After a solid first quarter for risk, Q2 could be a different story

The first quarter of 2021 is about to end on Wednesday, which means expect to see some window dressing by asset managers and rebalancing of portfolios. It has been yet another solid quarter for risky assets, thanks to record stimulus by central banks and governments raising hopes for a solid recovery from the pandemic.

 
Global share indices rose for the 4th straight quarter, although Chinese stocks have lagged while US technology shares have also come under a bit of pressure.
 
Crude oil, copper and Bitcoin were also all on course to rise for the 4th straight quarter, while safe-haven gold looked to fall for the first time in 10 quarters.  
 
In FX, the US dollar managed to rebound and ended its run of consecutive losses in preceding quarters. The greenback was supported above all by rising bond yields as investors speculated that the Fed would have to tighten its monetary policy sooner than expected as record stimulus measures would overcook inflation. The dollar was also supported by weakness in foreign currencies, especially safe haven currencies such as the Japanese yen and Swiss franc, while the euro also weakened noticeably as authorities there struggled to deliver the Covid vaccines.
 
Haven assets sold off, along with government bond prices, as investors chose the racier equity markets and Bitcoin amid recovery hopes. For that reason, commodity dollars fared better, especially the Canadian dollar, which found additional support thanks to rising oil prices. The pound also did well, particularly in the first half of Q1 thanks to the UK’s rapid deployment of Covid vaccines.
 

Looking Ahead: Q2

While confidence grows about the pace of US economic recovery, there will be plenty of reasons why investors might proceed with caution. These include concerns about tighter monetary policy as inflationary pressures rise, while Europe’s slow progress on vaccinations (where the virus has been rising sharply again), and ongoing disputes over supply of Covid vaccines could mean the re-opening of travel and tourism industry could be delayed longer than expected. It is also possible that more variants of Covid-19 could be found that might resist the vaccine. Meanwhile concerns over China’s relations with the West could come back to haunt certain sectors of the financial markets.

If yields start to rise more rapidly in the coming months then this could derail the stock market rally, although certain sectors like banks might perform better with rising borrowing costs.

But the UK’s success in vaccinations is a bright spot, while the US is also winning the race. Against this backdrop, the pound and the dollar could remain supported in the months ahead.
 
Week Ahead outlook

In the short-term, it is possible that the current trends may continue for a while. Still, I would err on the side of caution as we head into the next quarter. The new week has started with a bit of volatility, although following the overnight falls in Asia, there was a sense of calm by midday in London. US stock index futures had recovered noticeably from their overnight lows and European markets had also bounced, while crude oil had broken above Friday’s range despite news the ship blocking the Suez Canal was refloated. The dollar was a touch higher against the euro and some emerging market currencies, but weaker against most other major currencies. While it is calm now, things could potentially turn volatile later on in the week.
 
Suez Canal blockage and OPEC+

The immediate risk facing crude oil is the traffic block on the Suez Canal. Apparently, the cargo ship blocking the canal has been partially freed and officials say its course has been corrected by about 80%. Further manoeuvres will be needed when the water rises later in the day to free it up completely. There is a backlog of 300 ships waiting for passage through the canal. So, the situation is half resolved but now the focus is on when will the traffic clear. For now, supply concerns are continuing to keep oil prices supported.

Oil prices are also holding up because of speculation that the OPEC+ might roll over their current supply curbs into May at their meeting on Thursday.

However, if the OEPC+ decides against this, then we could see a sharp correction in oil prices later in the week. This could negatively impact energy stocks and some energy-linked currencies such as the Canadian dollar and Norwegian krone.
 
Archegos Capital Management woes could be trouble for more banks

Banks will also be in focus after Credit Suisse and Nomura Holdings warned of potentially large losses from a US client, which the media have speculated to be Archegos Capital Management. Apparently, more banks are exposed to Archegos, so be on the lookout for signs of contagion. On Friday, the firm sold $20 billion worth of shares in Chinese tech giants and US media firms ViacomCBS and Discovery.
 
US jobs report key event in an otherwise quiet week for data

The next big catalyst for the dollar is the monthly nonfarm jobs report, due for publication on Friday, 2nd April. We will also have important PMI data from China and elsewhere during the week, as well as the latest Eurozone inflation numbers in mid-week.

As we are heading into the last week of the month and first quarter, expect some window dressing. But a holiday-shortened week (with Europe as well as a few other countries observing Good Friday), trading volumes could be lighter. Meanwhile daylight-saving time shift for Europe at the weekend means we will be back to 5 hours behind New York again.
 
Economic calendar highlights
 
Tuesday: US Consumer Confidence (CB) and speeches by FOMC members Quarles and Williams

Wednesday:

• Chinese Manufacturing PMI

• Eurozone CPI

• US ADP private payrolls, pending home sales and crude oil inventories

Thursday:

• Aussie retail sales and Caixin Manufacturing PMI for China

• German Retail Sales and final Eurozone manufacturing PMI

• OPEC+ meeting

• US jobless claims and ISM manufacturing PMI

Friday:

• Good Friday holiday

• US nonfarm jobs report