Over the weekend, the Group of Twenty (G20) Finance Ministers and Central Bank Governors met in Moscow to discuss the global economic challenges. The group didn’t provide, as expected, an enlightening answer to the lingering question of whether we are bound for currency wars in different places of the globe, and for now, more specifically in the context of the intended sharp weakening of the Japanese yen over a relative short time span.

Maybe Christine Lagarde, managing director of the International Monetary Fund (IMF), said it all when she optimistically stated, “We’ve heard currency worries, not currency wars. … We've not seen confrontation but deliberation, dialogue, discussions and clearly this G20 meeting has been extremely helpful and productive.”

In my opinion, the G20 gave Japan simply the green light to manage its currency at its discretionary will, which includes stealth currency manipulation, to further weaker levels.

Of course, there was no warning whatsoever that the aimed Japanese policies could finally morph into a new form of Japanese “mercantilism.”

In this context, it’s interesting to take notice that Jens Weidmann, European Central Bank council member and president of the Deutsche Bundesbank, said to take into account the G20’s signal that economic weakness cannot be fought with protectionism and currency manipulation.

Further down the road, it will be interesting to see if Japanese Prime Minister Shinzo Abe will also be able, after winning the lower house (House of Representatives,) to win the upper house (House of Councillors) in June, which would give him practically unrestricted power to implement his intended policies of further weakening the Japanese yen, thereby stimulating the Japanese industry as well as “defeating” deflation once and for all.

In Japan, when a bill is passed by the lower house but is voted down by the upper house the House of Representatives can only override the decision of the House of Councillors by a two-thirds vote in the affirmative.

Long-term investors could do well to take notice that a further weakening of the Japanese yen is fully in the cards in the foreseeable future. This could also be a positive to the Japanese stock market.

Nevertheless, less positive could also be a massive rotation out of Japanese government bonds. Until now, such a rotation hasn’t shown the slightest sign of life and the five- and 10-year Japanese government bonds are yielding 0.14 percent and 0.74 percent, respectively, which are both lower than they were a month, and even a year ago.

Please keep in mind since mid-November when Abe made his comeback as Prime Minister, Japan’s Nikkei Index has risen around 30 percent, while the yen has fallen about 20 percent.

Besides that, over the coming days, we also have two so-called “known” key risk events — the parliamentary elections in Italy over the weekend and the “sequestration” cliff on March 1 in the United States.

Both events are able to provoke separately unpleasant jitters in various markets.
In Italy, I still don’t think the elections should provide us with such a huge surprise. However, if Silvio Berlusconi makes a comeback as prime minister, markets could really take a dive.

That said, I still think markets don’t reflect the real risks that are out there if a deep political change would take place in Italy.

In contrast to the markets, in Germany, the actual government coalition expressed its serious concerns, which is completely unusual, on the eve of the parliamentary elections in Italy and a possible comeback of Berlusconi. German Foreign Minister Guido Westerwelle said in the German daily Süddeutsche Zeitung: “Of course we are not a party in the Italian campaign. But whatever the new government does, we are hoping that the pro-European course and the necessary reforms will be continued.” He knows very well that with Berlusconi the ongoing reforms in Italy would be in real trouble.

In the United States, nobody knows if the planned budget cuts, known as sequestration, will kick in on March 1. So far, there seems no compromise deal on the table in Washington. As always, we’ll have to remain patient and wait.

If things don’t come out for the better next week, I’m afraid we could see a broadly non-anticipated surge of “risk-off” sentiment in various markets. Notwithstanding, I still hope things to turn out for the better.

But, whatever occurs, I also still see markets in a topping phase at actual levels. The investor sentiment readings, with the Consensus Bullish Sentiment of 73 percent and the Market Vane Bullish Consensus at 68 percent, are way too bullish to feel comfortable that we will not experience a market correction in the near future. Of course, as anybody else, I could be wrong.