Tokyo stocks fell for the first time in three trading days Tuesday, with the Nikkei Stock Average slipping 38.72 points to end the day at 13,529.65.

The dollar declined to the upper-98 yen range, prompting selling of exporters, including carmakers and machinery makers. Property developers and banks also traded lower, as investors sensed greater downside risk.

Trading value on the first section of the Tokyo Stock Exchange stayed below 3 trillion yen for the third straight session.

While expectations for global GDP growth are now expected to be +3.3% for 2013 against +3.2% for 2012, the IMF has just slashed the previously rosy 3.6% expectation as the global economy stalls. The US and Europe had significant cuts to their 2013 GDP growth expectations (though of course, this dip recovers hockey-stick-like in 2014). It will perhaps be surprising to learn that Japan had its growth expectation raised the most of all the major advanced and emerging nations. World Trade volume growth has also been cut notably – driven by a fall in the previously supposed driver of growth – emerging markets. The IMF’s less sanguine forecasts, however, are caveated with hope-driven perspective such as expectations that Debt-to-GDP will drop for all nations from 2013 to 2018 and while energy remains a major downside risk to global growth, we were stunned to read that they cite S&P 500 option prices as an indicator of upside potential. It seems, even at the IMF, that the market is all that matters (oh and the Japanese printing press).

 The global growth projection – quite a cone of uncertainty…with downside risk dominant

As the balance of risks is between oil market concerns and the ebullience of S&P 500 options prices!!! Is it any wonder that VIX is suppressed? >> Read More

Exchange traded funds have transformed the gold market. Since the first fund was launched nearly a decade ago, the products have become so successful in offering a simple way for investors to buy physical gold that they have acquired the nickname “the people’s central bank”.

But what happens when the people’s central bank decides to sell?

That is the question now haunting the bullion market. Since the start of January, gold ETFs have dumped 140 tonnes of gold. February saw the largest monthly outflow of gold from ETFs on record.

The sell-off is partly a reflection of broader negative sentiment towards gold, as investors become more confident in the global economy and put their money into riskier assets such as equities. Prices have slid 12 per cent since October to less than $1,580 a troy ounce, and are down 18 per cent from their record nominal high in 2011. >> Read More

Main headline from the latest ECB Monthly Report just out.

• The stronger Euro poses a risk that inflation might undershoot the European Central Bank’s target
• Recovery was expected to start later this year
• Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term
• Upside risks relate to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stem from weaker economic activity and, more recently, the appreciation of the Euro exchange rate
• Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term

As usual, the ECB bulletin was virtually identical to its main policy statement after their policy meeting last Thursday

JP Morgan revised its USD/JPY forecasts higher expecting the pair to trade in the 80-90 range for most of 2013, (previous forecasted range was 75-85).

“This revision was necessary since we had underestimated 1) the multiplier effect on the currency of Japan’s trade deficit, and 2) the significant change in non-Japanese investors’ perception towards Japanese politics and policies,” JPM clarifies.

The upside risk to this view, according to JPM, could probably take USD/JPY towards 100 by end-Q2 if one or more of these 3 scenarios materialize in Q1/Q2: >> Read More

Two months after cutting India’s credit rating outlook to negative, Fitch today said macroeconomic situation remains weak as growth is slow and inflation pressures are strong.

“The current macroeconomic outlook looks weak, as real GDP continues to slow and inflation pressures remain strong,” the agency said in a report on sovereign ratings across the Asia-Pacific.

Fitch today said the country’s external position is a “rating strength” with reserves of over USD 290 billion at the end of June which will suffice for six months of external payments.

“This still provides a key buffer during periods of higher global risk aversion,” it added.

Fitch also noted that an acceleration in economic reforms and an improving investment climate are the upsides, while a lax fiscal policy, especially in the run-up to the 2014 general elections, is the downside risk. >> Read More

Whether the show of Euro-zone disarray and disunity is being carefully orchestrated by the stronger economies or represents sheer ineptitude and disunity, the damage is certainly very real. Even if the Euro can be kept broadly intact, the equilibrium level for the currency will now be much weaker with an eventual move to parity against the US dollar unless Germany abandons ship before then. On a shorter-term timeframe, caution over aggressive selling remains essential given the threat of a sharp corrective recovery, but fading rallies remains the best course of action.

Confidence can be an ephemeral and intangible commodity. There are of course economic measures of consumer confidence, but real measures of sentiment and run much deeper and are very difficult to quantify. For the Euro project to succeed, confidence had to be maintained at a government, market and popular level. While governments were able to maintain a broadly united stance, capital flowed voluntarily into peripheral economies. Once this confidence falters, it is extremely difficult to regain trust. For example, even if Euro exit comments from Finland are a negotiating position on ESM support, the mere suggestion that a country could leave the Euro area causes major and irreversible damage.

Euro-zone leaders could not mask the tensions and disagreements at the EU Summit where, in effect, Italy and Spain blackmailed the German government into making concessions.

The German government has fought back and sought to downplay the significance of the Summit deal. Its clear that substantial roadblocks will be erected to any direct ESM support for the banking sector. The Finnish government appeared to break ranks late last week and suggested that it could consider leaving the Euro area. >> Read More

Tue, May 29th

• Japan Labour Market Data (Apr): We forecast an increase to 0.77X for the job offers/seekers ratio, while the unemployment rate has likely remained unchanged (GS 4.5% , consensus 4.5%, last 4.5%).
• Japan Retail Sales (Apr): Retail sales have likely been close to flat mom in April. (consensus 0.1% mom, last -1.2%)
• Turkish Central Bank Meeting: Consensus expects the rate to stay on hold at 5.75% but CBRT could attempt to tighten front end liquidity to stabilise the currency, while easing via credit tools at the longer end of the curve.
• South Africa GDP (Q1): GS expects +2.8% qoq ann growth in Q1 (consensus 2.1% qoq ann, last 3.2% qoq ann).
• German Consumer Price Inflation (May): Consensus expects stable prices since April (consensus 0.0% mom, last 0.1% mom).
• US Consumer Confidence (May): On the Conference Board measure we expect a small decline (GS 68.5, consensus 69.5, last 69.2).
• Also Interesting: US Case Shiller Home Prices (Mar), Dallas Fed Manufacturing Activity (May), Bank of Portugal Financial Stability Report, Hungary
• MPC Meeting (GS: on hold).

Wed, May 30th

• Australia Retail Sales (Apr): Consensus 0.2% mom, last 0.9% mom.
• Canada Industrial Production (Apr): Consensus 0.1% mom, last 0.2% mom.
• Brazil FX Flow Data for the previous week: Given the big swings in recent days, it will be interesting to get a better sense of what kind of flows have hit the market.
• Brazil Central Bank Meeting: We and consensus expect BACEN to lower the SELIC target rate by 50bp to a record low of 8.50%.
• Speeches: ECB’s Draghi, Fed’s Dudley, Fed’s Fischer
• Also Interesting: Eurozone Money Supply (Apr), US Pending Home Sales (Apr), Sweden GDP (Q1). >> Read More

In what S&P calls a ‘Perfect Storm’, the next four years will see a minimum of $30 trillion in companies’ refinancing needs related to maturing bonds and loans and further they expect $13-$16 trillion more debt will be required to finance growth. With bond portfolios over-stuffed with corporate debt (since angst over sovereign risk has skewed asset allocation away from that cohort) the rating agency is concerned that ongoing bank deleveraging, these huge debt re-funding requirements, and the diminishment of central banks and governments to do anything about it leave serious problems with a credit overhang so large. Critically, especially as we hear calls for ‘growth’ plans from Europe, is the increasing likelihood that, as Reuters reports, this will potentially influence corporate credit quality and “alter the fragile equilibrium that currently exists in the global corporate credit landscape”. While S&P expect the refinancing needs may well be met “This global wall of nonfinancial corporate debt will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds” which “raises the downside risk in global markets” as an inability to finance growth may well be the catalyst for another risk flare. “Governments and central banks have less fiscal and monetary flexibility to prevent serious problems emanating from future market disturbances. A perfect storm scenario would likely cause financing disruptions even for borrowers that are not highly leveraged.”

 We expect real GDP growth to remain below potential and inflation to moderate as tight monetary policy and weaker global growth cap demand. 

 Inflation: 

 Policy: 

 Risks: