Global investors eye USD weakness for greenlight on risk-taking

So far, risky assets have digested the rates repricing well – while the broad ‘risk-on’ rally has slowed to a crawl, the higher terminal rates have not moved through assets like a wrecking ball as some had assumed. But there remains a heightened degree of caution due to the steep rise in US yields and rate volatility, an environment where the US dollar tends to benefit.

I am sure global investors would like to see the US dollar weaken, which would be the cleanest signal that global risk-taking is greenlighted again.

ASIA MARKETS

Since the Chinese New Year holiday ended in late January, interest rates have been higher; the USD has staged a modest rebound; as a result, regional equities have softened. Some of these moves reflect a hawkish repricing of Fed expectations based on more robust growth and inflation data. But regional weakness also appears to reflect skepticism about the likely strength of China’s recovery, based on the recent underperformance of Chinese equities.

But, given the expected higher China vs. US economic growth differential, low starting valuation, and better earnings expectations, it will take little more than improving macro data to flip the switch triggering a transition of the equity cycle from the Speculative phase to the Growth phase.

OIL PRICES

Oil prices have traded cautiously flat overnight. And despite early reopening and a brighter forward macro-outlook, traders remain wary due to the surge in Russian oil exports, pushing the global oil market into a surplus and leading to a rise in oil inventories.

China’s reopening effects remain optimistic, but Oil traders are awaiting broader activity sponsorship that has yet to come through, while the Covid infection rate also remains high.

Consumption and property are the areas where the post-Lunar New Year recovery path remains uncertain.

Unfortunately, rising concerns due to overheating the US economy comes with a sting in the tail due to a higher or longer Fed narrative and a much stronger US dollar environment than expected, which is harmful to oil