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Around The World In 1,200 Words: Full Week Ahead Preview

As usual, lots on the docket.

Presumably, markets can try and get back to focusing on the fundamentals in the week ahead.

The obligatory strike on Syria is in the rearview mirror and unless Assad decides to gas some more folks, the rest of the world will get back to not caring about all the people who are dying there each and every day from conventional weapons (and yes, that’s just as sad as it sounds).

The geopolitical risk on the Korean peninsula of course downshifted again late last week as Kim ruled out further nuclear tests in an apparent effort to set the stage for his highly anticipated “Meeting of the Morons” summit with Trump. WSJ reported that during Pompeo’s super-secret mission to North Korea over Easter weekend, Kim suggested he might release three detained U.S. citizens as a further show of good will. The boy king will meet with South Korea’s Moon April 27 and it’s possible they’ll call an official end to war between North and South.

 

Markets (especially commodities) will be watching/listening for any news on further sanctions against Russia, although if we learned anything last week, it’s that Trump isn’t too keen on that idea, especially if he feels like he’s being frontrun on the announcement by Nikki Haley who “doesn’t get confused“, contrary to what Larry Kudlow would have you believe.

Mnuchin met with Russian Finance Minister Anton Siluanov on the sidelines of the IMF spring meeting in Washington. “Although there are many issues we don’t agree on, I think that it is important we are prepared to listen to our counterparts on issues,” Mnuchin mused, adding the obvious which is this: “They did have some clarification questions on sanctions.” I’ll bet, Steve.

The CBR meeting could be interesting considering the circumstances. “In the future, (exchange) rate volatility that increased because of the sanctions could lead to a temporary increase in inflationary expectations,” they said in their monthly report on Friday, suggesting that further rate cuts are on hold for now, until the impact from the sanctions on the ruble has time to play out. Things calmed down last week, but there’s lots of uncertainty out there:

USDRUB

“We expect the CBR to leave interest rates unchanged following recent sanction-driven RUB depreciation,” Barclays wrote over the weekend, adding that “with the pass-through from exchange rate movements into inflation at about 15%, the recent RUB sell-off could push inflation above the CBR’s 4% y/y target by the end of the year [and] as a result, we think that the CBR will pause its easing cycle, taking time to evaluate the impact on inflation and inflation expectations.”

But the real drama will come from the CBT, which desperately needs to do something (anything, really) to help reassure the market in the face of Erdogan’s insistence on juicing the economy despite inflation pressures and against anything that even approximates economic orthodoxy. Analysts are divided about the effect on the lira from his decision to call for snap elections on June 24, some 18 months ahead of schedule.

On one hand, there’s an argument to be made that he’ll want a stable currency in the lead-up to the vote and if you really wanted to, you could I guess suggest that the sooner we get this over with the better as it removes some uncertainty and perhaps takes some of the pressure off in terms of his propensity to insist on publicly shrieking about FX and rates conspiracies.

On the other hand, the more power he has, the more likely he is to simply commandeer the central bank and insist on low rates come hell or high water. And really, what fucking uncertainty? There is no “uncertainty” about the outcome of the vote. I mean there is no chance of him “losing”.

Anyway, what you’re looking for is a hike in the late liquidity window, hopefully by 100bps. The meeting is on April 25. It looks like markets are pricing a ~40bp LLW hike. Here’s how things have shaped up over the past month for USDTRY (note that initially, the call for early elections was bearish both for the lira and for Turkish stocks, but once it was made official, things calmed down and again, the relative wisdom of buying into this news is questionable):

USDTRY

Oil will be in focus again, thanks not only to the fact that we’re sitting near fresh three-year highs amid geopolitical tension and recently bullish inventory data from the U.S., but also because, on Friday, Donald Trump decided he’s a commodities strategist.

Any further upward pressure on commodities could conceivably cause more inflation jitters and perhaps lead to a continuation of the long end selloff and steepening we saw in the U.S. curve late last week, when 10Y yields rose to their highest since 2014:

10Y

That said, a deluge of supply this week could very well mean the flattening bias will be back. Here’s Bloomberg’s Brian Chappatta:

The U.S. will issue a combined $96 billion of two-, five- and seven-year notes this week, the largest slate of fixed-rate coupon sales since 2014, according to BMO Capital Markets. After a stretch dominated by Federal Reserve speakers, the offerings are likely to refocus traders on the prospect of ever-larger auctions to cover swelling budget gaps.

That outlook will be hammered home next week, when the Treasury releases its latest financing estimates for the current and upcoming quarters. With trillion-dollar deficits just around the corner, the department’s forecasts could very well be market-moving.

We’ll get the ECB this week as well, which will be a non-event ahead of June, when the market will get a look at a new set of macro projections. Of course this meeting will be more interesting than people were anticipating in light of Friday’s comments from Draghi and news that some Governing Council members would rather wait until July to make any announcement on APP (more on that here). Here’s Goldman:

We expect President Draghi to hint that the changes to the APP and forward guidance are likely to come in June (or possibly July), simply because the current guidance (which extends to September for the APP) will need to be updated. Furthermore, we expect the main topics of discussion at next week’s meeting to be: (i) whether recent weakness in activity indicators point to a more pronounced slowdown in Euro area growth than previously expected; and (ii) uncertainty over the extent of remaining slack in the Euro area economy, and the likely evolution of that slack in the future.

Oh, and we’ll also get the first BoJ meeting under the reshuffled leadership (i.e., Kuroda, Amamiya and Wakatabe). There have been rumblings about how much markets should read into Kuroda’s willingness to make BoJ accommodation seem a little less open-ended. He really hasn’t said anything “new”, per se, by suggesting that accommodation could be scaled back once the inflation target is hit, but this is a particularly thorny issue for Japan given that the yen is prone to strengthening on domestic political turmoil (i.e., the Moritomo scandal) and on any risk-off sentiment tied to geopolitical developments.

The Riksbank is on deck too. Oh, and watch the Mexican peso for any further signs that domestic politics (as opposed to Donald Trump) is starting to be the main driver.

All of the above could easily be relegated to the back burner in the event we get a headline with “Rosenstein”, “Mueller” or “Cohen” in it.

And if the weekend was any indication, they’ll be no shortage of “covfefe” from the presidential Twitter account.

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