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Risk Backdrop Remains Challenged

Published 03/24/2021, 08:07 AM
Updated 07/09/2023, 06:31 AM

In Europe, the risk backdrop remains challenged by the COVID scare even although some if not all the headwinds are transitory (i.e. reopenings are delayed, not derailed), and the broader constructive narrative remains intact. Clearly, some areas of the market like travel and leisure were priced for a near-perfect recovery. The picture will become clearer through the month-end. though when we get a better read on mobility data on both sides of the pond

And with EUR/USD back on the path of least resistance lower outside of JPY, the dollars safe-haven appeal continues to resonate.

In the US, the S&P 500 dropped off 1% in the last hour of trade amid short-term worries over fresh lockdowns in Europe, while US cases also rose 5% last week, the first increase in nine weeks.

Some estimates predict there will be as much as $88.5 bn of month-end rebalancing out of equities and into US fixed income. These factors continue to weigh on risk, led lower by value as further yield curve flattening sees money come out of reflation and mobility names. Longer-term concerns also hurt sentiment with renewed worries about US tax policy and a realisation that any lingering hope of a reset in US-China trade relations is unwarranted.

UK headline RPI came in at 1.37%, with the market expecting 1.62%  so a decent 25bp miss to the downside. Clothing and Footwear were a large part of the miss; typically, in February, there is a bounce, but this year, there was lockdown discounting. Travel was also weak. Still, there is likely to be considerable noise in the prints with inputted data and lockdown/Covid effects for at least the next six months.

Oil remains under pressure from the COVID-19 uptick in Europe/US, signs of slowing Chinese imports, and rising Iranian production (as China buys more of its oil). The real driver for the correction this week, however, not entirely fundamental, After an incredulous run this year and since the start of the fourth quarter of last year, oil was pricing in a global demand recovery that was too far over its skis but still faced risks. I know its a bit 20:20 hindsight but there is none the less. 

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