Stuck in the Suez with you

Suez Canal remains blocked

The rumours sweeping Asia over the giant container ship blocking the Suez Canal turned out to be just that, rumours, with the Ever Given unmoving. With experts forecasting unsticking it could take weeks, Egypt formally closed the canal, meaning Asia to Europe seaborne freight face a much longer and more expensive trip via South Africa and the Atlantic. An extended closure could find its way into inflation data as freight rates must also surely rise.

Oil gave up most of its gains as the US dollar continued rising, primarily because of Covid-19 fears as European lockdowns and its vaccination programme lurch from one train wreck to another. India, the world’s third-largest oil importer, joined Europe to effectively ban Covid-19 exports yesterday as it seeks to get in control of its escalating new wave of infections. Taken together, it becomes harder to construct a bullish case for energy in the near-term, and OPEC+’s April 1st meeting will almost certainly make no changes to the production cut schedule.

Elsewhere, the news was better. US Initial Jobless Claims slipped below 700,000 for the week, hinting yet again that the US economy is recovering quickly. President Biden doubled his jabs in arms target to 200 million in his first 100 days overnight and said that he would run again in 2024. That tempered by a weak US 7-year note auction which took some of the froth off equity markets that recovered after the positive jobless claims data.

That saw the US dollar power higher once again, and I expect trading in currency, bond and equity markets to be very choppy and noisy over the coming days as the end of the quarter approaches. President Biden may yet play a part in next week’s fun and games as he is likely to release preliminary details of the follow-on USD3 trillion remaking America package.

Although taxes will rise to pay for part of it, more debt issuance is on the way, which could be enough to lift US bond yields once again. We can expect more US dollar strength as a result, and tech-heavy equity markets in the US and Northern Asia will once again be in the firing line. Cyclicals such as the Dow and ASEAN markets should once again outperform. That will be assisted by the news that the Federal Reserve will allow banks to resume full dividend payouts and buybacks from June. Steeper yields curves and higher dividends will support financials and increase the likelihood of repetition elsewhere, notably in Singapore.

A rise by the US dollar next week may finally start weighing on Asian EM. Running dirty pegs to the dollar was easy last year when everyone was selling it, and the US cut rates. That allowed Asia to cut rates to the bone mostly as well while preserving the currency value. Things get more complicated if yields rise in the US and the dollar rallies, with domestic demand still seriously muted across Asia, even if the export machine is firing on all cylinders. Asia has no room to raise rates at the moment, so in a dirty peg world, you either start selling foreign reserves or allow currency depreciation. The joys of outsourcing monetary policy.

The Asian data calendar is once again bare, leaving the region to continue its Wall Street follow the leader pattern of the past week. Next week the calendar intensifies with China Industrial Profits released on Sunday, leading to official and Caixin PMI’s on Wednesday and Thursday. The pan-Asia Markit PMI data also hits the wires on Thursday, April 1st. Malaysian Trade and South Korean Manufacturing bookend it at the start of the week, and Thailand Manufacturing and South Korean Exports also on Thursday. With OPEC+ also meeting later on Thursday the 1st, April Fool’s Day is shaping up as the highlight of Asia’s week next week.

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