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from Counterparties:

MORNING BID – Sound as a pound

Global ructions are dominating asset flows right now, and we’re not even talking about violent events such as the ongoing Russia-Ukraine conflict, the rise of Islamic State in Iraq and Syria, or the Israel-Palestine situation. Right now smaller events – yet uncertain ones – seem to be affecting the larger markets a bit more, contributing to a decided shift in factors that U.S. assets are reacting to.

The bond market is no longer just about a steady belief in lower-for-forever activity from the Federal Reserve, but about the expectation for more flows from overseas as U.S. assets look more attractive and the U.S. dollar continues to strengthen. The dollar had a banner session against the pound with the threat of Scottish independence growing more and more possible (cue everyone yelling “Freedom!” while being drawn and quartered), as the messy considerations surrounding what happens to oil revenue and the diminution of the U.K. economy is considered. It also threatens to drive more flows toward the dollar as the Bank of England might be expected to hold off on raising interest rates when they had been expected to be the first central bank to act.

Still, the overall level of interest rates from the world’s four major central banks (including Japan and the ECB) is still quite low – about 200 basis points lower than where the 2000-2004 cycle troughed (the real rate is somewhere between 0 and -1 percent right now). Even as the Fed starts to bump rates higher next year, at the earliest, the accommodative nature of the other major banks should investors fully invested in various markets, including the United States. Rates are more likely to come under pressure – the expectation has been for bond yields to rise, a losing bet for months on end now, and yet it persists.

It’s even spread to Fed officials, with the San Francisco Fed noting in a paper that Fed projections are for the fed funds rate to be around 1 percent at the end of 2015 (private economists think about 0.8 percent), and to 2.5 percent at the end of 2016 versus a 1 percent rate thought logical by economists. That does set up the possibility of disappointment, although it’s fair to say the Fed is often a bit too optimistic about expectations for the economy, inflation and other indicators – they’ve been known to regularly overestimate how growth is going to strengthen over the last few years. It’s possible that the fact that the Fed has its hands on the lever means the staff forecasts about rates should be taken somewhat more seriously, but since they’ve been wrong as much as they have, we won’t.

from Breakingviews:

Pound joins euro as weak dollar victim

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The pound has joined the euro in the unwanted currency strength camp. There are British factors but the main reason is that excessively loose U.S. monetary policy is distorting currency markets - and other markets besides. Trouble is in store.

from Breakingviews:

Confused Fed adds to emerging market muddle

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A confused U.S. Federal Reserve has added to the muddle in emerging markets.

At their meeting that ended on March 19, the nine voting members of the Federal Open Market Committee (FOMC) wriggled out of a previous commitment to start increasing interest rates after unemployment had fallen to 6.5 percent. To assure markets that overnight rates will stay at near-zero levels, the committee promised instead to seek maximum employment and 2 percent inflation.

from Counterparties:

MORNING BID – Copper, China and currencies

Markets start on the back foot this morning, with weakness overseas - and particularly in emerging markets - feeding through to a bit of strain on U.S. futures and a bit of flight to quality to the U.S. bond market.

The outlook for China once again comes into play, with the most recent fears being more corporate defaults in the world's second-largest economy and the way in which copper imports are used in China as collateral to raise funds. So it's all nicely intertwined here and has had a detrimental effect on both China's stocks, stocks in various exchanges around the world, and of course the price of copper, which was down 5 percent in Shanghai.

from Breakingviews:

Scandal will reshape FX trading dynamics

By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Around the world, investigators are trying to find out if the largely unregulated foreign exchange market was manipulated. Even before the probes are completed, the pace of change will pick up in the $5 trillion-a-day market, in both what moves currencies and the way business is done.

from Counterparties:

MORNING BID – Janet Yellen’s rain (snow) check

This is the thing about delaying the new Fed chair's follow-up testimony by two weeks due to bad weather, you actually make the second hearing something that's potentially interesting. (It will depend, of course, on whether members of the Senate Committee ask provocative questions, and while you can lead a horse to water, well, you know.)

In the interim two weeks since Janet Yellen last appeared before Congress, the U.S. economic picture has gotten much more muddled. That's mostly because of poor retail sales and employment figures, and the out-of-control situation in Ukraine which has led to a regional flight of some assets. There's also been some interesting comments from the likes of Fed Governor Daniel Tarullo, who suggested the Fed should be paying more attention to the formation of asset bubbles and the use of monetary policy to curb them. That anyone is surprised at this shows how pervasive the "Fed put" option has become in the discussion of Fed activities, so we've really lowered expectations here.

from Breakingviews:

Whole FX business belongs in the dock

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

No one has yet been accused of a crime in the foreign exchange market, but there is a lot of talk of disturbing practices, including dealing in personal accounts against clients’ interests. This could be a scandal as big as the fixing of interbank lending rates. However, the probes seem unlikely to address the hardest questions about how the whole currency business works.

from MacroScope:

A week before emerging-market turmoil, a prescient exchange on just how much the Fed cares

photo

The last seven days has been a glaring example of fallout from the cross-border carry trade. That's the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.

The Fed's decision on Wednesday to keep cutting its stimulus effectively ignores the turmoil in such developing countries. And while the Fed may well be right not to overreact, it makes one wonder just how much attention major central banks pay to the carry trade and its global effects -- and it brings to mind a prescient exchange between some of the brightest lights of western economics, just a week before emerging markets were to run off the rails.

from Breakingviews:

Exportless recovery adds to emerging market risks

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The devaluation of the Argentine peso has shaken investors. It’s not exactly an emerging market crisis, but cracks are beginning to emerge in the cheery consensus about the global economy’s prospects in 2014.

from Edward Hadas:

Bitcoin repeats gold-standard errors

I cannot judge whether bitcoin represents a technological breakthrough, but I am confident that the pseudo-currency’s popularity shows widespread economic amnesia. If bitcoin ever became a real currency, it would suffer from the crippling problems of the gold standard.

The underlying problem is the belief that the electronic token’s independence from the government is a good thing. This libertarian notion could hardly be more wrong. Money is a common good for the whole society, and in the contemporary world governments are the pre-eminent social guardians.

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