Markets Weekly podcast - 12 April 2021

Jai Lakhani (JL): Hello its Monday the 12th of April and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will help you navigate through the volatility of the global economy and financial markets.

My name is Jai Lakhani, Investment Strategist with Barclays Private Bank. Each week we’ll be joined by guests to discuss the topics that matter most for investors and evaluate the risks and opportunities.

Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. I’ll then analyse the outlook for the FX market in light of our updated forecasts. Finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.

Moving on to markets, it was another measured week for bond markets as investors continued to re-evaluate the threat of inflation and the possible impact on monetary policy.

Minutes from the Federal Reserve meeting on Wednesday highlighted that Fed participants believe it will be some time until substantial further progress towards the committee's maximum employment and price stability goals will be achieved.

In terms of Treasury yield, the 10-year finished the week at 1.66%, down 6 basis points from the week prior, and fought off inflation fears early on Friday.

In the high yield market, which tends to outperform in inflationary environments stemming from economic recoveries, yields of CCC rated bonds have reached record lows at just over 6% and spreads at just over 500 basis points.

It’s worth pointing out that's the tightest level since 2014 and valuations in the sector appear stretched. Economies reopening and fiscal stimulus could be a tailwind for the sector but investors must be aware of significant volatility.

We think for investors looking for exposure in this space, active management and selection in the BB market is essential.

Moving forward to equities, investors for the most part continued to embrace the good news and reject the bad in what was a record setting week.

Concerns over lockdown measures across Europe, the restriction of the AstraZeneca vaccine due to its apparent link with blood clots, and the risk of prolonged travel restrictions were for the most part swept aside.

Instead, the continued reopening in the US, the impressive March payrolls data as hospitality and leisure saw strong job gains, the vaccine roll-out continuing its impressive pace, and further stimulus proposals from the Biden administration grabbed the headlines. So looking at equity performance, the S&P 500 hit all-time highs and surged past the 4000 mark and was up 2.7% over the week. What was driving it? Well technology appeared to be the leading sector, with the Dow Jones also hitting an all-time high on Friday.

Some of the strength behind the sector was also from President Biden’s proposed global tax agenda, where taxes will be based on the sales of a company in each country, regardless of their physical presence. Such an agenda could end this current threat of an imposition of unilateral digital taxes from multiple countries such as the UK, France, and Italy.

In Europe, the Stoxx 600 rose 1.2% last week and, like the S&P 500, reached an all-time high. Taking a look at the UK, the impressive vaccination programme and the reopening has boosted the FTSE 100.

It was up 2.6% for the week, its best week since early January, and is up 7% year to date. However, the same story couldn’t be said for China where investors saw red lights. Producer prices jumped by the most in two years.

The fear, of course, is these price pressures resulting in rate increases and a tightening in financial conditions. The CSI 300 index ended the week down 1.5%.

When we take a look at Brent crude, although benefitting from the economic recovery and global vaccine distribution thus far, Brent crude futures actually traded below $64 per barrel on Friday for the 5th day in a row, remaining far below the 14-month high of $71.00 hit in mid-March.

What was driving this? Well, fears of increasing supply in oil markets especially after OPEC+ agreed to phase in higher production and lingering concerns about the pace of recovery in fuel demand.

Looking forward to this week, equity markets may experience additional volatility later on as we kick off earnings seasons for Q1. US banks such as Wells Fargo, JPMorgan, and Goldman Sachs publish results on the 14th of April.

The consensus is expecting S&P 500 companies to deliver 8.5% sales and 25% earnings y/y growth in the quarter. In Europe companies publishing quarterly results in the Stoxx 600 are anticipated to post 2% sales and 47% earnings growth.

What to really take away from these numbers? Well as always, the key won't just be whether the companies beat or miss expectations and by how much. The real focus is going to be on guidance and whether the already punchy earnings growth consensus for 2021 can be matched or even surpassed.

In addition to the recovery in demand, we would expect a lot of attention to be on margins and whether higher input costs are starting to have a negative impact on companies’ profitability. Given current valuations, the room for error really is limited and equities need to validate the recovery scenario that is being priced in.

With positive pre-announcements outpacing negative ones by a ratio of 1.3:1, the mood is certainly good and any disappointment is likely to be heavily punished.

So that was the global economy and financial markets last week. Let's move on to consider the prospects for FX markets. I'm pleased to say that I'm joined by Marvin Barth, Head of FX and EM macro strategy for Barclays Investment Bank. Marvin, thanks for joining us today and let's get started.

Marvin Barth (MB): Thank you Jai.

JL: When we were here going into the year, our view was for dollar strength compared to consensus view of dollar weakening. Now with dollar strengthening, what’s our view versus consensus expectations, especially given President Biden’s agenda and the sizeable fiscal stimulus?

MB: Well, to the extent that I have an impression of what's going on with the consensus, it seems to have moved towards our view that the dollar is likely to be stronger this year than what people had anticipated. We were very much out of consensus, being the only bank on the street forecasting that at the start of the year. I think there is a reluctant acceptance of that so far this year.

A lot of focus on what those programmes from the US, the first stimulus programme and the proposed infrastructure programme, are going to do both in terms of supporting growth but also acting as a long run drag on the dollar given the funding requirements there.

We continue to think that the focus, at least for the next year or so, is really going to be on where the recovery is, in returns to capital in particular, is going to happen, and that seems to be happening most in the US so that’s why we continue to expect the dollar to do relatively well. But it’s important to put that in context.

That’s basically a flat dollar in our view. We’re not talking about a big appreciation; the dollar is already overvalued. But let’s remember to think about where we’ve come from. We’ve been basically trading in about a 5-10 percentage point range for five years now. We bounced off of lows that were similar to early 2018 at the start of this year.

We’re up about 2.5% from there in the dollar index and we're about 3.5% below the average of last five years so it's not like we're talking about big moves here.

JL: That’s interesting. And then taking a look at the UK and Europe, we’ve seen diverging vaccination programmes. The UK has seen impressive vaccine distribution versus Europe stalling. In light of this where do we see the two currencies heading?

MB: Well, we were already relatively bullish on sterling, you know coming off of near 60 year lows during the Brexit period, as that uncertainty dissipated we expected sterling to appreciate within that.

Of course the outperformance of the UK in terms of vaccinations, as well as actually frankly on the data front, is something that's further supporting that and so as a result we did upgrade our forecasts recently.

We have euro/sterling going down to 81 by the end of the year and a little bit lower beyond that. In cable terms, given that we have the euro depreciating versus the dollar, that's relatively flat for sterling versus the dollar but that's a combination of both the outperformance on the vaccine and these broader issues of recovery from Brexit.

JL: OK and then given the robust expectations that we’re seeing from investors of an economic recovery and also the strength in raw materials, are we expecting safe haven currencies such as the yen and the Swiss franc to struggle this year and commodity linked currencies to perform?

MB: So we do have commodity currencies outperforming this year, in fact our best performing currency within the G10 is the Canadian dollar supported by strong growth, its attachment to the US economy and how strong that is going, but as well as its links to a broad range of commodities.

Safe haven we actually have underperforming in the near term, as people are more engaged in the broader recovery and they're also getting a fair amount of safe haven exposure through the dollar.

The dollar has this interesting ability to be both a growth currency and a safe haven so from an asset allocation perspective it's very attractive right now.

But we do expect safe havens to come back, particularly if you think about like the Swiss franc, as the year goes on we're going to get closer and closer to the German and particularly the French elections next year, that is going to start to create more nervousness around that and we do expect euro/Swiss to go lower on that, we do expect dollar/yen to go lower on that, so we will see some recovery in those as the year wears on.

JL: Well thank you Marvin for your insights today on FX markets, a topic that is always of great importance for clients and their portfolios and we will follow the developments very closely.

Moving on to the key events this week. With unemployment in the US remaining elevated since the shock of April 2020, Thursday's initial jobless claims offer key information on the recovery in the US labour market.

Claims for the week ending 3rd of April rose 16k to 744k, while the previous week’s claims were revised higher to 728k. What these figures show is that the US economy is making an uneven recovery from the COVID crisis, even as falling infections and the vaccination rollout have created an optimistic outlook.

The topic that really is in investors’ minds is inflation and so therefore the US March CPI print on Tuesday is going to be of key importance, and could show the first signs of inflationary pressures, be it transitory or not. We expect the year on year CPI index on Tuesday to have risen to 2.6% from 1.7% in February.

Then taking a look at what is key to economic recovery, it is the almighty consumer. March retail sales date from the US and China will therefore be of importance. US retail sales fell 3% month on month in February after an upwardly revised gain of 7.6% in January.

It's worth pointing out that we actually expected to see this fall in February sales. We had a very strong gain in January and also had very adverse weather conditions in Texas and the freezing in February.

So declines in February were broadly based, suggesting sales normalised after an unsustainable increase in January. So the question is, well, what's different in March in terms of the strength of the consumer?

Well, given the passage of further fiscal stimulus and the distribution of direct cheques to households, the market now expects to see an increase of 4.7% in March sales.

In China, retail sales appear to be really gaining some momentum. They surged by 33.8% y/y in the January to February period, following a 4.6% increase in December.

The market was expecting this significant jump as we had very weak base effects from the huge losses seen in early 2020. It now expects to see a 27.2% y/y gain in Friday's March figure, still supported by the slump in 2020.

Taking a look at China in more depth, its shown resilient retail sales growth and strong industrial output, so when they release their Q1 GDP figures, it’s no surprise that we expect this reading to come in strong at 5% q/q. This after as expansion of 2.6% in Q4.

UK GDP data, on the other hand, will give an indication of how the economy fared under its third lockdown.

After a less severe than expected contraction of 2.9% m/m in January, the third lockdown does appear to have been less painful for the UK economy than investors first feared. We expect the February data to come in flat relative to January before seeing a slight recovery in March as the restrictions begin to ease.

And with that we'd like to thank you once again for joining us. We will of course be back next week but for now I wish you a successful trading week ahead.