Risk assets unfazed by higher bond yields
In a holiday-shortened trading week risk assets continued to rally, led by US stocks, seemingly ignoring the
clear upward trend in global rates.
A strong payrolls report out of the US was no help to the dollar, which sold-off against every other G10
currency. Emerging market currencies joined in the party, led by the Turkish lira, although nearly every major
one managed to post gains of more than 1% for the week.
We expect the positive tone in financial markets to remain in place for quite a while yet. The combination of
zero or negative rates in developed markets, a storm of fiscal support hitting domestic economics, and clear
though uneven progress in the vaccination front should keep risk assets well supported while bonds continue
to fall, particularly in the US. We are particularly positive on emerging market currencies, which are both cheap
and well placed to capitalise on the current environment.
Sterling outperformed every other G10 currency and a few emerging market ones last week. In addition to the
strong vaccination rollout there was a modest upward revision to the growth numbers for last year. The current
risk-seeking environment is proving a boom for the pound, which has now recovered all of its pandemic losses
against the euro and quite a bit more than that against the US dollar.
This will be a shortened trading week and there are no significant UK data releases or policy decisions, so we
expect sterling to continue following the path of least resistance upwards.
The main news last week was a disappointing print in March inflation that saw the core figure (excluding
volatile items) pull back to 0.9% on the year. It is clear that the fresh wave of lockdowns is restricting
consumption and delaying any onset of inflationary pressures in the Eurozone.
The highlight for this week will be the release of the ECB meeting minutes and industrial production numbers
out of Germany, France and Spain, which should be reasonably strong as the manufacturing sector is less
affected by the lockdowns. The impact on currency markets should be limited, however.
The successful vaccination rollout in the US and the progressive easing of the COVID restrictions is impacting
the economy faster than predicted. The payrolls report for March was much stronger than expected. The US
economy restored a net 916,000 jobs in the month, much higher than consensus and the strongest month of
net job creation since August
With the enormous stimulus package still to hit and a new infrastructure package on the horizon, economists
are busy bringing their estimates for a full recovery from the pandemic forward in time. We think it is
noteworthy that the dollar is not rallying and actually trending modestly lower in spite of rising US yields and a
barrage of positive economic news.
The safe-haven franc continues to hover close to its recent lows against the euro. Domestic forward-looking
indicators published last week showed a sharp increase in March, with the key KOF leading indicator jumping
to its highest level in more than a decade. This suggests that the Swiss economy is on the verge of a significant
rebound from the pandemic shock.
That being said, it’s hard to estimate when exactly we’ll see material improvements in the economy as news
from the pandemic front is mixed. New cases are on the rise, albeit the increase is not nearly as dramatic as in
some neighboring countries. Additionally, COVID-related deaths remain low, giving hope that an easing of
restriction measures could come fairly soon.
This week’s economic calendar for Switzerland is quite empty. We’ll focus primarily on the latest COVID
numbers and shifts in global sentiment.
The Australian dollar has spent much of the past week stuck within a very narrow 1% band versus the US dollar,
largely due to the lack of major market moving domestic news out last week. Friday’s retail sales and trade
balance data was for February and was, therefore, largely overlooked by investors.
Meanwhile, the Reserve Bank of Australia stuck to its guns this morning, keeping rates unchanged at record
lows and stressing that the first post-covid rate hike remains a long way off. The bank continues to remain
concerned about the uneven recovery in the economy, while stating that a sustained move higher in both
wages and inflationary pressure would not take place for a number of years. They did voice optimism over a
recovery in the Australian housing market, although there’s no reason to believe that this will materially alter
the bank’s view on policy. In the RBA’s March meeting minutes, policymakers suggested that rates could remain
unchanged until as far out as 2024.
The Canadian dollar remained one of the better performing currencies in the G10 last week, partly due to
growing expectations that the Bank of Canada will slow the pace of purchases under its asset purchasing
programme later this month. Strategists are eyeing an easing in the pace of purchases to C$3 billion from C$4
billion when the BoC meets in just over two weeks time, much sooner than both the Fed and ECB. Pessimism
of a few weeks ago has turned to optimism. Oil prices remain well supported around the $63 a barrel mark,
while the country’s vaccination programme is beginning to pick up pace – around 15% of the population have
received at least one vaccine doses, which is now slightly more than the EU.
This week should be a much busier one for financial markets in Canada, with a handful of major
macroeconomic data releases. We will be paying particular close attention to Friday’s monthly labour report for
March, which is expected to show a slowdown in job creation to 90k a month.
The yuan consolidated its losses last week following the currency’s recent sell-off versus the US dollar. Data out
of China has continued to point to a robust economic rebound.
This morning’s services PMI from Caixin beat
expectations, jumping to 54.3 from 51.5, its highest level in three months. Investors are, however, beginning to
focus on a closing in the gap between China’s economy and that of the US.
The rapid vaccination rollout in the
latter, combined with the disbursement of massive fiscal stimulus from the US government, may pressure the
USD/CNY cross higher in the coming weeks. China is lagging quite a way behind on the vaccination front,
having so far only administered doses to less than 10 per 100 people, versus around 50 in the US.
With few major economic data releases on the calendar in China this week, the yuan could be driven by events
elsewhere. That being said, we will be keeping one eye on Friday’s inflation data for March