Fedspeak is less lucid at the moment. We await Dr Bernanke this week. We are wondering if many at the Fed are now so worried about irrational exuberance in the asset markets, hence the recent increased taper talk? They may be thinking that QE is doing little for the real economy (as witnessed by continued weak cyclical data: Philly Fed, industrial production, Empire, ISMs, a big drop in capacity utilisation) yet it has elevated the housing and equity markets to levels that do not complement real growth and maybe they want to rein back some of the MBS side of QE? Reducing/tapering some monthly purchases does not mean tightening or even ending QE but the market has got so used to QE-infinity for the last 8 months that it could take any actual taper as a slight on it’s character. There are, of course, still those at the Fed who don’t want asset purchases to be meddled with, especially as inflation is low, growth is sub trend and below potential, and there is an ongoing fiscal drag. But the greater risk taking, instability talk and the dangerous/disruptive exit talk has definitely been escalated by certain Fed speakers. The 10y Treasury has seen a low to high of 163bp to 198bp since the non-farm, some of this as a result of these rumblings at the Fed.

In Japan, the continued trifecta of huge intraday NIKKEI ranges(always ending in a rally), spiking JGB yields, and USDJPY rising are giving out mixed problems: the NIKKEI ramp is supporting consumption, yet the JGB yield jumps are scaring banks (who hold plenty of the bonds and are seeing their VAR explode and profits drop), and the sharp JPY drop has helped exports but mangled the economies of the rest of Asia. JGBs are not risk free anymore and their volatility may not go away quietly. Will next weeks’ lifers’ investment transactions flows include more JGB buying as real yields are very attractive now?

Despite a decent showing in Q1 GDP (exports and consumption), Japan’s business CAPEX actually dropped off, highlighting a lack of investment intentions. The Japanese experiment is one of demand frontloading and worry later. If corporate Japan does not buy into all this froth and increase both wages and CAPEX, then, along with spiking JGB yields, there are problems sooner than later. Certainly the jump in energy and raw material import prices must be affecting corporate earnings and negating some of the Abenomics.

The AUD is weaker, in line with yield differentials, weaker China data, messier fiscal budgets as mining revenues decline and commodity prices fall, declines in the terms of trade, cancelled new investment projects, tepid growth in the non-mining sector, and the stronger USD. One huge observation we have is that AUD is at 11 month lows while equities are at all time highs. Say, just say, equities were to have a tumble (yes, yes, improbable, but just say…), then would markets resort to risk off/risk on mode, and would the AUD have further to go and trade as a risk-off currency? It has sold off sharply during a huge risk-on phase, with equities going the other way and we would like to see how AUD would trade if equities did notice gravity. We believe that if equities sold off, AUDJPY would sell off, and USD would rally even more as a safe haven and JPY would join it. Of course all this is conjecture and requires that equities sell off to happen…Now back to reality. AUD has been classed as a ‘safe haven’ in recent months. We don’t see how that can be, given it’s huge pro-cyclical dependence. Yes, it has been a huge recipient of corporate, yield hunting, AAA diversification flows, but a safe haven?! Not for us.

Elsewhere, while the UK economy has huge excess capacity and very weak wage growth leading to subdued consumer spending, overall data continues cautiously better and the FTSE hums along and extra easing is distant and Mervyn King said the ‘recovery is in sight’ as he upgraded growth forecasts at the QIR before soon joining Scholes, Owen, Beckham,Carragher and Sir Alex Ferguson in retirement. The new chap, Mr Carney, is being given leeway by the Chancellor to enact forward guidance and tolerate higher inflation to achieve growth objectives. The incumbents at the MPC are not happy with forward guidance as it could lead to credibility issues over breaking commitments if inflation got out of hand and the MPC was then unable to fulfil any guidance promises. One thing is for sure, the Bank of England will be at it’s most transparent ever under the new chap. If you don’t like the Short Sterling futures market now, you are unlikely to like it then.

Europe has been quieter as the USD drives the market a the moment. The DAX finally joins the ‘all time highs’ club. The now ‘vogue Europe debates’ are: negative deposit rates or not (and their unintended consequences), improving credit flows to SMEs, shunning austerity for pro-growth policies, boosting employment, and trying to speed through the Banking Union and oversight/single supervision resolution. All in a day’s work all those. Risk premia remains well behaved and Spain (already 54% for this year) and Italy bonds are almost (but not quite yet) trading like regular bonds, rising and falling with Bunds on data releases. Not seen that in a while. Q1 pan-EU GDP data was abysmal, but we knew that and the ECB has already reacted to it. The EU current account surplus is decent and should help EUR on the crosses, although the USD is king at the moment, on yield merit, and not for safe haven reasons. We are a little bit away from ‘positive contagion’ in Europe, but we are also out of the fragmentation, break-up, exit, default messes. It’s all about achieving growth now, which is the least worst of all these issues. However, as the ZEW economist smartly put it: Any further ECB cut could give off a negative signal and would be unhelpful.

One big danger to these markets now is that they would take an exogenous shock very badly, given the extended period of low volatility, complacency and stability. If you want ideas:  A US cyclical slowdown starting this quarter is a big possibility, given the weaker output data. China is back to not being pretty. Has Australia left it a bit late over the damages from the strong AUD? Is the Japan experiment shaky and is the NIKKEI due for a slap? Is the rest of Asia on the brink, courtesy of Japan? Is global disinflation due to low demand and recessionary forces a bigger worry than we believe, especially if the global economic recovery has lost it’s momentum? Is the ‘dash for trash’ rush into the junk bond market about to see some payback? (A few years ago, the 10y Treasury yield was higher than the current junk bond yield). There are issues out there but the market remains bulletproof for now and Parabolas continue rising, as the S&P has now caught up with our previous favoured Bubble market, the SENSEX:

USDJPY runs the show. A small shift into net buying of foreign bonds last week by Japanese investors, as well as large spot buy orders and an obsession with the 100 level played their part in a sharp jump in this pair. It was USDJPY up that preceded the rout in global bonds, not the reverse. The USA and Germany have definitely made objections but overall, the G7 are letting this pass. The NIKKEI is up 70% since November, yet material growth or inflation in Japan has yet to transpire. JGB yields surged 11bp on Friday to 70bp. Japanese banks, who hold a lot of these, aren’t comfortable with that type of move. There are still many obstacles in Japan: huge debt, fiscal indiscipline, no wage growth to match any rising prices, and surging imported energy prices that a fragile economy may not be able to deal well with. Still, the daily ramp up in the NIKKEI, on the back of USDJPY up, creates a wealth effect and masks over everything. We believe that the biggest danger to USDJPY up now lies with the Japanese authorities themselves trying to keep some diplomacy with their beleaguered, troubled, angry neighbours. If you recall when USDJPY was in the mid 80s, the initial target was 90-95. Thereafter 95-100. This may well be globally destabilising. With Asia Crisis 97/98 fears overhanging, the Korean rate cut was accompanied by stern anti JPY devaluation sentiment. Taiwan has seen recent disinflationary forces set in, and Indonesia and Singapore have seen weaker industrial data.

The ECB is ‘ready to act again if necessary’ and ‘is watching the data.’ We argue that the sliver of better German data just seen and the daily all time highs in the DAX and the exploration of ways and means to boost liquidity to the SMEs and the new wind of change shifting away from fiscal austerity to expansive government growth policy will likely delay any further action. Crisis management is better in Europe: rates are low and full allotment is extended. OMT is there as a backstop. A banking union is being worked on (slowly). The Portuguese financial market is reborn. Spain over Germany, through ‘natural’ market moves, is at 280bp (remember the Spanish wanted a guarantee of 200bp during the eye of the storm when this spread was above 550?). Target2 imbalances have shifted lower. So a lot there for virtuous circles of improvements and support for the EUR.

The main threat hanging over the EUR, Damocles Sword style, for now, is a deposit rate cut to negative. The ECB know this has a major FX impact. But it also has very destabilising money market impacts and we believe this is not an imminent policy instrument, more a theoretical discussion and a jawboning tool. The other threat for the EUR is if the troubled nations, who have been given more time to cut deficits, and make structural reforms and improve competitiveness mess this up and don’t act sensibly. The market has given huge benefit of the doubt to the likes of France. They should be wary of their actions.

China is definitely back to messy. The export data has been scrutinised for foul play as an excuse for firms, by overstating their business, to bring hot money onshore and avoid capital restrictions. Thus the cross border capital inflows are disguised as trade payments. These ‘Ghost trades’  corrupt the data. Any futures government crackdowns on this will surely see a big fall off in the China export data (assuming there is an effective, non-corrupt crackdown). China’s trade partners certainly are not seeing the matching, offsetting trade numbers.

China’s economic foundations are back to not being solid. PMI data is dropping off. Debt levels are enormous and the recent fall in PPI shows that industrial China is riddled with excess capacity as demand is weak, so hurting pricing power and profits. On the other hand, the property boom/bubble, partly due to hot money inflows, is keeping the PBOC’s hands tied (they even drained liquidity via bill sales for the first time in a while). Throw in the shadow banking and the huge local government debt problems as well as the PBOC’s bizarre daily higher fixings of CNY vs USD (so making CNYJPY go even higher), and there is much reason to be back looking at China again. Certainly the Shanghai index has not participated in any of the bubble bath that the other major markets are bathing in.

The RBA acted, as it definitely should have, and the market looked past the strong, yet volatile, employment report that from now on is expected to throw out anything. The AUD has broken through a 10 month range. The Budget is this week and there has been a lot of Gillard excuses made in advance about the fall in tax revenues due to the squeezed businesses and shelved mining projects. The RBNZ, also, has made louder noises re NZD strength and maybe there is a combined ANZAC resolve to get their currencies lower for the right and just reasons. Certainly the Australian PMIs across construction, manufacturing and services have been atrocious and retail sales were weak. Hell would have broken loose if such weak numbers would have been seen in Europe. Inflation is tame and CAPEX flows are dwindling as commodity prices drop off again and this much touted resource investment boom peak gets more and more headlines by the day. The big issue for the RBA is whether the decline in the Australian economy is actually deeper than they estimated and so have they been behind the curve and slow to move, given the persistently high AUD and weak global backdrop? If the market loses confidence in the RBA’s conservatism during a period when all other central banks were easing aggressively and global speculators, corporate flows and AAA/yield hunters were parking hot money into AUD, so withering away at Australia’s industrial base, then there could be serious punishment for them ahead.

As for the Fed, the taper debate has come back after the non-farms and recent claims data. The US labour market is showing similarities to the UK one of the past 8 months, whereby it has been improving despite slow rises in spending and output. The UK labour market has tailed off recently for what it’s worth. There is key activity data to come from the US this week. It would look strange if the Fed suddenly went to taper mode when they just announced at the last FOMC that they could go either way on asset purchases, depending on the data. Of interest still is the fact that much FedSpeak is about possible instabilities from excessive risk taking and reaching for yield as a result of QE. The other forward looking talk floating about is the likely disaster that could occur when the Fed has to finally exit QE. This is a long way off to start to contemplate now. We still believe the internal dynamics of the US economy are still sluggish and deleveraging is still high and that this recent surge in equities has, if anything, increased private sector debt in a limited growth enviroment. The Fed is boxed in. They know it. We know it. It’s great for equities and risk for now, but there are finite factors at play at the very end.

The UK has had a decent run of data, interspersed with some weather related consumer and inflation weakness, and the GBP is well off the lows and out of the limelight. This week’s QIR will be Mervyn King’s last and he will unlikely want to cause a mess. Greenshoots of a tentative recovery but a long way from pre crisis peaks is the possible message. Money Activism and Fiscal Conservatism is the UK two line whip, despite whatever the IMF says or what is going on in the rest of Europe regarding austerity. Ironically, there are now grumblings that the Help to Buy scheme risks creating a housing bubble that could push up house prices 30% by end 2015. Some would like that. The same danger could happen in the US as a result of the Fed’s continuous MBS purchases. Sharp house price rises are always deemed good for the economy and the recovery….until they crash.

Seasonality (remember ‘Sell in May?’) and the sudden surge in volatility across FX, bonds and commodities could still play their part in making this a month of two halves. Equities are sat immune, making daily all time or multi year highs for fun. Distortions and gaping divergences are everywhere: One day equities dip when the USD jumps, the next day, equities jump when the USD jumps. The descent of Gold on Friday could be a subtle signal to the beginning of another round of liquidations that drag other commodities down. We are also watching the junk bond market in the US as yields there hit an historic low. They are not called ‘Junk’ without reason. Our biggest concern, of recent, is the now very strong positive correlation between US equities and the USD. In zero sum games, this one does not add up well.

The year so far. Gaping lags in commodities vis a vis equities. NZD the best G10 currency:

What next for the Dow Jones as it passes through a new round handle? It wasn’t comfortable at 14000 first time round:

In terms of the S&P, if you are into mean reversion, then this graphic has something to say. Note how the 99/00 dotcom bubble was the most inflated in history:

The bottom line (revenues) during the current earnings season has not been all that:

In terms of seasonality, it is February, May and September that are problem months for the S&P over a decent time horizon. Don’t laugh this month off just yet:

As for the dynamics of market cycles, care to hazard a guess as to where we are? Maybe too many think we are already in ‘euphoria’ and this acts as a contrarian lever? Certainly the graphs of the equity markets look at least like the ‘thrill’ or the ‘euphoria’ parabola:

The Fed’s full steam ahead profligacy is doing it’s part. But is there a shelf life or diminishing returns to the impacts and benefits of QE3/4?:

The underbelly of US growth does not look particularly on solid foundations, given the recent fiscal tightening moves via tax hikes and sequestration:

Consumer confidence (68 at mom) in the US currently matches previous recession levels despite the all time highs in the equity markets:

One reason for this is that there’s certainly a long way to go till US households match the wealth of pre financial crash days :

And going to College in the US (and many other countries) has not been as lucrative as it used to be:

After a US Q4 GDP of 0.5% and a Q1 GDP of 2.5%, this table here shows US GDP in the quarters preceding previous recessions. As much as the Fed has been trying to bend the business cycles, these cycles may still have their say. A warning?:

Globally, the World is weaker :

In Australia, the RBA should, in it’s upcoming meeting, take note of the hard drop in manufacturing:

And the services sector Down Under is not doing well either. Throw in the slump in commodity prices and the weaker global demand, Australia could be a country in a dangerous position with a negligent Central Bank:

In Japan, the markets have front run the supposed outflows of the big life insurers and investors. So far, the overseas allocations have been disappointing. Can you pick out what these Lifers would need to do from here?:

In Europe, financial market matters are much better. Here, TARGET2 imbalances have dropped as per the kinks in the Spain and Germany lines:

And risk premia has compressed hugely this year, so fading away frears of fragmentation and convertibility risks :

Yet the French are not happy, neither recently, nor looking ahead:

The British aren’t happy either, and here is a big reason why as the household squeeze continues:

Have you managed to get trading limits for many of these places? Would be interesting to see the VAR usage:

Yet how many of those countries above are bright red in this graphic? Always trust a Dane:

Into the 5th month of the year and some markets seem to be reverting to the awkwardness of the second half of last year. Don’t scream for help:

With thanks to BIG, dshort.com , Global MacroMonitor, Finviz and WSJ for use of graphics.

We are updating daily on twitter on @RMDFX or www.twitter.com/rmdfx

The biggest debate at the moment is whether the ECB will cut 25bp off the refi rate on Thursday. The majority big banks’ research teams are calling a cut and the market reacted the most when Mr. Draghi’s former employers entered the fray. Still, some senior ECB members are not that forthcoming and not exactly overly committal: . Mssrs Asmussen, Coeure, Praet, Mersch (funnily enough, all from the North) keep telling us that a rate cut would have a limited effect; that ECB monetary policy is already very accommodative; that there are limits to monetary policy; that rates too low for too long can have real distortionary costs; that the fiscal authorities must do more to improve growth and unemployment; that more ECB risk taking would be a diversion; that the ECB has already done a lot and that the ECB cannot remove the constraints of lending. (Ms Merkel, in a proper faux pas, said this week that Germany actually needed higher rates). Monetary policy is indeed challenging given inflation differentials across the Euro area. What was a ‘lively’ discussion at the last meeting will be an even livelier one at this meeting.

Certainly the data remains weak and inflation is dropping. We have been in the unchanged camp for a long time. It’s tough to accept that they will cut. The EONIA curve is flat and very low as it is. There could still be twists early next week and one of those ECB ‘sources’ story may come out on Monday or Tuesday to massage expectations and eliminate any uncertainty. Data has been weak, but it has been weak for a long time without triggering mass crisis. The financial market stress indicators are performing exceptionally well. Fragmentation and convertibility risks have diminished. If, and we still believe it’s an if, they do cut, it could be one of the most insipid, ineffectual, unwarranted, unwanted cuts in Central Banking history. The EONIA market was so well ahead of this move that a move will not make a dent and the ECB will look to be out of ammo. And ECB members know that. Even IFO’s Wohlrabe, who’s weaker survey exacerbated the rate cut calls, does not want the ECB to cut rates.

An alternative move by the ECB, seeing as they are ‘ready for action’, is, rather than cutting, they could come out with ‘monetary innovation’ and creative incentives to increase bank lending and boost credit supplies and help lending via liquidity provision packages for SMEs that involve the European Investment Bank. Perhaps offering funding aid for SMEs and possibly new asset classes of securitised SME loans. So efforts to ease credit constraints to small firms. Repairing the impaired monetary transmission mechanism and transmitting interest rates evenly will have more effect than a rate cut. So ‘ready to act’ , does it imply a cut or more creative ideas to raise credit demand?

Away from the rate debate, austerity is fading in Europe. It seems to have reached it’s limits. The pace of deficit reduction is slowing. Spain has delayed reaching it’s deficit target by two years in a move that has been backed by all. Gradual as opposed to shock fiscal consolidation is the way forward. We view this as a growth positive timed well with the market’s renewed confidence in periphery debt. Any extra growth could add to government revenues, so helping reduce deficits more. There is also the appeasement to the austerity fatigued populous, who have suffered and sacrificed enough.

US data continues on the soft side of expectations (durables, Chicago Fed,  manufacturing PMI, Kansas City Fed, Richmond Fed, Q1 GDP). Q1 GDP’s stronger inputs from consumer spending and inventory accumulation will unlikely persist into Q2. We have already seen a very weak March retail sales print as payroll tax hikes have started to have an effect. The business investment picture is not encouraging and the PCE deflator at 1.3% ensures that QE stays eternal. The Fed is now talking about defending the inflation target from the low side as possible disinflationary pressures keep the TIPS market subdued. Housing data, encouraging as it is, is not a huge part of GDP as it was in 2007 and is not strong enough to support demand all by itself. US economic momentum has faded.

The disconnect/mismatch between the bulletproof behaviour in equities and the sluggish behaviour of the real economy ensures that the Fed is cornered and trapped in eternal QE. They dare drop this, the markets will suffer. It almost seems that the only way out of this fake, symbiotic relationship is that the market buckles first, cleanses itself of the excess and greed and euphoria and froth and allows the Fed to free itself from it’s shackles and revert to a more normal form of the business cycle. The Fed, and many amongst them know it, have created little in terms of above trend growth and have exacerbated a huge unstable bubble in equity prices, as well as disturbed the efficient monetary functionings of other large economies. So it is getting to a case of who blinks first: the Fed or the market? We believe the latter will force the former. Trying to manipulate and distort a business cycle, like the Fed are, has serious consequences on the distribution of wealth and sustainability of growth. In normal times, a downturn in asset prices corrects this. The Fed has admitted that if it’s policies fail, they will reassess. The business cycle, at the moment, is totally out of sync with the asset markets. If they both synchronise, then the Fed will be caught out badly. The market at some point may turn badly on the Fed.

Japan’s inflation data this week highlighted what a job the BOJ and Mr. Abe have on their hands given the huge deflationary forces. The weaker currency and rampant equity markets may not be enough to spur more investment at home and resolve long term structural problems. USDJPY has seriously underperformed the NIKKEI recently. Another fail at 100 and it seems the Japanese large investors and life insurers etc are not exactly rushing overseas for the gaisai (foreign bonds), and in fact are net repatriating still. It certainly does take a while to adjust your investing mandate and the speed of the JPY weakness has warranted caution amongst the ‘lifers’. The BOJ is likely sidelined for a while now and the market has it’s own decision making as to whether to push on with this long NIKKEI/short JPY trade, or has it reached it’s zenith, given all current available BOJ actions and information? The market is still very front run all sorts of JPY carry based assets, which, ironically , seems to have priced out the Japanese investors that were meant to rush in and square these positions up. Meanwhile, the Japanese debt and fiscal situation is getting higher and riskier.

Elsewhere, the UK avoided the triple dip and the bearish GBP camp has had to reassess. GBPUSD has behaved robustly since Mervyn King’s ITV interview in mid March. QE is on hold and data is still overall weak and it is worrying that the labour market has joined the weakness. Lower household incomes and higher living costs are adding to the squeeze on household finances. In Australia, the softer CPI, the still high AUD, cautious business sentiment, lower commodity prices and possible contractionary fiscal policy ahead have moved many to call a May cut with 11bp already priced. How battered are the Australian terms of trade from a few years ago? The market is covering part of it’s shorts in CAD , but we don’t think this is the start of a sustainable rise in CAD, given the economic slack, falling commodity price trends, household debt and housing market issues. We are still long term USDCAD bulls. China is still fixing lower USDCNY despite what looks like a milder recovery and dangerous bubbles in debt and housing. Band widening is cited. This could increase volatility and backfire, especially in the shadow of this unhelpful JPY weakening .

Only a fake tweet could dent the market this week and it took 3 minutes to turn that around. Global monetary accommodation is failing to translate into growth or even higher inflation expectations (Japan is still a work in progress)as post financial crisis private sector deleveraging continues and wage growth remains very low. There is a crucial week ahead for data and Central Banks. Bond yields are failing to confirm equity market rallies, continuing lower, and this remains the biggest tell in the current market’s distorted state.

We are updating our market thoughts daily on twitter @RMDfx or www.twitter.com/rmdfx

US data has continued to show weakness, except housing starts (although not of single family units). Of great interest has been some FedSpeak (including Lacker, a known hawk) highlighting the falling inflation data and even the possibility of increasing asset purchases and stimulus in response. This renewed fear of a dormant economy must surely now kill the ‘taper talk’ as some Fed members are now looking at disinflation, given PCE is at 1.3%, well below the 2% target and 10y Breakevens hit a low of 227bp this week. We doubt the Fed would increase asset purchases above the $85bio/pm given several members are already worried about the financial market stability risks as a result of the Fed’s expansive balance sheet, but clearly QE is here for a very very long time, effective or not. If this weak data streak does continue, disinflation concerns will accompany the possible market instability concerns. Not an encouraging sign.

Bringing in the corporate sector, earnings season so far has seen some big names miss their revenue expectations and mortgage lending income amongst the banking sector has disappointed. As well, Caterpillar, a global bellweather, has reported weak domestic and global retail sales data. Taking together disinflation concerns, weakening US data, increasing effects of the fiscal drag on the consumer, a concerned Fed, weak corporate revenues, and big drops in commodity prices as the leveraged community liquidates, it would seem plausible the equity market adjustment has further to go. 1540/1534 seems a big area in S&P. There was still a very keen desire to buy on Friday as we seem to have created a pattern of high volume sell off days (Mon,Wed,Thur) followed by low volume rally days (Tues,Fri).

The ECB is keen to let us all know: that monetary policy is not the key issue or a substitute for reform, that the ECB can’t fix everything or address the root of the crisis, that monetary policy is already very accommodative (given all data) and that further rate cuts will do little to stimulate growth. Herr Weidman went out of his way to clarify that his WSJ comments were misunderstood and that he was NOT signaling a rate cut. A rate cut would be possible if the data worsened, but that given the current analysis, rates are appropriate. (Note that the Germans, as a collective, do not want to enact a more expansive domestic policy to come to the aid of the rest of Europe as this could dent the market’s confidence). So the ECB has an implicit easing bias, but no action likely in the near future. Pressure remains on them to aid the SMEs (who account for 75% of EU employment), but really it is not the ECB’s role to distribute or allocate capital or credit as this is more a role for the banking system to finance the real sector. The ECB is mainly there for funding. So no doubt this SME aid debate will continue and the European Investment Bank (EIB) may be brought in.

We still pick out positives in Europe amidst the now embedded hatred: crisis response strategy and problem solving capacity and resilience have all improved, while fragmentation is definitely reversing. Target2 imbalances have dropped 25% from the peak and yet another 11bn EUR of LTRO was repaid despite the surrounding uncertainties over Italian politics and bail-in templates. EURUSD is stuck at the moment: dips offer value, given the large EU current account surplus, weaker US data and lower US Treasury yields, and the much much improved financial stress indicators as Italy and Spain risk permia keeps improving. France’s too, surprisingly, given their precarious growth, competitiveness and deficit target positions. However, there is, for now, a limit to how far the EUR can rally given the weak growth and unstable political backdrops. If the EU Commission does loosen the noose around austerity and excessively tight fiscal consolidation and allows more breathing space, especially after criticism from the G20, we would take this as a positive, since the world is trading the EUR as a growth story.

The AUD has shown some weakness. But we have seen this before many times within this 1.0115/1.06 range. In fact, since July last year. So we watch to see if there is any propulsion. It has reacted to the weaker equities, commodities and slower China data. Interestingly, it was weak on Friday despite positive equities. The government will miss their budget surplus target due to loss of revenues caused by the high AUD and lower commodity prices. The budget is on the 14th May and could be a key factor in the June RBA if contractionary measures are taken. A lower AUD is being screamed for as business (not consumer) confidence is tumbling and there are few signs that non-mining investment is picking up to offset falling CAPEX in mining. One wonders how the huge capital flows that alone, without fundamentals, are propping up the AUD would react if the RBA took aggressive action and/or if weak global sentiment took the AUD below this 1.0115 level? That would be one interesting exit door to watch.

China is back in the news. Is the rebound over? Weaker Q1 GDP and sequential activity data, a ratings downgrade, reports of catastrophic debt at the local government level, huge surges in banks bad loans, and a property bubble as home prices refuse to drop despite a severe clampdown. The foundations of the Chinese fixed income, money and debt markets are back under scrutiny. Maybe H2 12 recovery was not that great and was massaged to help the handover? And now weaker data is being fed back in amidst the better sentiment? Who knows? All we are near certain of is that GDP will print somewhere between 7.5-8.5% for years to come because that is what they want as they rebalance from fast high growth to sustainable, better quality, lower growth. But the underbelly may not be that stable and we are back watching. It’s still very odd that, amid this recent fragility, they continue to fix CNY at all time highs vs. the USD. The US criticism of China as a currency manipulator (and not Japan) ahead of the G20 seemed bizarre in the light of this. Now that the G20 is over, will the Chinese start to deflate the CNY? The level of CNYJPY is exorbitant at the moment and China, alongside suffering South Korea, are the most outspoken critics of the Japanese policy. Interestingly, Japanese exports to China are negative, despite this very high CNYJPY rate. The Chinese know how to cut you off.

Japan got a free pass at the G20, with full acknowledgement that policy was for domestic purposes and aimed at beating deflation. On the sidelines of the G20, the Russians, Asians and Brazilians were livid. The Japanese are citing their trade deficit as their defence for the weaker JPY. Looking at recent Japanese data, it is on the up, ever so slowly, buoyed by ‘wealth effects’ from the rising NIKKEI. Japan needs wage rises to beat deflation and match any upcoming inflation, yet the weaker JPY is preventing these as it is raising import costs for firms, so preventing them from raising wages. This dynamic will be key. One dynamic that has not changed is that the JPY is still the biggest safe haven out there. We saw this on Italian election day (Feb 25th) and last Monday, when, in an already selling off, liquidating market, the sad news from Boston hit the headlines

In the weekly MOF transactions data, capital flows and portfolio allocations by the big investors are still inbound as they remain net sellers of foreign bonds. The reallocation decision process is clearly not instantaneous and the weak JPY and already elevated asset prices do not make external investment attractive. Also, Japanese investors may be repatriating assets to lock in profits on investments made when the JPY was strong. So again, the JPY may be too weak to offer value overseas. Jockeying over when USDJPY touches 100 will dominate trading this week, but in the bigger picture, JGB, NIKKEI and JPY volatility will decide how the Japanese experiment ends, as well as the huge debt burden, standing at 240% of GDP.

Another week, another UK downgrade as Fitch joins Moodys, citing a weaker economic and fiscal outlook. Definitely was leaked, given the GBP selling before the announcement. Incoming Mr Carney is already playing down his role as UK saviour, citing that fiscal and structural adjustments are the key to long term, sustainable growth, not Central Bank guidance or the global monetary experiment. He had the audacity to place the UK in the ‘crisis group’ of nations. What a start! The IMF added to Chancellor Osborne’s tears by scolding his austerity policies. Not a good week for him.

Of decent interest in the UK was MPC’s Martin Weale talking about the possibility of a minor contraction in Q1 and that a lower inflation outlook could pressure more stimulus. Has he turned? The Q1 GDP number is on Wednesday. Data in the UK has been mixed to weak. Housing is showing life, given the FLS and Help to Buy stimulus programmes. However the labour market seems to have finally caught up with the weak growth outlook and unemployment has turned up. As well, average earnings and wage growth are deflating hard. The UK consumer is now squeezed via pay, austerity, sticky inflation and petrol prices, so adding to the weak, lacklustre demand backdrop. FLS has definitely helped mortgage lending, but has not improved credit flows to SMEs. The UK government could be creating uneven, unbalanced growth as it only improves the housing market.

The Scandis, NOK and SEK, seem to have been cracked, with the market now a dip buyer of EURSEK after the Riksbank was dovish, pushing back any semblance of a rate hike till later in 2014, given concern over the currency strength. A cut in July is even a possibility, but that is a while away yet. NOK has seen weaker data, especially inflation, and falling oil prices cut into it. Are we looking at possibly the end for the High Betas (NOK, SEK, AUD, CAD, NZD) dominance in conjunction with weakness in commodities and cracks in equities? Maybe so, especially if the hunt for yield trades and excess leverage has more unwinding to go and all rallies are sold into, for liquidation purposes.

Gold has been the huge talking point recently. The liquidation was brutal and Gold has ceased, for now, to be a hedge, a safe haven or a liquid asset. It has become a liquidation barometer, with the phrase ‘margin calls’ always nearby. Silver, the great gauge of liquidity, has also been battered. However, somewhere along the line, (1300?1250?), there should be a bid in Gold, given the continued low global real rates. But, right now, it is firmly a risk asset, not a risk hedge.

Next week’s MOF Portfolio Capital Flows data will be eagerly anticipated (yet another data set that the market now has to watch that it never used to bother with) to gauge whether money has instantaneously started to shift to higher yielding overseas assets or whether this reallocation dynamic is a long drawn out process that involves complex decision making on the part of the investors. Another key point is whether this huge, over exuberant, front running has driven asset prices up too far and possibly priced the Japanese out of the market, especially given that the JPY is so much weaker. A unit of S&P or 10y TSY in JPY terms costs a lot more now than they did 5 months ago. Do they really want 10y Germany at 125 yield? Irony of ironies if one of the best investments at the moment was …the JPY!! The hunt for yield got so extreme that everything was snapped up: bonds, equities, currencies of weak economies and even money market products like USDJPY XCCY basis swaps saw large moves, looking for any marginal higher yield ledge. Speculators are holding so much risk at the moment in anticipation that the Japanese will just turn up next week and take it all off them at these over elevated prices and even squaring up their short JPY positions for them, to boot. There must be an expiry date as to how long they can hold onto these positions.

Economy wise, for Japan, key data points going forward will be Capital expenditure, Exports and Consumption patterns to see if growth is being revived, which will aid this bold battle against deflation. It remains to be seen if the BOJ have got it right over the link between inflation and the monetary base in Japan. If the link is tenuous and JGBs do give way, then the Japanese project has issues. USDJPY was surreal last week, just failing to touch that big 100, despite every dip being bought, then having a clear out late on Friday that would leave the bulls a bit worried over the weekend. With the G20 finance meeting coming up, the US decided to ask the Japanese not to enact competitive devaluations. Timing very strange after a 22 big figure move. The NIKKEI will react in it’s usual 300 point gyration on Monday. If you add the daily JGB, NIKKEI and JPY volatility together in Japan, there is cause for concern at the long run level.

AUD ignored a 0.2% jump in unemployment that included a 0.2% drop in the labour participation rate. Half the bumper headline number of last time was given back and, we suspect, the rest may do too next month, such is the statistical calamity this number has become. Job advertisements data has been confirming a weakening labour market. Nonetheless, despite such bad data, the AUD soared on the back of the carry trade, again front running possible Japanese actions. Stories of cancelled mining projects are back amid higher costs as big companies look for savings. Westpac Consumer confidence dropped 5% last month and NAB business conditions hit 4 year lows. Commodities took a beating on Friday: Gold (which used to have a +93% 10 day rolling correlation with the AUD in 2011) was murdered and is now officially in a bear market . Silver, oil, copper were hit hard too amidst possible deflationary concerns amid weaker US data. Asian stock markets, especially Korea and China, are languishing and the other BRIC nations are reporting downgraded growth forecasts, weaker retail and car sales and gloomier prospects. If you add the weak EM picture, the beatings in commodities, and the deteriorating domestic economic picture, the AUD level is incredibly distorted. The RBA’s easing bias may become a bit more than just that in coming months. Their credibility may succumb to a reputation of negligence. There are no inflation concerns in Australia.

In addition to the previous week’s woeful data and fragilities, another important data point in the US, retail sales, were weak across the board, with downward revisions. Blame the payroll tax hikes, sequester, cold weather or sluggish jobs market. Michigan also surprised sharply to the downside, in spite of the very strong equities market. Clearly the ‘wage only’ consumer is not feeling the wealth. The Fed can take some blame in exacerbating such a fractious economy, where wealth is concentrated among the stock owning minority and income disparity is huge. Also of interest was that NFIB small business confidence took a sharp fall as well and rail cargo traffic is showing a downturn. US job growth may not see the required Fed goal of 200k/month as layoffs from the sequester and a weaker economy combine.

Whatever we write about US economic outlook seems irrelevant to equities as the dip just gets bought. The equity market has no downside it seems, despite weak growth, weak sentiment, weak commodities, weak overseas markets. The liquidity driven bid is gargantuan, euphoric, and, in our opinion, unstable in the big picture. The net change in S&P since non farm was from a spike low to 1539 to a rally to 1597 during no data days to finish at 1588 post retail sales. Monday will be interesting ahead of the end of the tax year. Sell in May is now 2 weeks away.

The Fed’s taper debate is taking on some new twists. Certainly it is now at the forefront of all FedSpeak. We know that Bernanke, Yellen and Dudley are keeping the liquidity going regardless. Indeed, Bernanke’s most recent comments were : ‘while the economy is better, conditions are clearly still far from where we would like them to be.’ Clearly the excess will remain for a while still and Bernanke is loving the whole global expansionary monetary policy vibe that is ongoing at the moment (ask the non-Japan Asians and Brazil if they do too). However, and this is the twist, more Fed speakers, doves and hawks together, are expressing concern over the size of the balance sheet and it’s effects on market stability. Now if you have these wise people worried, then shouldn’t we be? If you have a combination of (1)weaker growth despite huge liquidity, (2)euphoric behaviour in the asset markets despite weaker growth, (3) financial market improvements not translating into the real economy, and (4) the Fed worried about it’s own actions , then the end game is a concern. We repeat that the Fed’s trillions have not improved real trend growth.

An interesting graph we have come across. courtesy of dshort.com, shows that, despite all the ‘money on the sidelines’ talk, account holders are holding near record amounts of debt margin. A sort of ‘all in’ barometer. Note when this is elevated, it precedes turning points. Throw in record holdings of Junk Bonds and any other low grade, but high yielding, investments and you have a precarious situation.

In Europe, periphery yields, helped by front running Japan, have continued their phenomenal decline. Distant now is the market’s conviction that Spain would seek a full sovereign bailout. LTRO repayments resumed at 10bio EUR this week and data showed that unit labour costs have plunged in South Europe, so adding to their improved competitiveness. France seems the pariah state at the moment, garnering criticisms from all sides based on it’s lack of competitiveness, diminishing growth prospects and lack of labour market flexibility. The divergence away from Germany in terms of economic performance and competitiveness will be a key barometer going forward. Still, the market is trusting French bonds. Or is that just further front running of the Japan trade?

Of course, it is the weak economic enviroment and high unemployment that matters the most in Europe. It seems that a rate cut is not the preferred method of the ECB at this juncture to boost growth. ECB speakers are implying that policy will remain accommodative for a long period and that there is no ‘magic wand’ and that monetary policy cannot fix everything and given that rates are already so low, any marginal gain from a cut will be insignificant. We have been in the unchanged camp all along, and while a cut would not shock us, we will remain in the unchanged camp based on the recent rhetoric.

Interestingly, the IMF has weighed in, saying that an ECB easing could raise the risk of a money market mutual fund run, clog up the money markets, hurt EU bank stocks, raise default risk and delay bank balance sheet repair. Wow, it’s not like the ECB need much incentive to not cut anyway!! One thing that is emerging is that the ECB is adopting implicit forward guidance, whereby all the big speakers keep repeating that the ‘ECB will keep rates low and accommodative for long periods.’

Soft economic data is the main problem for the EUR at the moment, not the financial stress indicators. Tighter periphery spreads, lower yields in the US, this front running of Japan flow trade (although that has a shelf life), and a natural current account surplus are all acting in it’s favour. If US growth continues weaker, so cancelling out the weak European growth, then our favoured trades would be long EUR/AUD and long EUR/S&P. Timing is everything.

The BOJ money wave is lifting all asset prices everywhere. The BOJ has QE’d the world… for now. Abe has postponed the sell off. The euphoria continues, and the exuberance is higher than ever….as is the misunderstanding of risk.

A full house of weak key US data should now put Fed tapering talk to the sidelines for a while. The doves, including the boss and his likely successor, Ms Yellen, are firmly in charge of the liquidity hosepipes. US fiscal policy is tighter and the required 200k per month job creation streak is not there. The unemployment rate is down to 7.6% for the wrong reasons. Indeed,it is calculated that if the US labour participation rate today was the same as in early 2009, then the unemployment rate would be 11%. Bernanke’s favoured employment/population ratio fell sharply to 58.5%. It is a real sad story about the discouraged workers that have given up looking for work. This ties in with tales of food stamp usage at record highs and social inequality being America’s biggest undercurrent story. [NB:If the Jobs data weakness, be it in the NFP, claims or ISM component, is being explained away by cold weather, sequester kicking in, or early Easter, then why weren't these factors accounted for in the initial estimates? Easter didn't just suddenly creep up as an exogenous shock on the world?]

We have argued that Q1 was a quarter of assisted, not genuine, growth based on huge inventory accumulation after the weak Q4 of last year. Yes, we may see a 2.5-3.5% print for Q1 GDP, but unlikely repeated for the coming quarters. We still believe that the internal dynamics of the US economy took a major shift downwards after the 2007/8 financial crash as patterns of spending and investing behaviour were massively altered. We also believe that the fiscal tightening JUST begun in the US has yet to take it’s full toll, both on disposable incomes, and on economic expansion possibilities and animal spirits. Thus, asset prices are extremely overvalued and are up only on central bank liquidity, which itself has not really pushed growth anywhere near the long term trend. It is widely known now that asset prices have not reflected real GDP in recent times but more the place where huge walls of money are parked. This is the making of a fake bubble and unstable euphoria and greed amongst underlying weakness. Huge QE has not averted weaker data and subdued, below trend growth. Of course we await more data and a couple of weeks of soft data is no confirmation of an upcoming sharp slowdown, but it certainly doesn’t help. Q1 10, 11 and 12 also started decently amid ample Fed liquidity (via QE1, QE2 and OT respectively) yet all faded into Q2 of those years as the sugar rush highs wore off. Once again?

We also enter another earnings season next week. Cyclical stocks have been underperforming defencives in the recent run up. Not always a positive sign. Of course expectations and guidance has been played down yet again as Q1 saw a strong USD and weak overseas growth hurt several bell-weather names, so the chances of beats off a very low bar are possible. It would be dangerous if misses were frequent.

As for the Great Rotation, we never believed in that because of our weak view of the US economy and because bonds are still a very viable asset class, given the Fed’s desire to keep long yields low, and were always, physically, and verbally, on the bid (Japanese investors are now likely to join that bid too due to their crowding out from their domestic market post the BOJ). Given that growth may now be deemed not as solid as initially thought, 10y US yields have traded to 168 this week from highs of 209 a few weeks ago. There is now a gaping divergence between bond yields (falling) and equities (elevated) and the great bond bloodbath predicted is on hold yet again.

Nevertheless, for now, it seems that whatever the bearish case or argument, the appetite to buy the sell offs in equities is voracious, as is usually witnessed in the last few hours of trading in New York, so limiting the losses to minimal in the big scheme of things . The desire to rush in is admirable, yet concerning, given the surrounding fragilities. Money indeed does go to money.

But is this buying sustainable, given these divergences all over the place? Yield/equity divergence, we have mentioned; The small caps Russell is underperforming, as is the Dow Jones Transports; commodities are cratering, especially the likes of silver, which is a decent indicator of global risk indulgence, and copper, which is meant to have ‘the knowledge’. Oil too, especially Brent. Also, EM markets are trading appallingly as they suffer at the hands of Japan (see below). Will Q2 be the quarter of some form of realignmet? The US joining the rest of the world in terms of weak data could be the catalyst.

Draghi delivered a strange press conference of 2 halves. He started very dovish and downbeat and worried over the downside risks, including now to the core, non-fragmented, economies, and possibility that the ECB scenario of H2 recovery would not materialise, so setting up belief that a rate cut was imminent. Then he turned the presser round with swagger and assured confidence, proclaiming that OMT was great, that the ECB was ready to act and to not underestimate the will of Europe. He finished strong, confident and played down redenomination risks. The EUR reacted with an almighty short squeeze. It was important for him to not lose the market’s confidence.

Draghi also put a firm line under Cyprus from a contagion point of view. Hearing it from him was essential. We believe Draghi’s credibility is massive. He returned composure and competence after the political debacle over the Cyprus ‘template debate.’ (It’s still ongoing among the politicians as EU’s Rehn is on about it at the time of writing this). At the moment, the main problem for Europe is economic growth. It is no longer financial market stress as witnessed by the much improved risk premia between Spain/Italy over Germany, especially given Italy’s political stalemate. Also witness how France over Germany has come in a massive 20bp from 73 to 53 as French Bond yields collapsed. Draghi himself hailed OMT as the most powerful monetary tool.

The ECB is definitely ready to act but, we believe, is not sure with which tools to best suit the EMU. The possibility of a 25 bp rate cut is inching closer, we acknowledge. The monetary transmission mechanism is now less clogged than before, so a rate cut could feed into the whole of Europe and not just benefit the core. We are now not ruling it out, having been in the unchanged camp all along. BUT there are still obstacles for this: The question is whether the Germans will agree to this given their dislike for low global rates and the instabilities they may cause. ‘Extensive discussions’ indeed will abound. Also, the core ECB speakers seem to tout the benefits of unconventional measures over the conventional. If US data is proved to be turning worse for a prolonged period, then a 25bp ECB cut may not have a harmful effect on the EUR as long as all the EMU financial market indicators stay under control.

The BOJ blitzed expectations (that had been dampened going into the meeting), front loading all moves to a new level, and the market reacted accordingly. The BOJ meetings from hereon are all about continuing this quantitative and qualitative bold monetary stimulus, whereby they flood the monetary base and manipulate the quantity of JGBs in the economy. USDJPY reacted appropriately and the pair is now viewing the BOJ actions as the main driver, as witnessed by the way it ignored the weak US data to ramp up. The belief is that the BOJ’s huge JBG purchases will lead to large investors’ capital flight out into overseas assets as they become ‘crowded out’ in the domestic market. Soros says this is dangerous and could lead to an ‘avalanche’ JPY fall. The market is convinced USDJPY 100 is within days. The rest of Asia is hating on Japan at the moment as KOSPI makes 2m lows, Hang Seng slumps and the Shanghai Index is slightly negative for the year. In Europe, the Germans believe Japan is in violation of the G20 by using monetary policy to boost exports. US car manufacturers are the only ones to speak out there, so far. At some point soon, we believe a government representative, mainly for the sake of Asian harmony, will likely have to clarify the fair parameters of USDJPY.

Already, within 24 hours of the BOJ move, instability has hit the Japan market. The NIKKEI is having average daily ranges of 300-400 points (600 point range on Friday) and the JGB market had a a massive round trip on Friday, with 10y yields dropping to a low of 32bp, to then rally to 65bp, before settling at 53bp. USDJPY and the NIKKEI went up and then down in lockstep. If these type of ranges and price actions become too frequent, this instability will undermine the greatest of efforts by Messrs Kuroda and Abe. (Minsky Moments). If long end yields rise due to increased risk premium on JGB yields, then there will be a case of ‘all bets are off’.

Economic growth and CPI rises will be the ultimate judge of whether all this profligacy will work for Japan. There are still nasty pockets of weak data, including negative CPIs, amongst other indicators showing some bottoming out. If the link between base money and the real economy is weak in Japan, then economic strength may not be seen. Economic growth cannot arise from drastic changes to expectations alone.

Given that the limelight has been firmly on the US, Europe and Japan, the UK has enjoyed a period out of the frontline news. GBP has stabilised and even strengthened since King,first, then the MPC minutes expressed concern re Pound depreciation and it’s possible inflation consequences, so ending the UK’s involvement in the currency wars. Data is it’s usual weak to mixed bag self, the ratings agencies keep circling, and we await Q1 GDP to see if the dreaded triple dip has been avoided. The range seems to be -0.2/+0.3. It looks like the MPC will now hold out on any extra stimulus measures till the arrival of Mr. Carney. The May Quarterly Inflation Report should be their next big day out. Till then, we will get a lot more focus on how FLS has been working or whether the housing market is improving, given the Chancellor’s efforts to boost the economy via this avenue through the ‘help to buy’ scheme. Unfortunately, money and credit data has been on the soft side recently (implying that any inflation in the UK is not demand driven). Interestingly enough, a huge stimulus in recent weeks has been the collapse of Gilt yields: 10y yields are at 163bp from 223 in early Feb. This shows that the UK is still a safe haven, that credit rating downgrades mean nothing to core economies (witness France too and the US) and that the market has little issue with the sticky higher UK inflation that exists. It is also an endorsement of Chancellor Osborne’s fiscal policy (again the same for France, with the market having faith in their structural reform agenda).

Talking of Mark Carney, what great timing for his exit stage left from Canada? There is definitely strife there: the jobs data has had a huge turnaround, the housing market is in danger, consumers are in huge debt, and the trade deficit has widened hugely as exports drop and falling commodity prices hurt. Also, if recent US weakness does prove to be genuine, this will severely double Canada’s problems. We have been long term USDCAD bulls and we stay so.

Australian data recently has been very decent on the whole (retail sales, trade balance, house prices) and the RBA now seems unlikely to ease further in the near term, albeit will keep the easing bias to try and keep the AUD from rallying. We are not convinced Australia is out of trouble over a longer horizon. AUDUSD is in a quandary. It ended the week lower despite the strong domestic data, paying attention to events overseas(JPY moves) . This market is not as fluid as it used to be. Far from it. Anecdotal evidence still implies huge pockets of cancelled investment plans, weak labour demand, low new home sales and the pending slowdown in the resources investment boom and commodity supercycle. AUD is overvalued relative to commodities and EM markets The upcoming employment print this week will be a key watch to see whether last month’s bumper print was statistically flawed. One interesting point about the AUD now is that the government is heading into an election and a higher AUD would be dangerous. Look what Abe did to the JPY prior to his election. In fact Australia has the most to lose from this JPY devaluation if JPY weakness destabilises the other Asian economies, inhibiting their trade with Australia. AUDJPY at 101 is Room 101 for the Lucky Country.

China is quiet. Social and health issues are dominating the news. The shift from a high growth paradigm to a low growth one is ongoing and this has it’s periods of instability. The data is steady, not spectacular. The housing market clampdown and reforming of the wealth management products and shadow banking sectors has put a big dampener on the Shanghai Index. It seems the Shanghai index was used to, and preferred no boundaries, rules or regulations. The PBOC is one of the most outspoken critics of Japan’s JPY devaluation. Yet oddly, they just fixed the USDCNY mid rate at an all time CNY high below 6.26?! Maybe they are revving up for something? We cannot emphasize enough how dangerous for the rest of Asia these Japan actions are . Many Asian economies are still smarting from 1997/1998 following the huge rally in USDJPY that started in 1995/96. South Korea has cut it’s economic growth target for 2013 and has been forced to announce a supplementary budget to kick start the economy. Singapore and Taiwan have seen a spate of weak data and Hong Kong is being pulled in several different directions over housing, trade and social issues. If Japan doesn’t get it’s growth from Abenomics (and the first signs are that the data is still tepid)and this JPY weakness stalls these other nations, Asia could be rendered a big economic issue.

A quick mention must also be made about the continuing deflating of the Indian SENSEX bubble. This index has gone from a high this year of 20203 to Friday closing at 18450. This is still overvalued relative to growth and trade fundamentals. Brazil’s Bovespa has also been in the wars this year. The BRICS are not enjoying a good run.

Putting it all together, it is likely that the next few weeks will be dominated by (1)US data: if it does prove weaker, then markets have to realign further. We must assess whether this is a ‘Spring Swoon’ or the peaking of a very mature, central bank liquidity driven, below trend, underwhelming business cycle. (2) Japanese asset price behaviour: if the volatility and intraday ranges of JPY, NIKKEI and JGBS continue to be wide and unstable, the whole Japan project could pay dangerously.(3)European growth data, not financial stress indicators, which have, for now, fallen in line and are not a current cause for concern. However, US weakness would take precedent as we already know that Europe is in a feeble state.

US data is good. No questions. Assisted, not genuine, growth is peaking through. The Citi Surprise Index has ramped:

Note that even when this indicator was rolling over in Jan/early Feb, equities were ramping up. The bar is now getting higher for upside US data surprises. The next couple of months’ data will be crucial in terms of revealing whether the US has reached this so called ‘escape velocity’ or whether Q1 was mainly the result of inventory accumulation based growth as was the case in Q1 10,11 and 12. It has been very quickly forgotten that Q4 GDP was +0.5%. Q1 is estimated at 2.5-3%. The FOMC came and went without much drama, with Mr Bernanke admitting that at some point, a long way away, dependant on data especially from the labour market, that the Fed could vary the pace of asset purchases in line with the economy. We seriously stress that this is a long way away as he wants a lot more out of the economy and is worried about the fiscal drag that has just hit the US.

One danger we will return to in a couple of weeks will be Q1 earnings season. We saw some despondent quarterly earnings reporting from FedEx and Oracle and this may be an early warning, especially for those firms that prefer the USD to be weaker. Interestingly, the number of USD bullish pieces that have passed through our offices this last month have been huge. We are always long term believers in the USD, no question. We always like to buy it when it has gone down too far. However, currently, we are not sure that the USD (from here) is on the cusp of something monstrous purely because the Fed does not want that and are investing $85bio a month as well as spouting priceless rhetoric to ensure the USD is capped. (We emphasise that if the World turned into a big risk-off scenario, then the USD safe haven bid is different and we do not question that in any way). If the market is trading the USD based on a stronger US economy, then it must also trade the Treasury market the same way. But it isn’t as Treasuries have rallied despite strong data and 10y yields have fallen 15bp off their highs. This returns us to our argument that the next couple of months data are crucial for all US assets. The belt tightening and fiscal retrenchment that the US is undergoing has yet to show up anywhere. This cannot just have vanished into the ether.

Europe is in a bit of strife at the moment. Data continues weaker: flash PMIs, IFO, industrial production, high unemployment, the lagging, messy behaviour of France etc. The business enviroment has deteriorated again. As we know, there is still uncertainty in Italy, and this Cyprus merry-go-round is not a pillar of strength either, as the Germans want ‘no gain, without pain’ for the little island as it really has to restructure it’s unsustainable debt and banking set ups. During all of this, periphery spreads for Italy and Spain (where it really matters) have performed incredibly. EURUSD at 1.2990 would normally be a lot higher if you saw Italy 10y at 450 and Spain 10y at 483. However the market is trading real economic weakness in Europe, given it’s current love for the USD. We still maintain our near term unchanged view on all ECB rates as this current weakness in the growth data is consistent with the ECB’s weak H1, stronger H2 scenario and so their desire not to waste bullets/powder/ammo just now, as well as their belief that cuts don’t necessarily feed through to the troubled areas better than they do to the improving economies, like Germany, which certainly does not need lower rates, given it’s strong consumer. Current ECB policy is based on monitoring the periphery spreads. Any clogging in the monetary transmission mechanism that may cause fragmentation and convertibility risks to be elevated would then call up action that would do ‘whatever it takes’. Right now, this is not necessary.

Interestingly, during the course of the week, we saw financial stress indicators, like FRA-EONIA basis spreads and EURUSD XCCY basis swaps blow out a touch as front month Euribors (and Eurodollars and Short Sterling) got whacked due to protection and tightening of funding by banks in case there was a pan-EMU run on banks. An almost mini Lehman’s moment. Does this then require banks to repatriate EUR just like banks had to bring in as much USD as they could in 2008? In any case, moves were not extreme and contagion was contained as the EMU seems to have a better safety net than previously and banks in the peripheries are better capitalised these days. On a political note, surely the Germans’ firm stance over Cyprus is very positive for Merkel’s re-election campaign as it plays to the bailout fatigued German populate (as well as whacks the Russians)?

GBP did what it does best: get the market all one way, then ramp the other way. While we look ahead to new forward guidance tweaks and gimmicks to the BOE remit from the incoming governor, the fact is that the MPC, first with King in his ITV interview, then post the Minutes, have stated that they would be concerned if the now ‘properly valued’ Pound would drop further, so ruining their credibility towards price stability/anti-inflation commitments. Extra QE has been delayed and King did not win via ‘tyranny of consensus’. It seems the UK is now pulling out of the ‘currency wars.’ The short GBP trade may have run it’s course for now. Added to this, the Chancellor towed the line in a fiscally neutral budget, putting all faith in ‘monetary activism’ and in boosting housing. The 2% inflation target was left alone, although this now is cosmetic as inflation has not been there since December 09. Some data, especially retail sales, may be showing some stirs of life in the UK. Other data, like industrial production and manufacturing output, renew fears of the Triple Dip. Despite all of Osborne’s efforts, Fitch slapped the UK in the face with news of a possible downgrade by the end of April. Really irrelevant now in the big scheme of things.

The JPY showed that it still has it as a safe haven currency in times of trouble, given it’s ramp up on the initial Cyprus turbulence (remember it also had that monster rally on 25th Feb Italy election day?). Kuroda even softened his rhetoric implying that ‘policy makers will not rely on a weaker JPY to end deflation.’ The market has to get past this week’s Fiscal Year end and to the April 3-4 BOJ meeting to see where we are with regards to very high expectations vs actions. Will the BOJ deliver something spectacular to the inflation and growth outlook that is not already priced in? Larger amounts of longer term JGB asset purchases are priced in as is an earlier commencement to the open ended asset purchases scheduled to start in 2014. The Nikkei meanwhile continues with it’s 200-300 point daily ranges at multi year highs. Something reeks of dislocation and inherent instability here.

The AUD continues to baffle. If the RBA thinks the high AUD has hurt the Terms of Trade and the export sector, then they really are being a touch negligent. Some data has been better in Australia. We have to wait till the next employment report to see whether that number we saw, beefed hugely by part time labour, will have a large giveback, then we take it from there. The market is now firmly bullish of AUD, long of it and there is negligible rate cutting priced into the RBA, despite their firm easing bias. Therefore we are at the diametric opposite of recently, when the market was bearish and short, with a few cuts priced in. AUDCAD went over 1.07 and AUDJPY was very close to 100. An election in September and some reappearing cracks in the China story, as well as this much touted peak in the resources mining and investment boom could force the RBA to be a touch more pro-active. The government itself is crying over it’s lack of ability to generate a fiscal surplus due to lower tax revenues as companies struggle. We must not forget that the Chinese are very price sensitive and like a bargain. We are back to watching iron ore prices, it seems. The China property clampdown may matter here.

The market has recently taken a sustained dislike to two of it’s biggest loves of 2012: NOK & CAD. (The New Zealand government must wish the NZD be treated similarly). Admittedly the NOK move has been driven by the Norge Bank’s renewed dovishness of recent as they extend their forward rate guidance. With CAD (The 3rd largest market short after GBP and JPY), there are underlying concerns re housing prices and household debt. But really, AUDCAD at 1.07? Surely too high? Note also the continued weakness of copper and other base metals during this period of US data strength and equity euphoria. Another dislocation to watch.

Elsewhere, we note the continuing under-performance of the SENSEX. We have been on this one as a very inflated market, relative to fundamentals, for some time. There could be more to come here as India rate cuts come a bit too late as growth remains soft and political issues continue. We also note the once favourite of EM, the KRW has retreated significantly and we see some strife in Hong Kong over it’s housing bubble. EMs have been poor this year and this should fire a warning shot to how overvalued other markets may be. Will the Asians blame the JPY depreciation for their worsening growth outlooks? We have seen data fit graphs where EM markets statistically peak 3 months before Developed markets do. Just in time for ‘sell in May?’

As the S&P continues to chop wood in this 1555/1575 historic area, we are watching to see whether the FTSE has made a near term high at 6534 (now that the UK has exited the GBP depreciation play and there is no near term QE likely), and if the DAX has also peaked at the 8071 level, given renewed pressures in Europe and weaker data, and if the NIKKEI saw a near term level at 12650, given we are awaiting big things in the coming fortnight. The DOW JONES, not the most broad based of indicators, is constantly having fun making new all time highs on a near daily basis. No point arguing with this one, for now.

Periods of slightly higher volatility are quickly quashed and dismissed. The VIX hit 11.05 a fortnight ago and can barely touch 15 on a chaotic few days. Over-exuberance and complacency could be the greatest dislocations that could hurt these markets,

Proprietary Trader At New York Based Bank: The market is back to the 2005/2007 model .. building leverage slowly, but surely, on the back of creaking fundamentals papered over by excess liquidity. Fissures are returning to the European project (small tremors like Italy and Cyprus preceding the major earthquake?) But all will be forgiven until (if) the US data turns. If US data turns, it will be lights out. If it doesn’t, we march onward so it’s all about the US data from here.
The market overall is much more fun now .. things are moving and most good traders are having a great quarter. Let’s hope it continues!

Money Market/Rates Trader At UK Clearer: Markets have been much easier in the last quarter. We have had some massive moves in FX and I think participation has been high, notably GBPUSD and USDJPY. Stocks have been impressive to say the least, and I welcome the return of strong US data = strong USD. Risk on/ risk off was getting tiresome. Trending markets are much easier to trade and we have had strong trends in FX and equity markets in 2013. Buying the dip in equities and the USD has been a very profitable strategy. EM and commodity currencies have been interesting with the USD strength winning the battle over bullish equities.  Global rates have also been more exciting. The FED’S low for longer policy has come under closer scrutiny. Not only has better data and equity prices led to US yields shifting higher, but there are signs we may have some doves/ neutrals on the FOMC jumping ship to the hawks. No doubt Bernanke and other main decision makers are still firmly in the Dovish camp, but the market senses some internal conflict about QE-infinity. Treasuries seem to be set on a gentle upward sloping glide path to a mid 2 handle. The Treasury market has been kind in that the trend channel has been rather wide allowing bulls and bears to play nicely. We do look to be closing in on some key levels and battle lines are drawn. I get the feeling if we break 2.08/10 and close above on TYM3 then the bears will be in control for some time to come. Interesting times and I hope the light at the end of the tunnel is not another decoy. Returning to a world where we have some prospect of policy moves in both directions would be a refreshing change. STIRT traders around the globe would welcome some prospects of rate hikes. Flat curves are not easy to make budget on.

Chief FX Trader At London Based Bank: Something had to destroy “Risk off/on” and to a large extent it was Draghi and his confidence steroid injection. The markets relaxed and thankfully were handed the golden gift of a Plaza-style Yen managed depreciation to get their p/l teeth into. Confidence was boosted yet further with pockets filled. Now the market, armed with full coffers has focused on the divergent macro themes while all the time dreading that things will once again “go quiet”.
The themes remain – a strong US$ based on a resurgent economy contrasted with a managed Yen depreciation and inherent macro weakness in both the Eurozone and particularly the UK. I believe the Japanese have 100 in mind, and I believe they will tell us when to stop – however, will it? I think GBP declines over time irrespective of the political utterings of King. By contrast to the US, the UK and the Eurozone are a mess. My instincts are to buy wings…..1.35 Cable, 1.10 EURUSD and despite the managed nature of the Yen decline, 110/120 in USD – after all managed depreciation/appreciation is only controllable under certain circumstances. However, if JGB’s fell apart all bets are off…

Chief FX Trader At London Based Bank: So what has changed in the last 6 months ? To be honest, I’m not sure a great deal has. Smart people are still making more money than non-smart people, and long may that continue…. although I strongly suspect that with the big trend in the JPY and the Nikkei, this Pnl gap has increased significantly in this cycle. If you are a Fund or Bank trader – and you weren’t on this trade, then you’ve missed the one event MacroMan and his mates have been wasting options premium on since George (Soros) and his mates duffed up The Old Lady.
The JPY move confirmed that you need to be a professional Central Bank watcher, although it’s just a matter of to what extent a CB wants to weaken its currency. Sovereign flows remain the most sought after of all FX customer segments, and there are two ‘types’ of Sovereign, with perhaps the second, Emerging tier being the most interesting one.

Salespeople remain a more ‘valuable’ commodity than Spot Traders. In the past 6 months I know very good spot traders who have been made redundant and yet are still looking for a job, with hardly a sniff. And yet inexplicably I also know of very average (aka ‘close to useless’) Salespeople who have been made redundant and yet fall on their feet into very decent new positions after a matter of weeks.

The job description of a spot trader seems to get a little more wide ranging every quarter. The effort to add value and differentiate oneself from the crowd means the list of qualities has to be long …. price-maker, risk-manager, idea-generator, customer-friendly, technician, macro-savvy, and you’ve got to have a lot in it when you get it right and not a lot in it when you get it wrong. And you’ve got to do it with a smile on you face. And get paid less than ever before and pay a bigger percentage in tax than ever before. And we all moan about it like hell everyday. But as soon as you’re not in that job, well – we all miss it and badly want to get back in. Because it’s still the best job 95pct of us are ever going to get. A bad spot trading position is still not a bad position. It’s all relative. Ask me again in 6 months, I’ll still have a moan-up, but I certainly hope I am still in a position for you to ask !

Senior FX/Money Market Sales at London Based Bank: Basically macro Traders having a very good start to the year, mostly as it’s been a trending market and therefore it’s been easier to jump on the trend. Jan-Feb were excellent months and March a bit more challenging:
The big trade for 2013 was Long Usd-Yen post the Abe 2% inflation target.. And that’s been the biggest flow in the last 2 months with most of this month being unwinds as Macro takes profits. 95.00 was a big target level for them all and so no surprise we have basically hung around the current levels. My take is that 40% of longs have been taken off and now macro is trying to hang on for the BOJ meeting on the 4th April when the new Governor is expected to come in with some big measures to help meet this inflation target set by Abe.. Risk here is that the new measures don’t go far enough and is already in the price of usd-yen and we get a buy rumour sell/fact sort of market.
Next up were Cable shorts, again triggered by some shocking data, expectations for more QE and a new governor expected to change the BOE goal posts .. Macro went all in short Cable and long Eur-GBP but again once 1.5000 traded, all we have seen is unwinding and profit taking that’s gone on. Some Eur-GBP longs we flipped into Cable shorts as the Cyprus news and the Italian election triggered the next big macro positions, short EurUsd although this is still a position yet to really pay off…
The Cyprus situation may help the shorts make some money here.. Target is still around 1.2500-1.2700 for euro and 1.4400 for Cable.. Another big position we see macro put on is Long Usd-Chf.  Same story: it’s more to do with great US data, more so post the NFP and fact that SNB will keep the line in the sand at 1.2000 in Eur-Chf; Last trade this year is Short Aud-usd which has really cost macro again!! They expected a weak Capex and it was not weak; they expected further RBA rate cuts and they get a less dovish RBA; and despite weak China data, Aud-usd still bounces hard…

Rates/FX Trader, Now Trader Performance Coach:The negativity remains as strong as ever in my opinion, you only have to read the blogosphere on a daily basis: Fiscal this, sequester that, Italy this, currency war that, the great rotation, etc. etc, yet the market keeps rolling along. It just seems to me that everyone is looking for the next Black Swan all the time, or the next Big Thing, happy in the knowledge that if they keep calling enough negativity, then one day they’ll be right and tell the world they told you so. – When it happens it happens, until then keep playing the current game seems to be the theme. I ignore most headlines and stories, but do like to gauge general market reactions to them as an indicator.
Back to the real world and themes which have struck me have been the slow and continued abandonment of Austerity. Yes it is happening piecemeal, and has not become a rush, and where it is not happening, there seems to be growing pressure. – This cannot be good news for Bonds long-term, and I would expect yield curve steepening to continue. However this will have to fly in the face of being an incredibly costly trade to run as short-rates are not going anywhere: Witness the continued doubts over QE exit, and fears of a return to risk-off as we saw briefly with the Italian election fiasco. – This should also support Gold in the long run, though short-term Gold may have some further retracement.
The Short-end of the curve is very little fun, and seems to be like grinding blood out of a stone. FX has however been the place to be. Some good moves, including a new found love of the USD particularly versus Japan. I think the first phase of this is coming to an end. However I think longer-term the tide has and is turning in the USD’s favour. Once these USDJPY moves start, they tend not to stop for very long, though lots of people made good money on this trade and I think some are close to cashing in chips now, if not already done.
Best trades this year so far : Long USDJPY and Short AUDUSD, though out of both. – Currently like EURNOK. – GBP looks like a temporary base for now. EURUSD is pivotal around 1.2900/1.3000. – I’m on the sidelines on that until some clarity.

London Bank Global Macro Trader: 2013 in a positive spin:
After 7 bad macro years, are things finally looking up for the world? Starting with the US, that seems obvious to everyone, with the exception of Bernanke of course. For the macro community, a stronger USD has been the consensus trade of late. Should we then all rush in to buy US-assets with SPX at close to AllTimeHighs? I am not so sure about that when many EZ stock markets have 50% to 100% to reach 2007 peaks. It’s apparently more important to the investor base where the corporate HQ is than where the customers are…
However bad the Anglo-Saxon media (and clearly some market players) want the EZ crisis to flare up again, Cyprus is not a game changer.
Contrary to Cyprus, Russian ‘investors’ don’t have money stashed away in Portugal, Spain or Greece for tax reasons. And the mindful investor most likely moved her money away in 2011 the latest.
With corporate credit being the 2012 trade, and US and UK offering yields that are immune to any kind of return, it’s not surprising that money flows back to the stock market. Mind you, the SPX traded at p/e 25-30 with govvies at 5-6% some 10 years ago so we should really be up for a final panic rally in global equities at some stage the coming 12-18 months.
Bond yields are the real conundrum for most macro players: 5y USTs at 80bp is 4% below the nominal GDP 2013 and that’s simply wrong in the light of close to all time lows for VIX and very healthy US ISMs. On a different note it’s amazing how well Germany has played her cards to end up with a weaker currency and non-existing funding costs. Many are missing out the fact that peripheral Europe is doing long-term good changes under short term pain (just like Germany and Sweden in early 90s). Italy is bound for a primary budget surplus for 2013, beating even Germany.
When will it dawn upon the ‘AAA- investor’ that UK, despite austerity, still has an increasing budget deficit and increasing cost for running the show? Would any sane investor buy a corporate bond from a company with massive debt and increasing annual deficits and a government that bashes the main source of income, the financial sector, for a handful of dollars and a few political points?
Fingers crossed that we are on the road to a very fruitful period, a biblical 7 good years.
Comforting then that UK pension managers started 2013 with an all time high allocation to Gilts..

Senior Fx Sales/Trader At Zurich Based Bank:I was one of the doom and gloom writers back in October last year but I am pleased to say that, in general, there are reasons for some cautious optimism with respect to the FX markets in particular. Optimism which mainly refers to the return of tradeable market opportunities and a market regime which is more favourable for discretionary traders and trend followers (as opposed to algorithmic or systematic trading which had to take the backseat). Talking to several FX traders in hedge funds and banks, one can hear some relief and there are many more happy traders now compared to the last time we made an assessment in this regard. All this is confirmed by the Parker Global FX Index, which is the benchmark for FX traders (see below).
Over the last 3 months, we have witnessed the development of several forceful trends and outspoken moves, with decent follow-through and momentum (and hence more easy to join without having to go trough some nasty spikes against the trend). These moves were often ”officially” induced or at least semi officially induced (currency wars anyone?!) with JPY weakness the most outspoken one, followed recently by outspoken GBP weakness. We should also mention the powerful return of the EUR in January and early February, followed by the return of the USD. News trading and ”fundamental” trading (=discretionary trading) have been very rewarding. Basic trend following has been very rewarding as opposed to very short term systematic and algo trading.
The Parker Global FX index (updated till as at end of January 2013) confirms my pessimism back in October and my above made 2 assertions: (1) FX trading profits in general are returning (+1.26% over the last 3 months) after a steady decline over the last 2 years (-2.05%). And (2): discretionary trading (+1.15% over the last 3 months) is doing better than systematic trading (+0.35%). I have sent a copy of this index to the website owner, as it is copyrighted and only obtainable against payment. It follows the audited results of 45 FX only Hedge Funds and CTA’s.
Whether this optimism is valid as well when considering renewed industry hirings, increased trading volumes, enhanced job security for traders, improving bonus culture etc , is far less certain and too early to say. Although FX trading returns have picked up over the last 3 months as mentioned above, and although traders are in general more relaxed about their profitability, several major institutions in the FX space have continued to lay off traders and have continued to reduce investment and exposure to FX trading and proprietary trading. These decisions were probably still based on the pessimistic data of the last 2-3 years.

Far East Based CTA Manager: 2013 has looked a lot more promising from the outset. 2012 was blighted by low volatility and continued central bank manipulation, but now there seem to be different dynamics starting to play out. We’re seeing some interesting divisions within central banks policy meetings and a string of strong US data has people discussing the FED’s end game. It may be a long way off but we’ve seen some decent moves finally in the rates markets which is what will ignite FX volatility again. Risk on/risk off is finally showing signs of decoupling: S+P higher but also with a higher US dollar, lower AUD, lower copper etc. The FED has pinpointed the unemployment rate as a key gauge, so all employment data will now have the markets focus. Japan has seen huge fx and equity moves but whether the new BOJ board can deliver is another matter. US equities are due a correction from over bought levels, 5% or 20% who knows, and of course Europe and UK are far from fixed. Overall it’s very different from 3-6 months ago, much more positive from a trading perspective, it feels like we’re on the cusp of some large and aggressive moves, though not necessarily good for the global economy.

London Bank Chief Emerging Markets Trader: The market continues to be driven higher and for longer than expected up the wall of worry by QE inspired easy monetary conditions. The known unknowns in the forms of Europe have still to be resolved and will move back to centre and front of stage at some point. What will crystallise or prompt the market to re focus it’s angst towards Europe and question how Super Mario really is? Three potential speed bumps are – 1) The market will once again question the validity of the underpinnings of European convergence in the form of the Growth and Stability Pact (GSP). The division between the German mentality of living within ones means – austerity (?) and the need of the Club Med to address their competitiveness issue through growth and inflation rather than internal deflation seem irreconcilable positions. 2) The acknowledgement to the German voters that any fiscal transfer to the Club Med is anything other than a one off. Germany is estimated to be on the hook for 8% of GDP (about €500 bn at the moment) . Once the realisation that the proposed annual transfers over a period of time are greater than this €500bn estimated cost to Germany of leaving the € then an honest debate may start to happen with the German electorate. The advent of the AFD as a political party in Germany may prompt the start of this debate.3) The bail out of Cyprus may shatter the illusions that Greece was a one off. The bailing in of senior secured creditors and or Deposit holders to reduce the cost of the bail out to official stake holders may cause the resurrection of those willing to question the inviolability of the European project.
The other theme that is likely to become a major driver in FX markets is the concept of currency wars. The Brazilians intervened to defend 1.95 earlier in the week; the Hungarians seem keen to engineer a currency devaluation to aid building a surplus on the trade account moving forward, and not just from the collapse of imports as recent experiences have shown; and finally Wheeler’s comments that the NZD is 10-15% over valued just another example. The G7 communique was worthless as it represents the words of the worst offenders: the US, UK and Japan. The emerging world seems unlikely to accept further losses of competitive advantage: Philippines cut their SDA rate to mitigate the cost of sterilisation from their intervention antics, so expect a race to bottom.

London Bank Senior Emerging Markets Trader: Markets have changed and will continue to change and have always constantly evolved throughout my time anyway. I think the pace of change we saw the last few years was way bigger than most had expected but I do feel there has been some normality coming back to the market over the last few months. Last year, most people were completely fed up with markets that only provided risk on/risk off, but that seemed to change a lot with the JPY move that started at the back of last year. Not only did this provide the market with a decent trend it allowed people to actually make some money which was well needed on what had been a very very lean year up until that point. The continuation of the move on Q1 again gave people a great chance to capitalise and give traders something to really focus on. Anyone in the financial sector is very aware that we all need to be making money not just for self preservation but also the need to fuel some investment rather than the sweeping cuts we have been seeing for six months. Unfortunately after the weekend’s events in Cyprus I just hope we do not go back to the markets’ fear of ‘risk on/risk off.’
I would be a complete liar if I honestly believed markets have gone back to pre 2008 and that everyone is making good money. That is simply not the case and it will take some time for traders who have had their fingers burnt in the previous years to feel like they can trade as openly as they did in the past. There does see to me to be a slightly better atmosphere but I still speak to a lot of people who are very down hearted on the current trading situation. I have heard lots of complaints about how hard the market is….but there are a lot of people out there who are keen to get back in despite how tough the trading conditions are.
We have seen a seismic shift in how business is conducted with the ‘e world’ taking a bigger slice of a decreasing amount of business. I cannot see this being undone and the current business model that is in place in many banks for FX will have to change. Voice traders only see business from customers when the customers cannot hit a platform and are then expected to quote aggressively and then be expected to make decent margin from the flows (good f**king luck…flat on a trade is now a result). We have seen trading desk decimated by this move yet sales desks seems to be untouched which cannot be sustainable. Most produce little and expect a lot back but when business is conducted as described, so how can banks continue to make money?? Margins have been squeezed by customers in a very one way street with markets now so open to all and sundry, bank traders are working every angle to survive. I can see a move towards a sales/trader which most traders already do effectively but there are only a few in sales who could make the transition to trading.
As traders, we need some trends. We have seen that that can appear but we are still going to be stuck under the pressure of central banks artificially holding down interest rates and until they are perceived to change, there are only going to be a few opportunities to really jump on board some decent trading moves. I am a little more optimistic than 6 months ago but I am not sure if there is anything in that other than being so fed up with looking down for the last four years. We all have to adapt but can we adapt quick enough? Let’s hope the pace of change slows so that we can at least catch up a bit.

London Based Money Broker: In general I have had a very good start to this year, business wise. At the end of last year, during the ECB meeting, Draghi implied that the decision to leave rates unchanged was heavily debated. This sent the majority of Eonia and forward Eur traders to sell both EONIAS and forwards whilst buying EURIBOR futures. As we know, the rate is still the same and this has cost the traders and market in general a lot of ‘hard cash’. I have seen more people this year stopped out of EURIBOR futures positions than ever before. There had been a lot of range trading people trying to sell into forward rallies and do the opposite after a sell off. The latest one of these coming just now after the unrest with Cyprus causing a sell off over the weekend and from the open today forward traders gradually buying, and creating a small panic where nobody will show an offer close to being marketable. Generally, it has been a mixed start to the year, where some banks have ‘given it a go’ and tried to trade on the back of a new bonus term , and, as said, messed it up and tried to scramble cash back, so brokers talking to these banks have been busy, myself included, but there are a lot of bankers who have been ‘knocked’ with very poor bonus talks and now are staging a small protest , with a ‘why should I bother?’ attitude.

London Based Derivatives Broker : the cloudy day that was ruining my summer turned into a fully fledged change in the weather system. Mood in the room remains a forced cheerfulness (brokers en mass provoke a blitz like “it’ll be OK tomorrow” kind of feel). Trading volumes and noise (and general happiness) occur when we have sizeable down moves in fixed income. If we have flight to quality, an audible groan can be heard and the clicking on internet bank accounts reigning in is the new Prada and should be encouraged. While I sit here dwelling, it is noticeable that the IT boys are still planning holidays and indeed Compliance (anti business unit) are busily hiring and expanding, sort of becoming a mini/micro EU sending out dictats that flow readily into the junk box. All the focus, as ever, is in Europe, lurching from one mismanaged position to another, with the Davos crowd, readily self-congratulating on some small success and indeed the survival of their gravy train. I see things contracting more – with head count reductions continuing. Still, FSA registration will soon be required for mini cab driving. Over to that anti business unit again!

London Based Financial Markets HeadHunter: It’s all about regulation: After a generally difficult 2012 the second part of Q4 offered some promise going into the turn of the year as clients were making money in the FX and STIR space specifically. This optimism continued to boil up in the first 6 weeks of 2013 fuelled by recent record high volumes, which in FX specifically appeared to equal profits. Clients all seemed to have caught the obvious market trends in EUR, YEN & STG. However, it felt like any nascent optimism after 4 tough years seemed to vaporise overnight in mid February and was anyway, never going to represent a sufficiently prolonged period of positive returns to translate into headcount, which by and large failed to materialise.

Employee movement on the sell side specifically, is experiencing a huge impact from pending regulatory changes. Traditional sales and trading mandates are hard to come by. European pay and bonus directives seem to have resulted in stronger firms keeping their powder dry while they wait to assess the impact on fixed costs. Where there is movement it appears to be a steady drift away from one or two former giants that are suffering well documented woes and have become easy hunting grounds for talent as they continue their spiral of decline. If the banks that do need to selectively employ can not source from these ever weakening competitors, they are looking at cheap talent that is being exited from other institutions. On the very rare occasions that a potential employer is looking for top talent, after a decent start to the year, most FX/STIR guys are hoping to get paid on it and as such, if they’re approached, they tend to price themselves out of a move. Anyone focused on trading over sales will be having the toughest time of all, regulation principally driven out of the States and new approaches to regulatory capital ratings, have finally bitten and all but killed any movement in this space. All of this is resulting in a constant ratcheting down of total comp.

However, a changing regulatory environment also offers opportunity, only not in traditional business lines. The big growth area for the past 18 months continues to be the ancillary businesses. Banks that have flat headcount across the board, all seem to find increased capacity in the Prime Services area. Here there is an escalating battle for quality, client facing employees. Individuals that also have a strong product background and are consequently able to turn regulatory requirements, around concepts such as central clearing and collateral management, from pure costs into opportunities. As these areas move from concept to reality, getting the right calibre of product-aware representative who can structure bespoke solutions in front of clients, will determine the leaders from the pack and get them a seat at the client’s top table as a trusted advisor. Consequently, the more forward-thinking institutions are prepared to pay up in this space.

Regulation is also having an impact on the buy-side and we see a noticeably increasing appetite among clients to employ COO types from the sell side who have already been through the regulatory mill and also individuals who come from actuarial, accounting & technical backgrounds who can help them cover off the increasing fiduciary burden towards clients. In the same vein we see interest to recruit senior talent onto execution desks of both the leveraged and real money communities, individuals with a flow trading pedigree that will facilitate an enhanced execution methodology. Funds continue to look for talented risk managers, especially in the quantitative space but the emphasis is on short duration, high turnover approaches to risk, once again due to the changing regulatory environment.

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Once again, plenty to consider. My thanks again to all the above for taking the time and effort during this busy and volatile period to share their views. There is clearly a majority of happier market players who have capitalised in what seems to be a currency bull market. Will it keep going?

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The US economy is producing decent data. There are still obstacles ahead as we see the impact of the just enacted fiscal tightening. Retail sales will be watched to see how the tax hikes and high petrol prices have affected the consumer. The non farm payroll number was strong, although the 7.7% unemployment rate included a lower participation rate and is still a ways away from 6.5%. The Fed wants more of these type of prints and for a longer period. They also want to see growth jump above trend, so confirming the job growth. This latter dynamic, alas, is still a bit away. The taper talk is premature and is a market story rather than an actual Bernanke/Yellen (the Real Fed) story. Bond yields are back near the year’s highs but this says little for now as the Fed is lurking somewhere on the bid in Treasuries. The USD is on the up, but the Fed doesn’t want it to be too much on the up as this negates some of their easing. Remember the ‘US strong USD policy’ for a weak USD is still well in place. One of the reasons for QE3 in September 2012 was the rising USD during July/August.

Mr Draghi has returned to positive contagion. He downplayed the Italian elections and any EMU wide contagion emanating from them. He emphasised that reforms in Italy were on autopilot, so all is OK for now. He completely took away any EUR bearish talk by not alluding to downside risks to price stability from EUR strength and he has little interest in negative depo rates. We maintain our view of no near term cuts. Keeping ammo is key in case the ECBs H2 recovery scenario does not play out. They acknowledge that H1 is weak and they will see if current accommodative policy can help pull the Eurozone through. Periphery spreads over Germany for the 10Y yields are now 322 bp for Spain and 307 for Italy. While Italy, understandably, has some extra risk premium, Spain is running away with this positive contagion. EURUSD itself is a tricky call from here, 1.3000, while the market is deciding what to do with the USD on the back of the strong data and the aforementioned Fed tapering story, the EUR should keep it’s support in some crosses. The large positive current account balance of the Eurozone is getting airplay as one important supportive factor. Furthermore, while LTRO repayments have lessened, they are still, at the end of the day, happening and are, bit by bit, contributing to a smaller ECB balance sheet.

The MPC avoided QE this meeting, maybe swung by the better services PMI, but the GBP is continuously getting shaken up by the new media mantra of ‘fiscal conservatism and monetary activism’. The most eagerly anticipated UK market event will be the minutes for this meeting. Did it go to 5-4 against the extra QE (from 6-3) or did one of the 3 have a change of heart? Whatever the case, the FTSE just keeps on giving new highs.

The NIKKEI is trading on vapour. For an, at best, flat economy, the ramp up in this market is violent. The authorities have managed to play God with the stock markets. The market has high hopes of some SERIOUS action at the next BOJ. That hope must be well priced in by now. Ironically, JPY weakness has yet to improve the current account and trade balances. In fact, JPY weakness is adversely affecting fuel imports, making them more expensive. Can this last?  We are now past the implicitly accepted 95.00 level in USDJPY. Surrounding Asian economies are getting very unsettled.

The RBA has now managed down future rate cut expectations to just shy of one cut. Thus, if a renewed bout of economic weakness from overseas or domestically were to arise, the adjustment lower in the AUD could be sharper as the rate market would need to be called upon again. The Australian trade deficit situation over the last year has not looked healthy for such an economy dominated by commodity exports. AUDJPY at 98/99 is a serious issue for both China and the Lucky Country, as Japan stealths in on trade.

Irony of ironies with Canada, they revert from hiking bias to neutral bias and then see such a huge employment number. Bear in mind this number ends a run of very weak reports, so there may have been some levelling out going on. The Canadian economy is still vulnerable to the housing market bubble deflating and from high levels of household debt going forward. USDCAD recently has been a trade of relative strength in the US and weakness in Canada. It has been a long time since this has been the case.

China has been putting out some erratic data recently, with everything being written off as Chinese New Year holiday distortions. The activity data surprisingly came in weaker, with industrial production an retail sales on he low side, and CPI, boosted by food inflation, on the high side. Odd, given how strong exports came in for the same month. In any case, the global market has chosen to distance itself from big correlations with China during this time. The Shanghai index has been mainly concerned with the authorities’ continued ratcheting up of property price curbs and pressures on developers so as to ease housing speculation and cool the now rampant property bubble. The other China story is whether they choose to tighten monetary policy later this year. This would have market impact for sure, although it is difficult to see China allowing CNY appreciation while everyone around them is devaluing.

It’s very difficult to make a bearish case as the market is at full till euphoric and bullish . Underlying weakness and fragile internal dynamics are of no consequence to these markets buoyed by the Fed and the BOJ (not explicitly by the ECB). Stronger data gets the headlines and the weaker components are discarded. There are very few people looking for a market sell-off. This month is still young and we still have to get past The Ides of March.

Back in 2 weeks.