External Factors

Sentiment improved Tuesday, as markets seemed at ease (figuratively and literally) with Richard Clarida’s assurances on US monetary policy.

That’s a somewhat unsatisfying explanation for relatively buoyant risk, but it sufficed. The dollar at a four-month low was supportive. 10-year US reals are back to -0.90%. That’s ~34bps lower than the “highs” (scare quotes because real rates were still deeply negative) hit during Q1’s mini-bond tantrum.

“Unless US real yields undergo a major upheaval to the upside, the USD is going to struggle to hold onto gains,” TD’s Mazen Issa said. “The question from here is whether the risk drawdown has passed.”

ING’s Chris Turner noted that “external factors — global virus developments, commodity prices — may remain the main drivers of risk appetite and the USD ahead of the FOMC minutes.”

When it comes to “external factors,” and specifically “global virus developments,” stocks in Taiwan surged the most in more than a year, rebounding after a dastardly slump tied to a disconcerting COVID outbreak that forced the institution of containment measures and threatened to rewrite one of the world’s few real pandemic “success” stories. Tuesday’s gain was a remarkable 5.2% (figure below).

So, that was a dip worth buying. “Accommodation & catering, entertainment and transportation – the service subsectors which are most exposed – account for a total 30% of Taiwan’s private consumption, or 15% of Taiwan’s GDP,” SocGen’s Michelle Lam wrote Tuesday, adding that “the industrial sector, where momentum has been extremely robust thanks to the global semiconductor shortage and the recovery in global demand, should be far less affected by the lockdown measures.” She sees any hit to GDP as “manageable.”

“The Taiex is by far the most volatile among major stock benchmarks, with a measure of 10-day swings at the highest in more than a year,” Bloomberg noted. “The cost of hedging against swings in the benchmark rose to a 12-year high versus the S&P 500 on Monday.”

Meanwhile, the Japanese economy contracted more than expected in the first quarter. GDP shrank 5.1% (annualized) QoQ, worse than the 4.5% economists expected. Japan is still struggling to beat back COVID while preparing for the Olympics.

Around half of the world’s third-largest economy is laboring (or not) under virus protocols. If Japan slips into a double-dip recession, Yoshihide Suga’s political position could become untenable. “Though the preliminary data is often heavily revised, a chorus of business executives have started to voice concern over what they see as an unacceptably slow vaccine rollout in one of the world’s richest countries,” Bloomberg wrote.

When you toss in India’s dire situation (and it is indeed quite dire), you’re left to ponder a tenuous scenario outside the US.

As the CDC rolls back mask guidelines prompting businesses to do the same and states move towards full economic re-openings just in time for summer, pockets of concern remain abroad. And India is one very large “pocket.”

In any case, it’s worth keeping yourself apprised. The US won’t be secure in its position vis-à-vis COVID until the rest of the world is out of the woods, and that’s clearly not the case. Being separated by oceans doesn’t help when there are planes. London has 400 cases of the India variant, 100 of which are tied to travel, Mayor Sadiq Khan said Monday. That raises questions about where the other 300 came from, but it’s becoming clearer over time that the world isn’t going to be “rid” of COVID. Not now, not later this year and probably not ever.

But don’t let any of that keep you from buying equities. “The trading stance remains bull-oriented so far and investors are ready to seize any opportunity to buy dips on stocks,” someone told Bloomberg Tuesday.