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Quote of the Day

DBRS considers a selective default to be unlikely given the repercussions on the political parties, on investor sentiment and on the economic recovery.

Toronto-based ratings agency DBRS, as quoted in the Bloomberg story “U.S. Credit-Rating Outlook Changed to Stable by DBRS”

Lead Stories

GPIF Shakes Up Committee With Three Abe Panel Members
Anna Kitanaka and Shigeki Nozawa – Bloomberg
Japan’s government pension fund overhauled its investment committee, adding three members of a state panel that urged it to cut bonds, as the balance of power shifts at the world’s biggest manager of retirement savings.

***DA: Step one: fill the committee with Abenomics adherents. Step two: Diversify holdings to include riskier assets.

U.S. Credit-Rating Outlook Changed to Stable by DBRS
John Detrixhe – Bloomberg
The negative outlook on the U.S.’s AAA credit-ranking was changed to stable by DBRS Inc. amid declining federal budget deficits and after Congress suspended the nation’s debt limit earlier this year until 2015.

***DA: The CBO says we return to trillion dollar deficits again by 2022. Another problem for another decade.

Most net shorts in long-dated U.S. bonds since May-survey
The difference between the share of investors who are short longer-dated Treasuries than those who are long increased to its highest level in about 11 months in the latest week, according to a survey released on Tuesday by J.P. Morgan Securities.
The share of “short” investors exceeded the share of “long” investors by 23 percentage points on Monday, up from 21 points last week. This was the most since May 28, 2013, the firm said in a statement.

***DA: Betting on a pricking of the bond bubble.

High interest rates unavoidable to keep inflation under check, RBI to tell next government
Bodhisatva Ganguli – Economic Times
The Reserve Bank of India (RBI) will explain to the new government the need to keep inflation under control and why keeping interest rates relatively high may be unavoidable to achieve that, government officials familiar with RBI’s thinking said. Further, RBI, which is in the process of formulating new guidelines for bank licences, was unlikely to allow corporate houses to set up new banks in the near future, the officials said.

***DA: Careful – you are giving Paul Krugman a nervous tic.

China Details Cut in Rural Banks’ Reserve Requirements
The Wall Street Journal
China’s central bank said Tuesday that it will reduce the share of deposits that some rural lenders need to set aside as reserves, in a move aimed at giving a lift to economic growth.
The People’s Bank of China cautioned that the move doesn’t suggest a change in monetary policy but said it would increase lending to the agricultural sector.

Wall Street bets on change in Brazil, but the gradual kind
Walter Brandimarte – Reuters
Brazil’s financial markets have soared over the past month on hopes that the government may run smaller deficits, stop interfering as much in the private sector and perhaps even undertake long-needed reforms to revive the economy.
But some of the most experienced Brazil-watchers on Wall Street are saying: Not so fast, guys.

***DA: To paraphrase the late Chicago Mayor Richard J. Daley (the elder), “Brazil ain’t ready for reform.”

2 Italian Banks May Work With K.K.R. and Restructuring Firm on Distressed Loans
Chad Bray – The New York Times
Two of Italy’s largest banks are exploring joining forces with the private equity firm Kohlberg Kravis Roberts and the restructuring firm Alvarez & Marsal to potentially create a pool of “bad loans” and provide additional capital to help turn around those businesses.

***DA: Waste treatment and water reclamation, only with sovereign bonds.

Mega-Debt Pledge Puts Turkish Finances to Bonds in Peril
Isobel Finkel, Onur Ant and Ali Berat Meric – Bloomberg
Turkey’s pledge to guarantee the debt of contractors on public-works projects threatens to balloon government spending, a headwind for foreign buyers of the nation’s bonds.
The Treasury will insure 85 percent of the price of projects costing over 1 billion liras ($470 million) should an agreement fall through because of the contractor’s fault, the government said in its Official Gazette on April 19. It will guarantee the entire amount for causes unrelated to the firm, according to the notice.

***DA: It is an expensive proposition to guarantee the unguarantable.

Central Banks

Draghi Gauges Ukraine Effect as ECB Tackles Low Inflation
Alessandro Speciale – Bloomberg
Mario Draghi can look for clues from euro-area companies this week on whether the region needs more stimulus to counter economic risks from low inflation to geopolitical tension.

***DA: Contained, for now.

BOE Inflation Respite Seen Fleeting as Linkers Win
Anchalee Worrachate – Bloomberg
Bonds linked to U.K. inflation are beating all but one of their developed-market peers this year, a sign investors see price increases accelerating from the slowest pace since 2009 as the economy gathers strength.

Grand Central: Central Bank Nirvana, Interrupted
The Wall Street Journal
Policy makers at the Bank of England have been much less vocal than their counterparts at the European Central Bank in recent weeks. But then, they’ve had much less to worry about. That could be about to change, and the minutes of the BOE’s April policy meeting to be released Wednesday may reveal a growing anxiety about sterling’s strength and the rapid decline in U.K. inflation.


Dollar strength ebbs, threats of ECB action keep euro subdued
Daniel Bases – Reuters
Investors trimmed their positions of U.S. dollars on Tuesday after a two-week run higher, unmoved by a U.S. March existing home sales report that beat expectations but showed a modest decline from the prior month.

***DA: Risk on again.

Forget ‘fragile,’ these are ‘high five’ currencies
Jenny Cosgrave – CNBC
The strong performance of the “fragile five” currencies has marked a return to favor for the so-called carry trade, so much so that currency traders have rebranded the group the “high five.”

***DA: As I said, risk on again.

Forex: Ukraine Crisis, Weakened Yuan Elicits Yawns
Dean Popplewell – Forbes
Though tensions in Ukraine remain taut and global central banks continue to toy with investor sentiment – the People’s Bank of China (PBoC) weakened the yuan to its lowest level in 14 months yesterday – investors appear to be little concerned. Did they consume too much turkey during the four-day Easter holiday weekend?

***DA: Who eats turkey on Easter?

State’s top banker to tackle bitcoin, digital currency
Jamie McGee – The Tennessean
Greg Gonzales, the state’s top banking official, has joined a task force exploring virtual currencies, including the growing usage of bitcoin.
The Emerging Payments Task Force, comprised of nine state bank regulators, will study the impact of new payment systems on consumer protection and on the overall financial marketplace.

Indexes & Index Products

When Nasdaq Lags, The Overall Market Tends To Suffer
Rocky White – Forbes
Tech stocks have been slammed recently, resulting in the tech-heavy Nasdaq Composite trailing both the S&P 500 Index and the Dow Jones Industrial Average. The Nasdaq is down 1.9% in 2014, while the S&P 500 is leading those major indexes, up right around 0.9% on the year.

Misery Index Gap Weakens Aussie Versus Kiwi: Chart of the Day
Mariko Ishikawa and Hiroko Komiya – Bloomberg
Australia’s near decade-high jobless rate and quickening inflation have Japan’s Kokusai Asset Management Co. looking for alternatives across the Tasman Sea in New Zealand.
The CHART OF THE DAY shows the inverted spread between the two nations’ misery indexes, which add the jobless rate to the level of inflation.

Why Indexes Are Capitalization-Weighted
David Merkel –
Are index funds that are capitalization-weighted the best funds to invest in? No. So why do we talk about index funds so much? Because they represent the average dollar in the market. In principle, everyone could invest in a comprehensive index fund, and there would be no effects on the market.

***DA: Building the perfect index, with a beta of 1 and no alpha. That would put some people out of work.


Ex-Goldman Banker Thornton Emerges as Barrick Gold Dealmaker
Liezel Hill and Christopher Donville – Bloomberg
A week before Barrick Gold Corp. (ABX) Chairman Peter Munk retires, his successor John Thornton is emerging as a dealmaker as the former Goldman Sachs Group Inc. banker pursues a bid to combine the two biggest gold miners.
Negotiations between Barrick and Newmont Mining Corp. broke off last week amid minor disagreements while leaving open the possibility that discussions could still resume, two people with knowledge of the matter said April 19.

***DA: Barrick and Newmont under one roof would be big big big news.

Gold prices dip in Asia, but Ukraine events support
Gold prices dipped slightly in Asia on Tuesday, but remain supported by tensions between Russia and the West over events in the Ukraine.
On the Comex division of the New York Mercantile Exchange, Gold futures for June delivery traded at $1,287.90 a troy ounce, down 0.05%, afterhitting an overnight session low of $1,282.00 and off a high of $1,301.20.

Election cash restrictions to dent gold imports
Siddesh Mayenkar – Reuters India
India’s gold imports in April and May could be less than half of arrivals in March, as restrictions on the movement of cash during general elections dent the buying power of consumers, jewellery industry officials said.
Lower imports by the world’s No.2 buyer of gold after China could hurt a recovery in global prices of the precious metal after a sharp 28 percent drop last year.

Low-Income Americans Still Prefer to Own Gold — Gallup
Kitco News (via Gallup)
Although real estate was the top option as a long-term investment, gold made the top of the list for the subcategory of Americans whose annual household income is less than $30,000 at 31%. According to the data, only 18% of high-income earners favor gold as an investment.

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