TIME TO SHIFT YOUR PORTFOLIO TO CHINA

MAXIN ADVISORS Weekly Market Review addresses the major issue of the moment, reviews the market moves of the past week and monitors the evolution of the MAXIN GLOBAL FUND

Time To Shift Your Portfolio to China

In several articles over the past few months, we have been arguing that the world financial markets were going though major regime change that ran far deeper than relative macro-.economic trends and relative asset valuations.

In 2021 and 2022, we accurately called the secular top in US equity markets, highlighting the fact that the peak was a secular peak, marking the end of not only the 2020-2022 rally, of the 2009- 2022 rally but also the secular peak of a much longer structural bear market that started in 1932 and marked the era of dominance of America’s economic and geo-political leadership of the world.

We made the case that the DEC/JAN 2022 peak in US equities would be the beginning of a bear market that had the potential to last 13 to 15 years and would see US equities falling to the vicinity of 1’000 on the SP500 by 2033- 2035 with P/E ratios falling to low double digits or even single-digits, even if, in the mean time, the bear market could be ponctuated by bull market phases as we expect in 2024 / 2025, even if we never regain the top reached in January 2022.

In 2022, we also called the secular bottom of Chineses equities in October, at levels last seem 14 years ago, and extremes of undervaluations not seen in its own history. We made the case that the October 2022 bottom in Chinese equities was the beginning of a long-lasting secular bull market that would see Chinese equities rise substantially for at least a decade ahead, powered by strong economic growth and its massive consumer market, by a shift of domestic savings from real estate towards the financial markets and the development of the largest pension fund market in the world, and finally by rising valuations that will ultimately move from extremes of undervaluation to extremes of over valuations as is the normal cycle of asset prices.

We made the case that those secular trends reflected the growing divergences of a world that is now divided into two camps :

. America and Western democracies that were plagued with major macro imbalances, following decades of highly dangerous unorthodox monetary policies but also plagued by their own political and social imbalances due to the structural inefficiency of the democratic system, and

. China and other “stakeholders” nations, that have avoided the macro imbalances of the West by keeping moderate, balanced and reasonable monetary and fiscal policies, and, far more importantly, by a public governance and social organisation that may not be to the liking of the Wets, but that has demonstrated its worth as testified by the phenomenal rise of China or the UAE over the past 5 decades.

In several articles since 2016, we warned about a structural return of inflation in the West and over 2022, we warned about the highly damaging consequences of this return of inflation and corresponding surge in interest rates in a world that has accumulated debt hand over fist during the zero interest rates years. We predicted a significant real estate crisis ahead, and it has started to unfold in countries like Sweden and the UK to some extent, with far more to come in the US and continental Europe.

We also warned about the risks of a major financial and banking crisis due to the same imbalances and interest trends.

The events of the past few weeks proved us right, even if we were surprised at how quickly the banking crisis unfolded. We expected it to unfold later in the year, but getting the timing right on sentiment shifts is always tricky.

Since the beginning of March 2023, the Western world is facing a MAJOR crisis of confidence in its own banking system, as testified by the successive downfalls of SVB, Signature Bank, Silvergate and now potentially other regional banks in the US, and the travails of CREDIT SUISSE, leading a nation like Switzerland, a country where the rule of Law is the essence of society, negate the foundations of its legal system and stability overnight to save one of its two largest banks.

Time as come for investors to Shift their portfolios from American and European assets to Chinese assets very quickly.

And these are the reasons why :

America has become “Un Investable”, and Europe is not far behind.

The headwinds facing the American economy and asset markets are the most daunting we have seen in forty years as money managers and many of the below applies to Europe as well

Inflation

Inflation remains stubbornly high in the US and Europe and today, the components of inflation that are rising are the most difficult to tame. Inflation is both a monetary AND a psychological phenomenon and the stickiness of wages, services and shelter costs make its extremely unlikely that inflation will move down sharply any time soon, unless America and Europe enter a deep recession. Inflation eats into the consumers purchasing power and resilient inflation takes time to impact of households behaviours as well as the production chain behaviour.
Inflation is a tax on consumers in two ways; it decreases their real purchasing power AND reduces te real value of their savings and real estate. Inflation has become the MOST PRESSING political issue coming into the next elections.

Interest Rates

Beyond the raging debate about the next move of the FED this week, rates are bound to stay high as monetary policy is STILL accommodative with short term rates still lower than the CPI. Moreover, the markets are completely oblivious to the chances of inflation going higher in the coming months. Interest rates have a major impact of the purchasing power of households through car loans, mortgages and credit cards. With rates having surged 50x over the past year the impact on consumption will soon appear in the economy.
High interest rates are also a major headwind for highly leveraged corporations who face unexpected costs that cannot be passed on to consumers through higher prices hence impacting their margins mechanically and substantially. High interest rates are also extremely detrimental to public finances in countries that have accumulated massive public debt by rising the cost of servicing that debt while tax receipts do not increase. Budget deficits are bound to explode upwards.

Accumulated Debt

Over almost 15 years of artificially kept interest rates at zero, Western Central Banks have enticed households and corporations to pile into debt, the former to consumer and the latter to buy back their now elevated shares.
With interest rates rising, and sharply rising cots of financing, economic agents will now race to pay back debts reduce their stocks of debt, hence consume less while corporations use their free cash-flows to reduce their balance sheets rather than being back stocks or investing in new capacity or projects. Debt deflation is what face a world that has accumulated 350 trillion of debt, or the record level of 350 % of GDP, and that increase is mainly in the Western economies. Taking debt level down will have a severe recessionary effect, regardless of inflation levels, as was the case in Japan’s lost decades.

Rising Bond yields

Rising bond yields are the main cause of the current banking crisis of confidence and, contrary to 2008 where some institutions took risky bets on credit quality, this time round the issue is global and affected the highest credit rating of their portfolios. Banks are sitting on massive unrealised losses that could swell even higher if inflation continues to rise. And they are stuck with those unrealised losses FOR YEARS as it is highly unlikely that bond yields will come back down to the levels at which the banks acquired those bonds.

As Central Banks are already between a rick and a hard place with high inflation and bloated balance sheets, they cannot resort to quantitative easing again and buy debt in the market to lower bond yields.

The extraordinary measures taken in the US, with the unlawful sale of Credit Suisse to UBS and 6 central banks of the world entering an open credit line to the banking system just illustrates the state of panic that now prevails in the highest sphere of Government and economic policy.

Global Confidence crisis in the banking system

Investors should not underestimate the phenomenal earthquake that has just hit the western world banking system. depositors have suddenly realised that their deposits were actually loans they made to highly leveraged and highly illiquid financial institutions, big or small. The massive shift of deposits into Short term Government bills, Gold and cryptos testifies of the panic and it may only be the beginning. Further withdrawals or switching of deposits into Government bills, which form a banking liquidity standpoint amounts to the same, has the potential to truly endanger the banking system with unfortunately NO remedy apart from an imposed freezing of deposits .
This very sharp decrease in banking liquidity also means that banks will restrain considerably their lending activities, further pushing the economies into a deep economic contraction.

Real estate crisis unfolding and accelerating

Back in June 2022 we called the coming top of real estate markets and since then home pries have bee falling sharply in many western countries including the US, on the back of sharply rising interest and mortgage rates.
Real estate markets are facing the unpleasant dynamics of record high supply coming to the market at the very time demand is withdrawing due to higher costs and affordability sinking. Declining real estate prices have a major economic impact through the negative wealth effect as real estate is the largest component of households wealth, and seeing their home prices decline makes them refrain on consumption. Moreover, Real estate and construction represent between 17 and 20 % of mots western economies’ GDP and there has never been a real estate crisis in the past without a sharp economic recession afterwards.

US Households savings have now come done to a historical low

In the past two years, a large comment of economic growth came from US and European households spending the cash they received from Governments during the COVID period, explaining how consumption remained high while earnings were actually not rising. Today, that exceptional reservoir of consumption has completely dried up and households have to resort to credit to maintain their consumption levels. This is not going tomcats for very long, taking a major toll on retail sales, big ticket items and luxury goods.

A Sharp and Deep recession is about to hit the US and European economies

Despite the soothing words of President Biden and of the FED, all the dynamics above combine to plunge the western economies into a sharp contraction in the remainder of 2023. Economic contraction is a very negative headwind for equity markets, as corporate revenues and cash flow decline while costs remain elevated. Margins always decline during recessions. It further compounds declining sales du to rising unemployment and declining investments,

Conversely, the coming recession will be boon for bonds and will finally bring inflation down. but history shows that it will take time and significant damage before inflation comes down in a material way, and even so, it is unlikely to comeback towards the 2 % target level before next year or the one after.

Public Debt Spiral

Lower tax receipts, due to contracting economies and higher cost of the debt will combine to send the public finances of many western nations such as the US or France to mention only two into an extremely complicated debt spiral. Budget deficits are already exploding and they are bound to increase sharply ahead. with potentially significant conseqences for the ultimate value of the US currency and the EURO.

The debt ceiling Issue

America has already reached its statutory 31.6 Trillion US Dollars of debt issuance be the Federal Government,
The weakness of the Republican Party and the highly polarised political scene ahead of the coming elections could well send the US into default by June or July 2023. Adding to that the potential arrest of Denlad Trump this week and his calls for people taking ton the streets adds another component of political uncertainty at a time of heightened economic and banking crisis.

The same applies to may Nations in Europe that are grappling with major discontent of their populations about inflation or ferrous as is the case with France’s current unrest that will take a major toll on its economy and its public finances.

US and European Equities are at extremes of overvaluation

Highe rinderst rates and declining reverses are a killer for corporate margins in absolute terms and earnings are bound to decline ahead by more than most analysts expect. But higher interest rates also modify considerably the valuation obtained through discounted cash flow models.
Finally, no recession has ever happened without a significant bear market and this one will be atop,idied by the reversion to the mean of P/E ratios that have been hovering at unsustainable levels for way too long due to low interest rates.

It is never pleasant to paint such a dire picture, but unfortunately this is. exactly the state of the Western economies and markets at the moment.

What is extremely worrying is that the causes of the looming crisis are rooted in Governments and Monetary Authorities actions’ themselves that have create the conditions of a PERFECT SYSTEMIC Crisis.

By Contrast, China, the second largest economy of the world and the largest consumer market of the world has avoided all the structural imbalances that have built-u in the West :

. Inflation is below 2 % and is not rising
. The economy is growing again after two years of COVID
. Consumers have started spending again
. The Central Bank is EASING Monetary Policy
. The Government has managed its Real Estate excesses pro-actively and the sector is now recovering without major damages
. The Government has the financial means to stimulate through fiscal measures
. The Banking sector is highly regulated and has no issues similar to the Western banking sector.
. A New Government is in place with highly seasoned and experienced people at the helm.
. Equity valuations are extremely low
. Domestic savings are flowing from real estate into equities and bonds
. China’s banking system is extremely isolated from the global banking system and its stability is not endangered.
. Finally, China’s markets will be far more driven by domestic dynamics than by foreign dynamics, even if we see global investors gradually fleeing Western markets and increasing their weightings to Chinese equities.

In these troubled times, investors should carefully re-assess the structure of their portfolios and sell expensive assets in turbulent economies and re-allocate their wealth to cheap assets in a far stabler environment.

Depositors have suddenly realised that their deposits actually amounted to lending money to highly leveraged and illiquid financial institutions, the core assets of which, Treasury bonds, were sitting on massive losses due to the hazardous monetary policies pursued by the West since 2008. They are now shifting their liquid assets from

Weekly Market Review
19 Mar 2022

MACRO HIGHLIGHTS

ECB Hikes Rates to 14-Year High
The ECB raised interest rates by 50 bps as expected on Thursday, further pushing borrowing costs to the highest level since late 2008, in order to help temper the region’s stubbornly high inflation. Policymakers also said the euro area banking sector was resilient, with strong capital and liquidity positions, and that they were monitoring current market tensions closely, while they stood ready to respond as necessary to preserve price stability and maintain financial stability in the region. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility were all increased to 3.50%, 3.75% and 3.00%, respectively. The ECB staff now sees inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures will likely remain strong and core inflation is now expected to average 4.6% in 2023, higher than in the December projections.

China Cuts Reserve Ratio
The People’s Bank of China cut the reserve requirement ratio for financial institutions by 25bps on March 17th 2023, effective from March 27th. It is the first rate cut in banks’ reserve ratio since December, in an attempt to stimulate the economy, keep liquidity reasonably ample and better supply key areas, weak links. The RRR for big banks now stands at 10.75%, a fresh low since mid-2007 while the weighted average ratio for financial institutions stands at around 7.6%. The move was in line with market expectations, after PBoC governor Yi Gang recently said that “a reduction in the reserve requirement ratio would be an effective way to inject liquidity”, but also noticed that there was limited room for policy rate cuts.

China New Home Prices Fall for 10th Month
Average new home prices in China’s 70 major cities dropped by 1.2 percent year-on-year in February 2023, slowing from a 1.5 percent drop in the previous month. This was the tenth straight month of decrease in new home prices but the softest pace since July 2022, as Beijing ramped up policy support for the ailing property sector since last November. Among the Chinese biggest cities, prices fell in Tianjin (-2.2% vs 3.0% in January), Shenzhen (-1.1% vs -0.9%), Chongqing (-0.4% vs -0.6%), and Guangzhou (-0.6% vs -0.6%). Meantime, prices grew at softer paces in both Beijing (4.7% vs 5.2%) and Shanghai (3.9% vs 4.2%). On a monthly basis, new home prices rose by 0.3 percent, the most since July 2021, after a 0.1 percent gain in January, as the Chinese government moved to reopen the economy from pandemic curbs.

Hong Kong Jobless Rate at 3-Year Low
Hong Kong’s seasonally adjusted unemployment rate edged down to 3.3 percent in the three months ending February 2023, the lowest rate since the three-months to December 2019 and from 3.4 percent in the prior November- January reading. The number of unemployed persons dropped by 2,700 to 115,700, while employment also went down by 12,000 to 3,650,200. Unemployment fell in most sectors, more notably in the retail, transportation, and arts, entertainment and recreation sectors. Looking ahead, the country’s labor market is expected to improve further, supported by the gradual normalization of economic activities and the upturn in inbound tourism.

US Consumer Sentiment Unexpectedly Drops
The University of Michigan consumer sentiment for the US dropped for the first time in four months to 63.4 in March of 2023 from 67 in February, well below forecasts of 67, a preliminary estimate showed. Overall, all components worsened relatively evenly, mainly due to persistently high prices, creating downward momentum for sentiment leading into the financial turmoil. Still, this decrease was already fully realized prior to the failure of Silicon Valley Bank. Both current conditions (66.4 vs 70.7) and expectations (61.5 vs 64.7) worsened. At the same time, inflation expectations slowed for both the year-ahead (3.8%, the lowest since April of 2021, vs 4.1%) and the five-year outlook (2.8% vs 2.9%).

US Jobless Claims Fall More than Expected
The number of Americans filing for unemployment benefits fell by 20,000 from the previous week to 192,000 on the week ending March 11th, well below expectations of 205,000. It was the biggest fall since July mostly impacted by the drop in claims in New York, where school workers returned to work after a school break. The result pointed to further evidence of a stubbornly tight labor market, in line with the hot payroll figures for February. The tight job market forces employers to raise wages to attract and keep staff, magnifying inflationary pressure on the American economy. The four-week moving average, which removes week-to-week volatility, fell by 750 to 196,500. On a non-seasonally adjusted basis, claims fell by 21,396 to 217,444, with significant decreases noted in New York (-15,305) and California (-2,312).

Philadelphia Factory Activity Shrinks for 7th Month
The Philadelphia Fed Manufacturing Index in the US ticked up 1 point to -23.2 in March 2023, missing market expectations of -15.6 and marking its seventh consecutive negative reading. More than 34 percent of the firms reported declines in activity, while 11 percent reported increases; the majority (53 percent) reported no change. The indicators for new orders (-28.2 vs -13.6 in February) and shipments (-25.4 vs 8.7) both declined to their lowest readings since May 2020. On balance, the firms also reported a decline in employment (-10.3 vs 5.1), the index’s second negative reading since June 2020 and its lowest reading since May 2020. The firms continued to report overall increases in prices, but the indexes for prices paid and prices received both declined. The survey’s broad indicators for future activity continued to suggest subdued expectations for growth over the next six months.

US Industrial Output Unexpectedly Unchanged
Industrial production in the United States was unchanged in February 2023, missing market expectations of a 0.2 percent increase after rising by 0.3 percent in January. Manufacturing output edged up 0.1 percent, compared with forecasts of a 0.1 percent decrease. The indexes for durable manufacturing and nondurable manufacturing moved up 0.1 percent and 0.2 percent, respectively, while the index for other manufacturing (publishing and logging) fell 1.5 percent. Meanwhile, mining output fell 0.6 percent while the output of utilities rose 0.5 percent. Capacity utilization was unchanged in February at 78.0 percent, a rate that is 1.6 percentage points below its long-run average.

US Capacity Utilization Below Forecasts
Capacity utilization in the United States was unchanged at two-year lows of 78% in February of 2023, the same as in January, and below market forecasts of 78.4%. It is also 1.6 percentage points below its long-run average. Capacity utilization for manufacturing slipped 0.1 percentage point to 77.6%, the operating rate for mining fell 0.6 percentage point to 87.3%, while the operating rate for utilities increased 0.2 percentage point to 68.9%.

US Building Permits Rise More than Forecast
Building permits in the United States surged 13.8 percent to a seasonally adjusted annual rate of 1.524 million in February 2023, following a meager 0.1 percent advance in January and recovering from a 31-month low of 1.337 million in December. It was the highest reading in five months and well above market expectations of 1.34 million, a preliminary estimate showed. In February, single-family authorizations increased 7.6 percent to a rate of 777 thousand, up from January’s near three-year low of 722 thousand, while the volatile multi-segment jumped 21.1 percent to 747 thousand. Permits were up in the South (10.9 percent to 845 thousand), West (30.0 percent to 381 thousand) and Midwest (9.6 percent to 195 thousand), but were down in the Northeast (-2.8 percent to 103 thousand).

Canada Producer Prices Drop in February
Industrial producer prices in Canada fell by 0.8% month-over-month in February 2023, following a downwardly revised 0.3% increase in the prior month. Manufacturers’ costs declined mostly for energy and petroleum products (-5.8%), of which diesel (-11.7%) and finished motor gasoline (-2.9%); and primary non-ferrous metal products (-2.4%), with all three types of precious metals moving downward. Conversely, those for primary ferrous metal products (+1.7%) were up month over month for the first time since June 2022, mainly on higher prices for basic and semi-finished iron or steel products (+1.7%). Prices also increased for softwood lumber (+7.4%) and meat, fish and dairy products (+1.1%). On a yearly basis, producer price inflation eased to an over two-year low of 1.4% in February, after a downwardly revised 5% in the prior month. 

Eurozone Labor Costs Rise at Faster Pace
Hourly labor costs in the Euro Area rose by 5.7 percent year-on-year in the fourth quarter of 2022, a record high and accelerating from an upwardly revised 3.7 percent increase in the previous period. Wages and salaries per hour worked expanded by 5.1 percent (vs 3 percent in Q3) and the non-wage component rose by 7.7 percent (vs 5.9 percent), Among economic activities, labor cost growth was the highest in construction (6.9 percent), followed by services (6.2 percent) and industry (4.4 percent). 

Eurozone Inflation Rate still at 8.5 %
The consumer price inflation in the Euro Area was confirmed at 8.5 percent year-on-year in February 2023, the lowest since last May but well above the European Central Bank’s target of 2.0 percent, bolstering expectations that the central bank will remain hawkish for longer. Energy prices rose at a slower pace (13.7 percent vs 18.9 percent in January), while inflation accelerated for food, alcohol & tobacco (15.0 percent vs 14.1 percent), services (4.8 percent vs 4.4 percent) and non-energy industrial goods (6.8 percent vs 6.7 percent). Amongst the Eurozone’s largest economies, inflation picked up in Germany, France, Spain and the Netherlands, but slowed in Italy. Meanwhile, the core rate, which excludes volatile items such as energy and food, rose to a fresh record high of 5.6 percent in February.

Italy Inflation Rate Slows More than Initially Thought
The annual inflation rate in Italy was revised lower to 9.1% in February 2023 from an initial estimate of 9.2% and below 10% in January. It was the lowest inflation rate since September 2022, mainly due to a sharper decline in the prices of regulated energy products (-16.4% vs -12.0% in January) and a softer increase in those of non-regulated energy products (40.8% vs 59.3%). On the contrary, cost accelerated for processed food including alcohol (15.5% vs 14.9%), unprocessed food (8.7% vs 8.0%), tobacco (1.8% vs flat reading in January), services related to recreation including repair and personal care (6.1% vs 5.5%) and services related to transport (6.4% vs 5.9%). The annual core inflation rate, which excludes energy and unprocessed food, increased to 6.3% from6% in January and excluding energy only, it accelerated to 6.4% from 6.2%. On a monthly basis, consumer prices went up 0.2%, slightly less than preliminary figures of a 0.3% increase.

Austria Inflation Rate Eases from Record High
The annual inflation rate in Austria eased to 10.9 percent in February 2023, from a record high of 11.2 percent in the previous month, as prices slowed for housing & utilities (16.5% vs 19.3% in January), which include an 89.2% surge in district heat, 76% increase in solid fuels and 63.5% rise in gas. At the same time, costs eased for both food & non-alcoholic beverages (16.2% vs 17%), and transport (10.9% vs 11.1%), reflecting a 13.6% increase in fuel prices. On a monthly basis, consumer prices increased 0.9 percent in February, the same pace as in the previous month. Additionally, the harmonized index rose by 11% on the year and by 0.8 percent over the previous month.

Swedish Jobless Rate Rises to 8-Month High
Sweden’s unemployment rate increased to 8.2 percent in February 2023, the highest since June 2022, and compared with 7.9 percent in the same month last year. The number of unemployed advanced by 24 thousand from a year earlier to a nine-month high of 459 thousand, while employed persons went up by 67 thousand to a three-month high of 5.17 million. Accordingly, the employment rate climbed 0.3 percentage points to 68.2 percent while the labor force participation rate rose by 0.5 percentage points to 74.2 percent. Seasonally adjusted, the unemployment rate was at 7.4 percent in February.

Malta Inflation Rate Rises in February
Malta’s annual inflation rate rose to 7% in February 2023, from 6.8% in the previous month, as cost advanced further for food & non-alcoholic beverages (13.2% vs 11.7%); alcoholic beverages & tobacco (3.4% vs 2.4%); transport (3.5% vs 3.2%); recreation & culture (6.7% vs 6.3%). On the other hand, inflation slowed for clothing & footwear (8.1% vs 9.5%); furniture & household equipment (7.2% vs 8.5%); communication (0.9% vs 1.3%) and restaurant & hotels (5.6% vs 5.7%), while price growth was steady for housing & utilities (at 9.1%); health (at 4%) and education (at 4.7%). On a monthly basis, consumer prices inched up by 0.9% in February, the biggest rise since August 2022 and reversing from a 0.4% drop in January. 

Norway Economy Shrinks 0.2%
The GDP for Mainland Norway, which excludes the largely petroleum-based offshore sector, shrank by 0.2 percent from a month earlier in January 2023, matching the market expectations and shifting from a downwardly revised 0.3 percent rise in the previous month. The latest figure was the first decline since July 2022, mainly dragged down by the wholesale & retail trade, due to sharp decline in car trade. On a yearly basis, the economy grew by 5.7 percent in January 2023, accelerating sharply from a 1 percent increase in the previous month. 

Italian Trade Deficit Narrows in January
Italy posted a trade deficit of EUR 4.2 billion in January of 2023, the first deficit in three months, but narrowing from the EUR 6.5 billion gap in the corresponding period of the previous year. Exports rose by 15.3 percent to EUR 47.5 billion, with increased sales noted for machinery and appliances (19.8 percent), textiles, apparel, and clothing accessories (16.4 percent), and pharmaceutical and chemical products (53.9 percent). In the meantime, imports rose by a slower 8.4 percent to EUR 51.7 billion, reversing the trend of soaring import levels through 2022 as lower natural gas prices and higher dependency on other energy sources due to Russia’s supply squeeze drove natural gas purchases to sink by 10.2 percent. Still, higher purchases were recorded for transportation goods (43 percent) and textiles (19.3 percent). Regarding intra-European Union trade, Italy recorded a trade deficit of EUR 2.8 billion.

Spain Trade Deficit Narrows in January
Spain’s trade deficit narrowed to EUR 3.96 billion in January 2023 from EUR 6.52 billion in the same month last year, as exports surged 16.2 percent on rising sales of chemicals (20.8 percent), energy products (41.2 percent), capital goods (18.6 percent), and food, beverages and tobacco (15.9 percent). Among major trade partners, exports were mostly up to the EU (18.8 percent), the US (19.8 percent) and Morocco (18.3 percent). Meanwhile, imports advanced at a slower 5.3 percent, as increases in purchases of capital goods (20.7 percent), food, beverages and tobacco (20.1 percent), energy products (8.1 percent) and vehicles (15.4 percent) offset declines in imports of both chemicals (-13.7 percent) and non-chemical semi-manufactures (-15.1 percent). Imports rose from the EU (8.9 percent) and China (9.5 percent), but fell from the US (-11.5 percent) and Turkey (-22.6 percent).

Japan Industrial Output Falls the Most in 8 Months
Industrial production in Japan dropped by 5.3 percent month-over-month in January 2023, compared with a flash figure of a 4.6 percent fall and following a final 0.3 percent gain in the previous month. This was the first decline in industrial output since last October and the steepest pace in eight months. Industries that mainly contributed to the decline were production machinery (-15.3% vs 0.8% in December), motor vehicles (-10.1% vs 0.5%), and electronic parts & devices (-4.2% vs -0.7%). On an annual basis, industrial production fell 3.1% in January, the third straight month of decrease, after a revised 2.4 percent fall in December. 

Brazil Jobless Rate Slightly Above Expectations
The unemployment rate in Brazil rose to 8.4 percent in the three months to January 2023, up from 8.3 percent in the August to October 2022 period and slightly above market consensus of 8.3 percent. It was also the lowest rate for a November to January period since 2015. The number of unemployed people was little-changed at 9.0 million, down by 3.0 million on a yearly basis, while employment levels declined by 1.0 million to 98.6 million. The labor force participation rate was down 0.7 percentage points to 61.9 percent and the employment rate fell by the same margin to 56.7 percent. Real earnings rose by 1.6 percent to BRL 2,835 per month over the same period, up 7.7 percent on a yearly basis.

Central Bank of Russia Holds Rate at 7.5%
The Central Bank of Russia held its key interest rate steady at 7.5% for the fourth consecutive decision in its March 2023 meeting, in line with market expectations, and signaled that potential future rate hikes may take place should pro-inflationary expectations increase. The central bank noted that price growth remained moderated since its last meeting and that risks of additional inflationary pressure have significantly decreased. Despite posing a smaller threat, the bank underscored that pro-inflationary risks remain due to a weaker ruble amid deteriorating terms of trade, an unsustainably wide budget deficit, and a decrease in the labor force amid Russia’s military mobilization. While the central bank expects inflation to temporarily drop below the 4% target in 2024 due to high base year effects, inflationary pressures should gradually increase under the current scenario and remain prevalent in the coming years. The bank maintained its forecast of inflation easing to 5-7% in 2023.

Baltic Exchange Dry Index Down for 2nd Day, Posts 4th Weekly Gain
The Baltic Exchange’s main sea freight index, which measures the cost of shipping goods worldwide, was down for the second day on Friday, falling about 1.6% to 1,535 points, amid lower demand for its larger vessel segments. The capesize index, which tracks iron ore and coal cargos of 150,000 tonnes, declined for the third day, sipping 3.2% to 1,913 points; and the panamax index, which tracks coal or grain cargoes of about 60,000 tonnes to 70,000 tonnes, fell for the second consecutive day, decreasing about 1.3% to 1,723 points, its biggest daily percentage drop since February 16th. Conversely, the supramax index added 6 points at 1,318 points. Still, the benchmark index gained for a fourth consecutive week, adding 7.8%.

THE WEEK AHEAD

After last week’s turmoil, investors will continue to monitor the situation in the banking sector and await monetary policy decisions from major central banks including Fed, BoE, SNB, and Norges Bank. Inflation figures for Japan, the UK, and Canada will be released. On the macro-economic front, the Zew Economic Index for Germany, PMI data for the US, Japan, UK, Euro Area, Germany, and France will provide more colour about the health of the manufacturing and services sector in March.

In the US, the Federal Reserve’s will meet and decide on monetary policy with the context of the recent turmoil in the banking sector adding another level of uncertainty. Policymakers are seen raising the interest rate by 25 basis points to 5% to cool the economy and bring down stubbornly high inflation. Investors will also look for updated economic projections and dot plot estimates for cues on the Fed’s insight into the terminal level, inflation, economic growth, and unemployment outlooks. Also, the Commerce Department will post February durable goods orders and new home sales figures. S&P Global will publish March purchasing manager surveys measuring US manufacturing and services sector activities. At the same time, the National Association of Realtors will report sales of previously owned US homes in February.

In the United Kingdom, the Bank of England is expected to hike interest rates by 25bps to 4.25%, bringing borrowing costs to a level not seen since November 2008 in an attempt to curb inflation. The headline inflation has likely risen 0.6% month-on-month in February, resulting in the annual rate slowdown to 9.8% from 10.1%, well above the 2% target. Also, traders await flash S&P Global PMIs, Gfk consumer confidence, producer prices, retail trade, public sector net borrowing, and CBI gauge for factory orders.

In Europe, central banks in Switzerland, Norway, and Turkey will be deciding on interest rates. The S&P Global PMIs are anticipated to show private sector business activity across the Eurozone expanded for a third successive month during March, mainly due to a weaker contraction in the manufacturing sector, including that in Germany and France. Consumer confidence in the Euro Area has likely improved for a sixth month while the German investor sentiment is seen edging down from a 1-year high. Other key economic data feature Eurozone’s construction output and current account; Germany’s producer prices; Switzerland’s foreign trade, and final Q4 GDP figures for Spain and the Netherlands.

The People’s Bank of China is expected to leave its loan prime rates unchanged following fresh liquidity injections as the entity aims to support the country’s economic rebound further.

In Japan the BoJ’s Summary of Economic Opinions will give insights on Governor Kuroda’s last meeting. Japan will also release CPI data for February and flash PMI figures for March.

The central bank of the Philippines will set its interest rate, while Malaysia will divulge its February CPI print.

In Australia, PMI data for March and the minutes from the RBA’s latest meeting, as it might signal how close the cash rate is to its peak. C

CALENDAR

INFLATION

BONDS

USA

US Treasury Yields Fall Further
The yield on the US 10-year Treasury note fell to the 3.42% mark, the lowest in six weeks, as persistent concerns regarding the stability of the global financial sector ramped up demand for the safety of US government debt. The potential sale of the First Republic Bank extended the risk of a crisis in the banking sector after the collapse of Signature Bank and SVB. To add, the Swiss National Bank’s liquidity support for Credit Suisse offered a little relief for systemic risks to European lenders. Meanwhile, US unemployment claims figures were well below expectations in mid-March, reigniting concerns of a stubbornly tight labor market. Building permits also rose more than expected, supporting signals of a hot economy.

US 2-Year Government Bonds

US 10-Year Government Bonds

US 10-Year Government Bonds

US Long Dated Govt ETF

US High Yield ETF

Europe

Germany’s 10-year bond yield stabilized around 2.3% at the end of a volatile week that saw yields touch their lowest levels since February 2nd. Investors digested the latest European Central Bank’s decision and the outlook on monetary policy, while concerns over a widespread banking crisis faded after authorities and banks in the US and Europe stepped in to support troubled lenders. The bloc’s central bank raised interest rates as expected by 50 basis points to combat inflation, bringing borrowing costs to a fresh 14-year high, and said the Euro Area banking sector was resilient, while the future rate path would depend on incoming data. Meanwhile, the central bank’s core inflation forecast was revised upwards to average 4.6% in 2023.

French 10-Year Bond Yield Falls to 6-Week Low
The yield on the 10-year OAT fell below 2.7% in the second half of March, the lowest in six weeks as persistent concerns over the health of worldwide banks ramped up demand for debt, while investors assessed the outlook of monetary policy and France’s fiscal health. The ECB raised its benchmark interest rates by 50bps in its March meeting, in line with its previous pledge to extend the fight against soaring inflation. Still, the lender refrained from voicing its future stance due to uncertainty over the global financial sector. On the fiscal side, the French government pushed through plans to increase the legal pension age by 2 years to 64 without a vote in the National Assembly after the Senate approved the motion. While the move eases fiscal concerns and supports French debt, heavy opposition from labor unions, opposition parties, and mass strikes threatens political stability.

UK 10Y Bond Yield Steadies Around 3.4%
The yield on the UK’s 10-year Gilt stabilized around 3.4% at the end of a volatile week after touching an over one-month low of 3.25% on March 15th, as fears about an widespread banking crisis eased following efforts in the US and Europe to support troubled lenders. Investors await key policy decision from the Bank of England and Federal Reserve due next week. On Wednesday, British finance minister Jeremy Hunt pledged to halve inflation, reduce debt and get the economy growing. The Chancellor said Britain was set to avoid a recession in 2023 and inflation would likely fall to 2.9% by the end of 2023. Hunt also said he expected the UK to meet the fiscal rules set by the government in November.

Italian 10-Year Bond Yield Falls to 6-Week Low
The yield on the Italian 10-year BTP fell to 4% in March, the lowest in six weeks, as investors digested the ECB’s 50bps interest rate hike and continued to monitor risks over a potential crisis for European banks. The ECB’s rate hike was in line with its previous pledge, lifting key borrowing costs to their highest since 2008 to extend the fight against soaring inflation in the Eurozone. Still, the move defied recent market expectations of a softer rate hike after Credit Suisse’s exposed vulnerability and bank failures in the United States unveiled systemic risks to the global financial system. In the meantime, the central bank refrained from hinting at another interest rate hike in its next meeting or announcing a faster pace for quantitative tightening after the second quarter, lifting demand for higher-yielding Italian BTPs. Consequently, the spread between the 10-year BTP and its German counterpart narrowed to 185bps after reaching a two-month high of 192bps on March 15th.

Asia

CURRENCIES

US Dollar Falls
The dollar index eased to 103.7 on Friday, sliding for the second straight session as a rescue package for First Republic Bank eased market concerns about another bank failure in the US, lifting market sentiment while hurting demand for safe-haven currencies. Large US banks agreed to contribute $30 billion in deposits to First Republic Bank in a bid to shore up confidence in the banking system. Equities and risk-sensitive currencies rallied on the news, putting downward pressure on the dollar. The currency also weakened after the European Central Bank raised interest rates by 50 basis points despite the vulnerability of some European banks. Investors now look ahead to the Federal Reserve’s policy decision next week, where it is expected to deliver a more moderate 25 basis point rate increase in light of easing inflationary pressures and the recent banking turmoil.

Euro Extend Gains Above $1.06
The euro consolidated gains above $1.067 after the European Central Bank on Thursday raised interest rates as expected by 50 basis points to combat inflation and despite recent turmoil in the financial markets. ECB policymakers said the Euro Area banking sector was resilient and that they were monitoring current market tensions closely, while they stood ready to respond as necessary to preserve price stability and maintain financial stability in the region. Meanwhile, the central bank’s core inflation forecast was revised upwards to average 4.6% in 2023.

Sterling Rises Above $1.21
The British pound rose back above $1.21, as fears of a banking crisis in the US eased after a group of big US banks announced a $30 billion rescue package for First Republic Bank in an effort to prevent it from becoming the third to fail in less than a week. At the same time, investors awaited key central bank meetings in the UK and US next week. The Bank of England is seen hiking interest rates by 25 bps next week, before ending its current policy tightening cycle, while the US Federal Reserve will likely continue to raise rates to combat inflation, although at a slower pace. Elsewhere, British finance minister Jeremy Hunt pledged on Wednesday to halve inflation, reduce debt and get the economy growing, saying the UK would not enter a technical recession this year and inflation would likely fall to 2.9% by the end of 2023. Hunt also said he expects Britain to meet the fiscal rules set by the government in November.

Australian Dollar Climbs on US Bank Rescue
The Australian dollar rose above $0.67, moving further away from four-month lows as a rescue package for First Republic Bank eased market concerns about the vulnerability of the financial system, lifting market sentiment and supporting risk-sensitive currencies. Large US banks agreed to contribute $30 billion in deposits to First Republic Bank in a bid to shore up confidence in the banking system. Domestically, official data showed that Australia’s unemployment rate improved more than expected to 3.5% in February, pointing to a resilient labor market despite economic uncertainties. On the monetary policy front, the Reserve Bank of Australia delivered a widely expected 25 basis point rate hike at its March meeting. The central bank lifted the cash rate for the 10th straight meeting, bringing borrowing costs to an almost 11-year high of 3.6%.

CRYPTO CURRENCIES

Equities

World Indexes

USA

Wall Street Rattles As First Republic Sinks, Tech rises by 4.3 % 
The Dow finished over 380 points lower on Friday, while the S&P 500 and Nasdaq 100 lost 1.1% and 0.7%, respectively, as concerns over the banking sector turmoil kept investors on edge. First Republic Bank came under renewed heavy selling pressure, down nearly 33%, as the rescue attempt from larger banks, including JPMorgan Chase and Citigroup, offered only brief relief as worries persist that the infusion may not be enough to shore up the regional bank. US-listed Credit Suisse finished 7% down, even after the bank received a CHF50 billion lifeline from the Swiss National Bank. This week, the bank sector turmoil helped big techs to gain $500 billion sending Microsoft and Alphabet shares more than 12% higher.
On the week, Dow Jones lost 0.4%, while the S&P 500 and Nasdaq gained 1.5% and 4.3%, respectively.

Americas

Canadian Shares fall for a second Week
The S&P/TSX Composite index finished 0.7% down around the 19,380 mark on Friday, dragged down by losses in energy and financial sectors as fears regarding the stability of US banks continued to weigh on the heavy-weighing Canadian financial sector (-1.8%). Banks traded in Toronto took fresh blows and fell to their lowest since October 2022, as Royal Bank of Canada and Bank of Montreal slid 2.5% and 1.9%, respectively. In the meantime, energy shares dropped 1.6% pressured by lower oil and gas prices, with WTI contracts sinking to their lowest in 15 months. On the data front, Canadian raw material prices and industrial producer prices both declined in February, strengthening the Bank of Canada’s signal that further rate hikes won’t be necessary.
For the week, the Canadian stock index lost nearly 1.2%, marking the second straight week of loss. 

Brazilian Equities Slide to August Lows 
Brazil’s Ibovespa stock index closed 1.2% lower around the 102,180 level on Friday, not seen since early August 2022, despite a slight recovery the day before and in line with its global peers. Investors worldwide remain skeptical about the health of the banking sector, following the recent turmoil in the US and Europe.
On the domestic front, traders awaited any developments around the new fiscal framework that will replace the spending cap. Among single stocks, Energisa slumped nearly 8.3%, after reporting a 13.7% yearly decline in net profit in 2022. Hapvida (-10.2%), Eztec (-9.6%) and Cyrela (-7.4%) dragged down the main index. By contrast, Petroleum (+16.2%) led the gains, followed by a 9% jump in Ecorodovias shares after upbeat quarterly results. For the week, the Ibovespa fell 1.4%. 

Europe

European Stocks End Week Sharply Lower
European equity markets fell on Friday, with the benchmark Stoxx 600 down 1.2% as investors remained concerned about a potential banking crisis despite efforts in the United States and Europe to backstop troubled lenders. The Stoxx bank index dropped by more than 2.5% led by Credit Suisse (-8.2%). Domestically, the German DAX lost 1.3%, with Deutsche Bank falling 4.5% and the Commerzbank retreating 3.8%. Elsewhere, Santander dropped by over 4%, Swedbank by almost 4%, HSBC by nearly 3%, and Barclays by 2%. Credit Suisse announced it would borrow up to $54 billion from the Swiss National Bank. However, the latest moves have also fueled speculation that central banks could hold their hawkish stance going forward.
For the week, Europe’s bank index shed 11.5%, the most in a year.

French Stocks Lose 4 % on the week
The CAC 40 index extended losses to close about 1.4% down at 6,925 in a volatile session on Friday, in line with its regional peers, amid concerns over further instability in the banking sector despite rescue efforts in the US and Europe. Further protests erupted again today in France, as President Macron will trigger special constitutional powers to raise the retirement age, bypassing Parliament which had not yet voted on the proposal. On the corporate front, the top loser was Renault (-5%), followed by Axa (-3.3%), Publicis Groupe (-2.9%), Veolia Environment (-2.6%), Engie (-2.5%), Carrefour (-2.4%) and Credit Agricole (-2.3%).
For the week, the CAC 40 lost 4.1%, the sharpest decline since mid-September 2022.

FTSE 100 Closes at Four-Month Lows, Posts Sharpest Weekly Decline Since February 2022
Equities in London failed to hold their initial upside momentum on Friday, with the blue-chip FTSE 100 closing down 1% near a four-month low of 7,330 points, dragged by technology and financials shares. Worries worsen about the banking industry while fears mount that it could tip the economy into a recession as initial optimism fueled by bailouts on both sides of the Atlantic faded. Among single stocks, BT Group and Abrdn were among the biggest laggards, down over 5% each.
The FTSE 100 fell 5.4% this week, the worst weekly performance since February 2022.

Spanish Stocks Weekly Decline Largest in Over a Year
The IBEX 35 cut earlier gains to fall below 8720 on Friday, tracking its European peers lower, as investors worried about a potential banking crisis after Credit Suisse collapsed again due to its funds flight. Adding to the bearish sentiment, was also the ECB’s emergency meeting held today. Big financials all declined, with Banco Santander, BBVA, and Sabadell, falling by 4.65%, 3.49%, and 3.14%, respectively. The main laggard on the corporate, however, was Melia Hotels (-4.45%). Repsol was one of the few stocks to escape punishment, up by 1.35%, helped by oil prices recovery amid rumors of an OPEC intervention.
On the week, the index lost 6.09%, the largest decline for the period in over a year.

Italian Stocks Close Week 6.5% Lower
The FTSE MIB index erased early gains and closed 1.6% lower at 25,495 on Friday, booking a 6.5% plunge on the week as investors displayed pessimism on whether recent liquidity injections for troubled banks may be enough to support contagion risks in the sector. Banks once again led the declines in the session, with Finecobank sliding 4% while major lender UniCredit sank 3.6%. While ECB supervisors claimed there were no contagion issues for banks in the currency bloc, investors continued to fret over the value of BTPs that Italian banks have classified as held to maturity, given that higher risk premiums in Italian bonds magnify the vulnerability of Italian banks’ balance sheet. In the meantime, Eni outperformed the broader index following news that it made a 200 million barrel oil find in the Mexican Sureste basin.

Japan

Japanese Shares Post Sharp Weekly Drop
The Nikkei 225 Index rose 1.2% to close at 27,334 while the broader Topix Index climbed 1.15% to 1,959 in a tech-led rebound on Friday, tracking gains on Wall Street overnight as a rescue package for First Republic Bank eased market concerns about another bank failure in the US. The turmoil in the global banking sector also fueled speculations that major central banks could take a less aggressive approach in policy tightening in order to avoid a severe recession.
However, Japanese stocks still posted sharp weekly falls, with the Nikkei and Topix indexes losing 2.88% and 3.55%, respectively, as the banking crisis that started in the US and spread into Europe stoked fears of a broader weakness in the global economy. Technology stocks led the gains on Friday, including Tokyo Electron (2.9%), Advantest (3.3%) and Keyence (2.1%). Financial stocks also advanced such as Mitsubishi UFJ (0.4%), Japan Post Bank (1.2%) and Mizuho Financial (2%)

China

Chinese Shares End Week on Upbeat Note
The Hang Seng surged 314.68 points or 1.64% to close at 19,518.59 on Friday, booking a 1.0% jump weekly while shifting from sharp losses in the prior session, supported by gains in all sectors.  The PBoC eased Reserve requirements and will meet with some major commercial banks to discuss the development of the fixed-income market and reform of the market-making mechanism. Financials were up 0.6%; while consumers and property each gained over 1%. The tech sector jumped near 4.5%, boosted by a 13.7% climb in Baidu Inc. after brokerages including Citigroup tested the company’s chat-GPT-like service and granted it their preliminary approvals. Consumers gained almost 2% while property added 1.6%. Financials climbed 1.4% after declines in recent days. Among single stocks, Giant Biogene posted a 11.2% jump, alongside SenseTime Group (10.5%), Semiconductor Manufacturing (9.6%), Kingdee Intl. Software (8.7%), ZTO Express (7.9%), Country Garden Hlds. (7.7%), and Sunny Optical Technology (5.3%).
For the week, the benchmark indexes ended mixed, with the Shanghai Composite gaining 0.63% while the Shenzhen Component lost 1.44%.

Asia

Singapore Reverses earlier losses
The equity market in Singapore rose 27 points or 0.86% to close flat on Friday after finishing in the red on the previous session. Singapore joined its Southeast Asian peers in saying that its banks held insignificant exposure to the Swiss bank Credit Suisse. Traders paid little attention to official data showing Singapore’s non-oil domestic exports fell for the fifth straight month in February, as they digested a 50bps rate hike by the ECB Thursday that added to bets the US Fed will also raise interest rates next week. Gains were across the board, led by tech, real estate, and consumer non-financials. Thai Beverage PCL posted strong rises (3.2%), as did Capitaland Investment (2.9%), Venture Corp. (2.2%), and UOB Bank (1.5%).
For the week, the index edged up 0.2% after falling in the prior six weeks. 

Indonesia Stocks Reverse Big Losses Weekly
Indonesia’s equities gained on Friday, halting losses in the prior three sessions that saw the JCI index hitting its lowest in over 2 months. Bank Indonesia Thursday held steady its key interest rate at 5.75% for the third month, as the board shifted its focus to support growth amid a continued fall in core inflation. Gains were across the board, with financials among top performers, alongside consumers, utilities, and retail trade. Within bank stocks, BCA rose 0.6%, BRI climbed 1.7%, while Bank Mandiri and BNI added 1.3% and 0.8%, each.
For the week, however, the index lost 1.29%

India

Indian Shares Extend Decline
The BSE Sensex closed 355 points higher at 57,990 on Friday, extending the slight gains from the prior session as support for banks worldwide offered some respite for the battered financial system, lifting risk sentiment in Mumbai. Major US Banks reported to jointly infuse $30 billion to support the deposits in the First Republic Bank, while the Swiss National Bank supported troubled Credit Suisse to ease its recent vulnerability. The Kotak Mahindra Bank, HDFC Bank, and ICICI Bank all added more than 1.5% in the session. Raw material shares also booked gains, with Ultra Tech Cement and Tata Steel both jumping more than 2% on expectations of stronger export demand after the People’s Bank of China cut its reserve ratio to spur economic activity. The latter was also supported by news that China will cut its steel production for a third consecutive year in 2023.
Still, the global banking rout pressured the Sensex to close the week 2% lower.

Middle East

Russian Stocks Rise to 6-Month High Ahead of CBR
The ruble-based MOEX Russia index jumped by over 1.5% to the six-month high of 2,296 mark on Friday, supported by sharp gains for banks as investors await the monetary policy decision from the Central Bank of Russia. The central bank is expected to hold its key rate steady at 7.5% for the fourth consecutive decision as inflationary pressures remain high despite the marked slowdown since the start of Russia’s invasion of Ukraine. On the corporate front, Sberbank shares rallied by over 3.5% to mark over 80% of all turnover in the Moscow Exchange this session, after Interfax reported that the lender’s Supervisory Board will meet and hold a press conference today. Earlier this year, the bank stated that significant profit growth during the end of 2022 underscored the success of the bank’s repositioning since being excluded from the Western financial community due to sanctions, sparking a rally for the Russian banking sector. 

COMMODITIES

Energy

Oil Poised for Worst Week of 2023
WTI crude futures declined 3% to around $66.7 per barrel on Friday, hovering at its lowest levels since December 2021, on the back of global banking turmoil that stoked fears of broader weakness in the world economy.
The US oil benchmark is down almost 13% this week, which marks the sharpest weekly decline this year. Meanwhile, investors are watching closely for any potential response to the rout from OPEC+, with representatives from Saudi Arabia and Russia reportedly discussing efforts to promote market balance and stability. Saudi Arabia energy minister Prince Abdulaziz bin Salman recently stated that OPEC+ would stick to production cuts agreed upon in October until the year’s end. Investors also remained optimistic about a rebound in Chinese demand, with OPEC raising its forecast for the country’s oil demand growth in 2023.

US Natural Gas Prices Fall to 3-Week Low
US natural gas futures fell more than 7% to $2.35/MMBtu, the lowest in three weeks dragged by prospects of lower demand due to less cold weather. Average US gas demand, including exports, is expected to fall to 108 bcfd next week from 116.9 bcfd this week due to milder weather. The EIA said US utilities pulled 58 bcf of gas from storage during the week ended March 10, less than market expectations of a 62 bcf withdrawal. Last week’s decrease cut stockpiles to 1.972 trillion cubic feet (tcf), or 36% above the five-year average. Meanwhile, gas flows to LNG export plants have been on track to hit record highs after Freeport LNG’s export plant in Texas became operational again. For the week, US natural gas prices are down almost 3%.

Copper

Precious Metals

Gold Climbs to 11-Month High
Gold rose 2% to 1,960 an ounce on Friday, the highest since April 2022, closing with a 6.5% weekly gain, the most in 4-1/2 months, as investors poured into haven assets following the global banking turmoil that started in the US and stoked fears of broader weakness in the world economy. Expectations that major central banks would soften their stance on inflation in order to avoid a severe recession also supported gold prices. On the data front, preliminary estimates showed US consumer sentiment unexpectedly fell in March. Meanwhile, the ECB raised its policy rate by 50 bps despite the vulnerability of some European lenders, saying higher rates could improve bank margins. Investors now look ahead to the Federal Reserve’s policy decision next week, where it is expected to deliver a more moderate 25 basis point rate increase in light of easing inflationary pressures and the recent banking turmoil.

Silver Futures Enjoy Strong Momentum
Silver futures were trading shy of the $22 per ounce mark, close to levels last seen in February 2022, supported by a weaker dollar and concerns that the recent financial turmoil is far from over. Investors remained worried about the risk of financial contagion to bigger institutions despite assurance from Treasury Secretary Janet Yellen that the American banking system was in good shape. At the same time, the recent turmoil drove money markets to price an over 80% chance of a 25 bps hike next week.

Soft Commodities

Wheat Rebounds from 20-Month Low
Wheat futures in the US rose to over $7 per bushel, rebounding from the 20-month low of $6.65 touched on March 9th amid uncertainty over future supply. Ukrainian authorities rejected Moscow’s push to cut the extension of the deal guaranteeing a safe trade corridor in the Black Sea to 60 days instead of the 120-day period standard. The news spurred fears that major exporter Ukraine could have limited access to international customers, significantly restricting global supply. The country reported a stronger winter wheat harvest and must continue shipping wheat to free up space for the incoming harvest. Robust supply elsewhere limited the rebound in prices. Top exporter Russia is projected to sell up to 60 million tonnes of wheat on foreign markets in the current marketing year, according to President Putin’s speech to the country’s Federal Assembly. Russia harvested a record-high 153.8 million tonnes of wheat in 2022, driving farmers to turn to international customers to empty silos.

Sugar Eases from Six-Year High
Raw sugar futures were trading around 20.5 cents per pound, easing further from a six-year high of roughly 22 cents on February 27th, pressured partly by weakness in other agricultural markets and soft crude oil prices. A weaker Brazilian real was also bearish for the sugar market as it incentivized export selling from local producers. Keeping a floor under prices were prospects of reduced global output. Brazil, the leading sugar producer, suffered from poor weather during its planting season. Meanwhile, in India, some mills have already begun to stop crushing cane in Maharashtra, the country’s largest production region. Also, the sugar beet crop in Europe was the smallest in 20 years, mainly due to deteriorated weather conditions and a pesticide ban. The International Sugar Organization has recently cut its 2022/23 global sugar surplus estimate to 4.15 MMT from 6.19 MMT.

Lumber Bottomimg Out
Lumber futures bottomed around the $350 per thousand feet mark, close to levels last seen inJune 2020, before rebounding sharply to 451.5 as tight supplies and signs of a demand recovery have helped limit the downside. Last year, a sharp drop in prices and sluggish demand forced North American producers to curb output, leaving inventories low and sparking concerns about a supply shortage during the spring and early summer construction season. The critical building commodity remains roughly 80% down from its May 2021 peak of around $1,700, when supply chain issues compounded strong demand. 

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