Key morning headline
US officials think that China is considering taking "full control" 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 sabre-rattling battle lines around Taiwan’s sovereignty, risk sentiment could turn ugly pretty quickly.
US equities were stronger Friday, S&P up 1.7% and finding a fresh record high ahead of a busy data week with the granddaddy of them all, Non-Farm Payrolls, 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 little consternation for policymakers, risk sentiment bounced after President Biden doubled his goal for the US vaccine roll-out pace which played its part in stabilizing the ship.
Investors markets 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 is already showing up in the alt-data, with should provide a solid base for Spring lift off. And with a noticeable growth pick-up in March, "The Street" is likely positioning in expectation of upbeat cadence for the economic news over the coming weeks. Given there’s so much optimism in the economic reopening narrative baked into the price, it's hugely important that this week's financial data, at minimum, meets expectations to maintain this ship on an even keel.
But this will 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 forefront 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 was 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.
For medium-term concerns, investors know spending the money is the easy part – 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 enamoured with that.
Finally, and fitting into the “what do they know that we don't know” category, US futures are opening a bit shaky this morning as investors continued to digest what the knock implication and contagion implications, if any, are after weekend disclosures about the "carpet bombing" of block deals that shook the foundries mid-day Friday NY after Viacom and Discovery shares plummet 38 and 39 % respectively.
With a lot of economic, vaccine, and US herd immunity love priced into the oil markets, Covid-19 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 and 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, this morning, that beat goes on as canal workers struggle to refloat the vessel due to numerous logistical issues – none more so than the fact they’ve never before undertaken a task of this magnitude.
Each day that passes increases the oil on water rather than in the refinery for processing as voyage times increase for those queueing for the canal, or voyage distance and time increases as vessels re-route 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’ve been seeing, which imply to be nothing more sinister than the extensive rise at the beginning of March, which was primarily forward-looking and 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.
Coming off a defensive week for currency risk, which was fuelled by both Covid concerns and rising US yields, I suspect markets will continue a two-pronged trade view in FX:
The Ringgit has drifted to the weaker end of the 2021 range on a combination of rising Covid cases in the Western markets, possibly delaying both travel and key export channels lift off. And mostly it’s the prospect 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).
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Stocks soar, powered by first-rate earnings and a dazzling run of economic data; Gold plays catch as G10 falls flat while oil basks in the afterglow