First Impressions

The Elusive Recovery

Janet Yellen gave her first monetary policy speech as Federal Reserve Chair today, at the Economic Club of New York. The market reaction, initially anyway, was positive, as she indicated we would see at least another two years of ultra-low rates. Though core CPI is running about 1.66 percent, core PCE, the central bank’s preferred measure, has been spotted south of one percent. This means an accommodative policy is to remain intact for quite some time.

Read the text of Yellen’s speech => http://jlne.ws/1kyY1gH

Quote of the Day

“It’s a sign of confidence when you get the periphery rallying when there is a flight to quality. Investors do want yields, but nonetheless they will still be selective of what assets to go for. The periphery is one of them they think is safe enough and offers the best risk-reward trade.”

Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment bank in the story, “Euro Periphery Emerges as Haven as Bonds Rise Amid Ukraine Feud”.

Lead Stories

The ECB’s Show-Me-the-Money Problem with Currency Traders
Michael J. Casey – The Wall Street Journal
When the head of a powerful central bank warns that its currency is overvalued and threatens action to deal with it, it usually causes waves in financial markets.
Yet after Mario Draghi complained Saturday that the strong euro is depressing the price of imported goods, feeding deflation and hurting weaker euro-zone countries, the market impact has been virtually indiscernible.
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***DA: Actions speak much louder than words. As yet there has been no action.

In Going Long, the Fed Is Short-Sighted
George Melloan – The Wall Street Journal
Stock and bond traders spent most of last year in a state of high anxiety over what would happen when the Federal Reserve began “tapering” its monthly $85 billion purchases of Treasurys and mortgage-backed securities. But when the tapering was actually announced in December, the Dow Jones Industrial Average rose sharply, apparently out of relief from all the suspense. Today, after various fluctuations including last week’s swoon, the Dow is pretty much where it was back then.
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Euro Periphery Emerges as Haven as Bonds Rise Amid Ukraine Feud
Lukanyo Mnyanda and Eshe Nelson – Bloomberg
The euro area’s higher-yielding government bonds are emerging as a haven from emerging-market turmoil as the prospect of greater stimulus from the European Central Bank underpins demand for the securities.
Portuguese bonds outperformed their counterparts in the region today, with 10-year yields falling to the lowest since December 2009. Irish and Italian yields touched record lows even as Ukraine accused Russia of fueling “terrorism” in its eastern regions.
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***DA: Safety is a relative term.

Russell Investments Strategists’ Outlook – Second Quarter Update: Economies thaw from a cold winter and valuations heat up
Press Release (Russell Investments)
Russell Investments’ released its Strategists’ 2014 Global Outlook – Second Quarter Update, reflecting the most recent guidance from Russell’s global team of investment strategists.
In the report, the team notes that a variety of market crosscurrents have led to a lackluster start to 2014 and equity markets are still waiting for the fundamentals to validate their 2013 gains. These crosscurrents included the chilling winter impact on U.S. economic data, concerns around China’s debt and Japan’s consumption tax hike as well as tensions in Crimea and the stand-off in the East China Sea. But, as the U.S. economy finally heats up, Russell’s strategists maintain a modest preference for equities over fixed income globally. They predict monthly gains in U.S. non-farm jobs to average 215,000 over the next nine months and the U.S. Federal Reserve’s (the FED) interest rate hikes to be held off until mid-2015.
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Lehman Freeze Evoked as Bond Sale Scrapped Again: Russia Credit
Vladimir Kuznetsov – Bloomberg
Russia canceled its eighth bond sale this year as Finance Minister Anton Siluanov said the nation is facing the toughest conditions since 2008, when Lehman Brothers Holdings Inc.’s collapse sparked the financial crisis.
Yields on local currency 10-year bonds jumped 76 basis points since Russia’s incursion into Ukraine’s Crimea region at the start of March.
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This is nuts, inflation does not justify zero interest rates
Rob Wood – The Telegraph
Inflation is down to 1.6pc, below the Bank of England’s 2pc target. No chance of an interest rate hike soon then? I think that argument is wrong. The UK needs tighter monetary policy.
Keeping interest rates at record lows is unnecessary and unsustainable given rapidly falling unemployment and signs of a booming economy. Indeed, the argument that a small inflation undershoot justifies the loosest money policy for 300 years shows just how skewed perspectives have become.
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***DA: What do we want? RATE HIKE! When do we want it? NOW! (Repeat ad nauseum).

Credit Suisse Net Falls on Lower Investment Bank Profit
Elena Logutenkova and Jeffrey Vögeli – Bloomberg
Credit Suisse Group AG (CSGN), the second-biggest Swiss bank, reported a slump in first-quarter earnings as a drop in debt trading weighed on investment-banking profit.
The stock tumbled as much as 2.8 percent in Swiss trading after Credit Suisse said net income fell 34 percent to 859 million francs ($976 million) from a year earlier, missing the 1.09 billion-franc estimate of analysts surveyed by Bloomberg.
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Russian Holdings of Treasuries Fall to Lowest Since 2011
Kasia Klimasinska and Susanne Walker – Bloomberg
Russia’s holdings of U.S. government securities fell to the lowest level since 2011 in February as tensions in Crimea escalated and the ruble weakened, Treasury Department data showed.
Russian holdings declined for a fourth straight month, to $126.2 billion, from $131.8 billion in January, according to figures released today in Washington as a part of a monthly report on foreign holders of Treasuries as well as international portfolio flows.
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Central Banks

ECB plan could boost shares in Europe’s weakest companies
Francesco Canepa – Reuters
Shares in some of Europe’s least profitable and most indebted companies are set to outperform in the coming months if the European Central Bank starts buying corporate bonds to fight the threat of deflation.
The ECB has opened the door to the purchase of asset-backed securities such as secured corporate debt to revive economic activity in the euro zone, a move expected to give fresh impetus to a 20 percent rally in European shares since June.
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***DA: Von Mises called that “malinvestment” and said progress is unachievable until the market clears out all that junk.

Canada Keeps Key Lending Rate 1% With Neutral Bias
Greg Quinn – Bloomberg
Bank of Canada Governor Stephen Poloz remained neutral on the direction of his next interest-rate move, saying he will look through a quickening of inflation this year with companies still slow to invest.
Policy makers held their benchmark rate on overnight loans between commercial banks at 1 percent, where it’s been since September 2010, as expected by all 18 economists in a Bloomberg News survey.
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Bank of England unlikely to rush into an early interest rate rise
Larry Elliott – The Guardian
Employment up by more than 250,000 on the quarter. The unemployment rate below 7% and at its lowest rate in five years. Average earnings are picking up and finally outpacing prices. With the labour market as strong as that, surely an increase in interest rates must be coming?
That’s certainly what the City thinks.
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RBI push for Interest Rate Futures to boost trading
Neelasri Barman – Business Standard
The Reserve Bank of India (RBI)’s likelihood of launching more tenures in Interest Rate Futures (IRF) is set to drive trading volumes further. A senior official from RBI said last week this was being considered.
In December, the regulator made a third attempt to launch IRFs. The previous two attempts had witnessed a lukewarm response. RBI’s definition of IRF is, “a standardised interest rate derivative contract, traded on a recognised stock exchange to buy or sell a notional security or any other interest-bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract”.
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Currencies

Reforms bring end of ‘currency wars’ in sight
Simon Derrick – Financial Times
This year is likely to bring a significant easing of currency restrictions in the developing world. In particular, policy shifts in China and Russia offer the hope that the much discussed “currency wars” are finally drawing to a close, despite a recent complaint from a US official.
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***DA: Currency wars ending? That’ll be the day.

Can commodities predict currencies? – Deutsche Bank
FX Street
In a day where Aussie was dragged lower by falling gold prices, Deutsche Bank released an interesting paper where they claim to have found “stronger evidence that currencies can help predict commodity prices rather than vice versa.”
Which affects which?
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***DA: If I truly found something with predictive power that no one had noticed, the last thing I would do is write about it.

Tokyo Housewives Trade Yen as Japan Spurs Inflation: Currencies
Mariko Ishikawa, Kazumi Miura and Hiroko Komiya – Bloomberg
Bank of Japan Governor Haruhiko Kuroda’s success in stoking inflation is changing the way 63-year-old Tokyo housewife Ritsuko Ueda manages her savings.
Ueda is one of thousands of ordinary Japanese trying to protect the value of their capital by resorting to currency margin trading, a high-risk way of dealing foreign exchange that uses borrowed money.
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***DA: Stories like this almost always have the same ending.

Commodity currencies feel the heat as China data looms
Ian Chua – Reuters
Commodity currencies nursed heavy losses early on Wednesday, while the other major currencies struggled for clear direction as investors kept a nervous eye on developments in Ukraine and ahead of a slew of Chinese economic data.
The market is braced for China to report its slowest growth in five years in the first quarter at a time when Beijing appears to be resisting pressure to inject fresh stimulus into the economy.
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Kiwi Momentum Signals Biggest Rally Vulnerable: Market Reversal
John Detrixhe – Bloomberg
The rally in New Zealand’s currency against the U.S. dollar to its highest level in more than two years may be poised to falter as momentum studies signal recent gains are vulnerable.
The kiwi, as the currency is called, touched 87.46 U.S. cents on April 10, the highest level since August 2011. Technical signals known as stochastics suggest the currency may be overstretched, according to JPMorgan Chase & Co. A momentum indicator signals New Zealand’s dollar may fall 2.3 percent in 15 days, Bloomberg strategist Andrew Robinson wrote yesterday.
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Indexes & Index Products

Latest Russell Indexes Performance Data for European Smart Beta Investors
Press Release (via MarketWatch)
Russell fundamentally weighted indexes in Europe outperformed their market capitalisation-weighted counterparts in 2013 and 2014 year-to-date as of April 8.
“Should European equity markets improve, our data suggests that, in certain cases, investors in smart beta strategies may benefit from factoring in alternative indices, like fundamentally weighted indices, in their pursuit of investment opportunities,” said Gareth Parker, director of indexes research and product for Russell Investments Europe.
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Two Measures Of Inflation: CPI And The PCE Price Index And Fed Policy
Doug Short – Investing.com
Note from dshort: I’ve updated the accompanying charts with yesterday’s Consumer Price Index data from the Bureau of Labor Statistics. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison with the PCE Price Index.
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***DA: The key these days is the use of core stats, which are ex-food and energy. I understand why, but the general public feels the pinch.

Gold

Gold Tumbles Most in 16 Weeks on Fed Taper Speculation
Debarati Roy and Nicholas Larkin – Bloomberg
Gold tumbled 2 percent, the most in 16 weeks, on speculation that a gain in U.S. consumer prices will give the Federal Reserve more leeway to reduce monetary stimulus. Palladium fell for the first time in six sessions.
The consumer price index rose 0.2 percent, government data showed today, topping the 0.1 percent forecast in a Bloomberg survey of economists that matched the gain in the prior month.
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Market Uncertainty, Geopolitical Risks To Drive Investors Back Into Gold — SPDR Exec
Kitco News (via Forbes)
Increased volatility in equity markets and geopolitical uncertainty are expected to drive investors back into the gold market this year, said one analyst.
In an interview with Kitco News, David Mazza, head of research at SPDR ETFs and SSGA Funds, said that he is already starting to see investors take more interest in gold and SPDR Gold Shares physically-backed exchange-traded fund (NYSE: GLD). He added that investors are using the yellow metal to create “defensive” positions in their investment portfolios.
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China’s Gold Demand Stagnates In 2014, A Year After Gold Rush Fueled By ‘Grannies’
Sophie Song – International Business Times
China’s gold-loving grannies bought enough gold last year to see them through this year, and perhaps longer. Despite prices lower than this time a year ago, when the gold rush in the world’s second-largest economy began, demand is likely to remain level this year, the first time it has not increased since 2002.
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