Markets Outlook: Spring is in the air

Market highlights

• Spring in the air, with volatility collapsing everywhere
• A hugely significant data week with plenty of new releases and much optimism packed into the price
• China’s moves towards a green energy transition flow through to higher A-shares
• Fed’s big bank decision calms the jittery bond market nerves 

The Week Ahead

It's a hugely significant data week with much optimism packed into the current price; positive data surprises must remain the order of the day to keep this ship moving on and even keel.

US and China data is in focus – UMich sentiment (Mar 26), China PMIs (Mar 31), US ADP (Mar 31), Caixin PMI Mfg (Apr 1), ISM Mfg (Apr 1) and, of course, the granddaddy of them all US Non-Farm Payrolls (Apr 2).

China PMIs have been heading lower since late last year, though, for now, both are just barely in expansionary territory. The seasonals tend to point higher for the March observation period, but a crossover into contractionary territory may catch some attention.

The EZ CPI (Mar 31) is released out of Europe and the 1Q Tankan (Apr 1) comes out of Japan, where The Street expects manufacturing to show considerable improvements given the cyclical recovery and weaker JPY.

The global market finished the week on a high note with the risk-on tape spurred on by vaccine optimism amid President Joe Biden's plan for an "economic rejuvenation", which should continue to underpin global risk sentiment. 

The Fed decision to allow large US banks that clear the next round of stress tests with sufficient capital to resume dividend increases at the end of June has calmed the jittery bond market nerves.

As a result, the calming cadence of rates volatility falling has allowed risk asset to breathe much more effortlessly and follow through on President Joe Biden's plan for an "economic rejuvenation", which continues to resonate through the cross-asset backdrop. With Spring in the air, volatility is collapsing everywhere.

Markets didn't make much of a meal of the 7yr auction. Timing strategies around auctions are a meaningful part of auction demand; when one auction is extremely noisy, getting an excellent strategic signal on the next auction is harder. Volatility begets volatility.

As much as upbeat tempo for the economic news over the coming weeks is in the price – a strong ISM print, rebound in auto sales, above-consensus payrolls, and significant sequential jump in retail sales and industrial production. But service spending is picking up as those stimulus checks are hitting the real world (dining, lodging and air travel). The stimulus effect coinciding with increased vaccination and the arrival of warmer weather could be a game-changing panacea for risk. 

Indeed, in conjunction with a recovery in industrial activities from the Texas storm, this puts March well in a positive growth inflexion category, which is an unquestionably bullish signal for risk assets.

Oil prices are having another change of heart into week’s end, possibly driven by no end in sight to the Suez Canal worst-case scenario but more likely inspired by the bounce in broader risk sentiment on the back of Joe Biden's "economic rejuvenation plan." 

Oil Markets

'Energy Transition' is the process of shifting the world's energy system from one based on fossil fuels to one based on clean energy. The world wants to get to net-zero emissions, and we expect a significant shift in investments to retool the world's existing capital base to run on clean fuels. China is at the vanguard of this transition.

The People's Bank of China held a meeting with major domestic banks on Thursday, encouraging them to lend to green and low carbon industries. Banks have been asked to promote new products and services in line with the green finance standards and adjust the allocation of loans in time.

Although the overall monetary policy stance will likely remain neutral on the back of steady economic recovery, the proportion of bank lending may be adjusted to focus more on supporting green development to help China achieve its carbon neutrality goals.

Possible measures for the PBoC to support green finance might include window guidance of more lending to the green sector or adjusting the macro-prudential assessment framework favouring green financing.

A-shares have moved higher on media reports that the central bank may conduct an annual review of RRR under the inclusive finance scheme and encourage major banks to step up lending to the green and low-carbon industry.