“For fools rush in, where angels fear to tread” – Alexander Pope, 1711 An Essay on Criticism. 

Spring and April Fool’s Day await and markets have delivered the expected in like a lion and out like a lamb result for investors in March. Seasonal noises have delivered the expected up month for March and leave the April outlook expecting the same. The central fear is that rushing into the present risk asset rally feels foolish even with the seasonal push, given the fear displayed by various central bankers and the fixed income markets that suggest the growth cycle has turned.  US investors look to be playing for divergence as the rest of the world suffers. 

The drop in the VIX seems at odds with the spike in the MOVE index. The lack of fear beats greed in many places but in FX markets where emerging currencies suffer and safe-havens like CHF gain adds to the view that growth no longer drives investments. This isn’t a world for the faint hearted even as many would like to suggest it’s a return to Goldilocks as the FOMC is on hold and needs data good or bad to jolt it out of eating the “just right” porridge of equities. TINA (there is no alternative) thinking for equities dominates the return of passive plays against active managers and leaves risk parity returns outperforming again.  

There are cracks in the carry trade and doubts about growth rebounding sufficiently to matter as well. Are the angels of the markets, the FOMC, ECB, BOJ and others, fearful of a larger and longer soft-patch in growth or is it even worse as the markets diverge into liquidity trap thinking and inverted yield-curves predicting recessions? Is the 2020 hike projected by the FOMC dots ludicrous to the 25bps and more cuts priced? That set of questions dominates the fools-rush-in fear from bonds in March against the seasonal winning push for equities into April. The usual factors of fear from Brexit to US/China trade talks to elections everywhere are likely to scare even angels from the present risk-on course.  

Themes: 

China Growth– Is it like the China Beige Book suggests– clear 1Q is better then 4Q or is the weakness in Jan-Feb going to continue? The doubt about China growth rests on two points – first that the US/China trade talks will lead to a removal of tariffs and a return to normal trading lines; second that the Beijing stimulus and PBOC push for lending to private sector finds real demand rather than more SOE misallocation of capital. The data over the weekend support the positive hopes that China, as usual, can reflate and spark growth by fiat fiscal and monetary policy – through the long-term cost of further debt bubbles will be greater. The China March NBS manufacturing PMI rose to 50.5from 49.5 – better than the 49.2 expected. The NBS services PMI rose to 54.8 from 54.1 – also better than 54.3 expected. 

Tiered ECB– The talk of a tiered approach to the present negative rate regime of the ECB sparked speculation of future rate cuts and a series of speculative analysis on what it means for banks and markets. The repo markets in the periphery seem to be the biggest concern particularly in Spain and Italy where bonds suffered last week. The core nations continued to rally while volatility in fixed income seems destined to rise. As for banks, measures to support them will require more regulations and reporting making it less obvious that all banks win, likely only the big ones benefit. 

Turkish Municipal Elections and TRY- The state media reports that Turkey’s ruling party is leading in the elections. TRT says President Recep Tayyip Erdogan's conservative Islamic-based party has garnered nearly 48 percent of the votes in Sunday's municipal election with nearly 28 percent of the more than 194,000 ballot boxes counted. According to early results, the main opposition party has nearly 31 percent of the vote. The result may embolden the Erdogan regime and its battle to support the TRY via capital controls. 

The Wall Again- MXN reacted Friday to threats from Trump that he would close the Mexican border to all trade. The 2018 playbook targets 20.5 again for USD/MXN. The news reports Sunday have administration officials repeating the threat. Speaking to ABC’s “This Week” show, White House acting Chief of Staff Mick Mulvaney said the president had few other options in the absence of any support from Democrats for more border security or legislative action to change the immigration law. White House adviser Kellyanne Conway told “Fox News Sunday” that the situation at the border was at “melting point” and said the president was serious in his threat. “It certainly is not a bluff. You can take the president seriously.”

Question for the Week Ahead: Is the risk of a no-deal Brexit going to derail markets in April? The deadline for the UK is April 12th. The fact that the UK Parliament has voted down the UK May plan for an orderly exit opens up the risk that no deal will come to pass before the deadline and so the EU/UK divorce with no rules or process in place. For most investors, this risk was downplayed in March. The week ahead maybe a game-changer to this type of thinking – the various outcomes remain scary to investors and will likely leave the GBP in the lower boundary of its recent trading ranges. 

First, the odds are now favoring another general election– with Betfair at 2.14 for such a chance in 2019. The risk of a Labour victory and the implications for business will be in play and hurt investment flows. The UK Sunday Times sees the May government at risk of “total collapse”

Second, another referendum or a quick customs union fix are in play to get to May 22 or beyond with the EU.  In order to avoid a hard-no-deal Brexit, the government will need to have either another referendum on Article 50 or pass a custom’s union deal similar to Norway which prevents any other trade deals – these are possible outcomes in the next week and deliver some relief but the referendum vote failed last week by 27 votes. The customs union path lost by 6 votes but it will likely split the Tory party further and make any leadership struggle and future election that much more complicated. 

Third, how the other peripheral economies see the UK Brexit process will matter. If the EU strikes too hard a response to delay pleas, it matters. The future reactions of Poland, Hungary, and perhaps Italy, Greece, and Portugal are all in play. 

Market Recap: The last week delivered some political relief as the Mueller report left less likely impeachment risks while adding to political divides in Congress. Brexit votes were a mess and left more uncertainty in the UK. Politics in EU remain a focus with E8bn deficit hole in Italy one focus, Yellow-vests and Macron another, upcoming Spanish election a third. EU data was mixed with ECB Draghi and his tiered talk on deposits key driver. Asia data was light and US/China trade talks were the focus. US data was mixed – new home sales rose 4.9% to 667,000 SAAR while housing starts fell 8.7% m/m to 1.162mn. Pending home sales fell 1% after a +4.3% gain. Trade data improved in the US with exports up 0.9% and imports down 2.6% m/m putting the deficit at $51.1bn. US weekly jobless claims fell 5,000 to 211,000. The weekly same-store sales rose to 5.3% w/w from 4.9% while home mortgage applications rose 6% w/w from 0.3%. The US conference board consumer confidence fell to 124.1 from 131.4, but University of Michigan Sentiment rose. Fed regional manufacturing indexes were mixed with Kansas up, Dallas down, Richmond down to 10 from 16. 

Equities: The MSCI all-country World index rose 0.53% to 508.55 on the week, up 0.94% in March, up 11.6% in 1Q. The MSCI EM index fell 0.14% to 1058.13 on the week, up 0.7% on the month, up 10.2% in 1Q. China shares led 1Q but lagged with Japan on the week. India led the March gains but lags in 1Q. US markets continue to beat European ones both for the quarter but not on the week or month as ECB TLTRO-III and value hunting mixed with US/China trade deal hopes. 

• The S&P500 rose 1.2% to 2,834.40 on the week. For the month the index rose 1.1% and for the 1Q it’s up 13.07%. The DJIA rose 1.67% to 25,928.68 on the week, fell 0.38% on the month and is up 11.15% in 1Q. The NASDAQ rose 0.72% to 7,378.77 on the week, rose 3.18% on the month and is up 16.57% in 1Q. The Cboe VIX fell 16.81% or 2.77pp to 13.71% on the week, up 1.03% in March, off 46.07% in 1Q. 
• The Stoxx Europe 600 rose 0.81% to 379.09 on the week. For the month the index rose 1.3%, for 1Q it’s up 12.27%. The German DAX rose 1.42% to 11,526.04 on the week, off 0.65% on the month, up 9.16% in 1Q. The French CAC40 rose 1.53% to 5.350.53 on the week, up 1.62% on the month, up 13.10% in 1Q. The UK FTSE rose 0.99% to 7,279.19 on the week, up 2.43% on the month and 8.19% in 1Q. The Italian MIB rose 0.98% to 21,286.13 on the week, up 2.86% in March and 16.17% in 1Q. 
• The MSCI Asia Pacific Index fell 1.1% to 159.81 on the week, rose 0.7% on the month and up 8.92% in 1Q. The Japan Nikkei fell 1.95% to 21,205.81 on the week, fell 1.84% in March and rose 5.95% in 1Q. The China Shanghai Composite fell 0.43% to 3,090.76 on the week, rose 3.23% in March and rose 23.93% in 1Q. The Hong Kong Hang Seng fell 0.21% to 29,051.36 on the week, up 0.83% on the month and 12.40% in 1Q. India Nifty CNX rose 1.46% to 11,623.90 on the week, rose 7% in March and 7.01% in 1Q. The Australian ASX fell 0.31% to 6,262.70 on the week, off 0.19% in March and up 9.67% in 1Q. The Korea Kospi fell 2.12% to 2,140.67 on the week, off 2.49% in March and up 4.88% in 1Q. 

Fixed Income: Another big week for bonds with the moves leading markets elsewhere. Easing or expectations of it drive as central bankers give up on normalization. The big mover was Draghi and talk of tiered deposit rates following BOJ/Riksbank models which drove rate cut expectations for Europe. The UK Brexit drama and weaker data left EU bonds bid and that plus month-end extension demand helped keep fixed income less inversely correlated to risk-on moods. The size of negative yielding government bonds continues to rise now past $10trn. 

• US bonds continue to rally despite supply and mixed data– curve flatter with 5Y-30Y focus - US 2Y 2.27% off 6bps on the week, 29bps on the month; 3Y 2.22% off 5bps on the week 33bps on the month; 5Y 2.24% of 2bps on the week, 32bps on the month; 7Y 2.32% off 4bps on the week, 35bps on the month; 10Y 2.41% off 5bps on the week, off 35bps on the month; and 30Y 2.82% off 7bps on the week, 31bps on the month. 
• Canadian 10-year bond yields rose 2bps to 1.62% on the week, off 32bps on the month – with focus on data, oil, waiting for BOC. 
• Japan JGBs see curve flatten with US rates, equities, BOJ key on the week - 2Y -0.18% off 1bps on the week, 3bps on the month; 5Y -0.2% off 2bps on the week, 5bps on the month; 10Y -0.09% off 3bps on the week, 8bps on the month; 30Y 0.50% off 3bps on the week 12bps on the month. 
• Australian bonds rally sharply post RBNZ, global move curve steepens into RBA– 3Y 1.42% off 4bps on the week, 26bps on the month; 10Y 1.79% up 2bps on the week, off 37bps on the month.  NZ 10Y bonds 1.84% off 17bps on the week, 37bps on the month with RBNZ dovish bias key. 
• China bonds see bull curves steepening with focus on PBOC/US talks– 2Y 2.6% off 16bps on the week, off 15bps on the month; 5Y 2.93% off 9bps on the week, 12bps on the month; 10Y 3.09% off 5bps on the week, 12bps on the month. 
• UK Gilts rally but Brexit noise and politics drag, curve steepens– 5Y 0.75% off 3bps on the week, 25bps on the month; 10Y 1% off 1bps on the week, 30bps on the month; 30Y 1.55% up 7bps on the week, -25bps on the month.
• German Bunds see curve kinks, bid on ECB tiered deposit talk– 2Y -0.59% off 3bps on the week, 6bps on the month; 5Y -0.48% off 8bps on the week, -17bps on the month; 10Y -0.07% off 4bps on the week, off 26bps on the month; 30Y 0.57% off 2bps on the week, -25bps on the month. 
• French OATs see curve bull steepen, focus on data, Macron and ECB– 2Y -0.53% off 3bps on the week, -9bps on the month: 5Y -0.26% off 7bps on the week, -22bps on the month; 10Y 0.32% off 3bps on the week, 26bps on the month; 30Y 1.36% up 1bps on the week, -21bps on the month. 
• Italy BTPs have bad week, with bear curve flattening, as growth and politics clash– 2Y 0.27% up 4bps on the week, -9bps on the month; 5Y 1.52% up 5bps on the week, -14bps on the month; 10Y 2.49% up 3bps on the week, -24bps on the month; 30Y 3.48% off 1bps on the week, 20bsp on the month. 
• Spanish 10-year bond yields flat at 1.10% on the week, off 21bps on the month with focus on election, growth, ECB. 
• Portugal 10-year bond yields off 2bps to 1.26% on the week, off 24bps on the month with ECB hopes offsetting political doubts
• Greek 10-year bond yields off 5bps to 3.74% on the week, off 2bps on the month with focus on ECB, politics and growth still. 

Foreign Exchange: The US dollar index rose 0.65% to 97.28 on the week up 0.8% on the month. Emerging Markets were USD bid with LATAM leading the pain trade – EMEA: RUB 65.67 off 1.65% on the week, up 0.35% on the month; ZAR 14.482 flat on the week, off 1.8% on the month; TRY 5.54 up 3.8% on the week off 3.1% on the month – ASIA: INR 69.18 flat on the week, up 2.55% on the month; KRW 1136.10 off 0.1% on the week, off 0.8% on the month; CNY 6.7220 flat on the week, off 0.15% on the month – LATAM:BRL 3.924 off 0.45% on the week, off 4% on the month; MXN 19.421 off 1.75% on the week, off 0.8% on the month; ARS43.28 off 3.7% on the week, off 8.8% on the month. 

• EUR: 1.1215 off 0.85% on the week, off 1.4% on the month with focus on 1.1166-1.1420 and ECB policy tilt with talk of more easing key.
• JPY: 110.85 up 0.85% on the week, off 0.95% on the month with 110 break not sustained and month-end flows key, with BOJ easing talk – EUR/JPY 124.35 up 0.1%, but off 2.25% on the month – reflects equity fears.
• GBP: 1.3030 off 1.35% on the week, off 1.3% on the month with Brexit still key and no-deal risk rising, 1.30 pivot for 1.26 in play. EUR/GBP .8605 up 0.6% on the week, up 0.1% on the month. 
• CHF: .9950 up 0.15% on the week, off 0.35% on the month with EUR/CHF 1.1160 off 0.6% on the week, off 1.7% on the month – reflects Italy recession and politics, EU growth and ECB, Brexit and risk fears – with .9880 and 1.1180 break opening 1.10 tests. 
• CAD: 1.3345 off 0.6% on the week, up 0.4% on the month with oil and data key along with politics – 1.3450 cap for 1.3250 again. 
• AUD: .7095 up 0.15% on the week,up 0.2% on the month with China growth, rates and crosses key - .7050-.7250 keys; NZD .6800 off 1.05% on the week with RBNZ dovish tilt driving, flat on month. 

Commodities: The S&P/GSCI total return index was up a marginal 0.04% on the week to 2,533.23, but up 2% on the month and 15% in 1Q.  Winners were Cocoa and Copper, while Palladium and orange juice lagged last week. For 1Q its all about oil up 30%, Hogs up 16.3%, Palladium up 15% while Wheat is off 11.7%, Coffee 9.2% and Corn 7%. 

• Oil: $60.14 up 1.86% on the week, 7.78% on the month. Brent $68.39 up 2.03% on the week, 5.10% on the month with OPEC, global growth hopes, global rates driving $60 WTI break opens $65 next. 
• Gold $1291.90 off 1.62% on the week, off 0.1% on the month with rally fizzling as USD holds, rates help risk mood, $1285 and $1262 back in play. Silver $15.35 off 1.8% on the week, off 0.45% on the month with $15.50 key. Platinum $845.50 up 0.2% on the week, off 1.3% on the month while Palladium $1383.50 off 11.5% on the week, off 10.5% on the month with focus on auto bubble. 
• Corn: $356.50 off 5.75% on the week,off 2.05% on the month. Weather/trade fears reverse a bit. Soybeans $884.25 off 2.16% on the week, off 1.67% on the month with trade vs. planting key. Wheat $457.75 off 1.77% on the week, up 0.85% on the month with focus on rest of world. 
• Copper: $2.9430 up 0.96% on the week with May futures $2.9315 up 3.09% on the week. The Iron Ore contract flips to May $81.83 off 1.4% despite weather-related disruptions. 

Calendar for the Week Ahead: Another start of the month with focus still on Brexit, US/China trade talks and politics everywhere. The Japan Tankan, global PMI reports will be closely watched for growth hopes while US retail sales, durable goods and jobs data will be key. The European flash CPI, employment, retail sales, and German IP also matter. Australia RBA meeting will be watched for dovish tilt to match RBNZ while China Caixin PMI will be compared to the NBS. Korea trade and Japan household spending also important. 

Monday, April 1: Japan Tankan, global manufacturing PMI, Eurozone flash CPI, US retail sales, ISM, construction spending.

• 0530 pm Australia Mar AIG manufacturing PMI 54p 53.5e
• 0600 pm Australia Mar final CBA manufacturing PMI 52.9p 52e
• 0750 pm Japan 1Q Tankan large manufacturing 19p 13e with outlook 15p 12e / services 24p 22e with outlook 20p 20e
• 0800 pm Korea Mar trade surplus $3.1bn p $4.9bn e / exports (y/y) -11.1%p -8.7%e / imports -12.6%p -4.9%e
• 0830 pm Australia Mar NAB business confidence 2p 4e
• 0830 pm Japan Mar final manufacturing PMI 48.9p 48.9e
• 0830 pm Korea Mar manufacturing 47.2p 47.7e
• 0845 pm China Mar Caixin manufacturing PMI 49.9p 50.1e
• 0315 am Spain Mar manufacturing PMI 49.9p 49.6e
• 0345 am Italy Mar manufacturing PMI 47.7p 47.4e
• 0350 am France Mar final manufacturing PMI 51.5p 49.8e
• 0355 am German Mar final manufacturing PMI 47.6p 44.7e
• 0400 am Eurozone Mar final manufacturing PMI 49.3p 47.6e
• 0400 am Italy Feb unemployment 10.5%p 10.5%e
• 0430 am UK Mar manfucturing PMI 52p 51e
• 0500 am Eurozone Mar flash HICP (y/y) 1.5%p 1.5%e / core 1.0%p 0.9%e
• 0830 am US Feb retail sales (m/m) 0.2%p 0.3%e / ex autos 0.9%p 0.4%e
• 0930 am Canada Mar RBC manufacturing PMI 52.6p 52.8e
• 0945 am US Mar final manufacturing PMI 53p 52.5e
• 1000 am US Mar manufacturing ISM 54.2p 54.5e
• 1000 am US Jan business inventories (m/m) 0.6%p 0.4%e
• 1000 am US Feb construction spending (m/m) 1.3%p -0.3%e
• 0310 pm BOC Poloz speech

Tuesday, April 2: RBA, UK construction PMI, Eurozone jobs, US durable goods, auto sales. 

• 0700 pm Korea Mar CPI (m/m) 0.4%p 0.4%e (y/y) 0.5%p 0.9%e
• 1130 pm RBA rate decision – no change from 1.5% expected
• 1145 pm Japan 10Y JGB sale
• 0100 am India Mar manufacturing PMI 54.3p 51.9e
• 0300 am ECB Praet speech
• 0300 am Spain Mar unemployment change 3.3k p -33k e
• 0430 am UK Mar construction PMI 49.5p 50e
• 0500 am Eurozone Feb PPI (m/m) 0.4%p 0.1%e (y/y) 3%p 3.1%e
• 0500 am Eurozone Feb unemployment 7.8%p 7.8%e
• 0545 am UK 5Y Gilt sale
• 0800 am Brazil Feb industrial production (m/m) -0.8%p 0%e (y/y) -2.6%p -2.3%e
• 0830 am US Feb durable goods orders (m/m) 0.4%p -1.1%e / ex trans -0.1%p 0.3%e 
• 0300 pm US Mar total vehicle sales SAAR 16.6mn p 16.78mn e
• 0430 pm US weekly API oil inventories 1.93mb p 2.5mb 

Wednesday, April 3: Global services PMI, Australia trade, retail sales, Eurozone retail sales, US ADP, services ISM, Fed speeches. 

• 0530 pm Australia Mar AIG services PMI 44.5p 45e
• 0600 pm Australia Mar final CBA services PMI 48.7p 49.8e / composite 49.1p 49.8e
• 0830 pm Australia Feb trade surplus A$4.549bn p A$3.8bn e / exports (m/m) 5%p 2%e
• 0830 pm Australia Feb retail sales (m/m) 0.1%p 0.2%e
• 0830 pm Japan Mar services PMI 52.3p 52.1e
• 0945 pm China Mar Caixin services PMI 51.1p 52.3e / composite 50.7p 50e
• 0315 am Spain Mar services PMI 54.5p 55e
• 0345 am Italy Mar services PMI 50.4p 50.9e
• 0350 am France Mar final services PMI 50.2p 48.7e / composite 50.4p 49e
• 0355 am German Mar final services PMI 55.3p 54.9e / composite 52.8p 51.5e
• 0400 am Eurozone Mar final services PMI 52.8p 52.7e / composite 51.9p 51.3e
• 0430 am UK Mar services PMI 51.3p 50.9e
• 0500 am Eurozone Feb retail sales (m/m) 1.3%p 0.2%e (y/y) 2.2%p 2%e
• 0815 am US Mar ADP employment change 183k p 165k e
• 0830 am Atlanta Fed Bostic speech
• 0945 am US Mar final services PMI 56p 54.8e / composite 55.5p 54.3e
• 1000 am US Mar services ISM 59.7p 58.7e
• 1030 am US weekly EIA oil inventory 2.8mb p 3mb e / gasoline -2.883mb p -2.77mb e
• 0500 pm Minn Fed Kashkari speech

Thursday, April 4: German factory orders, US weekly claims, Fed speeches.

• 1145 pm Japan 30Y JGB sale
• 0200 am German Feb factory orders (m/m) -2.6%p +0.1%e
• 0330 am German Mar construction PMI 54.7p 54e
• 0440 am Spain 3-5-10Y Bono sale
• 0830 am US weekly jobless claims 211k p 215k e
• 1000 am Canada Mar Ivey PMI 50.6p 51.4e
• 0100 pm Cleveland Fed Mester speech
• 0400 pm NY Fed Williams speech

Friday, April 5: Japan household spending, German IP, Canada and US jobs. 

• 0730 pm Japan Feb household spending (m/m) 0.7%p -0.5%e (y/y) 2%p 2.1%e
• 0100 am Japan Feb leading indicators 95.9p 97.3e
• 0200 am German Feb industrial production (m/m) -0.8%p +0.5%e
• 0245 am French Feb trade deficit E4.2bn p E4.7bn e / C/A E0.9bn p E1.2bn e
• 0430 am UK 4Q final productivity (q/q) -0.4%p 0.2%e
• 0500 am French Feb retail sales (m/m) 0.9%p -0.3%
• 0830 am Canada Mar employment change 55.9k p -10k e / rate 5.8%p 5.8%e / participation rate 65.8%p 65.7%e
• 0830 US Mar NFP 20k p 170k e / unemployment 3.8%p 3.8%e / hourly earnings (y/y) 3.4%p 3.4% / participation 63.2%p 63.1%e
• 0300 pm US Feb consumer credit $17.05bn p $18bn e

Conclusions: Can the US diverge further from the rest of the world? Fears of China slowing, of UK Brexit, of EU elections and growth stalls – all those have left 1Q economic data for the world diverging from the US. The biggest differences are in moods as the US growth rate has clearly dropped from 3% in 2018 to less than 2% in 2019 so far.  

The mood of the consumer stands out as something that the FOMC patience and robust stock market has helped to support despite the global gloom.  The University of Michigan consumer sentiment index rose to 98.4 from 97.8 preliminary and well up from the 91.2 lows of January. This adds to the 1Q is soft-patch thinking and may actually lead to the FOMC holding its ground that its right to be neutral on rates rather than cutting them. 

The role of the FOMC and markets in rates has been the surprise in macro trading in March. The flow of volatility from December VIX to March MOVE leaves the CVIX as the next logical component to watch for trouble in the summer – that is when the US 2Q data will be clear, when the US divergence argument will either play out or not, when the political fears about EU/UK are better understood and when China growth rebounds either prove true or false.  Markets will be using the USD as the tool for this volatility risk and the tight 95-98 range for that index makes it clear that we have some significant risks for bigger FX moves in the months ahead.