Morgan Stanley

After widening its tolerance for real world volatility mid-March, the PBOC has faced a daily battering of USD buyers and CNY sellers which have driven the Chinese currency to its weakest level in over 18 months. However, things are starting to become problematic... while call buying and hedging is exploding - as carry traders and local specs rush to cover exposures, Bloomberg notes that Morgan Stanley fears as the yuan approaches the lower end of PBOC’s permissible daily trading range, anticipated intervention to defend band could put other currencies under selling pressure. The last time - Summer 2012 - that the PBOC defended its currency, EUR came under selling pressure but as Morgan Stanley notes, “In the very unlikely case” of PBOC not defending band, FX volatility would surge globally with implications going beyond RMB as markets would assume China’s economic problems might be significant... whocouldanode?

• Headline of the day goes to... Cold weather seen temporarily slowing U.S. economy (Reuters)
• Americans Want to Pull Back From World Stage, Poll Finds (WSJ)
• U.S. Plans to Charge BNP Over Sanctions (WSJ)
• What about Jay Carney: Putin Threat to Retaliate for Sanctions Carries Risks (BBG)
• Fed expected to take further step toward ending bond buying (Reuters)
• A Fed-Watcher’s Guide to FOMC Day: Steady Taper, Green Shoots (BBG)
• Alstom accepts 10 billion euro GE bid for its energy unit (Reuters)
• BOJ projects inflation exceeding 2 percent, keeps bullish view intact (Reuters)

• EU regulators unveil details of bank stress tests (FT)
• Just use NSAfari: U.S., UK advise avoiding Internet Explorer until bug fixed (Reuters)
• China’s Income Inequality Surpasses U.S., Posing Risk for Xi  (BBG)
• US races to refuel infrastructure fund as revenue dries up (FT)
• New Era Dawns at Nokia as Company Appoints CEO, Plans $1.4 Billion Special Dividend, Share-Repurchase Program (WSJ)
• Obama reassures allies, but doubts over 'pivot' to Asia persist (Reuters)
• Dissent at SEC over bank waivers (FT)
• U.S. Banks to Help Authorities with Tax Evasion Probe (WSJ)
• U.S., Europe Impose New Sanctions on Russia (WSJ)
• Why the U.S. Is Targeting the Business Empire of a Putin Ally (BBG)
• Euro-Area April Economic Confidence Unexpectedly Declines (BBG)
• Bitcoin traders settle class actions over failed Mt. Gox exchange (Reut

The bankruptcy of Energy Future Holdings, aka TXU, aka the largest LBO ever has been long in coming. As we previewed it most recently in September of last year, "if there was one deal that epitomized the last credit bubble, aside from the Blackstone IPO of course, it was the ginormous, $45 billion 2007 LBO of TXU, now Energy Future Holdings... the time to pay the piper for the last credit-fuelled binge has arrived and inevitable bankruptcy of this landmark deal is now just days away." It turned out it was more like months away, but it finally arrived, and moments ago, TXU finally succumbed to (lack of) cash flow reality, when it filed for a prepackaged Chapter 11 bankruptcy on Tuesday morning after months of negotiations with creditors aimed at speeding the restructuring of the private-equity backed utility's debt load of more than $40 billion. While it is unclear just how much total debt the company will ultimately restructure, it is likely that the final number will be greater than Enron's, making this also the largest ever non-financial bankruptcy in history.

• U.S. Plans to Hit Putin Inner Circle With New Sanctions (BBG)
• Russian Billions Scattered Abroad Show Trail to Putin Circle (BBG)
• GE’s Alstom Bid Gains Steam as Hollande Said Not Opposed (BBG)
• Russia-West tensions pressure stocks, buoy oil prices (Reuters)
• Toyota Said to Plan to Move U.S. Sales Office to Texas (BBG)
• Egyptian court seeks death sentence for Brotherhood leader, 682 supporters (Reuters)
• Greece warned of 14.9 billion euro financing gap (FT)
• Comcast to shed 3.9 million subscribers to ease cable deal (Reuters)
• Big U.S. Banks Make Swaps a Foreign Affair (WSJ)

Bad Government and Central Bank Policy Are the MAIN CAUSE of Runaway Inequality

Ralph Waldo Emerson once said “Doing well is the result of doing good. That’s what Capitalism is all about,” and nowhere is this description more embraced than on Wall Street. There, the idea of the meritocracy, where those that produce the most financial value get to take home the biggest rewards is almost a cliche  All of which begs the question, why do most hedge funds exist?  If Capitalism existed on Wall Street, and compensation was tied to the creation of economic value, most of the “absolute return industry” would go out of business. To understand why, we need to go back a decade.

• Russia raises interest rates to 7.5% (FT)
• Shanghai to Allow Raw Material Exchanges in Trade Zone (BBG)
• US, Japan Fail to Clinch Trade Deal (WSJ)
• 'We don't have a magic wand', says ECB's Constancio (Reuters)
• Tokyo Inflation Quickens to Fastest Since 1992 (BBG)
• Demand for Home Loans Plunges (WSJ)
• EU banks urged to grasp chance to raise capital (FT)

The PBOC's willingness to a) enter the global currency war (beggar thy neighbor), and b) 'allow' the Yuan to weaken and thus crush carry traders and leveraged 'hedgers' is about to get serious. The total size of the carry trades and hedges is hard to estimate but Deutsche believes it is around $500bn and as Morgan Stanley notes the ongoing weakness means things can get ugly fast as USDCNY crosses the crucial 6.25 level where losses from hedge products begin to surge. This is a critical level as it pre-dates Fed QE3 and BoJ QQE levels and these are pure levered derivative MtM losses - not a "well they will just rotate to US equities" loss - which means major tightening on credit conditions...

• Ukraine forces kill up to five rebels, Putin warns of consequences (Reuters)
• Obama to Russia: More sanctions are 'teed up' (AP)
• Vienna Banks Bemoan Russia Sanctions Testing Cold War Neutrality (BBG)
• GE’s $57 Billion Cash Overseas Said to Fuel Alstom Deal (BBG)
• GM posts lower first-quarter profit after recall costs (Reuters)
• Apple Stock Split Removes Obstacle to Inclusion in Dow (BBG)
• U.S. regulators to propose new net neutrality rules in May (Reuters)

• Ukraine's leaders say have U.S. backing to take on 'aggressors' (Reuters)
• Goldman Sachs Stands Firm as Banks Exit Commodity Trading (BBG)
• Obama reassures Japan, other allies on China as Asia trip begins (Reuters)
• China Challenges Obama’s Asia Pivot With Rapid Military Buildup (BBG)
• Google’s Stake in $2 Billion Apple-Samsung Trial Revealed (BBG)
• No bubble here: Numericable Set to Issue Record Junk Bond (WSJ)
• 'Bridgegate' scandal threatens next World Trade Center tower (Reuters)
• Supreme Court Conflicted on Legality of Aereo Online Video Service (WSJ)
• Barclays May Cut 7,500 at Investment Bank, Bernstein Says (BBG)

“Flash Boys” is a book written for Hollywood instead of the history books or policy makers.  Stay tuned for the movie.  

Stephen Roach, former Chief Economist at Morgan Stanley, has never been shy to share his opinions about the world and having left the Wall Street firm is even freer to speak uncomfortable truthiness. This brief clip, as Sovereign Man's Simon Black notes, says it all so succinctly... "The market has been distorted by far bigger forces than flash trading. To me, the force that has rigged the market... is the Federal Reserve, not the flash traders."

• Ukraine Accord Nears Collapse as Biden Meets Kiev Leaders (BBG)
• Novartis reshapes business via deals with GSK and Lilly (Reuters)
• Moscow Bankers See Fees Slide 67% as Ukraine Crisis Grows (BBG)
• Why ECB's QE will be Ukraine's fault: Draghi Gauges Ukraine Effect as ECB Tackles Low Inflation (BBG)
• As Phone Subsidies Fade, Apple Could Be Hurt (WSJ)
• Amazon Sales Take a Hit in States With Online Tax (BBG)
• Ford Speeds Up Succession Plan: Mark Fields, Auto Maker's No. 2, Seen Replacing Alan Mulally as CEO Ahead of Schedule (WSJ)
• U.S. force in Afghanistan may be cut to less than 10,000 troops (Reuters)
• IBM End to Buyback Splurge Pressures CEO to Boost Revenue (BBG)

Moving onto overnight markets, apart from China we are seeing broad based gains across most Asian equities. Bourses in Japan, Korea and Australia are up +0.2%, +0.2% and +0.5% respectively whereas the Hang Seng and the Shenzhen Composite indices are down -0.2% and -1.1% as we type. The gains in broader Asia Pacific followed what was another constructive session for risk assets yesterday during US trading hours. The S&P 500 (+0.38%) rose for its 5th consecutive day partly driven by better corporate earnings from the likes of GE and Morgan Stanley. Staying on the results season, we’ve had 70 of the S&P 500 companies  reporting so far and the usual trend is starting to emerge in which earnings beats are faring better than revenue beats. Indeed the beat:miss ratio for earnings has been strong at 77%:23% whereas revenue beats/misses are more balanced at 50%:50%. Looking ahead, markets should get ready for another big week of US earnings.