- The next fiscal package is shaping up to be quite large and focusing on infrastructure
- The EU has hardened its position towards AstraZeneca vaccines
- Oil prices were under pressure from favorable news regarding the Suez Canal ship blockage
- Geopolitical tensions surrounding China are set to worsen but probably not leading to disruptive action
- BOJ minutes reinforced the bank's pro-active yet accommodative mode
The dollar continues to power ahead. DXY broke above its 200-day moving average last week to trade at the highest level since mid-November, just below the 93 level. A break above the November 11 high near 93.208 would set up a test of the November 4 high near 94.302. The euro remains heavy and is trading just below $1.18. It is on track to test the November low near $1.1605. Sterling has been outperforming, extending Friday's bounce to $1.38. The rise in USD/JPY has resumed and is on track to break above the June 5 high near 109.85 after last week's test. A break would set up a test of the March 2020 high near 111.70. EM currencies are broadly weaker, with the Mexican peso down 0.8% and the Chinese yuan down 0.3% against the dollar.
Major sovereign debt yields are little changed, but U.S. breakeven rates continue to tick higher. Yields are ticking higher in Europe and unchanged in U.S. Treasury markets, with the 10-year at 1.66%. More concerning longer-dated breakeven rates are rising again, buoyed by the possibility of greater stimulus from the Biden administration (see below).
Equity markets are holding up well after the block trade Archegos drama. A few banks announced they would face material losses from their exposure to the asset manager as it unwinds its leveraged positions. Estimates place Archegos' positions at $20 bln. Asian indices were broadly higher, with the Nikkei closing up 0.7%, China's indices are up 0.2-0.5% and Taiwan's up 1%. The EuroStoxx 600 index is flat, and U.S. futures are broadly lower.
Oil prices were under pressure from favorable news regarding the Suez Canal ship blockage. Reports claim that Ever Given has been partially freed, but traffic has not yet been reestablished. Even when the canal normalizes, crude still faces a comparatively weaker demand picture than we expected even a few weeks ago, given the poor pandemic developments in Europe and many EMs. It's unclear how OPEC+ will react now, but it's unlikely that the group will be too quick about signaling higher supply at this week's meeting. Brent is down 1.5% on the day to $63.6 per barrel.
The next fiscal package is shaping up to be quite large and focusing on infrastructure. Early reports suggest a $3 trln price tag for a package that addresses infrastructure, climate change, education, and a whole grab bag of progressive policies. The proposal would be partially funded by higher taxes on businesses and high-income earners. Given the divided Senate, a couple of moderate Democrats hold the key to how big this package ends up being. For instance, we know that Senator Manchin was not shy about using his leverage during the negotiations over the last $1.9 trln package. There will be lots of horse-trading to come, but the key takeaway is that there is still a significant fiscal stimulus in the pipeline.
Indeed, market-implied inflation rates are starting to react. Breakeven rates for 10- and 30-year has been grinding higher, now at 2.36% and 2.32%, respectively. The 5-year rate is still below its cycle highs, but it's not far from its current level of 2.63%. We think the Fed is walking over a narrow bridge: falling to one side, they are seen as behind the curve, on the other a taper tantrum. It's hard to imagine that risk can sustain a risk-on mood if longer-dated inflation rates and real yields start to move decidedly higher.
EUROPE / MIDDLE EASET / AFRICA
As expected, the EU has hardened its position towards AstraZeneca vaccines. According to internal markets commissioner Thierry Breton, the block will prevent the company's vaccines from being exported as long as it "doesn't make good on its obligations," according to internal markets commissioner Thierry Breton. Talks between the UK about the vaccine exports have so far not led to any agreement. The EU is also looking to create a "health pass" to improve movement in the region. On the UK side, the government confirmed that the Moderna vaccine would be available next month. Reports claim there will be 500k doses available.
BOJ minutes reinforced the bank's pro-active yet accommodative mode. One official said the bank should respond "strictly" to volatility in the 10-years to defend the upper limit of 0.25%. But the overall policy directive is still very accommodative and will remain so. Indeed, the text clarified that the markets should not perceive the change in ETFs purchases as tightening. The BOJ should be happy that JGB yields remain depressed and the steady rise in USD/JPY has not been derailed.
China posted a huge industrial profit print for February. The 179% y/y growth is in part due to base effects and higher prices, but also suggestive of strong industrial production (+35%) and sales (+45%). We don't think this will change the PBoC's calculus very much and stick to the view that some form of tapering is in the pipeline, but it will be very gentile.
Geopolitical tensions surrounding China are set to worsen but probably not leading to disruptive action. From the U.S. side, Tread Representative Katherine Tai said Trump-era tariffs will remain in place for now. Meanwhile, China continues its measured escalation policy with sanctions against American and Canadian individuals as retaliation against accusations of human-rights abuses in Xinjiang. This follows sanctions against EU politicians last week.