The start of March is always an important test for markets. In 2018 March confirmed that February volatility and selling was a bottom. For 2019 many fear the opposite. The calendar of events ahead sets the big picture tone for markets now as many see less obvious value plays in equities or bonds. Less hawkish central bankers aren’t sufficient to cap rates anymore as the US and UK markets showed this week. The risk-on mood has limits as well with many now wanting confirmation from the real economy as green shoots need to lead to real growth. The drive of geopolitical concerns over economic ones continued last week with focus on US/China trade deal hopes, UK political shifts driving risks for a hard-Brexit down and opening up another referendum or delay along with a new election. India/Pakistan and their skirmish over the Kashmir scared many but remained contained with no nuclear fears. The US/North Korea summit ended early but there were some deals – as the US/South Korea agreed to end joint military exercises. All of these stories matter as they were supportive for risk. The tail-risks of December have been unwound again. The outlook for March rests on those risks remaining in check along with a few new fears – like EU elections or US internal politics. Overall, the seasonal push for March will be competing with these fears. 

This is clear from the weekend headlines which center around European politics – and in the week ahead with China growth targets and US jobs likely leading market focus. Expect the month to pivot around the UK Brexit deadlines and the US FOMC meeting March 20-21.

1) Spanish election sets up as a battle against populists. Spain’s socialist PM Sanchez is gunning for a win on April 28, even as he has been the shortest serving leader in modern times. The battle he wages against the far-right PP and the liberal center Ciudadanos Party rests on his coalition building acumen. 

2) Portugal PM warns on China investment screening. One of the biggest winners from China investment, Portugal, labels the latest new regulations on non-EU investment as protectionist. This counters efforts from France and Germany and the larger push from the US. 

3) Banks need more external checks on loans according to Basel committee after UK Metro Bank issues. According to the FT report Bill Coen, the secretary general of the committee noted: “Auditors should be given responsibility for checking banks’ calculations to minimize the scope for errors or cheating,” in a sign that the crisis at the nine-year-old bank is reverberating around the industry.

4) German public sector pay rise could support growth. Unions representing about 1m German public sector workers have agreed to a deal that will mean pay rises by 8.8 per cent over the next three years. The deal covers workers in all German regions except the state of Hessen.

5) Estonia election focus is on rise of far-right against centrist parties. Nearly half of the 880,690 eligible voters had cast their ballots by midday on Sunday, including 40% who used e-voting in advance polling. A poll collating e-voters and those intent on using paper ballots on Sunday suggests a tight race. The Center party of the prime minister, Juri Ratas, scored 24.5% support, narrowly trailing the liberal Reform party led by the former MEP Kaja Kallas with 26.6%, according to pollster Kantar Emor.

Question for the Week Ahead: Has the US peaked for the year? The weekend US President Trump speech at CPAC in Maryland and his comment on the USD is a wake-up call for many investors that have become comfortable in the lower volatility, higher equity world so far delivered. The 2018 lessons for the USD and markets have not been lost.

“I want a strong dollar but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump said Saturday. He continued to complain about Fed Powell policy as he referenced “a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentleman that likes a very strong dollar in the Fed.” This push from the US President is the same as December 24, which led to a significant risk reduction for the S&P 500. US divergence on growth and rates is in play for 2019. Many see the outperformance of the US markets – second only to China – so far as the key risk for the next month. The US fears drive not only on Trump tweets and speeches or his political backlash in Congress but also on the economy and corporate earnings. The role of the USD in how Trump operates with China, Japan, and Europe is also in play along with the foreign investment flows. The BOJ shift to focus on JPY and its role is a case in point from last week, and it will be watched as Trump / Abe meet.

1) US earnings – S&P500 earnings are forecast for 2019 at 5.3% down from 24.4% in 2018 according to FTSE Russell. EU companies (ex UK) are expected to see profits at 9.1% and emerging market companies at 13.9%. 

2) Value of US markets  – US S&P500 trades at 16.4 times earnings 12M forward while the Stoxx Europe is 13.4 times and the MSCI EM is 11.5 times according to Refinitiv.  

3) USD overvaluation. The USD is 20% overvalued to the EUR and over 40% against some emerging markets like Mexico and Korea which have brokered US trade deals. The flow of money into US markets may slow on the PPP logic all-else-being equal.  

Market Recap: US/China trade deal hope dominated with the US not imposing the 25% tariffs on the deadline and with talk of 150-page agreement ready for signing.  UK Brexit saw reversals from UK May to allow a delay and Labour Corbyn support another referendum. US data was weaker with ISM at 54.2 back to Nov 2016 lows and worse than the 55.5 expected. December housing starts fell sharply and hit their lowest level in over two years, gains in home prices slowed more than expected, and consumer spending fell sharply. 4Q GDP beat expectations up 2.6% after 3.4% in 3Q – with consumer demand key. PCE inflation was up 0.1% m/m, 1.9% y/y – still tame and keeping the FOMC Powell patience talk intact. US Michigan consumer sentiment was 93.8 – also weaker then 95.6 expected. China trade hopes and MSCI saying it would quadruple the China share weightings in its index led to a big rally there even as data was mixed with NBS PMI lower but Caixin higher than expected – though still in contraction. Capital inflow hopes are high and the CNY is up 2% on the ytd. The focus on geopolitics was keen with Trump/Kim summit ending early with no deal, with India/Pakistan conflict leading to attacks on both sides, calming with return of an Indian pilot shot down on a sortie. Japan GDP rose 1.4% in 4Q – bouncing back from natural disasters. Japan debt according to the MOF is now set to be over $10trn by year-end. The European focus on growth and politics continued with weaker PMI reports in most of the region, and with lower core CPI.  

Equities: The MSCI all-country World Index rose 0.32% to 505.75 on the week, up 2.96% on the month and up 11% ytd. The MSCI EM index fell 0.68% to 1051.54 on the week but still up 0.15% on the month, up 8.9% ytd. The major bourses were mixed with China and Europe leading and US and UK lagging. 

• The S&P500 rose 0.39% to 2,803.69 on the week – closes over 2800 for the first time in 4-months. Technology led, small-caps lagged this last week. For the month it rose 3.6% and year-to-date up 11.8% - the S&P500 is up 20.7% from its Christmas Eve 208 lows. The DJIA fell 0.02% to 26,026.32 on the week – ending a 9-week winning streak, but up 3.84% on the month and 11.57% on the ytd. The NASDAQ rose 0.90% to 7,595.35 on the week, up 4.6% on the month and 14.5% ytd. Cboe VIX rose marginally up 0.06pp to 13.57 on the week, up 0.44% but for the month off 15.9% and for ytd off 46.6%. 
• The Stoxx Europe 600 rose 0.81% to 374.24 on the week. For the month it rose 4.0% and year-to-date it’s up 10.84%. The German DAX rose 1.26% to 11,601.68 on the week, up 3.77% on the month and 9.88% ytd. The French CAC40 rose 0.95% to 5,265.19 on the week, up 4.9% on the month and 11.30% ytd. The UK FTSE fell 1% to 7,106.73 on the week, up 1.23% on the month and 5.63% ytd. The Italian FTSE MIB rose 2.13% on the week, up 5.7% on the month and 12.94% ytd.
• The MSCI Asia Pacific Index was flat at 159.07 on the week, up 1.8% on the month, up 8.43% ytd. The star performer last month was China with the Shanghai Composite up 6.77% to 2,994.01 on the week, up 14.35% on the month and 20.05% ytd. The Japan Nikkei rose 0.83% to 21,602.69 on the week, up 3.9% on the month and 7.93% ytd. The Hong Kong Hang Seng fell 0.01% to 28,812.17 on the week, up 3.16% on the month and up 11.48% on the year. The India CNX Nifty rose 0.67% to 10,863.50 on the week, off 0.3% on the month and up just 3.87% on the year. The Korea Kospi fell 1.49% to 2,195.44 on the week off 0.4% on the month and up 7.56% on the ytd. The Australian ASX rose 0.51% to 6,273.80 on the week, up 5.7% on the month and 9.9% ytd. 

Fixed Income: The risk-on mood for equities led to a weaker global bond market, but month-end extension buying off-set some of the pain. Mixed data and central bankers sounding dovish also supported. Supply from US and EU was absorbed but deficits are still notable focal points for the US, Italy, and others. The China stimulus plans and role of PBOC remains in play. The shift in BOJ talking caught some attention with JPY now a focus given the Abe VAT hike plans are still going ahead. 

• US Bonds see curve bear steepen with FOMC and supply driving– For the week: 2Y 2.56% up 6bps, 3Y 2.54% up 8bps, 5Y 2.56% up 9bps, 10Y 2.76% up 11bps, 30Y 3.13% up 11bps. For the month, US bonds were in a tight range (one of the quietest 2 months in years) and are up just 3bps, and down just 12bps from the year start. 
• The Canadian 10-year bond yields are up 5bps to 1.94% on the week, off 3bps on the month and 26bps from the start of the year – with BOC at odds with the data as key focus. 
• Japan JGB see curve steeper even with weaker data, focus on US/China trade and US rates – For the week: 2Y -0.14% up 4bps, 5Y -0.15% up 0.3bps, 10Y -0.1% up 3bps, 30Y 0.62% up 5bps. For the month, 10Y off 1bps but off 7bps on the year. 
• Australian bonds sold with US/China but weaker growth and RBA next driver. For the week: 3Y 1.70% up 6bps, 10Y 2.20% up 10bps. For the month 10Y off 3bps but off 56 ytd.  New Zealand 10Y off 1bps to 2.20% on the week, off 2bps on the month and 76bps on the year. 
• UK Gilts lower on Brexit delay, new referendum hopes, curve bear flattens- For the week: 5Y 1.01% up 11bps, 10Y 1.30% up 14bps, 30Y 1.80% up 11bps. For the month, 10Y up 7bps but off 22bps for the year
• German Bunds sell off with risk-on, curve steeper – For the week: 2Y -0.53% up 3bps, 5Y -0.31% up 5bps, 10Y 0.19% up 9bps, 30Y 0.82% up 10bps. For the month, 10Y up just 1bps but off 45bps on the year. 
• French OATs sell off with risk-on, better data, curve steeper– For the week: 2Y -0.43% up 1bps, 5Y -0.4% up 3bps, 10Y 0.58% up 6bps, 30Y 1.57% up 5bps. For the month, 10Y off 1bps and off 32bps on the year. 
• Italian BTPs see a sharp rally, curve bull flattens– For the week: 2Y 0.41% off 11bps, 5Y 1.67% off 5bps, 10Y 2.78% off 12bps,, 30Y 3.69% off 1bps. For the month, 10Y off 2bps and up 50bps on the year. 
• Spanish Bonos rally despite politics with weaker data focus– 10Y off 9bps to 1.22% on the week, off 17bps on the month and off 27bps on the year. 
• Portugal bonds sold off on politics and growth– 10Y up 2bps to 1.49% on the week, but off 19bps on the month and 46bps on the year. 
• Greek bonds rally sharply with growth key – 10Y off 16bsp to 3.65% on the week, off 70bps on the month and 130bps on the year. 

Foreign Exchange: The US dollar index held 96.53 on the week rose 1% on the month and is up 7% on the last year. In emerging markets– the USD was mostly bid for the week and month. EMEA: RUB 65.913 off 0.85% on the week, off 0.6% on the month while ZAR 14.221 off 1.65% on the week, off 6% on the month and TRY 5.373 off 1.05% on the week, off 3% on the month. ASIA:INR 70.99 up 0.1% on the week, up 1% on the month, KRW 1126.6 off 0.4% on the week, off 0.7% on the month, CNY 6.7110 off 0.15% on the week, up 1% on the month; LATAM: MXN 19.257 off 0.65% on the week, off 0.8% on the month, BRL 3.7750 off 0.7% on the week, 2.9% on the month, 39.787 off 1.6% on the week, off 7.2% on the month. 

• EUR: 1.1375 up 0.3% on the week, off 0.7% on the month with 1.13-1.15 holding and this being the tightest spread for EUR for 3-months since inception. 
• JPY: 111.90 up 1.10% on the week, up 2.25% on the month with BOJ shifting to JPY focus, 110-112 set to break with 115 next? EUR/JPY 127.20 up 1.4% on the week, 1.15% on the month – equities key. 
• GBP: 1.3200 up 1.15% on the week, up 0.95% on the month with hard Brexit unwinding 1.30-1.34 keys – EUR/GBP .8600 off 0.9% on the week, off 1.8% on the month with ECB vs. BOE key. 
• CHF: .9985 off 0.15% on the week, up 0.1% on the month – holding near 1.00 with .98-1.01 range holding. EUR/CHF 1.1355 up 0.15% on the week off 0.5% on the month – 1.1280-1.1480 key – politics and ECB drive. 
• AUD: .7080 off 0.65% on the week, off 2.3% on the month – RBA key next week seen as dovish with May cut risk, GDP important – NZD .6800 off 0.6% on the week off 1.2% on the month with RBNZ and data key.
• CAD: 1.3295 up 1.2% on the week, up 1.4% on the month – BOC at odds with weaker data and oil/commodities not enough. 1.3050-1.3350 key. 

Commodities:The S&P/GSCI total return index fell 1.9% to 2,464.06 on the week. Weaker result for most commodities with Palladium and NatGas notable exceptions while grains, lumber silver all suffer. 

• Oil: $55.80 off 2.55% on the week up 1.1% on the month. Stuck in range with $54.50-$58 key. Brent $65.07 off 3.05% on the week, up 3.75% on the month.  Oil watching global demand, OPEC, US sanctions against US production, inventories. 
• Gold: $1293.30 off 2.6% on the week, off 1.4% on the month with $1320 and $1305 breakdown on risk-on for equities, bid USD, rate move key - $1265 next key.  Silver $14.202 off 4.4% on the week, off 4.2% on the month; Platinum $856.80 up 1.9% on the week, 4.8% on the month, Palladium $1545.40 up 3.2% on the week, up 13.2% on the month.
• Corn: $364 off 3bps on the week, off 4% on the month. Breaking down after range trading with export sales report driver. Soybeans $899.25 off 1.2% on the week, off 2.1% on the month – best of the grains but with China buying it was expected. Wheat $454 off 6.7% on the week, off 13.65% on the month – again hit with export sales lagging coupled with snow cover helping spring crop. 
• Copper: $2.9740 up 1.9% on the week, futures May $2.9325 down 0.5%. Copper has had a big run and $2.60 base now in place for $3.20 test again. Iron ore futures (China March $83.43 flipping to April $81.69) – up .45% on the week recovering and holding from $91.51 highs at beginning of Feb. 

Calendar for the Week Ahead: The US job report Friday, US service ISM and new home sales are all important and in focus for measuring the spread of US weakness in the economy. The ECB, RBA and BOC meetings set the tone for monetary policy reactions to present 1Q softness. Global Services PMI along with Australian GDP and China trade, inflation and PMIs will also matter.  

Monday, March 4: Korea PMI, UK construction PMI, US construction spending

• 0730 pm Australia 4Q business inventories 0%p 0.4%e / corp profits 1.9%p 3%e
• 0730 pm Korea Feb manufacturing PMI 48.3p 48.1e
• 0300 am Spain Feb unemployment change 83.5k p 5k e
• 0430 am UK Feb Construction PMI 50.6p 50.3e
• 0500 am EU Jan PPI (m/m) -0.8%p 0.3%e (y/y) 3%p 2.9%e
• 0730 am Boston Fed Rosengren speech
• 1000 am US Dec construction spending (m/m) 0.8%p 0.2%e

Tuesday, March 5: China Party Congress, RBA, global Services PMI, EU retail sales, US service ISM, new home sales. 

• 0430 pm Australia Feb AIG Services PMI 44.3p 43.8e
• 0500 pm Australia Feb CBA composite PMI 51.3p 43.8e / Services 51p 49.3e
• 0600 pm Korea 4Q final GDP (q/q) 0.6%p 1%e (y/y) 2%p 3.1%e
• 0600 pm Korea Feb CPI (m/m) -0.1%p 0.5%e (y/y) 0.8%p 0.5%e
• 0730 pm Australia 4Q C/A deficit A$10.7bn p A$9.2bn e
• 0730 pm Japan Feb Nikkei Services PMI 51.6p 52.1e
• 0845 pm China Feb Caixin Services PMI 53.6p 53.8e / Composite 50.9p 50.4e
• 1030 pm Australia RBA rate decision – no change from 1.5% expected – dovish tilt in statement on watch
• 1045 pm Japan 10Y JGB sale
• 0315 am Spain Feb services PMI 54.7p 54.2e
• 0330 am Italy Feb services PMI 49.7p 49.5e
• 0350 am France Feb final services PMI 47.8p 49.8e / composite 48.2p 49.9e
• 0355 am German Feb final services PMI 53p 55.1e / composite 52.1p 52.7e
• 0400 am Eurozone Feb final services PMI 51.2p 52.3e / composite 51p 51.4e
• 0400 am Italy 4Q final GDP (q/q) -0.1%p -0.2%e (y/y) 0.6%p 0.1%e
• 0430 am UK BOE FPC statement
• 0430 am UK Feb services PMI 50.1p 49.9e
• 0500 am Eurozone Jan retail sales (m/m0)-1.6%p 1%e (y/y) 0.8%p 1.8%e
• 0900 am Mexico Feb consumer confidence 112p 109e
• 0945 am US Feb final services PMI 54.2p 56.2e / composite 54.4p 55.8e
• 1000 am US Mar IBD/TIPP economic optimism 50.3p 50e
• 1000 am US Dec new home sales 16.9%p -8.7%e / 0.657m p 0.593m e
• 1000 am US Feb Service ISM 56.7p 57.2e
• 0200 pm US Jan monthly budget -$14bn p  +$48bn e
• 0430 pm US weekly API oil inventories -4.2mb e +2mb e

Wednesday, March 6: Australia GDP, Polish rate decision, BOC rate decision, US and Canada trade deficits, Fed Beige Book.

• 0510 pm RBA Lowe speech
• 0730 pm Australia 4Q GDP (q/q) 0.3%p 0.4%e (y/y) 2.8%p 2.6%e
• 0830 pm BOJ Harada speech
• 0330 am German Feb construction PMI 50.7p 50.5e
• 0545 am UK 5Y Gilt sale
• 0800 am Poland central bank rate decision no change from 1.5% expected. 
• 0815 am US Feb ADP employment change 213k p 190k e
• 0830 am Canada Dec trade deficit C$2.06bn p C$2.39bn e
• 0830 am US Dec trade deficit $49.3bn p $57.3bn e
• 1000 am Canada Feb Ivey PMI 54.7p 53e
• 1000 am Bank of Canada rate decision – no change from 1.75% expected – dovish tilt expected
• 1030 am US weekly EIA oil inventories -8.647mb p +2.8mb e
• 1210 pm NY Fed Williams speech
• 0200 pm US Fed Beige Book

Thursday, March 7: Australia trade, China FX reserves, ECB rate decision, US productivity. 

• 0650 pm RBA Simon speech
• 0730 pm Australia Jan trade surplus A$3.68bn p A$3bn e / exports -2%p +1%e
• 1045 pm Japan 30Y JGB sale
• 1200 am Japan Jan LEI preliminary 97.5p 96e / coincident 101.8p 101.6e
• 0300 am China Feb FX reserves $3.09trn p $3.09trn e
• 0400 am Italy Jan retail sales (m/m) -0.7%p +0.4%e
• 0430 am BOE Tenreyro speech
• 0440 am Spain 5-10Y Oblig sale
• 0500 am Eurozone 4Q final GDP (q/q) 0.2%p 0.2%e (y/y) 1.6%p 1.2%e
• 0500 am Eurozone 4Q employment change 0.2%p 0.3%e
• 0745 am ECB rate decision – no change expected from -0.4%
• 0830 am ECB Draghi news conference
• 0830 am US weekly jobless claims 225k p 225k e
• 0830 am US 4Q productivity 2.3%p 1.7%e /ULC 0.9%p 1.6%e
• 0900 am Mexico Feb CPI 4.37%p 4.48%e
• 1215 pm Fed Brainard speech
• 1245 pm BOC Patterson speech
• 0300 pm US Jan consumer credit $16.55bn p $15.5bn e

Friday, March 8: China trade, German factory orders, France/Italy IP, US jobs report, Canada jobs report

• 0630 pm Japan Jan household spending (y/y) 0.1%p 0.8%e
• 0650 pm Japan 4Q final GDP (q/q) -0.7%p -0.5%e (y/y) -2.6%p 1.5%e
• 1000 pm China Feb trade surplus $39.16bn p $25.5bn e / exports 9.1%p -4.5%e / imports -1.5%p -1.4%e
• 1200 am Japan Feb EcoWatchers current 45.6p 46.3e 
• 0200 am German Jan factory orders (m/m) -1.6%p 0.4%e
• 0245 am French Jan industrial production (m/m) 0.8%p 0%e
• 0245 am French trade deficit E4.7bn p E4bn e
• 0400 am Italy Jan industrial production (m/m) -0.8%p 0.2%e (y/y) -5.5%p -3%e
• 0830 am US Feb non-farm payrolls 304k p 180k e / unemployment rate 4%p 3.9%e / wages 0.1%p 0.3%e
• 0830 am Canada Feb jobs change 66.8k p -5k e / unemployment 5.8%p 5.7%e 

Conclusions: Is it growth or inflation that matters most to keeping the US markets happy? Investors want a long list of events to go right for the S&P500 3000 target – including a US/China trade deal, US growth at 2.5% for 2019, US corporate earnings at 5% plus, US rates flat with the FOMC on hold and patient, US inflation in check at 2% or lower, China growing at 6%, EU politics remaining sane and Europe growing, and the UK with no hard-Brexit or new economic drama. Throw is no more price shocks in oil, no new geopolitical issues like India/Pakistan, no more rocket man fears from North Korea and less on US/Russia nuclear proliferation. There is plenty at home in the US to focus on with politics as the 2020 Presidential race heats up.  

Last week was an important one for data, and the week ahead is likely to be much the same, as US jobs will be watched to confirm the US economy holding despite weaker stories in housing, manufacturing, and some retail. The US GDP last week highlights the role of the consumer in keeping the US growth intact and the role of steady to higher wages isn’t lost on economists. 

The lack of any big price pressures is welcomed as well as investors want wages to be good but not great so profits at corporations can still outperform. The lack of big 4Q investments was countered by a rise in buy-backs which has triggered some notable political backlashes. How markets see GDP in 1Q and forward matters, but so too is how inflation plays out with wages vs. oil/food and other more difficult things like education and health care in play. 

For the week ahead, the fact that US President highlighted the USD and given its ability to hold in the present range so well makes the FX market a key risk barometer going forward.  A sharp drop in the USD maybe what the President likes but what investors fear with 95.50 a line to respect for 93.50 retests in play heading to 91.45 the 50% retracement of the Fed taper tantrum rally from 2014 lows to Trump induced repatriation and US divergence highs of early 2017.