Macro:

China’s annual NPC started Sunday. Its annual growth target was lowered to around 6.5%, down from the 6.5-7.0% range of 2016. This moderation of the target growth rate is in line with efforts to manage the risks arising from a year of substantial economic stimulus which was engaged to achieve the 6.8% growth rate of 2016.

M2 and total social financing targets were also reflective of the government’s plan to rein in leverage and liquidity used to boost the economy in 2016. Also of note is the stated objective or making the RMB exchange rate more market driven. A free float is some time away but this signals a desire to move to a more rules based, market driven economy. The conditions appear right or at least balanced, for liberalizing the economy. On the one hand, domestic growth is slowing, European political risk is heightened and protectionist rhetoric from the US is gaining, but on the other global growth is stabilizing, as are the commodity markets, and domestic manufacturing has exited restructuring induced recession.

It is likely that the Chinese calculation is that it is acceptable to liberalize the economy while growth has stabilized domestically from the monetary and fiscal boosts of 2016, and the global economy is growing from the delayed effects of European and Japanese QE, and with the US economy at escape velocity, and that one cannot wait for the risks of protectionism and populism to precipitate or dissipate.

Equities:

A flat week for equities as China reins in ultra loose policy and the US braces for a Fed rate hike. A good week for European and Japanese equities.

Bonds:

The CoCo market was buoyed by Deutsche Bank’s rights issue intended to raise 8 billion EUR of equity capital and lay to rest any doubts about it ability to pay CoCo coupons. Along with the capital increase is a plan to shrink its 4 divisions into 3 (combining markets and corporate finance), to retain Posbank and integrate it with DB’s retail operations. The restructuring is expected to cost 2 billion EUR and is a reversal on past strategy that seemed ineffectual.

YTD CoCos are one of the best performing markets, and especially when adjusted for their volatility. Expect returns to remain robust as regulatory changes favour the asset class.

10 year bund yields rose from 0.20 to 0.35 on rising inflation expectations across the Eurozone. Peripheral credit risk expectations receded, however, as investors absorbed the political risks in the coming Dutch and French elections. Peripheral bonds may have been too pessimistic and yields on Italian and Spanish bonds tightened relative to bunds.

US treasuries traded in a tight range as the market awaits the Ides of March.

Week ahead:

Mar 6

  • Eurozone Sentix
  • Brazil PMI
  • Fed’s Kashkari speaks
  • Taiwan trade data
  • Germany factory orders

Mar 7

  • Eurozone GDP
  • US trade balance
  • Japan current account,
  • German industrial production

Mar 8

  • China trade balance
  • Swiss inflation
  • US ADP employment, unit labour costs

Mar 9

  • ECB meeting. Draghi press conference.
  • China PPI, CPI

Mar 10

  • India trade data
  • US average earnings, umemployment
  • China credit data, new loans, TSF, money supply
  • France industrial and mfg production
  • UK industrial and mfg production, trade balance, GDP