First Impressions

A Game of Operation
Doug Ashburn – John Lothian News

Remember the board game “Operation?” For those unfamiliar, the game requires the removal of pieces of plastic shaped like various parts of the body, from crevices on the game board, without touching the side of any crevice. If you did, a buzzer would sound.

I was never very good at the game, especially when my older sister would use distraction or fear to try to make me screw up. Of course, I blew the dust off the game and played it with my own children a few years back, and I was still bad at the game.

Imagine, if you will, playing such a game with your eyes closed, or, perhaps, with the sides in constant flux. This is what the world’s central banks are essentially doing with current policy. I am reminded of that fact by several stories in today’s newsletter.

For example, today’s top story, “Leaving buyers club could be Fed’s next tricky task,” draws comments from several insiders including Janet Yellen, Ben Bernanke, Chicago Fed President Charles Evans, and more. The moral of the story is that, when the Fed began its unprecedented buying spree of treasury and mortgage-backed securities, it was entering uncharted waters, and it is important now more than ever for the market to not overreact to what happens next, because, quite frankly, it is anybody’s guess.

I get it – the Fed is trying to talk the markets into stability to avoid shocks, because if the market drove rates up too quickly, and the general economy suffered, the Fed would be forced to re-initiate its purchase programs (an “un-taper”).

The reason I bring this up is because of the other big story of the day – the ECB and “lowflation.” ECB President Mario Draghi has been on the defensive since holding rates steady at its last meeting. Draghi came out yesterday talking of quantitative easing and a “high degree of monetary accommodation.” While these phrases are nothing new, he added new language yesterday about the governing council’s unanimous commitment to using “unconventional instruments” to cope with deflation risks.

In other words, the ECB is about to enter a game of “Operation” the Fed has been playing. May they keep a steady hand and a clear vision.

Quote of the Day

“You want it to be part of that glide path, if you will, as part of our policy that we expect interest rates to remain low for a few more years. What worries me that whenever we do one thing, people read too much into it.”

Former Fed Chairman Ben Bernanke in the story, “Leaving buyers club could be Fed’s next tricky task”.

Lead Stories

Leaving buyers club could be Fed’s next tricky task
Reuters
With the wind-down of the Federal Reserve’s massive bond buying under way, policymakers are beginning to discuss the next stage – when to allow the U.S. central bank’s swollen balance sheet to shrink.
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***DA: Are they only just now figuring this out?

ECB ready to print money if ‘lowflation’ lingers too long
Reuters
The European Central Bank opened the door on Thursday to turning on its money-printing presses to boost the euro zone economy and keep inflation from staying too low.
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Banking Industry’s Daffodils May Finally Be Blooming
MoneyBeat – WSJ
Banking lending, a key cog that’s been missing from the U.S. economic recovery, may be showing some signs of finally accelerating. Heard on the Street’s John Carney stopped by the MoneyBeat desk to explain why the banking industry’s “early spring daffodils” may finally be blooming.
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Pimco’s MacLean Says Regulation’s Too Blunt in Leveraged Credit
Mary Childs – Bloomberg
Regulators’ attempts to curb excessive risk-taking in lending may have unintended consequences including restricting access for some borrowers, according to Beth MacLean, manager of a bank-loan portfolio at Pacific Investment Management Co.
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Apollo Bets on Emerging Markets With Ex-JPMorgan Trader
Miles Weiss – Bloomberg
Leon Black, who made billions by buying up debt of companies in the U.S. and Europe that others deemed worthless, is turning to emerging markets as the next source of growth for his $161 billion money management firm.
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Japan’s Kokusai Asset fund knocked from top spot by Fidelity
Reuters
A global bond fund of Japan’s Kokusai Asset Management, which has reigned as the top mutual fund in the country for more than 12 years, was knocked from the position by Fidelity’s U.S. high-yield fund as investors become more enthusiastic about chasing higher returns.
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Euro the one that they want, Central Bank reserve edition
FT Alphaville
Why is the euro so strong? There are plenty of reasons, but one additional factor has been confirmed by the latest data on global foreign exchange reserves: central bank buying.
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Guest post: The IMF approach to sovereign debt restructuring
FT Alphaville
This year’s IMF-World Bank Spring Meeting is likely to include discussion of proposals to change the fund’s policy on sovereign debt restructuring. Gabriel Sterne, senior economist at Exotix with IMF experience, and Charles Blitzer, Principal at Blitzer Consulting and a former IMF staff member, argue in favour of a case-by-case approach.
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Central Banks

This is How Mario Draghi Does a Putdown
Paul Hannon and Ian Talley – MoneyBeat – WSJ
For a moment Thursday, European Central Bank President Mario Draghi, arguably one of the coolest, most collected central bankers on the planet, looked cross.
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Draghi Deflation Fight Seen on Different QE Path to Fed
John Fraher and Jana Randow – Bloomberg
European Central Bank President Mario Draghi’s version of QE might turn out to be rather different from the type deployed by the Federal Reserve.
As ECB officials try to stamp out the risk of deflation, Draghi yesterday gave his strongest signal so far that the ECB is prepared to embrace a policy that has become a byword for large-scale government bond purchases.
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How Is 2014 Shaping Up for Central Banks? Blackstone and Hilsenrath Field Your Questions
MoneyBeat – WSJ
Journal economics correspondents Brian Blackstone and Jon Hilsenrath will discuss the European Central Bank‘s rate decision and take readers’ questions in a live video Spreecast chat at 2:00 p.m. EST Thursday, April 3. You can sign in with Twitter, Facebook, or join as a guest. Submit questions or chat live. RSVP for a reminder to the Spreecast here.
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Fed’s Pykhtin: new risk measure less punitive than CEM
Matt Cameron – Risk.net
Basel Committee’s new standardised approach to counterparty risk exposures will replace much-criticised CEM measure in a trio of rules
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Jeremy Stein to Resign From Fed Board to Return to Harvard
BINYAMIN APPELBAUM – NYTimes.com
Jeremy C. Stein, a member of the Federal Reserve’s board who has raised concerns about its stimulus campaign, will resign at the end of May and return to his previous role at Harvard.
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***DA: If you can’t join ‘em, beat it. I think that’s how the saying goes.

European Central Bank Hints at Bond-Buying Program
JACK EWING – NYTimes.com
The European Central Bank gave its strongest signal yet that it was considering action to stimulate the euro zone economy. But the bank immediately faced criticism that talk of large-scale bond purchases — the same method used by the Federal Reserve to help restart the United States economy — was little more than a bluff.
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U.S. Fed balance sheet details for latest week
Reuters
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Foreign central banks’ US debt holdings – Fed
Reuters
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Currencies

Desjardins Bests Wall Street With Forecast for Pound: Currencies
Cecile Gutscher – Bloomberg
Economists from a Canadian credit union and a German state-owned bank are delivering the best predictions in global foreign-exchange markets, while only one Wall Street firm ranks among the top 10.
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The Foreign Exchange Carry Trade: The Afterlife
Clare Connaghan – MoneyBeat – WSJ
The carry trade is back in vogue. For much of the last few years, this trading strategy–whereby investors borrow money in currencies where rates are low and exchange it for currencies in countries where rates are high—has been in the wilderness as low interest rate rates and an array of stimulus measures made it simply unprofitable.
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PBOC Sets Yuan Reference Rate at Six-Month Low
Wynne Wang – MoneyBeat – WSJ
China’s central bank set the yuan’s daily reference rate at the weakest in more than six months to reflect broad gains in the dollar overseas, but traders say it pushed more investors to sell the dollar.
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China Cash Shortage Brings IOUs to Fore
WSJ.com
Xie Daoliang’s business survives by trading almost exclusively in a virtual currency, but not by choice. Mr. Xie makes bulldozer treads and other parts for heavy machinery. These days, when he makes a sale he seldom gets paid in cash. Instead, he gets a piece of paper with a value printed on it and a promise from a bank that it will pay at an arranged point in the future.
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Acceptance Drafts: a Primer on China’s Virtual Currency
Dinny McMahon and Liyan Qi – MoneyBeat – WSJ
Companies in China are complaining that they’re seeing less cash, and instead are getting paid in acceptance drafts, a type of virtual currency. It’s not a new problem.
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BitBeat: IRS Ruling A Burden for Some, an Opportunity for Others
MoneyBeat – WSJ
Bitcoin users, time to brush up on your book-keeping – or develop some good software to do it for you. It now seems clear that the Internal Revenue Service’s guidance last week that bitcoin be treated as a property asset for tax purposes will impact how people use it in their purchases of goods and services.
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Bitcoin’s Boosters Struggle to Shore Up Confidence
WSJ.com
When Patrick Murck walked into a small, drab conference room at the U.S. attorney’s office in Manhattan last month, the freewheeling world of the virtual currency bitcoin got uncomfortably real. The 38-year-old Mr. Murck is general counsel of the Bitcoin Foundation, a trade group that promotes bitcoin.
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Indexes & Index Products

Bloomberg Buys UBS Aussie Bond Indexes
Marina Daras – WatersTechnology
After 25 years of calculating a family of Australian bond indexes, Swiss investment bank UBS has sold the indexes – including the benchmark UBS Composite Bond Index – to data giant Bloomberg.
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Nasdaq, Chaikin Ally for Alpha-Enhanced Indexes
Faye Kilburn – WatersTechnology
Philadelphia-based investment analytics provider Chaikin Analytics has partnered with Nasdaq OMX to develop three new equal-weighted US equity indexes that are designed to outperform their respective benchmarks.
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Gold

Gold Prices Pare Weekly Decline Before U.S. Jobs Data
Debarati Roy – Bloomberg
Gold jumped the most in three weeks after a report showing U.S. job growth was smaller than expected triggered concern the economy may not be expanding as fast as forecast, boosting demand for bullion as a store of value.
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Investing: Gold mining funds are hot but risky
John Waggoner – USA Today
Finding gold is one of the most thrilling experiences you can have. Seeing a glint of gold in the bottom of a pan while standing in a muddy streambed is great. Finding a gold coin on the sidewalk is even better. And finding gold in your mutual fund statement – that’s the best.
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China imports less gold as demand wanes, currency weakens – sources
A. Ananthalakshmi – Reuters
Banks in China have been importing less gold over the past month as demand waned after the festival season, while cheaper prices at home due to a softer yuan also curbed overseas purchases of the precious metal, banking sources and traders said.
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You Shouldn’t Buy a Gold ETF When these Companies are Available
Bob Ciura – The Motley Fool
If you’ve ever pondered investing in gold, your first thought is probably to buy a gold exchange-traded fund such as the SPDR Gold Shares ETF (NYSEMKT: GLD ) . There are plenty of reasons to think gold could rally, so it’s a reasonable time to consider investing…
However, the economy is by no means firing on all cylinders, and renewed geopolitical tension has reared its ugly head once again.
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