Global investors were quick to shake off worries about a hedge fund default that roiled global banking stocks overnight, while rekindled concerns about inflation pushed bond yields higher.
European equities are set up to again be defensive early although bond proxies and expensive growth names may struggle given the further rise in bond yields. Another move higher in the dollar may weigh on cyclical early while energy names to be in focus given reports that Saudi/OPEC+ are prepared to extend production cuts.
Yields continue to grind higher, driven by real yields, although the orderly nature of the move has helped keep a bid under equities (albeit a defensive one).
The US markets have traded mixed all day although off worst levels in what was a pretty defensive tape. But Volumes remained light outside of a number of tech/media names in a holiday-shortened week.
With spring in the air and President Biden expected to formally unveil a $3 trillion infrastructure plan Wednesday, just as the acceleration in activity from stimulus checks hitting doormats is feeding into the alt-data, it could provide a smoother and lengthier runway for risk to initially take flight.
But spending the money is the easy part. However, the more difficult decision is how to pay for it. And with all roads intersecting at "tax hike junction", Wall Street won't be enamoured, so all that is yummy around the infrastructure deal will need to be taken with a pinch of tax man salt.
US Wind Power Plans Unveiled
The Biden administration Monday unveiled plans to accelerate offshore wind growth, targeting 30GW of capacity by 2030 (White House fact sheet here). This should help renew interest in the renewable theme even if it doesn't come as a complete surprise given President Joe Biden's comments during the campaign and since the election, but it's positive to have some detail out there.
China Bonds To Be Included In WGBI
Index provider FTSE Russell on Monday confirmed Chinese sovereign bonds will be included in its flagship bond index starting later this year. Chinese government bonds (CGBs) will be included in the FTSE World Government Bond Index (WGBI) from the end of October and will be phased in over an extended 36 months (rather than over 12 months as initially announced in September).
The CGB weight in the index will be 5.25% based on the upcoming April profile, though this might change a bit when the inclusion actually happens in October. The market expectations were coalescing around p 5-6% and so resulting inflows will be on the lower end of the $125 bn-$150 bn range. In the medium term, the focus remains on market liquidity and supply in Q2.
Crude Oil Supported By Saudi Reports
Crude oil is holding onto Monday’s gains following reports that Saudi Arabia is prepared to support extending oil cuts by OPEC and allies into May and June and is also ready to extend its own voluntary cuts to boost oil prices amid a new wave of coronavirus lockdowns.
The cuts involve OPEC led by Saudi Arabia as well as non-OPEC producers led by Russia. Together with their cuts currently stand at just over 7 million barrels per day plus an additional 1 million bpd voluntary reduction by Saudi Arabia.
Turkey President Removes Central Bank Deputy Governor
Turkey's President Recep Tayyip Erdogan has removed central bank Deputy Governor Murat Cetinkaya, according to press reports citing a decree published in the Official Gazette, and Mustafa Duman has been appointed as his replacement.
The lira sold off after the news and this morning is trading 0.8% weaker at 8.2715 versus the dollar, underperforming the EMFX complex. Central Bank of Turkey to hold an ordinary general meeting at 14:00 Ankara (12:00 London).
Other senior economy officials have left posts this month. The chief executive of the stock exchange’s operator and the general manager of Turkey’s biggest lender, state-run Ziraat Bank, both stepped down, and Erdogan fired the head of the Turkish wealth fund.
London Open: A reasonably pedestrian day for risk markets in Asia as traders fine-tune the NFP playbooks
A reasonably pedestrian day in Asia's risk markets as any rallying cry was muffled by President Biden's comments urging the continuation of mask mandates along with the US CDC Director's warning on a fourth wave which threatens to bring some of the recent weeks' European lockdown anxiety state-side.
As for the oil markets, the inflation theme has not gone away. Positioning is probably much cleaner after such a volatile run. OPEC+, having maintained production cuts at higher prices last month, seems less likely to open the taps at current levels. and that seems supportive enough.
However, for risk sentiment in general, it is always a struggle to break higher ground when the market focus coalesces around a hugely risky NFP week as investors likely need a little more "proof is in the economic pudding" before taking the next leap of faith.
Nonfarm Payrolls Playbook
The street uniformly believes US data is at an inflexion point, and Friday's payrolls will be the beginning of a sharp acceleration on the US jobs markets. However, the constant discussion at every virtual market corner remains concerned about intense bond market reactions to robust incoming data and inflation risks beyond the base effects.
I like owning the belly of the 2s5s10s fly in modest sizes ahead of this Friday's payroll report.
Small-cap stocks are more sensitive to growth and value more sensitive to inflation, but low quality and rate-sensitive stocks are far along the cycle and probably not a great buy. Still, the value rotation should continue into Q2 but peak when breakevens crest..
Nonfarm Payrolls Forex Playbook
The USD should be supported this week by rebalancing flow, but that should pave the way for fresh risk-taking after quarter-end. Although I'm bullish USD via USD/JPY (since January), and still short euro, I think the EUR/USD could benefit from greater risk-taking proclivities into a new quarter, especially if Europe stops jabbing themselves the foot and starts finding the vaccine mark on the population's arm.
The euro faces a shallow bar expectation-wise. Vaccine supply in Europe has stepped up recently. Given all hands-on board, it's more reasonable to think the European Commission can hit, if not exceed, its target of reaching herd immunity by summer. Another positive factor is that are green shoots are starting to take root in the region's business sector in anticipation of easing restrictions that are becoming more difficult to maintain politically,
In EM, I'm sticking with FX reopening beneficiaries, KRW, SGD, and MXN
Asia
For all the bumps in the first quarter, Asia remains on target. The Year of the Ox, much like any working farm animal, will stay sturdy and reliable – with occasionally stubborn hurdles, to be sure. Still, nothing to un-towards should throw it off course, but not so sure we will see another running of the bulls any time soon.
Vaccines hold out the hope of healing, and the hopes are justified. Yet patience is needed, for their roll-out is proceeding more slowly than elsewhere, which means that many restrictions, above all on travel, will have to stay in place for quite some time. Herd immunity may be possible for several markets within the Year of the Ox, but more towards its end. Consumer spending, while picking up, will thus not precisely soar in the coming months.