Equities and rates: Look out below

Overview:  The US dollar begins the new week mostly firmer. The dollar-bloc currencies and Scandis are the weakest. Sterling and the euro are little changed, while the continued drop in the US 10-year yield has helped lift the yen by nearly 0.5%. Emerging market currencies are mixed as well. A handful of Asian currencies, including the Chinese yuan, are higher. The Turkish lira is also firmer, after falling nearly 4% over the past two weeks. Russia, which apparently has disappointed US President Trump, who has threatened secondary tariffs its oil if it does not accept the cease fire with Ukraine, has seen the ruble soften today. 

The knock-on impact from the US tariff offensive is taking a toll on equities. Japan's Nikkei 225 stumbled by 4%, as did Taiwan's Taiex. South Korea's Kospi dropped 3%. Australia's ASX 200 was off 1.75%. The Hang Seng lost 1.3% and China's CSI 300 fell 0.7%. India is off less than 0.5%. Europe's Stoxx 600 is down for its fourth consecutive session and its nearly 1.3% loss is greater than the loss of the past two sessions put together. It gapped lower today and US index futures are poised to do so too. Some of the flows out of equities is finding a haven in the government bond markets. The 10-year JGB yields fell five basis points to 1.48%, while European benchmark rates are mostly 2-4 bp lower. The 10-year yield Treasury is below 4.20%. It settled only once since last December below 4.20%, and that was on March 3. Gold jumped to a new record near $3128. It settled around $3011 a week ago. May WTI is firm slightly below $70 but has been in a $68.80-$70.15 range today.

USD: The Dollar Index posted its lowest settlement of the week ahead of the weekend. It tested support near 103.75 and a break warns of a test on the recent low near 103.15. This is an important week. There are three main elements. The first is the reciprocal tariffs the US threatened for April 2. President Trump has suggested some flexibility that was not apparent in the auto tariffs. He seems to suggest that the maximalist approach to include all non-tariff barriers to trade may not be implemented and there could be some exemptions granted. Nevertheless, his continues to threaten sectoral tariffs, including lumber, pharma, copper, and semiconductor chips. The timing and breadth are not clear. The second element are the apparent capital flows. It seems to be in part an unwinding of last year's record-purchases are European purchases of US equities. In any event, that some US equity sales have flowed out of the US, and this is reflected by the pressure it is under. Some of the capital found refuge in the Treasuries, where the 10-year fell 14 bp in the last two sessions, as the S&P 500 fell almost 2% and the NASDAQ fell more than 3%. The indices are poised to gap lower. The 10-year yield is down another 5-6 basis points today and has slipped below 4.20% today. The third is the labor market report. It is more about monthly jobs report not so much the JOLTS data, for which the markets' infatuation seems to have diminished. The median in Bloomberg's survey has crept up to about 135k from 120k a week ago after 151k increase in February. Just like DOGE spending cuts have not been picked up in the Federal government report, so to have the applications for unemployment benefits by federal workers been de minimis. Similarly weekly initial jobless have been nearly flat over the past four weeks. Moreover, the four-week moving average is 224k compared with 222k in the last reporting week in 2024. Still, amid the great uncertainty, clear the risks are for the labor market to deteriorate at an accelerate rate. Ultimately, we expect the resumption of the Fed's easing cycle will be driven by the deterioration in the labor market more than a converge inflation with its target. The household survey is different than the establishment survey, and it is possible that the unemployment rate ticks up. In H2 2024, it was between 4.0% and 4.2%. It was in the middle of that range in January. 

EURO: After trending lower from $1.0955 to about $1.0735, the euro bounced ahead of the weekend and posted its highest settlement of the week, and retracing half of the pullback. It reached $1.0850. Last Monday's high was slightly shy of $1.0860, and the next retracement is near $1.0870. The preliminary estimate for March CPI is due tomorrow. But before the weekend, France, and Spain, reported, and Germany and Italy report today. The headline and core may have slipped. It might not have much market impact. The more pressing issue the third shock. The first was Russia's invasion of Ukraine (18-years after NATO was extended to the Baltics--stretching the cause-and-effect narrative that seemingly has gained traction since the US election), the de-risking from China, and now the volte face of the United States. It is a multi-faceted shock. It is geostrategic in terms of support for Ukraine, for which the US is pushing for control of all future major infrastructure and mineral investment, siding with Russia over the EU at the UN on security issues. It is also clearly about trade. And it is also territorial. The US says it "must" own Greenland. Yet, Denmark is a member of NATO. The US does not possess Germany, for example It is strategically important and, as does Greenland, German hosts a significant US military presence. 

CNY: The dollar's recovery stalled last week near CNH7.2825 settled near straddling the CNH7.2700 area. It fell to a five-day low near CNH7.2530 today. The PBOC set the dollar's reference rate at CNY7.1782 today (CNY1.752 Friday). The market is relative calm given that an inflection point might be near. Beijing is reportedly preparing to retaliate if it is subject to the "retaliatory tariffs" on April 2. Tensions are elevated, and the risks of escalation are increasing and some expression in the capital markets cannot be ruled out. US Commerce, Treasury, and Trade Representative are to issue reports on Thursday on Chinese trade practices. It should not be surprising if China were to find a way to probe and test of the US resolve in Asia Pacific security. Earlier today, China reported its March PMI earlier today. A small improvement was seen. The manufacturing PMI rose to 50.5 from 50.2. The non-manufacturing PMI rose to 50.8 from 50.2. The composite rose to 51.4 from 51.1. Last March it was at 52.7. Separately, over the weekend, Beijing announced a CNY500 bln (~$69 bln) capital injection into the four large banks. It announced plans last September and renewed its pledge early last month. While China's economy still does not appear to have much traction, and it is difficult to measure, but as the US main rival/challenger, it arguable derives the most benefit form intra-alliance tension. One of its strategies have been to pry Europe away from the US. The Trump administration appears to be making this happen and faster that Beijing could have rightly hopped. We have argued for several years on these pages that the biggest threat to the US and the dollar was abdication not encroachment. This is not quite what we imagined but close. 

JPY: The dollar recorded a technical key reversal before the weekend by making a new extreme for the move, in this case JPY151.20, before reversing low and settling below the previous day's low (~JPY150.05). Follow-through selling today, encouraged by the continued drop in US rates, saw the greenback fall to JPY148.70. If it is retracing the rally since the March 11 low (~JPY146.55), it met the (50%) objective today near JPY148.90. The next retracement (61.8%) is about JPY148.30.US Treasuries 10-year yield was driven down after setting the month's high last Thursday near 4.40%, it dropped to the week's low ahead of the weekend near 4.25% to almost 4.18% today. The March average is 4.27%. Japan reported industrial production snapped back in February, growing by 2.5% after 1.1% decline in January. On the other hand, January retail sales were revised to 1.2% from 0.5%, and February's retail sales rose another 0.5%. The median forecast in Bloomberg's survey sees the Japanese economy barely eking out growth of about 0.1% quarter-over-quarter here in Q1 (0.4% annualized), down from a little more than 0.4% (2.2% annualized) in Q4 24. Today's data suggests somewhat stronger growth. The highlight this week is the quarterly Tankan Survey due early tomorrow. Given the state of trade, it is understandable that sentiment among manufacturers weaken while service producer sentiment can fare better. Uncertainty may also constrain capex plans.

GBP: Sterling stalled last week again near $1.30. We had thought after rallying for two-months and momentum indicators turning down and see a potential topping pattern on the bar charts, that the risks were on the downside. But sterling pullbacks have been bought and limited in any event. It is trading on both sides of the pre-weekend range (~$1.2925-$1.2970). A break of $1.2860 is needed to lend credence to it being a topping pattern. It is a light week for market-moving UK data. Consumer credit and mortgage data reported today with little impact. This week, the final March PMI (and the first look at the construction PMI) are due. March New car registrations, (a proxy for purchases) may be revealing. They have quietly fallen for the past five months on a year-over-year basis and may have extended the slide another month.

CAD: The US dollar’s two-day recovery at the end of last week lifted it through the nearly three-week downtrend. The move above CAD1.4350 targets CAD1.4400, though it can move back into the CAD1.4550 area without breaking this month's range. The economic data Canada reports this week may be of tertiary significance of investors and policymakers. The steel and aluminum, auto tariffs, the possibility reciprocal later this week, and more to come, including lumber, are going to hit Canadian growth and many economists warn of a recession. The February merchandise trade and even the jobs data at the end of the week may pose some headline risk but ultimately are unlikely to sway investors or policymakers. The reports will show where the economy was before the American shock. The economy averaged about growth of about 2.4% at an annualized pace last year and was expected to moderate to around 1.5% for the next few quarters. The risk is on the downside, no matter how the economy performed in February.

AUD: The Australian dollar has been sold to about $0.6255 today, its lowest level since March 5. The five- and 20-day moving averages converge around $0.6300, the middle of the broader two-month range of $0.6200-$0.6400. Only a break of this range is important. The results of the Reserve Bank of Australia's meeting will be announced early tomorrow, and while there is no sure thing, there is little doubt that it will stand pat with its cash rate at 4.1%. The RBA has signaled a cautionary stance and made it clear there is no sense of urgency. It cut last month and likely sees no need for back-to-back cuts. Moreover, the government announced a loosening of fiscal policy ahead of the May 3 election. After this week's meeting the next one is May 20, and the futures market has priced in a cut then fully. A week ago, it was about 2/3 discounted. 

MXN: There are two weights on the peso: monetary policy and economic risks. The central bank is pursuing a more aggressive easing cycle than the Federal Reserve. Last week, the Bank of Mexico delivered its second consecutive half-point cut, it signaled further cuts are possible of the same magnitude, which was more dovish than many, including ourselves, expected. Mexico, like Canada, is on the cutting edge of a shock emanating from the United States. The risk is for a weaker peso. After falling slightly through MXN19.85 in mid-March, the dollar recovered almost MXN20.46 before the weekend. It stalled near MXN20.45 so far today. Above the MXN20.55 area there is little on the charts to prevent a run at MXN21.00, including the positioning of the momentum indicators, which have turned higher.