WS Risk-Off Spilled Over to Asia

Markets

Markets yesterday initially reacted stoic to Saturday’s attack of Iran and against Israel. European and US equity markets even opened in green. Brent oil briefly dropped below the $90 p/b mark. Investors apparently expected any Israeli reaction to be guarded as the international community advocated de-escalation. Yields also resumed the uptrend that was interrupted on Friday. The focus from bond market also returned to the data. US March retail sales printed exceptionally strong both for headline (0.7 % M/M) and core measures (control group 1.1% m/m). The report reinforced recent market positioning assessing that the three rate hikes suggested in the March Fed dots is becoming ever more unlikely. US yields for maturities > 2-y touched new YTD peak levels. The former was blocked by the 5.0% barrier. Later, risk sentiment turned for the worse as Israeli officials warned the country will respond to the Iran attack. (US) equities gave of initially gains to close deep in red (Nasdaq -1.79%). Oil reversed course closing north $90 p/b. Especially short-term US yields ceded part of the early gains. Still, in a steepening move, yields closed between 2.4 bps (2-y) and 8.7 bps (30-y) higher. German yields showed similar gains (2-y +5.6 bps, 30-y 8.2 bps) but remain within the sideways consolidation pattern that is already in place since February. On FX markets, the dollar continues to outshine peers. The trade-weighted index DXY regained the 106 mark (106.21). USD/JPY touched a new 34-y top (close 154.28). EUR/USD saw more follow-through losses on Friday’s break below 1.0695 (close 106.24).

Yesterday’s WS risk-off spilled over to Asia this morning with regional indices losing up to 2.0%. Chinese data published this morning (cf infra) don’t help to improve sentiment. Still US Treasuries struggle to avoid further losses (+1 bp). The dollar outperforms (EUR/USD 1.0615, USD/JPY 134.35). Later today, the eco calendar is modestly interesting including ZEW confidence in Germany. In the US, building permits & housing starts and March production data will be released. Even in a risk-off context, bonds probably aren’t in a good position to play a safe haven role as inflationary risks won’t disappear anytime soon. At the same time, the dollar has few contenders to rival its save haven credentials. EUR/USD 1.0611 (76% retracement Oct/Jan) is the finally hurdle for a return to the 2023 low (1.0448). UK labour data published this morning were mostly weaker than expected. Employment in the 3 months to February declined sharply (-156k vs +74k expected). The unemployment rate jumped from 4.0% to 4.2%. Average weekly earnings eases marginally less than expected. Sterling declines in a first reaction (EUR/GBP 0.854).

News & Views

Chinese growth beat expectations but it’s only a shallow victory. GDP expanded 1.6% q/q in 2024Q1, accelerating from an upwardly revised 1.2% in Q4 2023 and topping the 1.5% analyst estimate. The accompanying monthly data releases shed some light on the composition. Fixed asset investment gained steam in March, accelerating to 4.5% y/y. The upswing, however, was almost entirely driven by state investments growing 7.8% vs a mere 0.5% growth in private investments. Industrial production slowed, both by state-owned companies and privately owned ones. The headline figure dropped to 4.5%. Retail sales offered little reasons to cheer as well with a deceleration to 3.1% y/y, down from the 5.5% gain in the first two months of the year and even further down from December’s 7.4%. Both industrial production and retail sales missed expectations by a wide margin. Property investment tumbled 9.5% in March, suggesting few to no signs of improvement in the giant but ailing sector. The Chinese yuan understandably quickly erased a kneejerk move higher in the wake of the release. USD/CNY traded at 7.2304 at this morning’s low-point before recovering to 7.2376 currently – near the weakest level since mid-November. It is this ongoing CNY weakness that prevents the Chinese central bank to drastically cut rates to jumpstart the economy, especially against the background of a Fed that has its hands tied because of stubbornly high inflation and ongoing economic strength.

The EU stepped up the trade offensive against China by unleashing a series of probes. It already launched an investigation into Chinese subsidies for electric vehicles and concluded last month that there was “sufficient evidence” of that, paving the way for import duties by July at the earliest. In addition, the EU will now look into the possibility of illegal support for Chinese windparks on European soil and for solar and railway firms. It will also launch an inquiry into China’s procurement of medical devices in the short run.