MacroScope

It seems eons since the euro zone finance ministers’ meetings which made such a hash of the Cyprus bailout but they were only two months ago. Monday’s Eurogroup will be altogether less eventful with some of the gathering probably a little jaded having spent part of their weekend at the G7 outside London where the usual differences about growth versus austerity and banking reform were aired.

No one will be sorry for a more routine meeting and there are no icebergs on the horizon but the agenda is still a full one. Featuring will be the economic situation on the basis of the Commission’s latest forecasts, the state of play in Cyprus, the decision already taken to release more bailout money to Greece, the new steps taken by Portugal to fill the gaps in its budget after the country’s top court struck some measures out, a review of European Commission reports on what is ailing Spain and Slovenia and a broad discussion about the merits of the ESM bailout being allowed to recapitalise bank retroactively from next year.

Italy offers a range of bonds at auction worth up to 8 billion euros which should be snapped up given the European Central Bank’s underwriting of the euro zone and Japanese money coursing through the financial system.

Germany’s Economy Ministry publishes its monthly report and Finance Minister Wolfgang Schaeuble makes a speech, this ahead of Q1 GDP figures on Wednesday which are likely to show that of the bigger members of the euro zone club, only Europe’s largest economy returned to growth in the first three months of the year. The Bank of France has just forecast that the French economy will eke out growth of 0.1 percent in the second quarter.

Schaeuble, writing in the FT, has confirmed what we reported last week – namely that he wants a limited banking union based around cross-border supervision and only much, much later (never?) a bloc-wide system to deal with failing banks which he continues to insist will require treaty change. Build the timber frame first and the steel frame later, he says. Until then, euro zone countries would continue to deal with problem banks. This has the fortunate effect of preventing Germany from taking on liability for others but it’s nothing like the structure that was proposed last year and will continue to cause considerable angst elsewhere, not least France, Spain and the European Central Bank.

G7 finance ministers meet London on Friday and Saturday. Since they and many more met in Washington only three weeks ago and not much has changed since, it’s tempting to ask what is the point of this British gathering. There have been mutterings from some of the travelling delegations to that effect.

If there is an angle, it is the unusual focus on financial regulation (usually not part of the Group of Seven’s remit) with some feeling that more than four years after the collapse of Lehman Brothers, efforts to put in place structures to prevent similar events spinning out of control in future are flagging. That puts the euro zone’s fluctuating plans for a banking union firmly in focus, which in turn puts German Finance Minister Wolfgang Schaeuble right in the spotlight.

On Tuesday, he said elements of a banking union would have to be pursued without lengthy and arduous treaty change, something he’d previously said would be necessary. Was that a softening of his position? Er, probably not. More likely, the subtext is that because treaty change takes too long, Berlin will pursue only those elements of banking union that don’t require it – i.e. bloc-wide regulation yes, but forget about a bank resolution mechanism let alone a joint deposit guarantee.

The flurry of activity about a G7 currency statement yesterday can now be put in perspective. It will almost certainly happen but it’s very much going through the motions.

We’ve been saying for a while that having urged it to reflate its economy for some time, Japan’s partners could hardly complain now that it is. Lael Brainard of the U.S. Treasury basically let that cat out of the bag last night, warning against competitive devaluations but saying that Washington supported Tokyo’s efforts to reinvigorate growth and end deflation.

What we’ll get is a bland recommitment to market-determined exchange rates and not much more.

With the rhetoric getting more heated, the three-year market fixation on bond yields could well be supplanted by currencies in the months ahead.

This week, everything points towards the first meeting this year of G20 finance ministers and central bankers in Moscow on Friday and Saturday. We’ve already got a clear steer from sources that even though France wants the strong euro on the agenda there will be little pressure put on Japan and others whose policies are pushing their currencies lower. Having urged Tokyo to reflate its economy last year, its G20 peers can hardly complain now that it has. That is not to say there won’t be lots of words on the issue though.

The Wall Street Journal has a piece saying the G7 – or at least its European and U.S. constituents – are planning a joint message ahead of the G20 to warn against a destabilizing competitive currency devaluation race. If true, this will have a big impact on the FX market.

Just one look at the whoosh higher in global markets in January and you'd be forgiven smug faith in the hoary old market adage of "Don't fight the Fed" -- or to update the phrase less pithily for the modern, globalised marketplace: "Don't fight the world's central banks". (or "Don't Battle the Banks", maybe?)

In tandem with this month's Federal Reserve forecast of near-zero U.S. official interest rates for the next two years, the European Central Bank provided its banking sector nearly half a trillion euros of cheap 3-year loans in late December (and may do almost as much again on Feb 29). Add to that ongoing bouts of money printing by the Bank of England, Swiss National Bank, Bank of Japan and more than 40 expected acts of monetary easing by central banks around the world in the first half of this year and that's a lot of additional central bank support behind the market rebound.  So is betting against this firepower a mug's game? Well, some investors caution against the chance that the Banks are firing duds.

According to giant bond fund manager Pimco, the post-credit crisis process of household, corporate and sovereign deleveraging is so intense and loaded with risk that central banks may just be keeping up with events and even then are doing so at very different speeds. What's more the solution to the problem is not a monetary one anyway and all they can do is ease the pain.

European Central Bank  President Jean-Claude Trichet plans to keep a cool head at this weekend’s meeting of Group of Seven policymakers in Canada’s far north.

Large iceberg over Frobisher Bay

“I am very happy to go very far up, far up in the north of Canada,” he told journalists before hopping on a plane en-route to frostbitten Iqaluit, some 300 kilometres south of the Arctic Circle.

“We will have all the right environment to be as cool as possible in judging the situation.”

North Korea, one of former President George Bush’s “axis of evil” countries and one of the few remaining Stalinist states, deserves to be re-evaluated given the prospect of a power succession and the changing economic landscape in the region, according to Goldman Sachs.

Apart from the robust military establishment (absorbing at least 20-30% of GDP vs 3% of GDP in South Korea),  Goldman says North Korea has large untapped potential, including rich human capital, abundant mineral resources (valued at around 140 times 2008 GDP) and significant room for productivity gains.

“We project that the GDP of a united Korea in dollar terms could exceed that of France, Germany and possibly Japan in 30-40 years, should the growth potential of North Korea, notably its rich mineral wealth, be realised,” the bank’s economist Goohoon Kwon says in a paper.

Finance chiefs from the G20 meeting in London on Friday and Saturday are likely to be in a slightly better — or at least more relieved — mood than they were last time they got together.

The world economy is still in a mess and the financial system is far from running normally. But — and it is a big but at that — fears of global economic collapse have dissipated. This is in no small part as a result of the actions of groups such as the G20 which endorsed coordinated intervention into the marketplace.

So much so, in fact, that much of this weekend’s discussions will touch on the so-called exit strategies that countries will need to get themselves back out of the stumulus and bailout business. With markets in mind, they are likely to be coy about it.

Five things to think about this week:

EARNINGS DELUGE
-- A heavy U.S. earnings week looms and the European reporting calendar is picking up. While more banks and financials will be reporting (e.g. Bank of America, Bank of New York Mellon, Credit Suisse and a trading update due from Barclays), results will start flowing from a wider range of sectors in both the U.S. and Europe (ranging from Apple and IBM to Glaxo SmithKline, Du Pont, Coca Cola). Health of the broader economy on display.

MACRO SIGNALS
-- The more mixed signals that earnings send, the more investors are likely to look to macro and other indicators as a cross-check of whether the stock market rebound is sustainable and whether the economy is anywhere near an inflexion point. Flash PMIs and Ifo for April will give an early indication of how economic activity was faring as Q2 got underway. Trade data from Japan is also due for release.

FISCAL HELP
 -- The UK budget on April 22 is expected to issue grim forecasts and extend a helping hand to some sectors, such as autos. The fiscal presentation will keep the spotlight on the limited room for budgetary manoeuvre in Britain and elsewhere with past bailouts and support measures leaving tough decisions to be made on public spending, taxes, etc.

Goldman Sachs has long been a keen advocate of the BRICs — Brazil, Russia, India and China – as a new power tool for world growth. Indeed, it is credited with coining the phrase.

In a note, the firm says that even though the group is being hit differently by the global slowdown — Russia suffering most,  India least — a uniform drive from the four will return as soon as the cycle starts to turn.

It is predicting big things as early as next year.  It says China’s economy is already the third largest in the world and it sees it eclipsing current No. 2  Japan as early as 2010. Furthermore, as a group, the four countries are set to be dominant.