Overview: Market sentiment appears to be stabilizing ahead of the weekend. The MSCI Asia Pacific Index halted a five-day slide, with all the large bourses, but Australia advancing more than 1%. Europe's sawtooth pattern of alternating gains and losses remains intact for the eighth session. Yesterday was a down day, so today is higher. US equities are also trading with a firmer bias. Yields are firm as this week's decline is pared. The US 10-year yield is near 1.66%, leaving it off about four basis points on the week. European benchmarks are 2-3 bp higher on the day and 3-5 lower on the week. For its part, the dollar is surrendering some of its gains against most of the major currencies, though it is making new highs against the yen and Swiss franc. Emerging market currencies are also mostly higher. The Turkish lira the chief exception. It is off about 0.5% on the day and almost 10% lower on the week following the dismissal of the governor of the central bank. For the first time in two weeks, the JP Morgan Emerging Market Currency Index is posting back-to-back gains, but it is still off about 1.8% on the week. Gold is stuck in the lower end of this week's range (~$1721-$1747). Resistance is now being encountered ahead of $1730.Oil's dramatic volatility this week is calming down gradually. May WTI is within yesterday's trading range, which itself was inside Wednesday's (~$57.30-$61.30). It is testing the $60-area in Europe. It is estimated that the Evergreen ship, carrying around $9.5 bln in goods stuck in the Suez Canal, may not be extricated for several more days. About 10% of the world's trade goes through the canal, according to reports.  

Asia Pacific

It has not been a good week for China.  The US, EU, UK, and Canada imposed sanctions for human rights violations in Xinjiang, and China has rarely looked so isolated. Its closest ally maybe Russia, continues to help arm India. India has ordered the same air defense missile system from Russia as Turkey did to the chagrin of NATO but also has longstanding military hardware relations, including co-development with Russia. China's other allies are North Korea, which it does not appear able to control, and Iran. China has struck back with counter-sanctions, first on the EU, and today on the UK. The sanctions on the EU seem clumsy and puts the lauded investment agreement struck at the end of last year, after seven years of negotiating, at risk. China denies the accusations and could resolve the dispute with greater transparency and allowing some international observers (e.g., UN) to enter Xinjiang.  

Tokyo reports its CPI a few weeks before the national figures. The March estimate was released today. Headline CPI is 0.2% lower than a year ago after a 0.3% fall in February. The core rate, which excludes fresh food, is off 0.1%. It too was -0.3% in February. The deflationary forces come from fresh food and energy, without which prices rose by 0.3% year-over-year. It has been positive each month this year.  

The US dollar rose to almost JPY109.50 in early European turnover, its best level since last June. The market may not have much of an appetite to take it much higher ahead of the weekend. Initial support may be seen near JPY109.20.Still, a test on the JPY110 area looks likely next week. The Australian dollar made a new low for the year yesterday by one-hundredth of a penny (~$0.7563) but has come back bid today, moving back above $0.7600. A move above the $0.7630 area would likely signal the start of an upside correction that could extend toward $0.7700. The Chinese yuan is trading with a firmer bias to end a three-day decline. Nevertheless, it is recording its fifth consecutive weekly decline, the longest losing streak in a couple of years. Still, the move's magnitude should not be exaggerated: It has lost about 1.25% over the run. It set a three-month low yesterday near CNY6.5470.The PBOC set the dollar's reference rate today at CNY6.5376, slightly lower than projected.  

Europe

UK consumers returned in February after hibernating in January. UK retail sales rose 2.1% on the month, including gasoline/diesel, and 2.4% without. The former was spot on expectations, while the latter was firmer than the 1.7% increase projected by the median forecast in Bloomberg's survey. The UK's phased re-opening begins on Monday as households can gather outside. With plans to re-open fully by June 1, Parliament, including some Tories, pushed back against extending the government's emergency powers for another six months.  

Figures released by the EU yesterday as it seeks to justify its actions that could ban exports of the vaccine show that it has exported more vaccines than it has administered. Of the 77mln vaccines, it has exported about 21 mln went to the UK, which accounts for around 2/3 of the vaccines it has administered. While the UK has been among the most successful in rolling out the vaccine, it relied on EU manufacturing capacity and its liberal export policy. The EU wants to be able to block further exports of the vaccine from companies that have not met their local commitment, especially if the doses are going to countries that do not send full doses or ingredients of the vaccine to the EU or are in a better health situation or higher vaccine rates. Separately, the EU revealed that 100 mln vaccines have been delivered in Q1 and more than three times are expected to be delivered in Q2. 

The strength of Germany's preliminary March PMI, where the composite jumped to 56.8 from 51.1, a new multiyear high, has been confirmed by the IFO survey. It handily beat expectations. The current assessment rose to 93.0 from 90.6, and the expectations component rose to 100.4 from 95.0. These lifted the overall reading of the business climate to 96.6 from 92.7. This is the highest since June 2019.  

The euro approached $1.1760 yesterday, the lowest since last November. There has been no follow-through selling today, but the upticks have not been impressive. The euro has not been able to retake $1.1800, it needs to close above $1.1830 to begin healing the technical damage. An option for 400 mln euros at $1.18 expires today. Note that US participants have been particularly aggressive this week, and the euro has settled on or near session lows for the past three days. The Sterling has fared better than the euro this week. It recorded new lows for March but held above February's low (~$1.3565) and is approaching previous support of around $1.38 in Europe. A move above there would be helpful, but a close above $1.3840 would put it in a good position to start next week.  

America

After seeing reasonable demand for the week's early coupon sales, the US Treasury's seven-year note sale was soft, even if not as bad as last month's auction. The bid-cover was only a few tenths of a percent (at 2.23x vs. 2.28x average). Dealers were left with an average amount just shy of a quarter. The 10-year Treasury rose by around three basis points to the session of 1.64%, but it quickly recovered and returned to 1.61% by the close of futures trading. There are no coupon sales next week.  

The past three days have seen wide $3-$4 ranges in the price of May WTI. The talking points have included the Suez Canal blockage, the fifth weekly build in the US, the new lockdowns in Europe depending on the latest direction of prices. The bottom line is WTI for May delivery was off 5.1% for the week coming into today and is up about 2% today. It peaked on March 8 near $67.80 and based these past three sessions in the $57.25-$57.45 range. The US 10-year yield peaked 10 days later, on March 18. We note that the 10-year breakeven (the difference between the conventional yield and the inflation-protected security) has trended higher and set a new seven-year high yesterday, a little above 233 bp. The decoupling of the breakeven from oil prices is worth watching. On a purely directional basis, the correlation is still high at 0.83 on a rolling 60-day basis. However, the rolling 30-day correlation has fallen to about 0.1 from over 0.90 in the middle of last month.  

The US reports February personal income and consumption data today. Income figures are being skewed by the government's payments to households. They were in between payments in February, but the new $1400 checks will lift the March figures. Spending jumped 2.4% in January and is projected to have fallen by around 0.8% in February. It, too, is likely bouncing back now. The deflator is still a month away from the beginning of the impact of the base effect. The February deflator is expected to be a little changed at a 1.6% headline rate and 1.5% core. Canada's economic diary is light, while Mexico reports its February trade balance. It is expected to swing back into surplus after the deficit in January. Mexico has reported a January trade deficit since 2011. Yesterday, the central bank left the overnight target rate at 4.0%. It was a unanimous decision.  

The US dollar rose to almost CAD1.2630 yesterday, its best level since March 10. That was a little above the (61.8%) retracement objective of this month's decline. It is better offered today. Some support is seen a little below CAD1.2550, but stronger support may be nearer CAD1.2500. With the US dollar near CAD1.2580, the Canadian dollar has fallen about 0.65% this week, making it the second strongest currency behind the Japanese yen (-0.55%). The greenback was rebuffed from the MXN21.00 area yesterday and Wednesday. It is finding support ahead of MXN20.50. The low for the month was set last week near MXN20.29. The greenback rose for five sessions through Wednesday and is low for the second session today, but a consolidative tone ahead of the weekend seems like the most likely scenario.