Bond Outlook May 3rd

Our qualified optimism about world economic rebalancing, which we also describe as a move from a uni-polar to a tri-polar world, is apparently becoming conventional wisdom. Even Stephen Roach (MSI) says this week that he has moved into optimistic mode. He states four reasons for his change of heart:

• Inflation is in check
• Central Banks everywhere are adopting neutral stances on interest rates
• The G7 meeting has led at last to governments taking seriously the need for rebalancing
• China is shifting to domestic demand expansion.

The G7 meeting seems to have given impetus to USD weakening. The implication is that the US authorities have now decided to devalue their way out of debt. Our evocative image of the weekly Beijing “dollar fix meeting” may now need expanding to include a telephone chat with Ben Bernanke. The EUR and the JPY are the main beneficiaries of USD weakness, but by default. Nonetheless, there is an alternative to them in the form of gold. Our suspicion remains that China is increasing its gold reserves and is partly responsible for the eve rising gold price.