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John Lothian News/MarketsWiki Survey
When we started the JLN Financials newsletter last fall, we recognized it would be a work in progress. The idea came about because of the amount of news overlap between interest rates, foreign exchange, indexes and precious metals. So we consolidated our subscriber lists and began publishing under one umbrella.

Quite frankly, we think we got it right, but we sure could use your input. Please consider filling out our 2014 John Lothian News/marketsWiki survey. It consists of 5 questions and a blank slate for your comments. It should not take more than 30 seconds of your time. As an added incentive, filling out the survey puts you in the running for either an iPad mini or a pair of Bose Quiet Comfort Noise-Canceling Headphones. Thank you.

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Quote of the Day

“El-Erian is gone and he’s not coming back and why he left or what you might have said or done doesn’t matter. It’s time for Bill to focus on what he does for a living, which is manage bond portfolios.”

Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor in the story, “Gross Prods El-Erian to Explain Reason for Pimco Exit”.

Lead Stories

Toxic Debt Condemned in Crisis Heralded as Europe’s Savior
Alastair Marsh – Bloomberg
Asset-backed securities were denounced for causing the financial crisis. Now the debt is being seen as a savior for Europe’s economy.
The European Central Bank signaled this week that plans to ward off deflation may center on asset-backed securities, while policy makers are promoting an expansion of the market.

***DA: The point is to get the toxic waste off the banks’ books and onto the public’s and held to maturity, since a central bank is unlikely to sell in a panic.

Wall Street’s Bond Trading, Allocation Under Finra Review
Christine Harper – Bloomberg
The Financial Industry Regulatory Authority is examining whether Wall Street firms overcharge investors on some bond trades and whether they unfairly allocate new corporate debt issues to reward certain clients.

***DA: What took them so long? These charges have been leveled for longer than I have been in the business.

Gross Prods El-Erian to Explain Reason for Pimco Exit
Alexis Leondis – Bloomberg
More than two months after Pacific Investment Management Co.’s former Chief Executive Officer Mohamed El-Erian announced his resignation from the world’s biggest bond manager, Bill Gross is still looking for a reason.
Gross, 69, speaking in an interview with Bloomberg Television’s Trish Regan yesterday, said El-Erian’s departure is still a mystery for him and a disappointment for the Newport Beach, California-based firm, which manages the industry’s biggest bond fund.

***DA: What’s the opposite of a gag order?

Interest rates in Britain: after five years, change is surely coming
The Guardian
Mervyn King used to say that a central bank should be judged by how boring it is. By that token the Bank of England has never been more successful, as its monthly policy decisions are utterly predictable.
It is now more than five years since Threadneedle Street changed official interest rates.

***DA: You sure about that?

Will Interest Rates Rise Earlier Than Predicted?
Sean Hanlon – Forbes
It goes without saying that the actions of the Federal Reserve have the single greatest influence on interest rates. These Fed influences encompass not only its formal statements, but also comments made by the chairperson and other Fed officials.

U.S. Global Growth Engine Putt-Putts Instead of Purring: Economy
Simon Kennedy and Ilan Kolet – Bloomberg
As the International Monetary Fund declares the strengthening U.S. economy is providing a “major impulse” to the world, economists are questioning just how powerful it will prove to be.

***DA: I would rather be a train than a cat.

The more the Fed explains, the less markets understand
Rex Nutting – MarketWatch
The Federal Reserve’s policy on interest rates has been stuck at zero for five years. But its communications policy has been anything but steady.
It’s flipped from one extreme to the other as Fed officials vainly attempt to explain what the central bank is doing, why it’s doing it and what it will likely do next.

***DA: Clarity and transparency are used more often when the narrative is good news. Bad news needs to be massaged.

Why Rising Interest Rates Won’t Kill the Bull Market
Steve Goldberg – Kiplinger
Stock investors have become increasingly worried about how the market will react as the Federal Reserve ends its extraordinary bond-buying program. I, myself, am of the generation that began investing in the early 1980s, when the late market strategist Marty Zweig regularly cautioned, “Don’t fight the Fed.”

***DA: Spoiler alert: a downturn in consumer confidence will kill the bull market.

Quebec Bonds Show Scottish Separatists Size Matters: U.K. Credit
Lukanyo Mnyanda and Rodney Jefferson – Bloomberg
As Scotland’s nationalists step up their campaign to leave the U.K., markets elsewhere suggest independence isn’t popular with bond investors.
Yields on Quebec’s 10-year securities declined after separatists in the Canadian province lost ground in an April 7 election.

***JB: Just don’t ask what’s under the kilt.

Central Banks

Central Banks Say Regulations May Undermine Europe’s Economic Recovery
Christopher Lawton and Todd Buell – The Wall Street Journal
Two of the world’s leading central banks took aim Friday at regulations they said could make it harder for small firms to access financing, thus undermining Europe’s economic recovery.
In a six-page report, the European Central Bank and the Bank of England said they are concerned about the “shrinking” market for asset backed securities, or bundles of mortgage, small business and other loans that are packaged and sold to investors.

ECB ready to act but central banks can’t do everything: Constancio
The European Central Bank is ready to use unconventional tools to cope with any overly prolonged period of low inflation, the ECB’s vice president said, although he added that “people seem to expect too much from central banks”.

***DA: Some have argued they can’t do anything.

ECB Unites With BOE in Call to Ease Asset-Backed Bond Rules
Jennifer Ryan, Jana Randow and Alessandro Speciale – Bloomberg
The European Central Bank and the Bank of England said regulators must support and promote the asset-backed bond market, ensuring that rules to safeguard the financial system don’t unnecessarily impair the securities’ use.

***DA: When structured properly, securitization provides numerous benefits. But they are not risk-free, and during a systemic event, it gets hard to separate the safe from the unsafe.

Weidmann Citing QE Legitimacy Paves Way for ECB Consensus
Jana Randow – Bloomberg
Jens Weidmann has morphed from Dr. No into Mr. Maybe.
After building a reputation as a nay-sayer on the European Central Bank’s Governing Council, the Bundesbank president’s support for large-scale asset purchases marks a shift that helps the fight against deflationary threats.

China central bank: credit growth steady but watching debt risks
China’s central bank governor, Zhou Xiaochuan, said on Friday that although credit growth was stable, the central bank remained vigilant against the risks from corporate indebtedness.

The Fed’s Inflation Problem
Most people think inflation is bad on its face. But one school of economic thought holds that a little inflation is a good thing, if it is confined to assets like stocks and real estate. But if it spills over to the supermarket or the gas station, no one is an inflation fan. Our central bank’s policy is to goose asset prices, thus getting the sluggish economy finally moving. Trouble is, that kind of precision is a tall order.

***DA: It often feels like we have inflation in anything that costs me money – groceries, travel, college tuition, etc., but places where we earn money – wages and interest, have stagnated or even deflated.

Raghuram Rajan takes the battle to the Fed camp
V. Anantha Nageswaran – LiveMint
In the last four months, Reserve Bank of India (RBI) governor Raghuram Rajan has been hammering away about how the extremely prolonged accommodative monetary policies pursued in the developed world, particularly the US, is creating problems in the emerging markets. These policies have sent capital flooding into emerging economies. Such flows create, among other things, credit bubbles, asset price bubbles and exchange rate overvaluation. Suddenly, as these policies are reversed, the tide withdraws, leaving emerging markets with an economic and capital market mess.

DIARY – Major Central Bank Meetings for 2014
Please find below a list of dates of meetings and interest rate decisions in 2014 from key central banks around the world.


SNB Seen Sticking With Cap in 2014 Amid Haven Demand: Economy
Catherine Bosley and Joshua Robinson – Bloomberg
Swiss National Bank officials will defend their cap on the franc for at least another year as they endure pressure from potential policy easing in the euro area to investor demand for safe assets, economists say.
No respondent in the Bloomberg Monthly Survey predicted that the SNB will allow the franc ceiling of 1.20 per euro to lapse in 2014. The poll of 21 economists found that eight see the SNB doing so in 2015, while six see the ceiling expiring in 2016 and two in 2017.

***DA: It’s hard to be both a safe haven and a competitive export economy.

Texan Discovers Key to Euro Going Against Consensus: Currencies
If you want to know where the euro is headed, look to Texas. That’s the home of Prestige Economics LLC, the fewer-than-10-person researcher and consultancy that proved to be the most-accurate forecaster of the euro-dollar pair last quarter among more than 50 firms worldwide in data compiled by Bloomberg. Prestige was also No. 1 for the pound-dollar and dollar-Swiss franc, while coming in at No. 2 for euro-yen.

***DA: Everything’s bigger in Texas, including their forecasting acumen. But apparently they are not big enough to be quoted in the next story:

Euro will rally further, say the most accurate FX forecasters
The euro will rise even more, according to some of the top foreign exchange strategists who accurately predicted resilience in the common currency over the past year.

The future of Scotland’s currency continues to divide opinion, polls show
The Guardian
YouGov poll finds 53 percent of Britons outside Scotland oppose the country keeping the pound and believe it has no viable alternative to sterling should it vote for independence.

Indexes & Index Products

Explore The Core With Smart Beta
Luciano Siracusano, III – Seeking Alpha
ETFs can be used in many ways, but one of the most popular is the “core and explore” approach. Investors use ETFs to implement core positions, often with funds tracking capitalization-weighted indexes, and use tactical ETFs or active managers in the periphery of the portfolio to pursue alpha.


Gold extends rally after Fed minutes as stocks tumble
Frank Tang and Clara Denina – Reuters
Gold rose to its highest price in more than two weeks on Thursday, boosted by a sharp pullback in U.S. equities and follow-through buying a day after minutes from the Federal Reserve’s latest policy meeting revealed its cautious approach in future interest-rate hikes.

Does the Gold Price reflect true gold Demand and Supply?
Despite the furore surrounding the Gold Fix [unfairly, we believe] it is a singularly determined attempt amongst commodities to set a twice daily price that does reflect demand and supply of gold, at those moments. To understand this we have to see what happens at the Fixing sessions.

Will gold ever recover from its ‘$1 trillion crash’?
Jenny Cosgrave – CNBC
This week last year, the price of gold suffered a 15 percent drop inside two trading days. It was a volatile year for the precious metal — 2013 finally put an end to a 12-year bull run. And that is unlikely to be reversed no matter how volatile the markets get, analysts have told CNBC.

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