LIVE MARKETS-Deficits and the dollar

PUBLISHED: Thu, 25 Mar 2021 12:52:18 GMT
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* European shares extend losses, down 0.8%

* Cineworld slumps on plans to raise debt ceiling

* Giant container ship stranded in Suez Canal

* U.S. stock futures turn negative

March 25 – Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

DEFICITS AND THE DOLLAR (1252 GMT)

The United States has just posted its widest current account deficit since 2008, at 3.1% of GDP. The $1.9 trillion stimulus package (and talk of another $3 trillion in infrastructure spending) should further blow out its “twin” current account and budget deficits.

FX markets have been aflutter for months, betting the deficits will pummel the dollar. But instead such bets have taken a hit as the greenback has rallied 3% year-to-date.

Stephen Jen, CIO of the Eurizon SLJ fund and the proponent of the Dollar Smile thesis, is not surprised, however.

A reminder here of what the Dollar Smile theory is about. Suggested by Jen years ago when he was an economist at Morgan Stanley, it holds that whenever the U.S. economy outperforms or lags others, the dollar strengthens. Regardless of deficits or valuations.

But when the US economy runs with the rest of the world, the dollar becomes vulnerable. We wrote here https://www.reuters.com/article/us-usa-markets-dollar-idUSKBN2A517V on the subject recently.

If Jen’s theory is valid, the dollar could strengthen as the U.S. economy pulls ahead of others. And the current account gap? It simply doesn’t matter, Jen says, adding:

“The ratio of global stock of assets to GDP is now more than 10 times. A U.S. current account deficit of 5% of GDP would require merely 0.1% of global liquid assets to finance.”

Jen reminds us investors shrugged off U.S. deficits in the 1980s, when high Fed rates boosted the dollar so much, it led to the 1985 Plaza Accord where countries agreed measures to weaken the greenback.

And while deficits do matter for developing countries, they are less important for one which prints the world’s reserve currency, many argue.

Oliver Allen at Capital Economics says while positive risk appetite is a catalyst for dollar losses, the correlation has been overwhelmed by surging Treasury yields.

Yields have slipped this week but Allen points out that unlike other central banks in Japan and the eurozone, the Fed seems less inclined to act against higher yields.

(Sujata Rao)

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THE (PRICEY) COST OF THE SUEZ CANAL BLOCKAGE (1133 GMT)

A vessel almost as long as the Empire State Building is high is blocking traffic in one of the world’s busiest shipping channels for oil and other products, pushing down shares of top shipping companies.

AP Moller-Maersk stocks fell about 9.4%, while Hapag Lloyd shares dipped 16.5% this week as efforts to dislodge the 400 m (430 yard) long container vessel that has blocked The Suez Canal continued for a third day.

The incident is proving to be pricey for the industry, with Saxo Bank estimating that there’s almost $10 billion worth of daily marine traffic halted by The Ever Given vessel, owned by Japanese ship-owner Shoei Kisen.

Reports suggests it could even take weeks to free the waterway from the vessel that is now blocking transit in both directions through the busy shipping channel linking Asia and Europe.

ING says ship-owners will be forced to decide whether to wait out the clearing of the stuck vessel or to go around the Cape of Good Hope.

“The Suez Canal is a vital point for global trade, including energy markets,” they say citing that around 10% of global seaborne oil trade and around 8% of global LNG trade passes through the canal.

Despite the supply difficulties, oil prices are falling as a new round of coronavirus restrictions in Europe revived worries about demand.

But “clearly, the longer this disruption lasts the more likely we see refiners/buyers having to turn to the spot market to ensure supply from elsewhere,” ING says.

(Joice Alves)

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WHEN COVID RESTRICTIONS SUPPORT HIGH YIELDS (1106 GMT)

The third wave of the pandemic is messing up also corporate credit, with investment grade suffering from more downgrades, while high yield bonds continue their positive momentum.

The high yield (HY) segment, “which is heavily exposed to the manufacturing cycle, is benefiting from the ongoing mini boom in the sector,” BofA analysts say, recalling that German PMI manufacturing hit a record high this month.

Besides, rating agencies may have rushed to excessively downgrade HY-rated firms last year, so the year-to-date upgrades could be driven by a “balancing act”, restoring the fair credit rating of some issuers, they add.

The HY segment which is now recording “its fastest start to an upgrade cycle ever,” is likely to continue its positive momentum in the next few months.

But investment grade (IG) debt owners, concerned by a new wave of downgrades triggered by new lockdowns, should keep calm, as the long-awaited European credit rating upgrade cycle “has not fully started yet.”

A meaningful acceleration in the vaccine rollout and the lifting of economic restrictions “will allow a broad and sustained wave of upgrades across all European credit markets.”

(Stefano Rebaudo)

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WHAT’S HOT (0929 GMT)

As spring kicked in with much of the Continent confined at home facing a third wave of COVID-19, the world is watching the speed at which people are getting a vaccine.

And as about 500 million doses of the vaccine have been given to people globally, Jefferies has revised its coverage to identify the European stocks with potential to surprise in the next fiscal year.

Bearing in mind that “the pace of vaccinations by region remains the single biggest determinant of the recovery trajectory,” Jefferies analysts say.

Earnings positive vibes could come from the following five names as the market has yet to price in a full earnings recovery on these Buy rated companies: ABI, BBVA, Jet2, SAP and Societe Generale. While positive dividend surprises could be seen in Centamin , Glencore and Travis Perkins.

Here is a list of Jefferies recommendations:

(Joice Alves)

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GOOD MORNING BROKEN CORRELATIONS! (0838 GMT)

European bourses have opened in the red in a session which is already loaded with contradictions, broken correlations and unusual patterns.

First and foremost, it’s worth noting that while the STOXX 600 is down about 0.2% in early trading, Wall Street futures are still trading in the black, 0.3% for the S&P and 0.5% for the Nasdaq. It’s worth noting that S&P 500 fell 0.5% ahead of close yesterday.

Second, while PMIs are one of the key indicators watched by equity strategists, it’s fair to say that yesterday’s good surprise had little positive effect.

Looking at oil prices, it’s another weird one with prices edging down despite the Suez Canal being blocked and disrupting part of the oil trade. Rising Covid cases might be weighing?

So quite counter intuitively, the oil and gas sector is the worst performing one, losing 1.3% at the moment.

Also while growth and tech stocks had been tracking U.S. Treasury yield, the correlation seems broken at the moment if you look at the Nasdaq which yesterday fell along borrowing costs.

There’s no spillover it seems from the overnight fall of Chinese tech shares due to concerns some may have to delist from U.S. markets.

Today in Europe, the tech sector is down 0.2%, which is just a tad lower than the broader market.

What seems to be the market focus today is how Europe deals with the third wave of the pandemic and whether a vaccine war with the UK can be averted.

(Julien Ponthus)

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COVID, MISSILES AND TANKER TAILBACKS (0816 GMT)

Plenty to chew over in what’s shaping up to be a busy session.

First to note is a sharp fall in dual-listed Chinese company shares after the U.S. securities regulator adopted measures that would kick foreign companies off American stock exchanges if they do not comply with U.S. auditing standards.

Another reason for markets to stay in risk-off mode perhaps was North Korea which launched two ballistic missiles into the sea near Japan. All that weighed on stocks earlier in Asia and now European stock futures are a tad softer.

But the session looks set to brighten up as U.S. equity futures point to a higher open for Wall Street.

They might seek some reassurance from the host of central bankers due to speak later in the day, including the ECB’s Christine Lagarde. The Swiss National Bank also meets and should keep interest rates at -0.75%, where it’s been for over six years. Central banks meet in South Africa and Mexico too.

Vaccine rollouts and supplies could be high on the agenda at an EU summit later on. The bloc on Wednesday tightened its oversight of coronavirus vaccine exports, giving it greater scope to block shipments to countries with higher inoculation rates such as Britain.

While German Chancellor Angela Merkel has made a U-turn over imposing a full 5-day lockdown over Easter, concerns about the euro area economy continue to pressure the euro, which is languishing near 4-month lows around $1.18.

Those worries also pulled crude prices more than 1% lower despite the oil tanker tailbacks caused by the stranded container ship in the Suez Canal. Key developments that should provide more direction to markets on Thursday: – ECB President Christine Lagarde, Bundesbank President Jens Weidmann, and Bank of England governor Andre Bailey, participate in a virtual central bank event hosted by BIS. – Sweden’s Ingves, Bank of Canada’s Macklem, ECB’s Weidman, ECB’s Villeroy de Galhau, New York Fed’s Williams also due to speak. – U.S. Treasury to auction 7-year bonds; 5-year bonds sold Wednesday with a sold bid (Full Story) – Italy to launch BTP short-term, a new government bond that will replace CTZ notes – Final iteration of US Q4 GDP

(Dhara Ranasinghe)

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ALONE IN THE RED (0641 GMT)

European futures are currently trading in the red at the same pace as their Wall Street peers are cruising in the black: that’s about 0.2% give or take.

Tension is building up ahead of the virtual summit at which EU’ leaders will discuss new rules which would allow the bloc vaccine shipments to countries which are not sharing doses they produce.

The threat of a vaccine war adds up to concerns about Europe’s sluggish vaccination campaign and the new round of lockdowns implemented to keep the third wave of COVID-19 infection under control.

Among other factors weighing on the market today is the selloff in Chinese technology shares due to concerns they could be de-listed from U.S. bourses.

(Julien Ponthus)

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