Macro:

India’s Lok Sahba passed the 4 GST bills putting the implementation on track for a July 1 start. This is a significant piece of tax reform which had been long awaited. The GST will replace a complex web of central and state levies including excise duties, service taxes, cesses and surcharges, entertainment taxes, lottery and gaming taxes, entry tax, luxury tax, ad infinitum. One benefit will be the simplification of supply chains which are currently part of physical tax planning and will optimize inventory cycles.

In the run up to the Aramco IPO, Saudi Arabia cut Aramco’s tax rate from 85% to 50%, a move that would certainly sweeten the IPO. Aramco also pays a 20% royalty tax.

Equities:

US equities took a tumble when the healthcare bill was withdrawn. Equities subsequently recovered on better economic data.

Generally a weak USD transmitted the US equity weakness to global markets which similarly dipped and recovered.

Bonds:

Inflation could be peaking ex US. One reading does not a trend make but we are beginning to see European and Asian inflation data below expectations after a solid rebound from the lows of 2015. Euro area inflation fell back from 2.0% to 1.5%, China inflation from 2.5% to 0.8% and while Japan national Feb inflation was steady, Tokyo core inflation for March slowed into a contraction against expectations for a small expansion. US inflation is steady to rising.

USD duration will be difficult to call and highly dependent on whether Trump is successful in getting his tax and infrastructure plans ratified in Congress. On recent track record, the prognosis is not so good.

EUR duration is similarly fraught. The ECB is on the brink of tightening financial conditions as inflation rolls over. Eurozone bonds had not priced in the rebound in inflation perhaps seeing it, correctly as it now seems, as a temporary reprieve. French – German spreads have been volatile and recently widened again as new developments and contenders emerge to jostle for position in the upcoming election. Italian – German spreads have spiked as the spectre of Italian NPLs rises again, as it does periodically.

The loan market has been a steady performer for a year and a half, faltered, not on fundamentals or events but under the weight of capital inflows from US investors seeking yield but avoiding duration, and from Asia’s FMP craze. Perhaps a period of volatility will knock some sense into the market but for now, the vast majority of performing loans are trading at or above par and repricings continue.

FX:

YTD the USD has given back 55% of its upside against JPY and EUR as investors wonder when if ever Trump will get anything past his colleagues in Congress.

The Indian rupee is on a tear as the confluence of political currency, reform progress, improved liquidity and a more hawkish RBI drive sentiment.

Commodities:

OPEC’s general secretary Barkindo said that crude inventories were starting to decline in a sign that the production cuts were bringing the market into balance.

US Crude inventories had been volatile with builds larger than forecast which triggered weakness in the oil flat price.  At the same time gasoline and distillate inventories have experienced 6 consecutive weeks of draws providing a counterbalancing picture. WTI which slumped to below 48 USD mid-week recovered to over 50 by the weekend. The WTI Brent spread which went from discount to as much as 8 USD retreated to 5.25. While we are unlikely to see 20-30 USD spreads soon, the case for widening spreads is intact.

Industrial metals remained robust as the manufacturing recovery rolls on.

Week ahead:

Apr 2

  • Japan Tankan report
  • Caixin mfg PMI
  • Russia GDP

Apr 3

  • Europe mfg PMI, unemployment
  • Italy unemployment
  • US ISM mfg PMI
  • India mgf PMI
  • Fed’s Dudley, Harker, Lacker and Lockhart speak

Apr 4

  • Eurozone retail sales
  • US trade balance, unit labour costs
  • ECB’s Likanen speaks, Fed’s Tarullo speaks

Apr 5

  • Europe services and composite PMI
  • US ADP employment
  • ISM non mfg
  • FOMC minutes

Apr 6

  • Taiwan CPI
  • Swiss inflation data
  • RBI monetary policy meeting.
  • US payrolls

Apr 7

  • US avg hourly earnings, unemployment
  • France, Germany, UK industrial and manufacturing production