Should we brace for more financial accidents?
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SHOULD WE BRACE FOR MORE FINANCIAL ACCIDENTS?
In late 2022, British liability-driven investment (LDI) funds triggered a crash in UK government bonds. A few weeks ago, the failure of the Silicon Valley Bank in the U.S. set off the largest moves in the yield curve since the 80s.
It might be worth asking if we are done, or if the financial system could still deliver shocks and nasty surprises.
"When 40 years of rising public and private sector debt meets the sharpest rise in interest rates in 12 months, the only known is that accidents are likely," says James Stuttard, head of the global macro team at Robeco. "Where they occur precisely is the million-dollar question."
Stuttard provides some examples.
U.S. corporate debt to GDP has never been higher than on the eve of a recession as it is now.
Meanwhile, the ratio of U.S. government debt to GDP is 120%; in 2007, versus 60% right before the global financial crisis.
"This is far from a U.S.-only issue: be it French corporate debt, Italian government debt, or Chinese state-owned enterprise debt, the aggregate debt-to-GDP statistics of all of the world’s major economies have risen, during decades of easy money and increased borrowing," he argues.
"The implications for portfolio positioning over the medium to longer-term are clear: steeper curves, lower yields, and opportunities to pick up spread product at recessionary levels."
STOXX SET FOR BIGGEST WEEKLY JUMP SINCE JANUARY (0751 GMT)
Europe's STOXX 600 is little changed on Friday although it is still up around 3.4% for the week, its biggest weekly increase in three months.
The pan-European benchmark .STOXX was last up just 0.03%, with most of the major bourses in Europe broadly flat ahead of key European and U.S. inflation data.
Pressure on the real estate sector .SX86P is showing little sign of easing, with the sector lagging in Europe, down 0.6% after falling to its lowest level since October earlier this week.
Retail .SXRP and food & beverage .SX3P continued their recent strong momentum, rising 0.7% and 0.8%, respectively.
Shares in dual-listed Tui TUIT.L TUI1n.DE continued to slide in the week at it conducts a capital increase to repay state aid. Its Frankfurt listing has slid 23% in the week, on track for its biggest weekly drop since the onset of the pandemic in March 2020.
Here's your opening snapshot:
EUROPEAN FUTURES STEADY AHEAD OF PIVOTAL INFLATION DATA (0630 GMT)
European equity futures are little changed on Friday, with inflation data back in the spotlight after recent troubles in the financial system.
Euro area consumer price growth is expected to slow on an annual basis, but the core measure is seen hitting a record high of 5.7%, putting pressure on the ECB to push on with further rate hikes.
The Fed's preferred measure of inflation, personal consumption expenditures (PCE), is also released today. Economists polled by Reuters expect the core measure to hold steady at 4.7% annually.
Euro STOXX 50 futures STXEc1 are down 0.05% with negligible moves seen in DAX FDXc1, CAC FCEc1 and FTSE 100 FFIc1 futures, a very different picture from the previous Friday when worries about Deutsche Bank sent global shares reeling.
Wall Street futures are little changed, while MSCI's broadest index of Asia-Pacific share excluding Japan .MIAPJ0000PUS is notching a 0.5% gain.
Q1 WAS HARD TO GET A HANDLE ON, AND A CHOPPY Q2 BECKONS (0557 GMT)
A lot of investors went in to this year expecting the U.S. interest rate outlook to reveal itself, and for clarity on that front to inform pricing for pretty much everything else.
Three months have gone by and it hasn't quite worked out that way.
Pulling in one direction is a bank collapse that set interest rate expectations diving. Pulling in the other is persistently high inflation.
After a month of wild swings for bonds and interest rate futures, rate expectations are settling around a peak in the Fed funds rate near 5% and then steady downhill from there.
Traders reckon policymakers will need to be careful while the effects of fragile bank confidence roll through the economy.
The outlook remains far from clear while the sentiment on banks and lending is so delicate. One piece of clarity is the contrast with Europe, where markets have priced in another 50 basis points in hikes this year and inflation is running hot. 0#ECBWATCH
Euro zone inflation data later in the day can reinforce that, if it echoes stronger-than-expected German figures published on Thursday. The euro EUR=EBS is up 1.8% on the quarter. Sterling GBP=D3 is up 2.5%.
Nerves on banks and lower U.S. Treasury yields have delivered investors into the arms of profitable, big cap technology companies. The Nasdaq .IXIC, is eying its best quarter in more than two years.
Elsewhere, there are positive signs - China's manufacturing activity expanded again in March, albeit at a slowing pace, and there are growing signs of an end to the regulatory storm there.
E-commerce firm JD.Com 9618.HK is planning to spin off its property and industrial units, sources told Reuters, following in the footsteps of similar plans at rival Alibaba 9988.HK, which markets have taken as a broadly encouraging signal.
On the flipside, Japan's government said on Friday it plans to restrict exports of 23 types of semiconductor manufacturing equipment, aligning its technology trade controls with a U.S. push to curb China's ability to make advanced chips.
The second quarter may prove as difficult to navigate as the first.
Key developments that could influence markets on Friday:
Economics: Euro zone inflation, U.S. core PCE
Q1 world marketshttps://tmsnrt.rs/3lRX64j
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