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U.S. Wants Firings at France's BNP Authorities Push for BNP Workers to Be Sacked, in Addition to $10 Billion in Fines, Over Sanctions Issue

U.S. authorities are seeking to punish individual employees at BNP Paribas SA BNP.FR -2.98% and pressing the bank to fire at least a dozen people, in part because of the bank's conduct in allegedly evading sanctions related to Sudan, according to people familiar with the discussions.

U.S. Plans to Charge BNP Over Sanctions (4/30/2014) The New York Department of Financial Services is pressing for some of the stiffest punishments, including pushing for executives to be axed and seeking a temporary suspension of the bank's dollar-clearing privileges as part of any settlement with the U.S. Justice Department, the Manhattan district attorney's office and regulators, these people said. Prosecutors and regulators are pushing BNP to pay more than $10 billion to resolve the probe.

BNP Paribas hasn't agreed to those demands, and it isn't clear anyone will be fired or a settlement will be finalized. It still could take weeks to complete any deal, according to people familiar with the discussions. A BNP spokesman declined to comment.

U.S. authorities have been most alarmed by the scope of the efforts made to allegedly evade sanctions related to Sudan and by what prosecutors have come to view as the deliberate nature of the apparent deception involved in allegedly hiding transactions for Sudanese entities, these people said.

The transactions were allegedly conducted by the bank's trade-finance unit, mostly out of Geneva and Paris offices, according to a person familiar with the bank's activities.

Prosecutors are also unhappy with the bank's initial response to requests in 2009 for documents or interviews with employees, which they contend was slow or incomplete, people familiar with the case said. A person with knowledge of the matter said BNP responded to U.S. authorities' requests in a timely manner.

BNP has said in the past that its internal investigation into the matter uncovered "a significant volume of transactions" from 2002 to 2009 that could be "considered impermissible under U.S. laws and regulations" related to sanctions.

News of the potential penalties triggered concern among investors and some French politicians, who accused Washington of wielding unilateral sanctions as an extraterritorial hammer against French business interests.

Shares in the bank ended down 2.4% in Paris, making it the second-biggest loser in the French CAC-40 index, and the cost of insuring BNP's debt against possible default rose, while its bond prices fell.

"This, unfortunately, isn't the first such case in the history of Franco-U.S. relationships, and is the trademark of Washington's judicial and trading hegemony," said French lawmaker Jacques Myard, of the conservative opposition UMP party.

A spokesman for French President François Hollande referred calls about BNP Paribas to the Finance Ministry. An official at the Finance Ministry declined to comment. A French foreign-ministry spokesman said the government was closely monitoring the situation regarding BNP but declined to comment further.

Mr. Hollande will meet with President Barack Obama next week during ceremonies marking the 70th anniversary of D-Day, though it wasn't clear BNP would be among topics addressed.

Senior French officials have said the government was following the situation very closely but that they could ill afford to appear to be trying to influence the course of U.S. justice.

The prospect of an 11-figure penalty has raised the specter of BNP needing to scale back some of its ambitious international growth plans, curtail its dividend payments or sell shares to replenish its capital buffers, analysts say. BNP officials, while hoping to negotiate a smaller settlement, share some of those market concerns and are working on contingency plans, according to a person familiar with the bank's thinking.

BNP officials and analysts are concerned that a penalty in the $10 billion range would knock a full percentage point off an important capital ratio. That has the potential to compromise the bank's ability to pump money into rekindling its growth in countries like the U.S., where the bank has sought to expand its business to secure better access to North American investors, said the person familiar with the bank's thinking.

The push by Benjamin Lawsky, the New York state regulator, for heads to roll at the bank is one of four vital issues in the continuing settlement talks. The other three elements being sought in the deal by U.S. authorities, according to people familiar with the negotiations, are a guilty plea by the bank or a subsidiary, a financial penalty of more than $10 billion and a temporary suspension of the bank's ability to process dollar transactions through New York, where it is licensed.

The bank hasn't agreed to any of those terms, and the final outcome could look different from what U.S. authorities are seeking, these people said.

Mr. Lawsky has proposed the temporary ban as an alternative to the more serious step of stripping the firm of its banking license, which in effect would shut down its New York operations, these people said.

"There's no way to recover from that," said Andy Schmidt, research director at CEB TowerGroup, a research arm of Corporate Executive Board Co. "The temporary suspension [of dollar clearing] is a nuisance. It will have certainly a short-term…impact. You're going to lose business. If I had to choose between the suspension and the revocation [of a license], absolutely I would choose the suspension."

Such a suspension would affect BNP's ability to perform even the most mundane transactions in the U.S. for business clients, such as processing payrolls for businesses and payments made by a company to its suppliers. It would also hinder the bank's ability to handle payments related to trade financing, foreign-exchange transactions and customer loan payments, according to analysts.

"A bank that loses its ability to clear in U.S. dollars loses access to the biggest payments market on the planet," Mr. Schmidt said.

Mr. Lawsky, in a March speech, said institutions should face more than stiff fines when found to have committed wrongdoing. "Individuals should face real, serious penalties and sanctions when they break the rules,'' Mr. Lawsky said. "That can mean putting people in jail when they break the law in the context of criminal prosecutions. But it can also mean suspensions, firings, bonus clawbacks, and other types of penalties in the regulatory context.''

The number of years that have elapsed since BNP allegedly engaged in the conduct in question, however, means the statute of limitations may prevent criminal charges against any employees involved in illegal transactions, something that has irked prosecutors, some of these people said. The limit is five years under the International Emergency Economic Powers Act, the law that allows the U.S. government to implement sanctions. BNP itself can waive the statute of limitations as part of a settlement, but banks can't compel their employees to do so.

FBI, SEC probe trading of Carl Icahn, Billy Walters, Phil Mickelson

Federal investigators are pursuing a major insider-trading probe involving finance, gambling and sports, examining the trading of investor Carl Icahn, golfer Phil Mickelson and Las Vegas bettor William "Billy" Walters.

The Federal Bureau of Investigation and the Securities and Exchange Commission are examining whether Mr. Mickelson and Mr. Walters traded illicitly on nonpublic information from Mr. Icahn about his investments in public companies, people briefed on the probe said.

Investigators are examining whether over the past three years Mr. Icahn tipped Mr. Walters—famous in Las Vegas for his sports-betting acumen—about potentially market-moving investments by Mr. Icahn's company.

The FBI and SEC are examining whether Mr. Walters on at least one occasion passed a tip on to Mr. Mickelson, these people said, and are studying the two men's trading patterns.

"We do not know of any investigation," Mr. Icahn said on Friday. "We are always very careful to observe all legal requirements in all of our activities." The suggestion that he was involved in improper trading, he said, was "inflammatory and speculative."

"Phil is not the target of any investigation. Period," said a lawyer for Mr. Mickelson, Glenn Cohen, on Friday, adding that an FBI agent had told him Mr. Mickelson wasn't a target. The FBI declined to comment on Mr. Cohen's statement.

Two FBI agents approached Mr. Mickelson on Thursday after he finished a round of golf at the Memorial Tournament in Dublin, Ohio, seeking to speak with him in connection with the investigation, a person familiar with the situation said. Mr. Mickelson referred them to his attorney, this person said.

When asked to comment about the investigation, Mr. Walters, reached by phone on Friday, said, "I don't have any comment about anything," and then hung up.

The probe comes as part of the government's increased focus on insider trading, which has resulted in 85 convictions and guilty pleas out of 90 people charged by prosecutors in Manhattan federal court since August 2009. None has been acquitted; five cases are pending.

The most prominent of those cases largely have involved Wall Street traders, corporate executives and others in the financial world. Messrs. Icahn, Walters and Mickelson are among the highest-profile group of figures to be in the government's sights.

There is no indication the government will bring a case in the current investigation, the people briefed on the probe said. Indeed, publicity of the probe could jeopardize the government's ability to put together any potential case, they said, by limiting its ability to covertly gather evidence.

The investigation signals that the FBI and the SEC are concerned about a potential dark side of shareholder activism. Activist investors push for broad changes at companies or try to move stock prices with their arguments. Mr. Icahn, a 78-year-old billionaire, has come to epitomize such activism in U.S. boardrooms.

Investigators are focusing on potentially abusive practices among such activists, including whether they are leaking information about their stakes before making public disclosures—the subject of a Wall Street Journal page-one article in March.{http://m.europe.wsj.com/articles/SB10001424052702304888404579381250791474792?mobile=y}

It isn't clear what legal theory the investigators would use if they built a case against the three men. Leaks by activists about positions they are building is a murky area of securities law. Some lawyers in recent years have advised investing clients that such leaks don't violate securities laws because they don't represent a "breach," or violation, of a duty to keep the information secret.

One potential legal theory could involve the duty an investor has to shareholders at a public company, some lawyers say. Mr. Icahn runs publicly traded Icahn Enterprises IEP -0.10% LP. One question is whether investors like Mr. Icahn have a duty to keep their nonpublic trading a secret in the interest of their shareholders, some lawyers say.

Federal securities law also prohibits trading based on nonpublic information about tender offers that are in the works.

Mr. Walters, born in Kentucky to a family of professional poker players, is a legendary sports bettor who wagers based on computerized forecasts of the outcomes of games, among other factors. He has also become a force in the Las Vegas real-estate world and has bought and sold golf courses.

Mr. Icahn met Mr. Walters, 67, through a mutual acquaintance when Mr. Icahn's company owned the Stratosphere Hotel in Las Vegas. Mr. Icahn bought the Stratosphere in 1998 and sold it along with several other properties for $1.2 billion in 2008.

The two struck up a friendship. Mr. Icahn was once an avid poker player and enjoys betting on football games. The two have spoken about stocks.

Mr. Walters and Mr. Mickelson, 43, play golf together, said people familiar with their relationship. Sometimes Mr. Walters has suggested stocks for Mr. Mickelson to consider buying, one of the people said.

Mr. Mickelson, who has one of the most loyal followings of top professional golfers, has won the prestigious Masters three times.

Mr. Icahn said he didn't know who Mr. Mickelson was.

The government investigation began three years ago after Mr. Icahn accumulated a 9.1% stake in Clorox Co. CLX +0.16% in February 2011, said the people briefed on the probe. On July 15, 2011, he made a $10.2 billion offer for Clorox that caused the stock to jump.

Well-timed trading around the time of his bid caught the attention of investigators, who began digging into the suspicious trading in Clorox stock, the people familiar with the probe said.

On Wall Street, rumors had swirled that word leaked out ahead of Mr. Icahn's Clorox bid. Large, highly risky trades had been made in Clorox options four days before his bid. After his $76.50-a-share offer was announced, those options soared in value along with Clorox shares, which closed on July 15 up 8.9% at $74.55.

Investigators have examined trades in Clorox options, the people briefed on the probe said.

Clorox rejected Mr. Icahn's overture. He launched a proxy battle in August 2011, proposing a slate to replace the company's board with 11 of his nominees. In September 2011, he dropped his proxy battle.

By December 2011, he had sold his entire 12 million shares in the company. Clorox shares, which reached a high in 2011 just after Mr. Icahn's bid, closed at around $66 at the end 2011. A Clorox spokeswoman declined to comment.

The investigators expanded their probe to look at trading patterns by Mr. Walters and Mr. Mickelson relating to Dean Foods Co. DF -0.11% , said the people briefed on the probe. The FBI, following its approach to Mr. Mickelson on Thursday, expressed an interest in his trading in Dean Foods, a person familiar with the situation said.

Mr. Icahn said he never traded in Dean Foods. A Dean Foods spokesman declined to comment.

Blackstone's Byron Wien is Bullish on U.S. Economy

He's heard the pessimism. But the Wall St. veteran expects stronger economic growth and earnings. Editor's Note: Wien is a senior adviser to Blackstone, the asset management and private-equity firm.

The worst winter in the United States since 1995–96 has finally ended and the economy is responding favorably. I never gave up hope. I believed the housing recovery and energy production were enduring positives, but even those areas were experiencing setbacks. Early favorable signs were the sharp increase in bank loans (up at an annual rate of almost 10%), which indicated improved business confidence, and a pick-up in rail-car loadings, which reflected strong order books across a broad range of sectors. First-quarter real growth was down 1%; however, showing the economy was at stall speed, but the late Easter may have contributed to that. Those cautious on the outlook point out that the harsh weather could only explain one percent or less of the overall Gross National Product shortfall, suggesting that the quarter was fundamentally weak without considering the weather factor. I still believe momentum will build as we move through the rest of the year, and as a result we should see better economic growth and earnings.

The most significant change could come from capital-spending. Until now, the money that corporations have committed to capital equipment projects has gone to purchase labor-saving devices in both manufacturing and service industries. Very few new plants have been built, which is understandable with operating rates at 79%. We are now beginning to see evidence that capital expenditures are broadening to include new production facilities and this should result in a higher level of job creation. Even so, the unemployment rate has dropped from 6.7% to 6.3% – although the decline in the participation rate has clouded the favorable aspect of this improvement. Up to now, the conventional view has been that those dropping out of the work force were frustrated by the difficulty of finding a job. Recent research has taken a harder look at demographics and concluded that "baby boomers" who are reaching retirement age are accounting for an important part of the decline in the participation rate. In any case, the economy did create 288,000 jobs in the U.S. in April and that provided support for the optimistic view. I am still looking for real growth to approach 3% by year-end, which should provide a favorable background for earnings and the equity market. I also expect the unemployment rate to drop to 6%.

Meanwhile, we are five months into the new year and the Standard & Poor's 500 has made little progress (up about 3%, so far). Various reasons are given for this result. Some valuation measures like that of Robert Shiller, which looks at normalized earnings over a decade, indicate the market is now overvalued at 25 times, a level high enough to warn investors that a decline is coming. My model, which is based on operating earnings over the next twelve months, shows the market multiple to be slightly above the historical median at 16.3 times and well below the valuation levels of previous tops (25–30 times). Others believe the excessive valuations of Tesla ( TSLA ), Netflix ( NFLX ), social media and biotech stocks are suggestive of a "bubble" and we all know what that means. A third group likens the Ukraine situation to 1914. A basically unstable world was thrown into a war because of the assassination of an archduke in Sarajevo. While that might be a stretch, an event in Israel/Palestine, Iran, or the South China Sea could turn worse at any time, disrupting oil shipments and world trade.

Taking a hard look at earnings last year, revenue growth is clearly not the main factor contributing to increases. Share buybacks net of share issuance were important. A potential problem for earnings is corporate guidance, which is more cautious than at any point since 2009, according to International Strategy & Investment. There have, however, been some recent improvements in earnings. We experienced a similar period of negative guidance between 2005 and 2007, but earnings expanded more than 8% in those years. We could be in a period where the fundamentals (the economy and earnings) improve and interest rates stay low, but the market makes little progress. The reason could be related to sentiment, which is positive (a contrary indicator), and the fact that institutions are fully invested in equities as a result of the strong performance of the developed equity markets over the past two years.

Others believe that the market's rise during 2012 and 2013 was fueled by the monetary accommodation of the Federal Reserve and now, with the Fed reducing its bond-buying program by $10 billion a month, the liquidity that was the driving force of equity performance will diminish with a resultant negative effect on stock prices. One worry I have is that revenues will not expand fast enough for earnings to reach the S&P 500 level of $115 (or higher) that most strategists and economists are using. If profit margins stay where they are at 10.2% of GDP (after an adjustment for inventory values) or 9.2% of sales, both all-time highs, revenues have to increase at close to 5% to achieve the earnings projections. Right now revenues are increasing at about a 4% rate. If the economy grows at a real rate of 3% and inflation is 2%, overall corporate revenues, which are nominal, should expand at a 5% rate, but we are running behind that rate now.

Another worry is that productivity is not increasing. Earnings have been growing at 5% to 10% over the past few years even though the economy has been growing at less than 3%. Low interest rates and modest inflation have helped, but productivity improvements as a result of technology and tighter management have played a role. If productivity remains flat because those in charge don't come up with new ideas to increase efficiency or technology advances are less impactful, profit improvements will be even more dependent on growth in the overall economy to produce increases. All of these factors are on the dark side of the outlook.

Perhaps the most impressive aspect of the current economic environment is the increase in merger and acquisition activity. In the past 111 days there have been 206 deals amounting to $1.7 trillion, a level comparable to 2007. There are two ways to look at this level of activity. The optimists would say that corporate executives and their boards are more confident about the outlook and are more willing to make substantial commitments to strengthen their strategic position. A more cautious investor would say that this is yet another sign of the animal spirits that usually precede a market decline. Since there are so many other factors on the positive side, I am siding with the optimists. The Institute of Supply Management manufacturing and service indexes have been rising steadily. Consumer credit is increasing, initial unemployment claims are declining, small business operators are becoming more optimistic and hotel revenues are strong, all signs of business confidence. Rising stock prices and house values have increased consumer net worth to more than $82 trillion, well above the $70 trillion peak of 2007. Critics would argue that too much of this increase has accrued to the already rich (the inequality problem), but there are signs that the broader population may be benefiting as well: more jobs are being created and average hourly earnings look like they are starting to rise.

Another favorable sign is vehicle production. So far this year the seasonally adjusted annual rate has increased from 10.5 million units to a recent record of 11.6 million. Some of this may reflect the aging fleet of American cars, and a peak may occur at some point, but right now this is one of the clear positives. The rig count is also picking up, which is a good sign. In 2010, 2011 and 2012 the economy slowed down during the summer and the stock market declined in sympathy. Some investors are worried that we could experience a similar circumstance, prompting a recall of the mantra, "sell in May and go away." A shift in monetary policy took place in each of those years, however, and that doesn't seem likely in 2014. The Economic Cycle Research Institute Index correctly forecasted the second-half slowdowns in the U.S. economy in 2010, 2011 and 2012. It indicated the economy would not have a slowdown in 2013 and we didn't have one. The index has moved up sharply recently, which provides reassurance that the current favorable economic signs will continue. My view is that economic momentum is about to increase, so the background for higher equity prices is favorable.

I am hearing rumblings of a controversy about housing, which has been improving since 2008. Both new and existing home sales are off their peaks, but improving recently, and some investors are worried that the best part of the residential construction cycle is behind us. Since housing has been a source of jobs as well as a positive factor in other aspects of the economic recovery, that would present a problem. Home ownership in the U.S. has dropped from 69% in 2007 to 65% now, but we know that the high precrash level was a result of irresponsible behavior by both lenders and borrowers. The lower level may be more normal. A new concern is that there are some secular forces that could cause home ownership to move toward 60%, which would be an economic negative. This would be caused by a lower level of family formations as young people choose to get married later or not get married at all. The new generation may also want to maintain maximum flexibility in their lifestyle and rent their residence so they can change jobs and locations easily. At this point, however, identifying this as a major trend is premature.

One of the reasons people are not buying homes is not mortgage interest rates. A 30-year mortgage yield is 4.2%, which is very attractive. In fact, interest rates around the world are low. To almost everyone's surprise, the 10-year U.S. Treasury yields less than 2.6% and rates abroad are similarly depressed. Spain can borrow money at 3% and Greece at 6%, a long way from the double-digit yields during the European crisis of 2010 when these countries were having trouble obtaining funds at double-digit rates. Why are rates so low? Part of the answer may be the need for institutional investors to rebalance their portfolios since equities have done so much better than bonds over the past two years. Another reason is the abundant liquidity that has built up around the world as a result of improved corporate profitability in the economic recovery. A third reason could be some apprehension over geopolitical instability around the world and the desire to "park" funds in safe instruments until there is more clarity on the outlook.

While investors in the U.S. may be relatively complacent about the unsettled conditions in Ukraine since February, their counterparts abroad have been much more concerned. That's why Vladimir Putin's decision to move troops back from the border of Eastern Ukraine (as yet unimplemented) could be important to the equity markets. I believe three factors contributed to his decision. First, the conflict between Russian separatists and Ukrainian nationalists was likely to erupt into widespread bloodshed and world leaders would hold him responsible for that situation. Second, the integration of Crimea into the Russian federation was proving difficult and it would be important to accomplish that successfully. Third, sanctions were hurting the already weak Russian economy. Putin therefore decided to scale back his aggression for now and wait for a more favorable time to make his move. The Ukrainian election took place with a minimum of turbulence. Many polling places were closed in Eastern Ukraine to prevent conflicts between the nationalists (of varying allegiances) and the separatists. Petro Poroshenko won a majority and the turnout was strong. Now let's see if he can bring the country together and develop a harmonious relationship with Moscow. Putin has said he will accept him as Ukraine's leader. In another major geopolitical event, the outcome of the election in India was favorable and reform may at last be on the way in that complicated but important country. In contrast, events in the South China Sea seem to be heating up. China has had a confrontation with Vietnam over offshore oil drilling rights, which as of now is unresolved.

I continue to believe traditional economic factors like economic growth, earnings and interest rates will drive the equity markets this year and that geopolitical events will be background rather than central factors. Everyone involved has too much to lose by not taking advantage of the worldwide expansion underway, but we have to get used to unsettled geopolitical conditions involving Russia and China continuing to influence the investment environment.

Weekly Market Update: Buy in May...

- Both equities and bonds gained ground slowly this week: the S&P500 pushed out to record highs above 1,920 and the benchmark US 10-year yield fell as low as 2.433%, its lowest level since last June. In Europe, the DAX was at all-time highs and the FTSE was only 100 points away from all-time highs. Meanwhile, trading volumes were pretty light, due in part to the Memorial Day holiday in the United States and Ascension Day in Europe. But with ever strengthening asset prices comes complacency: the VIX volatility index dropped to 11.46 (last Friday's bottom was 11.36, the lowest reading since March 2013) and a break below 11.00 would put the index right where it was at the beginning of 2007, which makes many analysts very uncomfortable. For the week, the DJIA rose 0.7%, the S&P500 added 1.2% and the Nasdaq gained 1.4%.

- The second reading of US Q1 GDP was revised to -1.0% from +0.1% in the advance reading. The downward revision was due to a larger drag from inventories and less government spending than surmised by the advance reading. This marks only the second time since the recession that GDP declined during a quarter. There is also concern about Q1 gross domestic income, which fell 2.3%, its worst performance since the recession. Note that the personal consumption figure stayed very strong at +3.1%. Fed presidents Williams and Plosser both said they were not too worried about the weak data and said there would be a big snapback in the Q2 GDP figures. In yet another sign inflation is rebounding, the April PCE index rose to its highest annualized rate since late 2012. The personal consumption expenditure index rose 0.2% in April, as did the core rate that strips out food and energy.

- Billionaire oligarch Petro Poroshenko won the Ukrainian presidential elections on May 25, taking 55% of the vote, with Yulia Tymoshenko trailing with 13%. The decisive victory prevented a runoff and leaves Poroshenko in a strong position to continue Kiev's "anti-terrorist" operations in the eastern part of the country. There was more violence in the east this week, as militants shot down helicopters and launched assaults on military bases, leading to scores of casualties. Note that Poroshenko will be sworn in as Ukraine's fifth president on June 7, and he has promised to immediately dissolve parliament and call early elections. Ukraine began payments for gas debt owed to Gazprom, and it looks as though negotiations will continue and prevent Russia from demanding pre-payment for future gas deliveries.

- Gold prices took a 2% tumble on Tuesday after China's gold imports from Hong Kong fell in April amid signs that investment demand is waning. Moreover, the decisive election outcome in Ukraine and Russia's conciliatory moves helped drive the safe haven lower. Prices fell further in the second half of the week, and spot gold closed out the week around $1,250, at February lows.

- Pfizer let the clock run out on its bid for AstraZeneca, with no higher offer or further interest from AstraZeneca. Under UK takeover rules, Pfizer could resubmit another offer for AstraZeneca in six months, meaning the chances of a deal are not entirely gone. In contrast, Valeant continued its full court press, and in the span of a few days boosted the cash component of its offer for Allergan twice, first by $10 to $58.30/share and then again by $13.70 to $72/share (the firm maintained the equity component at 0.83 of a Valeant share). Pilgrim's Pride offered to buy Hillshire Brands for $45/share in cash, in a deal worth $6.4 billion. Recall that back on May 12th, Hillshire cut its own deal to buy Pinnacle Foods for $36/share in cash and stock, in a total deal valued around $4.3 billion.

- Next week, the Obama administration will roll out a set of EPA proposals to regulate emissions from existing power plants, including coal plants. The key structure of the proposals will be a cap-and-trade system designed to give states the flexibility to meet benchmarks, as opposed to placing emissions limits on individual plants. Recall that last week, there were reports suggesting the EPA rules could result in a required 25% cut in greenhouse gas emissions by the utility sector.

- Homebuilder Toll Brothers more than doubled its profits in the first quarter, widely beating both earnings and revenue expectations. The company reaffirmed its FY targets, slightly raising the low end of its average selling price outlook. The backlog and deliveries grew by healthy double-digit percentages, indicating that the housing recovery is on track, at least at the high end of the market. "We are in a leveling period in the early stages of the housing recovery with significant pent-up demand building," said TOL's CEO.

- Comments by ECB figures suggest the chances of easing at next Thursday's ECB Council meeting are looking better and better. President Draghi warned about the potential for a "negative spiral" between low inflation, falling inflation expectations and poor credit availability. Austria's Nowotny said the ECB cannot allow destabilization of inflation expectations and admitted that a rate cut is under discussion. Luxembourg's Mersch warned that multiple steps could be taken at next week's meeting. The consensus view is that the deposit rate will be cut into negative territory for the first time ever, and staff inflation forecasts will be significantly reduced, signaling the ECB's seriousness about the need for more action to fight deflation. EUR/USD traded in a very tight range, from a high of 1.3670 on Monday to lows around 1.3600 mid-week.

- Three key Japanese economic reports provided a worrying but not wholly unexpected view of the continuing impact of PM Abe's reforms. April retail sales saw their biggest annual decline in over three years (-13.7% m/m, -4.4% y/y). This is the first report in the series since the VAT tax went up to 8% from 5% on April 1st. Recall the March y/y figure was +11%, boosted by buying ahead of the tax hike. April industrial production was weaker than expected, prompting Tokyo to lower its economic assessment on the sector to "flattening as a trend." Finally April national CPI (+3.1%) and May Tokyo CPI (+3.4%) rose at their fastest rates in two decades. The CPI data were driven higher by the consumption tax hike being passed on to consumers, and analysts are divided on the extent to which the adjusted version really meets the BoJ's 2% target. USD/JPY was locked in the top half of the 101 handle.

- Chinese authorities have sworn off massive stimulus programs as a means for bolstering the nation's slowing economy, and as a result Beijing is looking to more targeted approaches. The housing market is slowing and April industrial profit growth data out this week slowed to single digits y/y. Cutting the reserve requirement ratio is widely understood to be the next weapon in the arsenal. Various commentators said that the chances of a RRR cut in the second half of 2014 is looking increasingly likely, and JPMorgan said there would be at least two RRR reductions. Beijing's other, less subtle weapon is to weaken the renminbi: this week the PBoC let the yuan mid-point drop to 6.1705, its weakest setting since last September.

- There were renewed tensions between China and Vietnam after a Chinese ship rammed and sunk a Vietnamese fishing vessel. A spokesperson for the Vietnamese Foreign Ministry said that the fishing boat was initially surrounded by 40 Chinese ships approximately 17 nautical miles from the China Haiyang Shiyou-981 oil rig. The oil rig was the cause of violent anti-China protests earlier this month. At the ASEAN conference in Singapore, Japan PM Abe commented that Japan would start to play a more proactive role in maintaining security in Asia and support efforts by the Philippines and Vietnam to resolve conflicts.