The reopening of Suez will give us an idea of how much this factor was pushing supply-driven inflation expectations higher.
US 10-year breakevens are about 40bp higher year to date, the highest since April 2014. Beyond the Suez factor, supply chains remain strained according to regional Fed surveys on business activity.
Cost-push pressures are unlikely to fade anytime soon and that’s before considering the impact on prices further along the price chain of a rebound in consumer demand through Q2.
Risks to equity markets in the context of Friday’s block sales could prove to be a counterbalancing force against supply-chain disruption in gauging the next steps for global yields. Nonetheless, Monday’s Asia session is proving very resilient with equities holding up and the USD only modestly firmer.
Asia FX
The US dollar wrecking ball effect couldn't start to take prisoners in the Asia FX.
USD/HKD finally broke above 7.7700 with Bilibili (NASDAQ:BILI) down 2% at the start of trade Monday. The pair is capped at 7.7720 so far. HKD funding remains flush with tom/next at -0.3/-0.25.
USD/THB remained bid with foreign investors reducing holdings of local bonds and stocks, this despite the effort to rekindle reopening plans by reducing days spent under quarantine requirements in some tourist provinces. Clearly, investors remained worried that another holiday season could go up in dust if the government doesn't ease the tight and confusing certificate of entry requirements .
Spot went up to 31.24 and was capped by exporters selling. The next resistance is at 31.30.
Did Full Moon Fever Hit Oil Markets?
Crude was down more than 1% after Inchcape Shipping Services said stricken container ship Ever Given was successfully refloated.
It seemed like a case of Full Moon Fever and the ensuing tidal surge helped the stricken container ship Ever Given refloat.
China Rate Hike Fever?
China equities remained subdued in anticipation of marginal monetary policy tightening which may mean risk appetite slumbering with stock trading is likely to be even less active in the short term.
Gold Grinds
The gold market has been quiet, grinding away with the US dollar trading sideways. If dollar strength persists, bullion may wobble. Breaking the recent lows could open up a slide toward $1700, especially with higher US yields.
We would see quite some noise in that vicinity and longer-term players would return. WGC reported that investors have waited more than a decade for this type of commodities rally but perhaps their patience is about to be rewarded. The market moves between August 2020 and February 2021 ranks in the top 5% of six-month moves since 1971 and, with a 30-year low as a base, this suggests they could have further to go.
Gold's weak performance so far is consistent with previous reflationary episodes—its time to shine that may yet come.
Asia Open
Investors took a cautious approach at the Asia open amid the PB Margin Call and US-China concerns see E-minis trading 0.5% lower at first, but then making a strong spring ahead.
Major US equity indices are trading at or close to all-time highs despite large blocks of stock that were sold on Friday. From a macro point of view, details of micro concerns don’t matter until such issues are self-evident and or become a source of contagion.
The post-pandemic new normal is delayed, particularly through the oil price channel, by rising new COVID-19 cases and associated restrictions in the Eurozone, while winter weather-impacted US data for February was mixed. But much-improved data for March should start coming through this week, lighting the blue touch paper for a strong set of data into Q2.
Higher UST yields remain the path of least resistance with US equities at or close to all-time highs ahead of a strong period for economic data. For EM, a global recovery that is driven more by the US consumer than China investment-led spending is challenging when combined with higher yields.
The broad-based sell-off in Turkey’s financial markets last week after the replacement of the central bank governor was an idiosyncratic event that did not ripple across EM. However, the year-to-date performance of the BRL (-9.7%) and COP (-6.5%) are in a similar ballpark to the TRY (8.3%), suggesting that higher UST yields are a headwind for the asset class.
This week's financial data, at a minimum, is hugely important to meet expectations in order to maintain this ship on an even keel.
Press Reports: U.S. Officials Think China Is Considering Taking Over Taiwan
Well, if this isn't a case of "out of the battle for technology supremacy frying pan and into the geopolitical firestorm," I'm not sure what is. It's already a worrying proposition that two economic behemoths draw battlegrounds, setting the stage for a real dust-up as the superpowers shift from vying for supply chain domination to battling it out for global internet technology supremacy.
But if they start to hint about drawing virtual geopolitical saber-rattling battle lines around Taiwan sovereignty, risk sentiment could turn ugly pretty quickly.
Markets
US equities were stronger Friday, S&P 500 up 1.7% and finding a fresh record high ahead of a busy data week with the granddaddy of them all—NFP—set to provide keen direction for risk markets as we enter Q2. After springing a few leaks due to global COVID concerns, with new variants causing more than a few worries for policymakers, risk sentiment bounced after President Joseph Biden doubled his goal for the US vaccine roll-out pace played its part in stabilizing the ship.
Investors swing back to the policy agenda with President Biden expected to formally unveil a $3trn infrastructure plan this week, just as the acceleration in activity from recently delivered stimulus checks are already showing up in the alt-data with should provide a solid base for Spring lift off.
With a noticeable growth pick in March, "The Street" is likely positioning; expecting an upbeat cadence for the economic news over the coming weeks. Given there is so much optimism in the economic reopening narrative baked into the price, it's hugely important, this week's financial data, at minimum, meets expectations.
But this could be a double-edged sword for pockets of the market as the combination of stimulus and robust data support equity prices. However, tech faces some challenges if the "risk-on" signal manifests into higher real yields.
Indeed, the strength of the recovery and the partaking inflation risk remains at the vanguard of investors' minds after the final read on Michigan sentiment for March was revised up, leaving the index 1.9pts higher than February. Most notable in the details: a tick up in long-run inflation expectations. 5-10yr expectations rose from 2.7% to 2.8%—the highest level since July 2018 and only slightly below the 2.9% average that prevailed before the 2014 oil shock.
And for medium-term concerns, investors know spending the money is the easy part. However, the more difficult decision is how to pay for it. And with all roads appearing to lead to US tax hikes, Wall Street won't be enamored with that.
Finally, and fitting into the what do they know that we don't know category, US futures opened a bit shaky today as investors continued to digest the knock implication and contagion implications, if any, after weekend disclosures about the "carpet bombing" of block deals that shook the foundries midday Friday in NY after ViacomCBS (NASDAQ:VIAC) and Discovery (NASDAQ:DISCA) shares plummet 38% and 39%, respectively.
Oil Markets
Crude oil slumped, to some extent driven by profit-taking after a year-long rally. Inflation remains a threat, and positioning is much cleaner. OPEC+ seems more likely to maintain production cuts, and the Suez Canal blockage created supply problems.
With a lot of economic, vaccine, and US herd immunity love priced into the oil markets, COVID resurgence continues to hang like an anvil around the market's neck and keeps prices in check. But the inflation theme has not gone away. Positioning is probably much cleaner after such a volatile week. OPEC+, having maintained production cuts at higher prices last month, seems less likely to open the taps at current levels.
Still. after oil sentiment sprung a leak early last week, prices recovered as markets continued to digest the blocked Suez canal's challenges and ramifications.
Similarly, that beat went on as canal workers were still struggling to refloat the vessel due to numerous logistical issues, none more so than the fact they have never undertaken a task of this horror.
Each day that passed increased the oil on water rather than in the refinery for processing as voyage times increased for those queueing for the canal or voyage distance and time increased as vessels re-routed around Africa. Either way, it should help to re-tighten the physical market and stabilize prices.
While there has been plenty of noise—Iran, China buying, European lockdowns, Dollar, Suez—none of it tallies with the big moves we have been seeing, which imply to be nothing more sinister than the extensive rise at the beginning of March, which was primarily forward-looking, which got too far ahead of the demand reality in the immediate aftermath of the last OPEC+ meeting. Given the evident fragility in prices, this week's meeting seems likely to be quite cautious on the production front.
Forex
This will be a defensive week for currency risk, which was fueled by both COVID concerns and rising US yields. I suspect markets will continue a two-pronged trade view: to stay long USD vs. vulnerable low-yielders where a dovish central bank is likely to keep rate divergence in play; and to stay positioned for the global recovery via only selective high beta FX, funded by EUR, CHF or JPY and avoiding the US dollar with US yields set to move higher.
Malaysia's Ringgit
The ringgit has drifted to the weaker end of the 2021 range on a combination of rising COVID cases in the western markets, and possible delaying of both travel and key export channels lift off. And mostly the prospects of US higher yields keeping the rigging on a weaker tangent as the market continues to price in central bank divergence (Fed hike in 2022/23 vs. no rate hikes from BNM).