The main topic of the week is the move higher in global yields. Lee Hardman, currency analyst, explains why this is positive for the markets, pointing to increased confidence in the global recovery outlook.

This goes hand in hand with recent COVID data showing sharp improvement in cases worldwide, with the vaccine roll-out and various restrictions bringing levels back to those seen late last year.

Lee also talks through what this means for economic rebound and how this focus on yields might impact the upcoming testimony from Fed Chair Powell. Listen now for more.

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MUFG’s oil price conviction is emphatically shifting more bullish than previous above consensus – and market forwards – forecasts. A confluence of vaccine optimism, an easing of COVID-19 cases and fatalities, greater US stimulus, a more upbeat IMF assessment of the global recovery, stern OPEC+ discipline, US supply outages, Biden’s early bullish energy actions and prospects of a weaker US dollar are powering oil markets forward.

Ehsan Khoman, Head of Emerging Markets Research (EMEA), elaborates on MUFG’s price thesis which now signals a peak summer loaded bell curve profile with Brent crude “overshooting” in Q2 at USD77/b.

Following this, he expects a regression back, ending the year at USD64/b, as markets gradually revert towards the equilibrium price for the oil industry – which he believes is centred on the current anchor near the long-term marginal cost of production and support of ~USD55-60/b for Brent crude.

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Following good growth figures from Japan, better than expected corporate earnings from the U.S., and a continued successful vaccine roll out in the UK, the FX markets have started the week in a positive mood as investor sentiment pivots towards risk-on.

Derek Halpenny, Head of Research for Global Markets EMEA and International Securities, gives an overview of what to expect from EUR-USD trading in the coming months; fiscal stimulus from the U.S. is looking to be larger and sooner than previously thought, but where does that leave the outlook for these two currencies? Listen to Derek’s analysis now.

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Emerging markets (EM) may get worse before they get better given vaccine distribution will require patience, with inoculation lagging in developed markets.

However, a confluence of forces – cyclicality, commodities, China and valuation – signals EM outperformance in 2021, according to Ehsan Khoman, Head of Emerging Markets Research (EMEA).

What could end the party early? Investing in EM is never without risks, and Ehsan advocates that investors should not lower their guard completely and would be best-positioned by adopting idiosyncratic bottom-up strategies instead of focusing on top-down macro.

In this week’s podcast, he examines four critical dynamics that could derail the EM recovery this year.

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In this week’s podcast, U.S. Rates Strategist, John Herrmann, does a deep dive into both the establishment survey and the household survey. He finds a few distortions in the technical aspects of the payroll report that may turn around quickly to support payroll computations over the months of February through June 2021. For the unemployment rate, John’s work continues to uncover the roles played by two significant forces that act to depress the reported U3 unemployment rate (by a few hundred basis points).

All combined, John remains confident that his year-end forecast for the U3 unemployment rate likely may be attained – that of 4.042% – which is far lower than the FOMC’s projection (5.00%), lower than the consensus estimate (5.50%), and lower than even the lowest estimate in the Bloomberg survey (4.10%). In John’s view, markets “taper chatter” likely will become quite loud as the year progresses.  

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In today’s podcast, MUFG Head of Agency Mortgage Strategy and Prepayment Modeling, Glenn Schultz, discusses the January 2021 prepayment speeds and explores if speeds are slowing down and if we are seeing burnout in the premium sector. 

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In Japan, Tochigi prefecture lifted the State of Emergency on February 7, though 10 prefectures including Tokyo city will likely maintain it until March 7. With the chill of February, the COVID-19 pandemic should not be considered a thing of the past. USDJPY rise paused after U.S. employment data was released at the end of last week. JPY buying flows could pick up in February. The BoJ announced it plans to scale back on buying JGBs this month. The MoF will also meet this by cutting issuances of TDBs. Japan is putting its own version of Modern Monetary Theory (MMT) into practice.

In today’s episode, MUFG Chief Japan Strategist, Takahiro Sekido, discusses the MoF’s outlook for the fiscal balance in February, key points for Japan’s 2020 Balance of Payments, and January cross border flows. He also shares his outlooks for Dollar/Yen, Yen rates, and Yen basis.

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GBP forecast for the year ahead is positive following the Bank of England policy meeting last week. Lee Hardman, currency analyst, outlines how the scaling back of expectations for further rates cuts and negative rates along with the continued vaccine roll-out has given way to market optimism.

Lee also looks at the outlook for USD, which isn’t quite as rosy - a recent disappointing payrolls report shows the U.S. economy is recovering, but remains far from normal. Listen now.

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A broad economic recovery across emerging markets (EM) in EMEA is being delayed by the Q1 winter speed bump, with a resurgence in COVID-19 cases across parts of the region, the emergence of more contagious strains and a return of mobility restrictions in nearly all countries.

The inflation outlook though is a different story, according to Ehsan Khoman, Head of Emerging Markets Research (EMEA). After a bottoming out of price pressures in 2020, he forecasts increasing supply-side inflation risks, in particular in EM high yielders, combined with a strong rebound in global commodity prices.

The result is likely to be tighter monetary conditions, especially with interest rates at record lows in most EMs. With initial signs of policy normalisation within EM beginning to resurface in a few markets, this poses a hurdle against any chase for carry.

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