as inflationary packets still abound across the land (see China). Yet what does that mean from a modern monetarist standpoint: why crush gold as an alterantive to the local paper currency of course.  Sure enough:

• INDIA ECONOMY SECRETARY: EXPECT TO LOWER GOLD CONSUMPTION IN ECONOMY - DJ

And there you have it: because the last thing India needs is a surge in gold buying now that it too has joined the global reliquification parade. That said, we are curious in what parallel universe will liquidity easing result in less demand for hard assets. Aks the algos who are selling on nothing but headlines.

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.