災害/病気

Highlights Massive slack in the US labour market means that the current uplift in US inflation is highly likely to fade by the end of the year. On a long-term horizon, investors should own US T-bonds. Equity investors should fade the reflation trade… …and rotate into the unloved defensive sectors such as healthcare, consumer staples, and personal products. These sector preferences imply an overweight to developed markets (DM) versus emerging markets (EM). On a 6+ month horizon, overweight US T-bonds versus German bunds. Fractal trade shortlist: France versus Japan; corn versus wheat; timber; and building materials. Feature Chart of the WeekMillions Of People Have Dropped Out Of The US Labour Market The near 40 percent of Americans not in the labour market is the highest level in 50 years. Moreover, the exodus out of the labour market during the pandemic was on an unprecedented scale in the modern era. This means that we should treat the US unemployment rate with a huge dose of salt, because it does not include the millions of people that have dropped out of the labour market (Chart I-1). Even the headline 14 million plunge in the number of US unemployed is deceptive, because it is almost entirely due to the furloughed workers that have returned to their jobs (Chart I-2). Chart I-2Furloughed Workers Have Returned To Their Jobs... Worryingly, the additional 2 million ‘permanent unemployed’ has barely budged from its pandemic peak and the number of economically inactive stands 5.5 million higher (Chart I-3). Meanwhile, population growth is increasing the potential labour force. In combination, underemployment in the US labour market amounts to around 10 million people. Chart I-3...But The Numbers Of Permanent Unemployed And Inactive Remain Elevated To its credit, the Federal Reserve is acutely aware of this. Last week, Chair Jay Powell pointed out that: “We’re a long way from full employment, payroll jobs are 8.4 million below where they were in February of 2020…these were people who were working in February of 2020. They clearly want to work. So those people, they’re going to need help” Implicit is the Fed’s belief that the massive slack in the US labour market will keep structural inflation depressed. And that the coming increases in inflation will be short-lived. Travel And Hospitality Cannot Move The Inflation Needle Some people argue that pent-up demand for things that we couldn’t do under social restrictions – such as travel and eat out – will unleash a major inflation. The flaw in this argument is that these things account for a tiny part of the inflation basket. For example, airfares are weighted at a negligible 0.6 percent in the US consumer price index (CPI). Eating out at (full service) restaurants is weighted at just 3 percent. So, even if these prices were to surge, they would barely move the overall inflation needle. By far the biggest component in US inflation is rent of shelter, weighted at 33 percent in the CPI and 42 percent in the core CPI. By far the biggest component in US inflation is rent of shelter, weighted at 33 percent in the CPI and 42 percent in the core CPI. The lion’s share of rent of shelter is so-called ‘owner-equivalent rent’, weighted at 24 percent in the CPI and 30 percent in the core CPI.1  Owner-equivalent rent is the hypothetical cost that homeowners incur to consume their own home, obtained by surveying a sample of homeowners. In the US, this hypothetical cost tracks actual rents. So, we can say that the biggest driver of US inflation is rent inflation (Chart I-4). Chart I-4Owner-Equivalent Rent Inflation Tracks Actual Rent Inflation Rent inflation has consistently outperformed the rest of the inflation basket. Hence, to get overall inflation to a persistent 2 percent, rent inflation must get to 3 percent and stay there – meaning a persistent 1.5 percent higher than it is now (Chart I-5). Chart I-5Core Inflation At 2 Percent Requires Rent Inflation At 3 Percent What drives rent inflation? The answer is the permanent unemployment rate. This is because the ability to pay rent relies on the security of having a permanent job. Empirically, a one percent decline in the permanent unemployment rate lifts rent inflation by one percent (Chart I-6). Chart I-6A 1 Percent Decline In The Permanent Unemployment Rate Lifts Rent Inflation By 1 Percent Pulling this together, the US permanent unemployment rate needs to fall by about 1.5 percent for core inflation to reach the Fed’s target persistently. Put another way, most of the additional 2 million permanent unemployed need to find work. Yet history teaches us that this will take a long time. The Post-Pandemic Productivity Boom Will Be Disinflationary When an industry sheds millions of jobs in a recession, it tends to substitute that labour input permanently with a new productivity-boosting technology or strategy. For example, after the Great Depression the smaller craft-based auto producers shut down permanently, while those that had adopted labour-saving mass production survived. The result was a major restructuring of the auto productive structure. Another example was the ‘typing pool’, a ubiquitous feature of office life until the late 1990s. After the dot com bust, the wholesale roll-out of Microsoft Word wiped out these typing jobs. It takes years for excess labour to get fully absorbed into a post-recession economy. Hence, the flip side of a post-recession productivity boom is that displaced workers need to re-skill, or even change career – requiring a long time for the excess labour to get absorbed into the restructured economy. After the dot com bust, it took four years. After the global financial crisis, it took six years (Chart I-7). Chart I-7How Long Does It Take To Absorb The Permanent Unemployed? The post-pandemic experience will be no different. In fact, compared to a common-or-garden recession, the pandemic has accelerated wider-reaching changes to the way that we live, work, and interact. This means that it might take even longer for the economy to attain the central bank’s goal of ‘full employment.’ Again, to its credit, the Federal Reserve is acutely aware of this. As Jay Powell went on to say: “It’s going to be a different economy. We’ve been hearing a lot from companies looking at deploying better technology and perhaps fewer people, including in some of the services industries that have been employing a lot of people. It seems quite likely that a number of the people who had those service sector jobs will struggle to find the same job, and may need time to find work” In summary, elevated permanent unemployment will subdue rent inflation. And subdued rent inflation will constrain overall inflation once the current supply bottlenecks clear. On a long-term horizon, investors should own US T-bonds. Equity investors should fade the reflation trade, and rotate into the unloved defensive sectors such as healthcare, consumer staples, and personal products. These sector preferences imply an overweight to developed markets (DM) versus emerging markets (EM). US And European Inflation Will Converge US and European inflation rates are not measured on an apples-for-apples basis. European inflation excludes the largest component in the US inflation basket – owner-equivalent rent (OER). To repeat, OER is the hypothetical cost that homeowners incur to consume their own home. European statisticians do not like to include any hypothetical item in the inflation basket that does not have a market price. So, euro area inflation includes actual rents, but it excludes OER. On an apples-for-apples comparison, inflation rates in the US and the euro area have been near-identical for many years. This means that US core inflation has a 30 percent higher weighting to an item that has persistently inflated at well above 2 percent. If we strip out OER, then the core inflation rates in the US and the euro area have been near-identical for many years (Chart I-8).2 Chart I-8On An Apples-For-Apples Comparison, Inflation In The US And Euro Area Are Near-Identical Alternatively, what if we include OER in euro area inflation? Despite European rent controls, actual rents have persistently outperformed core inflation. Hence, OER would likely outperform by even more. We can infer that including OER would have lifted euro area inflation very close to US inflation (Chart I-9). Chart I-9Omitting Owner-Equivalent Rent Has Depressed Euro Area Inflation All of this may sound like a petty academic difference, but this petty academic difference has generated huge economic and political consequences. As OER has boosted inflation in the US versus Europe, US and euro area monetary policy have diverged much more than they should. Which means US and euro area bond yields have diverged much more than they should. Which has structurally weakened the euro. Which has spawned the near $200 billion trade surplus for the euro area versus the US. And all because of a petty academic difference! What happens next? If, as we expect, US shelter inflation remains depressed then the major difference between US and euro area inflation will vanish. Reinforcing this will be a catch-up in euro area growth as the delayed roll-out of vaccinations takes effect. On this basis, a stand-out opportunity on a 6+ month investment horizon is yield convergence between US T-bonds and German bunds. Overweight US T-bonds versus German bunds. Candidates For Countertrend Reversals Corn prices have surged on increased demand from China combined with supply shortages resulting from poor weather in Brazil. This has caused an odd divergence between corn and wheat prices, which is now susceptible to a sharp correction (Chart I-10). Chart I-10The Rally In Corn Versus Wheat Is Vulnerable To Reversal Likewise, timber prices have boomed on the back of increased housebuilding demand combined with supply bottlenecks. But as these bottlenecks clear and/or higher bond yields cool demand, the sector is vulnerable to an aggressive reversal given its fragile fractal structure (Chart I-11). Chart I-11Timber Prices Are Vulnerable To Reversal To play this, our first recommended trade is to short the Invesco Building and Construction ETF (PKB) versus the Healthcare SPDR (XLV), setting the profit target and symmetrical stop-loss at 15 percent (Chart I-12). Chart I-12Short Building And Construction (PKB) Versus Healthcare (XLV) Finally, within stock markets, the recent divergence of France versus Japan is highly unusual given that the two markets have near-identical sector compositions. This divergence has taken France versus Japan to the top of its multi-year trading range (Chart I-13). Chart I-13Short France Versus Japan Hence, our second recommended trade is to short France versus Japan (MSCI indexes), setting the profit target and symmetrical stop-loss at 4.8 percent. Dhaval Joshi Chief Strategist dhaval@bcaresearch.com Footnotes 1 The PCE has broadly similar weights as the CPI. 2 We have approximated the removal of OER by removing the whole shelter component. 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Highlights Rising CO2 emissions on the back of stronger global energy growth this year will keep energy markets focused on expanding ESG risks in the buildout of renewable generation via metals mining (Chart of the Week).   EM energy demand is expected to grow 3.4% this year vs. 2019 levels and will account for ~ 70% of global energy demand growth.  Demand in DM economies will fall 3% this year vs 2019 levels.  Overall, global demand is expected to recover all the ground lost to the COVID-19 pandemic, according to the IEA.  Rising energy demand will be met by higher fossil-fuel use, with coal demand increasing by more than total renewables generation this year and accounting for more than half of global energy demand growth. Demand for renewable power will increase by 8,300 TWh (8%) this year, the largest y/y increase recorded by the IEA.  As renewables generation is built out, demand for bulks (iron ore and steel) and base metals will increase.1  Building that new energy supply will contribute to rising CO2, particularly in the renewables' supply chains. Feature Energy demand will recover much of the ground lost to the COVID-19 pandemic last year, according to the IEA.2 Most of this is down to successful rollouts of vaccination programs in systemically important economies – e.g., China, the US and the UK – and the massive fiscal and monetary stimulus deployed to carry the global economy through the pandemic. The risk of further lockdowns and uncontrolled spread of variants of the virus remains high, but, at present, progress continues to be made and wider vaccine distribution can be expected. The IEA expects a global recovery in energy demand of 4.6% this year, which will put total demand at ~ 0.5% above 2019 levels. The global rebound will be led by EM economies, where demand is expected to grow 3.4% this year vs. 2019 levels and will account for ~ 70% of global energy demand growth. Energy demand in DM economies will fall 3% this year vs 2019 levels. Overall, global demand is expected to recover all the ground lost to the COVID-19 pandemic, according to the IEA. Chart of the WeekGlobal CO2 Emissions Will Rebound Post-COVID-19 Coal demand will lead the rebound in fossil-fuel use, which is expected to account for more than total renewables demand globally this year, covering more than half of global energy demand growth. This will push CO2 emissions up by 5% this year. Asia coal demand – led by China's and India's world-leading coal-plant buildout over the past 20 years – will account for 80% of world demand (Chart 2). Chart 2China, India Lead Coal-Fired Generation Buildout Demand for renewable power will post its biggest year-on-year gain on record, increasing by 8,300 TWh (8%) this year. This increase comes at the back of roughly a decade of an increasing share of electricity from renewables globally (Chart 3). As renewables generation is built out, demand for bulks (iron ore and steel) and base metals will increase.3 Building that new energy supply will contribute to rising CO2, particularly in the renewables' supply chains. Chart 3Share of Electricity From Renewables Has Been Increasing ESG Risks Increase With Renewables Buildout Governments have pledged to invest vast sums of money into the green energy transition, to reduce fossil fuels consumption and deforestation, thus curbing temperature increases. In addition, banks have pledged trillions will be made available to support the buildout of renewable technologies over the coming years. The World Bank, under the most ambitious scenarios considered (IEA ETP B2DS and IRENA REmap), projects that renewables, will make up approximately 90% of the installed electricity generation capacity up to 2050. This analysis excludes oil, biomass and tidal energy. (Chart 4). Building these renewable energy sources will be extremely mineral intensive (Chart 5). Chart 4Renewables Potential Is Huge … While we have highlighted issues such as a lack of mining capex and decreasing ore grades in past research – both of which can be addressed by higher metals and minerals prices – the environmental, social and governance (ESG) risks posed by mining are equally important factors for investors, policymakers and mining companies to consider.4 The mining industry generally uses three principal sources of energy for its operations – diesel fuel (mostly in moving mined ore down the supply chain for processing), grid electricity and explosives. Of these three, diesel and electricity consumption contributes substantially to mining’s GHG emissions. In the mining stage, land clearing, drilling, blasting, crushing and hauling require a considerable amount of energy, and hence emit the highest amounts of greenhouse gases (GHGs). Chart 5… As Are Its Mineral Requirements The Environmental Impact Of Mining Under the scenarios depicted in Chart 5, copper suppliers could be called on to produce approximately 21mm MT of the red metal annually between now and 2050, which is equivalent to a 7% annual increase of supplies vs. the 2017 reference year shown in the chart. Mining sufficient amounts of copper, a metal which is critical to the renewable energy buildout, both in terms of quantity and versatility, will test miners' and governments' ability to extract sufficient amounts of ore for further processing without massively damaging the environment or indigenous populations' habitats (Chart 6). Chart 6Copper Spans All Renewables Technologies A recent risk analysis of 308 undeveloped copper orebodies found that for 180 of the orebodies – roughly equivalent to 570mm MT of copper – ore-grade risk was characterized as moderate-to-high risk.5 High risk implies a lower concentration of metal in the ore deposits. Mining in ore bodies with lower copper grades will be more energy intensive, and thus will emit more greenhouse gases. Table 1 is a risk matrix of the 40 mines that have the most amount of copper tonnage in this analysis: 27 of these mines displayed in the matrix have a medium-to-high grade risk. Table 1Mining Risk Matrix Another analysis established a negative relationship between the ore-grade quality and energy consumption across mines for different metals and minerals.6 This paper found that, as ore grade depletes, the energy needed to extract it and send it along the supply chain for further processing is exponentially higher (Chart 7). Lastly, a recent examination found that in 2018, primary metals and mining accounted for approximately 10% of the total greenhouse gases. Using a case study of Chile, the world’s largest producer of the red metal, the researchers found that fuel consumption increased by 130% and electricity consumption per unit of mined copper increased by 32% from 2001 to 2017. This increase was primarily due to decreasing ore grades.7 As ore grades continue to fall, these exponential relationships likely will persist or become more significant. Chart 7Energy Use Rises As Ore Quality Falls Bottom Line: While technology can improve extraction, it cannot reduce the minimum energy required for the mining process. This increased energy use will contribute to the total amount of CO2 and other GHGs emitted in the process of extracting the ores required to realize a low-carbon future. Trade-Off Between CO2 Emissions And Economic Development A recent Reuters analysis highlights the gap between EM and DM from the perspective of their renewable energy transition priorities.8 Of the 17 UN Sustainable Development Goals (SDGs), “Taking action to combat climate change” takes precedence over the rest for DM economies. This is largely because they have already dealt with other energy and income intensive SDGs such as improvements in healthcare and poverty reduction. The large scale of unmet energy demand in developing countries poses a huge challenge to controlling CO2 emissions. The populations of these countries are growing fast and are projected to continue increasing over the next three decades. Rising populations, make the issue of a "green-energy transition" extremely dynamic – i.e., not only do EM economies need to replace existing fossil fuels, but they also need to add enough extra zero-emission fuel sources to meet the growth in energy demand. Bottom Line: Coupled with the increased amount of energy required to mine the same amount of metal (due to lower ore grades), rising energy demand resulting from a burgeoning population in EM economies - which use fossil fuels to meet their primary needs - will require more metals to be mined for the renewable energy transition. This will further increase the amount of carbon dioxide and other greenhouse gas emissions from mine activity, and increase the risk to indigenous populations living close-by to the sources of this new metals supply. ESG risks will increase as a result, presenting greater challenges to attracting funding to these efforts.   Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com   Commodities Round-Up Energy: Bullish OPEC 2.0 was expected to stick with its decision to return ~ 2mm b/d of supply to the market at its ministerial meeting Wednesday. Markets remain wary of demand slowing as COVID-19-induced lockdowns persist and case counts increase globally. The production being returned to market includes 1mm b/d of voluntary cuts by Saudi Arabia, which could, if needs be, keep barrels off the market if demand weakens. Base Metals: Bullish Front-month COMEX copper is holding above $4.50/lb, after breaching its 11-year high earlier this week. The proximate cause of the initial lift above that level was news of a strike by Chilean port workers on Monday protesting restrictions on early pension-fund drawdowns, according to mining.com. After a slight breather, prices returned to trading north of $4.50/lb by mid-week. Last week, we raised our Dec21 COMEX copper price forecast to $5.00/lb from $4.50/lb. Separately, high-grade iron ore (65% Fe) hit record highs, while the benchmark grade (62% Fe) traded above $190/MT earlier in the week on the back of lower-than-expected production by major suppliers and USD weakness. Steel futures on the Shanghai Futures Exchange hit another record as well, as strong demand and threats of mandated reductions in Chinese steel output to reduce pollution loom (Chart 8). Precious Metals: Bullish Rising COVID cases, especially in India, Brazil and Japan are increasing gold’s safe-haven appeal (Chart 9). The US CFTC, in its Commitment of Traders (COT) report for the week ending April 20, stated that speculators raised their COMEX gold bullish positions. At the end of the two-day FOMC meeting, the Fed decided against lifting interest rates and withdrawing support for the US economy. However, officials sounded more optimistic about the economy than they did in March. The decision did not give any sign interest rates would be lifted, or asset purchases would be tapered against the backdrop of a steadily improving economy.  Net, this could increase demand for gold, as inflationary pressures rise. As of Tuesday’s close, COMEX gold was trading at $1778/oz. Ags/Softs: Neutral Corn and bean futures settled down by mid-week after a sharp rally earlier. After rising to a new eight-year high just below $7/bushel due to cold weather in the US, and fears a lower harvest in Brazil will reduce global grain supplies, corn settled down to ~ $6.85/bu at mid-week trading. Beans traded above $15.50/bu earlier in the week, their highest since June 2014, and settled down to ~ $15.36/bu by mid-week. Attention remains focused on global supplies. The uptrend in grains and beans remains intact. Chart 8 Chart 9   Footnotes 1     Please see Renewables, China's FYP Underpin Metals Demand, published 26 November 2020, for further discussion.  It is available at ces.bcaresearch.com. 2     Please see Global Energy Review 2021, the IEA's Flagship report for April 2021. 3    Please see Renewables, China's FYP Underpin Metals Demand, published 26 November 2020, for further discussion.  It is available at ces.bcaresearch.com. 4    We discussed these capex issues in last week's research, Copper Headed Higher On Surge In Steel Prices, which is available at ces.bcaresearch.com. 5    Please see Valenta et al.’s ‘Re-thinking complex orebodies: Consequences for the future world supply of copper’ published in 2019 for this analysis. 6    Please see Calvo et. al.’s ‘Decreasing Ore Grades in Global Metallic Mining: A Theoretical Issue or a Global Reality?’ published in 2016 for this analysis. 7     Please see Azadi et. al.’s ‘Transparency on greenhouse gas emissions from mining to enable climate change mitigation’ published in 2020 for this analysis. 8    Please see John Kemp's Column: CO2 emission limits and economic development published 19 April 2021 by reuters.com.   Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

Highlights Developed economies continue to transition towards a post-pandemic state. Europe has further to go, but it is lagging the US at a constant rate and is thus merely delayed – not on a different path. This ongoing transition is also reflected in the global macro data, which continues to surprise to the upside. Widespread optimism about the outlook for economic activity and earnings over the coming year has led some investors to ask whether an imminent peak in the rate of growth could be a potentially negative inflection point for richly valued risky asset prices. Using our global leading economic indicator as a guide, we find that a peak in growth momentum in and of itself is not likely to be enough of a catalyst for meaningful risky asset underperformance versus government bonds. A sizeable shock to sentiment would likely be required, causing either a very serious growth slowdown, outright fears of recession, or some other event that negatively impacts earnings growth or raises the equity risk premium (“ERP”). We can identify several candidates for such a shock, including the emergence of new, vaccine-resistant variants of COVID-19, the impact of higher taxes on earnings, overtightening in China, and a potentially hawkish shift in monetary policy in the developed world. But none of these risks individually appears to be likely enough to warrant reducing cyclical portfolio exposure. We continue to expect positive absolute single-digit returns from stocks over the coming 6-12 months, and would recommend that investors remain overweight stocks versus bonds in a multi-asset portfolio. We remain overweight global ex-US equities vs. the US, but expect that euro area stocks will have to do the heavy lifting, driven either by the underperformance of global technology stocks or the outperformance of euro area financials. Within a fixed-income portfolio, we recommend a modestly short duration stance, but do so primarily on a risk-adjusted basis. Feature Chart I-1Europe Is Behind The US, But On The Same Path Over the past month, developed economies have continued to transition towards a post-pandemic state. While the number of new confirmed COVID-19 cases remains relatively high on a per capita basis in the US and Europe, there continues to be significant progress on the vaccination front in all Western advanced economies. Europe continues to lag the US and the UK in terms of the share of the population that has received at least one dose of vaccine, but Chart I-1 highlights that the gap has remained constant at approximately six weeks (to the US). Panel 2 of Chart I-1 highlights that the US and UK both experienced either falling or a stable number of new cases once the number of first doses reached current European levels; Israel required significant further gains in the breadth of vaccinations before it altered COVID-19’s transmission dynamics in that country, but this appears to have occurred because of a much higher pace of spread earlier this year. The negative impact on advanced economies from reduced services activity is strongly linked to pandemic control measures (such as stay-at-home orders, curfews, forced business closures, etc). We have argued that, outside of the US, the implementation and removal of these measures is being driven by the impact of the pandemic on the medical system, rather than the sheer number of new cases and deaths. Chart I-2 highlights that, based on this framework, Europe still has further to go – current per capita hospitalizations remain much higher in France and Italy than in the US, UK, or Canada. But the nature of the disease means that hospitalizations begin to fall even if case counts remain relatively stable, and fall rapidly once new cases trend lower. Given the steady gains that European countries are making in providing first vaccine doses to their populations, it seems likely that hospitalizations there will peak sometime in the coming four to six weeks. This underscores that Europe is not on a different path than that of the US, it is simply further behind in the process (and will ultimately catch up). The transition towards a post-pandemic state is also reflected in the global macro data, which continues to positively surprise in all three major economies (Chart I-3). In Europe, the April services PMI rose back above the 50 mark, April consumer confidence surprised to the upside, and February retail sales came in better than expected (Table I-1). In the US, the March services PMI was also very strong, the labor market continued to meaningfully improve, and several measures of inflation surprised to the upside. Chart I-2Euro Area Hospitalizations Remain High, But Will Soon Decline Chart I-3The Macro Data Continues To Positively Surprise   Table I-1Services PMIs And The Labor Market Continue To Meaningfully Improve Chart I-4China's Current Contribution To Global Demand Is Strong In China, the recent tick higher in the surprise index likely reflects the recognition of some data series whose release was delayed due to the Chinese New Year, as well as significant base effects (compared with Q1 2020) in many data series recorded in year-over-year terms. On a quarter-over-quarter basis, Chinese economic activity decelerated last quarter to 0.6% from the upwardly revised 3.2% in Q4 2020 – which was below the anticipated 1.4% q/q. Still, Chinese RMB-denominated import growth closely matches (lagging) data on global exports to China (in US$ terms), with the former suggesting that China’s current contribution to global external demand remains strong (Chart I-4). This is also consistent with rising producer prices, which had fallen back into deflationary territory last year (panel 2). Peaking Growth Momentum: Should Investors Be Worried? The continued increase in the number of vaccine doses administered, positive data surprises, and bullish global growth forecasts for this year have understandably led to extremely optimistic investor sentiment. It has also naturally raised the question of “what could go wrong?”, with some investors pointing to an imminent peak in the rate of growth as a potentially negative inflection point for richly valued risky asset prices. Chart I-5 addresses this question by examining 12 episodes of waning growth momentum since 1990, defined as an identifiable peak in our global leading economic indicator. Panel 2 shows the 12-month rate of change in the relative performance of global equities versus a US$-hedged 7-10 year global Treasury index. Chart I-5Is Peaking Growth Momentum A Risk For Stocks? At first blush, the chart does support the notion that a peak in growth momentum is generally negative for risky asset prices. The subsequent 12-month relative return from stocks versus bonds following a peak in the LEI has been negative in 8 out of the 12 episodes, suggesting that the risks of an equity correction are currently quite elevated. However, there is more to the story than this simple calculation implies (Table I-2). First, two of the twelve episodes saw the global LEI peak in the context of an eventual US recession, so it is not surprising that stocks underperformed bonds in those episodes. Second, out of the six non-recessionary episodes, only two of them involved significant underperformance, in 2002 and in 2015. Table I-2Peak Growth Momentum Is An Insufficient Catalyst For Equity Underperformance US equities underperformed in the former case because of the persistently damaging impact of corporate excesses that built up during the dot-com bubble, and predominantly global ex-US equities underperformed bonds in the latter case because of a combination of the significant impact on global CAPEX from the 2014 dollar and oil price shock, as well as a major decline in global bond yields. In the four other non-recessionary examples of equity underperformance, stocks only modestly underperformed bonds, and often this occurred in the context of significant events: surprising Fed hawkishness in 1994, the Asian financial crisis in 1997, a major slowdown in China in 2013, and the combination of a domestically-driven Chinese economic slowdown coupled with the Sino/US trade war in 2017/2018. The key point for investors is that a peak in growth momentum is in and of itself not enough of a catalyst for meaningful risky asset underperformance versus government bonds. A sizeable shock to sentiment would likely be required, causing either a very serious growth slowdown, outright fears of recession, or some other event that negatively impacts earnings growth or raises the equity risk premium (“ERP”). What Else Could Go Wrong? There are four other plausible risks that we can identify to a bullish stance towards risky assets over the coming 6-12 months. We discuss each of these risks below. New COVID-19 Variants Chart I-6 highlights that bottom up analysts expect global earnings per share to be 12% higher than their pre-pandemic level in 12-months’ time. This expectation is driven by extraordinarily easy fiscal and monetary policy, but also the view that vaccination against COVID-19 will allow social distancing policies to end and services activity to fully recover. However, as India is clearly – and tragically – demonstrating at present, the emerging world is lagging in terms of vaccinating its population. India’s per capita case count has soared (Chart I-7), which is surprising given that the country’s COVID-19 infection rate has been significantly below that of more advanced economies over the past year. It is therefore likely that India’s case count explosion is due to new variants of the disease, and periodic outbreaks in less developed countries – as well as vaccine hesitancy in more developed economies – risks the emergence of even newer variants that may be partially or substantially vaccine-resistant. Chart I-6Earnings Expectations Already Price In A Normalization In Services Activity Chart I-7India's COVID-19 Situation Is Tragic, And Concerning   New variants of COVID-19 may prove to be less deadly, but the economic impact of the pandemic has come mainly from its potential to collapse the medical system via high rates of serious illness requiring hospitalization, not strictly from its lethality. As such, potentially new vaccine-resistant variants of the disease resulting in similar or higher rates of hospitalization pose a risk to a bullish economic outlook. Taxation Both corporate and individual tax rates are set to rise in the US over the coming 12-18 months which, at first blush, could certainly qualify as a non-recessionary event that negatively impacts earnings or raises the ERP. Corporate taxes are set to rise first as part of the American Jobs Plan, which our political strategists have argued will probably take the Biden administration most of this year to pass. The plan involves a proposed increase in the domestic corporate income tax rate to 28% from 21%, a higher minimum tax on foreign profits, and a 15% minimum tax on “book income”. In addition, as part of the American Families Plan, Biden is proposing to increase the top marginal income tax rate for households earning $400,000 or more to 39.6% (from 37%), and to substantially increase the capital gains tax rate for those earning $1 million or more from a base rate of 20% to 39.6%. The 3.8% tax on investment income that funds Obamacare would be kept in place, which would bring the total capital gain tax rate to 43.4% for that income group. Peter Berezin, BCA’s Chief Global Strategist, made two points about higher corporate taxes in a recent report.1 First, he noted that the changes would likely result in an 8% decline in forward earnings if passed as currently proposed, but that various tax credits as well as opposition to a 28% corporate tax rate from Democratic Senator Joe Manchin would likely cap the impact at 5%. Second, he argued that the behavior of 12-month forward earnings and the performance of stocks that benefitted the most from President Trump’s corporate tax cuts suggest that very little impact from these changes has been priced in. Peter argued in his report that the effect of strong economic growth will likely offset the negative impact of higher taxes on earnings, and we are inclined to agree. Chart I-8 highlights that a 5% reduction in 12-month forward earnings would reduce the equity risk premium by roughly 20-25 basis points, which would not be disastrous on its own. Still, the fact that these changes have not been priced in means that corporate tax hikes could be a more meaningful driver of lower stock prices if the impact is ultimately larger than we currently expect or if the growth outlook suddenly shifts in a negative direction. In terms of changes to individual taxes, our sense is that the proposed increase in the capital gains tax rate is more significant than the modest proposed change to the top marginal income tax rate for higher-income households. For individuals earning $1 million or more, Chart I-9 highlights that the proposed change to the capital gains rate would bring it to the highest level seen since the late 1970s. Given the rich valuation of equities, it seems inconceivable that such a change would not trigger some short-term selling of equities to lock in long-term gains at lower tax rates. Chart I-8Higher Corporate Taxes Will Only Modestly Reduce the Equity Risk Premium Chart I-9Biden's Capital Gains Tax Proposal Would Lead To Some Selling Of Stocks...   But like upcoming changes to corporate taxes, we see the potential for higher taxes on wealthy individuals as a risk to the equity market and not as a likely driver of stock prices over a cyclical time horizon. First, our political strategists see 50/50 odds that the American Families Plan will be passed this year, meaning that short-term tax avoidance selling may be postponed until 2022. In addition, Chart I-10 highlights that over the longer term, the relationship between the maximum capital gains tax rate and the ERP is weak or nonexistent. The chart highlights that the perception of a positive relationship rests entirely on the second half of the 1970s, when the maximum capital gains tax rate was between 30-40%. However, it seems clear from the chart that the stagflationary environment of that period was responsible for a high ERP, as the capital gains rate fell from 1977 to 1982 without any significant decline in risk premia. It took until the end of the 1982 recession and the beginning of the structural disinflationary period for the equity risk premium to decline, suggesting that there is effectively no relationship between the two (and therefore no reason to believe that higher capital gains taxes will lead to sustained declines in stock market multiples). Chart I-10…But The Effect Would Not Likely Last Overtightening In China Chart I-11Leading Indicators Of China's Economy Are Pointing Down, Not Up Even though Chart I-4 highlighted that Chinese import demand is currently strong, we expect China’s growth impulse to weaken in the second half of the year. Chart I-11 highlights that our leading indicator for China’s Li Keqiang index has done a good job of predicting Chinese import growth, and the indicator is now in a clear downtrend. Panel 2 presents the components of the indicator, and shows that all three are trending lower. Monetary conditions are potentially rebounding from extremely weak levels (due to past deflation and a rise in the RMB versus the US dollar and other Asian currencies), but money supply and credit measures are deteriorating. Leading indicators for China’s economy are deteriorating because Chinese policymakers have already tightened liquidity conditions in response to the country’s rebound from the pandemic and following a surge in the credit impulse. The 3-month repo rate returned to pre-pandemic levels in the second half of last year (Chart I-12), and consequently the private sector credit impulse (particularly that of corporate bond issuance) fell despite robust medium-to-long term loan growth. Chart I-12Chinese Interest Rates Have Already Returned To Pre-COVID Levels We noted in our January report that China’s credit impulse has consistently followed a 3½-year cycle since 2010, and this year has been no different. This cycle is not exogenous or mystical; it has been caused by the repeated “oversteering” of activity by Chinese policymakers who frequently oscillate between the need to fight deflation and the strong desire to curb additional private sector leveraging. Our base case view is that policymakers will not accidentally overtighten the economy, and that the credit impulse will settle somewhere between late 2019 levels and the peak rate reached in the latter half of last year. But the risk of significant oversteering cannot be ruled out, and will likely remain a downcycle risk for investors for several years to come. A Hawkish Shift In Monetary Policy In Developed Markets Last week the Bank of Canada announced that it would taper its pace of government debt purchases from 4 billion to 3 billion CAD per week. The announcement was noteworthy for many investors, as it suggested that asset purchase reductions could also be announced by the Fed and other major central banks by the end of the second or third quarter. Many investors are sensitive to the tapering question because of what transpired during the “Taper Tantrum” episode of 2013. During an appearance before Congress in late May of that year, then Chair Ben Bernanke stated that the Fed could “step down” the pace of its asset purchases in the next few FOMC meetings if economic conditions continued to improve. The result was that 10-year Treasurys fell roughly 10% in total return terms over the subsequent three-month period. While stocks rallied in response to the growth-positive implications of the move, this occurred from a much higher ERP starting point than exists today. The risk, in the minds of some investors, is that tapering today could thus lead to a correction in stock prices. There are two counterpoints to this view. First, bonds have already sold off meaningfully over the past several months in response to a significant improvement in the economic outlook, and investors already expect the Fed to raise interest rates earlier than it is publicly forecasting. It is thus difficult to see how an announcement of tapering from the Fed would significantly alter the outlook for monetary policy over the coming 6-18 months. Chart I-13Another Taper Tantrum-Like Selloff Would Necessitate Higher Expectations For R-star Second, it is notable that the “Taper Tantrum” began at yield levels at the front end of the curve that are roughly similar to what prevails today. 5-year/5-year forward bond yields stood at roughly 3% at the beginning of the “Tantrum”, compared with 2.3% today. Chart I-13 highlights how high forward bond yields would need to rise in order to generate another selloff of similar magnitude from 10-year Treasury yields (roughly 3.65%). In our view, a rise to this level over the coming year is essentially impossible without a major shift in investor expectations about the natural rate of interest. We highlighted the risk of such a shift in last month’s report,2 but for now it would likely necessitate hard evidence of little-to-no permanent damage to the labor market from the pandemic. This is not our base case view, but it will be an important possibility to monitor as the decisive end to social distancing and other pandemic control measures draws nearer. Investment Conclusions As noted above, there are several identifiable risks to a bullish outlook for risky assets, but none of these risks individually appear to be likely. Given this, we continue to expect positive absolute single-digit returns from stocks over the coming 6-12 months, and would recommend that investors remain overweight stocks versus bonds in a multi-asset portfolio. We favor value versus growth stocks, cyclical versus defensive sectors, and small versus large cap stocks, although there is more return potential over the coming year in value versus growth than the latter two positions. We also remain short the US dollar over a cyclical time horizon. Within a global equity portfolio, we remain overweight global ex-US equities vs the US, but this position has moved against us over the past two months. Chart I-14 highlights that global ex-US equities have given back all of their October – January gains versus US equities, most of which has occurred since late-February. The chart also highlights that all of this underperformance has been driven by emerging market stocks, as euro area equity performance has been mostly stable year-to-date. Chart I-15 highlights that EM underperformance has occurred both in the broadly-defined tech sector as well as when measured in ex-tech terms. To us, this suggests that EM stocks are responding to the deterioration in leading indicators for the Chinese economy that we noted above, which implies that they are not likely to lead global ex-US equity performance higher over the course of the year barring an imminent shift in Chinese policy. We continue to expect that euro area stocks will have to do the heavy lifting, driven either by the underperformance of global technology stocks or the outperformance of euro area financials – which are extremely cheap relative to US banks and have much further scope for earnings to normalize as the pandemic draws to a close. Chart I-14Emerging Markets Have Caused Global Ex-US Stocks To Underperform Chart I-15EM's Underperformance Has Been Broad-Based   As a final point, investors should note that we are recommending a modestly short duration stance within a fixed-income portfolio, but that we make this recommendation primarily on a risk-adjusted basis. Chart I-16 highlights that Treasury market excess returns (relative to cash) have historically been driven by whether the Fed funds rate increases by more or less than what is currently priced into the market. Over the past 12 months, the Treasury index has very substantially underperformed cash without a hawkish surprise, and the rate path that is currently implied by the OIS curve is already more hawkish than the Fed is (for now) projecting. On this basis, a neutral duration stance could be justified, but we would still prefer a modestly short duration stance due to the risk of a potential increase in investor expectations for the neutral rate of interest late this year or in early 2022. Chart I-16Policy Rate Surprises Tend To Drive The Duration Call Jonathan LaBerge, CFA Vice President The Bank Credit Analyst April 29, 2021 Next Report: May 27, 2021   II. In COVID’s Wake: Government Debt And The Path Of Interest Rates The US fiscal outlook has deteriorated substantially over the past two decades, as a consequence of the fiscal response to both the global financial crisis and the COVID-19 pandemic. US government debt-to-GDP is now nearly as high as it was at the end of the Second World War, and is projected by the US Congressional Budget Office (CBO) to explode higher over the coming 30 years. Some investors argue that extreme levels of government debt now virtually guarantee that interest rates will remain structurally low, and we test this claim alongside a scenario that limits the projected rise in the primary deficit. We find that US fiscal reform, when it eventually occurs, will likely be negative for health care stocks. We also note that even in a scenario where the US limits the size of its future primary budget deficit, net interest outlays will likely rise to elevated levels compared to history. A comparison with the Canadian experience in the 1990s suggests a structurally negative outlook for the US dollar, from an overvalued starting point. Finally, we note that the US fiscal outlook does not necessarily prevent an increase in interest rates over the coming few years in a scenario where investors raise their expectations for the neutral rate of interest, a possibility that we discussed in last month’s report. This scenario is not our base case view, but it is plausible and should actively be monitored by investors over the coming one to two years. For now, we do not expect that rising interest rates pose a risk to stocks over the coming 6-12 months. Investors should remain cyclically overweight equities within a multi-asset portfolio, and should maintain a below-benchmark level of duration on a risk-adjusted basis. In 2001, US government debt held by the public as a share of GDP stood at 31.5%, after having fallen roughly 16 percentage points from early 1993 levels. Today, as a result of both the global financial crisis and the COVID-19 pandemic, the debt to GDP ratio has risen to a whopping 100%, and is projected to rise meaningfully higher over the coming decades. In this report we review the long-term US fiscal outlook in the wake of the pandemic, with a focus on the implications for interest rates. Some investors argue that extreme levels of government debt now virtually guarantee that interest rates will remain structurally low, and we test this claim alongside a scenario that limits the projected rise in the primary deficit. We find that US fiscal reform, when it eventually occurs, will likely be negative for health care stocks, whose fundamental performance has outstripped that of the broad equity market since the mid-1990s (reflecting pricing power that stands to be curtailed through regulation). We also note that even in a scenario where the US limits the size of its future primary budget deficit, net interest outlays will likely rise to elevated levels compared to history. A comparison with the Canadian experience in the 1990s suggests a structurally negative outlook for the US dollar, from an overvalued starting point. Finally, we note that the US fiscal outlook does not necessarily prevent an increase in interest rates over the coming few years in the hypothetical scenario that we described in last month’s report,3 i.e., an environment where the narrative of secular stagnation is challenged and investor expectations for the neutral rate rise closer to trend rates of economic growth. This scenario is not our base case view, but it is plausible and should actively be monitored by investors over the coming one to two years. For now, investors should remain cyclically overweight equities within a multi-asset portfolio, and should maintain a below-benchmark level of duration on a risk-adjusted basis. Debt Sustainability, And The CBO’s Baseline Projection When analyzing the US fiscal outlook, the Congressional Budget Office’s Long-Term Budget Outlook report is typically the reference point for investors. The report provides annual projections for the budget deficit and the debt-to-GDP ratio for the next three decades, as well as a breakdown of the projected deficit into its primary (i.e., non-interest) and net interest components. Charts II-1 and II-2 present the most recent baseline projections from the CBO, which clearly present a dire long-term outlook. The deficit and debt-to-GDP ratio are projected to be relatively stable over the next decade, but explode higher over the subsequent 20 years. In 2051, the CBO’s baseline projects that the budget deficit will be roughly 13% of GDP, with net interest costs accounting for approximately two-thirds of the deficit. Chart II-1The CBO’s Fiscal Outlook Is Extremely Negative Chart II-2In 2051, The CBO Projects A 13% Annual Budget Deficit In order to understand what is driving the CBO’s dire long-term budget and debt forecast, it is important to review the government debt sustainability equation shown below. The equation highlights that the change in a government’s debt-to-GDP ratio is approximately equal to 1) the primary deficit plus 2) net interest costs as a share of GDP, the latter being defined as the product of last year’s debt-to-GDP ratio and the difference between the average interest rate on the debt and the rate of GDP growth. Δ Debt-To-GDP Ratio ≈ Primary Deficit As A % Of GDP4 + (r-g)*(Prior Period Debt-To-GDP Ratio) Where: r = Average interest rate on government debt and g = Nominal GDP growth The equation highlights that expectations of a persistently rising debt-to-GDP ratio must occur either because of expectations of a persistent primary deficit, or expectations that interest rates will persistently exceed the rate of economic growth (or some combination of the two). This underscores why debt sustainability analysis often focuses on the primary budget balance, as a country’s debt-to-GDP ratio will be stable if no primary deficit exists and interest costs are at or below the prevailing rate of economic growth. Chart II-3 illustrates the source of the CBO’s projected rise in debt-to-GDP beyond 2031, by presenting the two components of the debt sustainability equation alongside the projected annual change in the debt-to-GDP ratio. The chart makes it clear that while the CBO is forecasting a sizeable primary deficit to continue, it is projected to grow at a slower pace than the debt-to-GDP ratio itself. The increasing rate at which the debt-to-GDP ratio is projected to grow in the latter years of the CBO’s forecast period is clearly driven by the interest rate component, meaning that “r” is projected to be greater than “g”. Chart II-4 presents this point directly, by highlighting that the CBO is forecasting the average interest rate on government debt to exceed that of nominal GDP growth in 2038, and to continue to exceed growth (by an increasing amount) thereafter. Chart II-3Decomposing The CBO's Projected Change In The Debt-To-GDP Ratio Chart II-4The CBO's Projections Rest, In Part, On Rates Eventually Exceeding Growth   Three Adjustments To The CBO’s Baseline We make three adjustments to the CBO’s baseline in order to assess how the US fiscal outlook shifts under an interest rate path that is different than that projected by the CBO. First, we adjust the CBO’s projected budget deficit over the coming few years based on deficit forecasts from our US Political Strategy service following the passage of the American Recovery Plan act.5 Chart II-5We Test The Effect Of An Initially Higher, But More Sustainable, Rate Path Next, we adjust the interest component of the total budget deficit based on a new path for short- and long-term interest rates that models a scenario in which the neutral rate of interest rises to, but not above, GDP growth (Chart II-5). In last month’s report we outlined a scenario in which this could feasibly occur,3 and the hypothetical path for interest rates shown in Chart II-5 thus incorporates both the negative budgetary impact of an earlier rise in interest rates and the positive budgetary impact of “r” never rising above “g”. We explicitly exclude any crowding out effect on long-term interest rates, based on the view that term premia are likely to remain muted in a world of low potential economic growth, unless a fiscal crisis appears to be imminent (see Box II-1). Box II-1 Arguing Against The CBO’s Crowding Out Assumption The CBO’s projection that interest rates will ultimately rise above the rate of economic growth rests on the view that increased government spending will absorb savings that would otherwise finance private investment (a “crowding out” effect). We agree that crowding out can occur over the course of the business cycle, especially in a scenario where increased government spending pushes output above its potential (creating a cyclical acceleration in inflation and eventually an increase in interest rates). But the CBO is assuming that high government debt-to-GDP ratios will crowd out private investment on a structural basis, and on this basis we disagree. First, Chart Box II-1 highlights that there is essentially no empirical relationship across countries between a country’s debt-to-GDP ratio and its long-term government bond yield. Japan is a clear outlier in the chart, but including Japan implies that the relationship is negative, not positive. Chart Box II-1There Is No Empirical Relationship Between Debt-To-GDP And Interest Rates In addition, given that central banks directly control interest rates at the short-end of the curve, a structural crowding out effect can only manifest itself in the form of an elevated term premium embedded in longer-term government bond yields. Our bet is that term premia are likely to stay low in a world of low falling nominal growth, as evidenced by the experience of the past decade.6 Finally, we model the impact of two changes, beginning in 2031, that would work towards reducing the primary deficit: an increase in average government revenue to 20% of GDP (its peak level reached in 2000), and a slower pace of increase on major health care program spending. Despite the fact that population aging will increase mandatory spending on social security and health care over the coming three decades, the CBO has highlighted that the majority of the increase in spending towards these programs is projected to occur due to rising health care costs per person (Chart II-6). We thus model the impact of medical care cost control by limiting the rise in net mandatory outlays on health care programs between 2021 and 2051 to roughly half of what the CBO baseline projects. This adjustment does not prevent mandatory spending on health care programs from rising, given the strong political challenges involved in limiting spending increases that are caused by an aging population. Chart II-6The US Structural Primary Balance Is Heavily Impacted By Medical Costs Charts II-7 and II-8 illustrate how these three adjustments impact the long-term US fiscal outlook. Relative to the CBO’s baseline projections, the American Recovery Plan (ARP) budget deficit forecasts from our US Political Strategy service imply that the debt-to-GDP ratio will be approximately three to four percentage points higher over the very near term, and roughly ten points higher over the long term. Chart II-7Even With Higher Rates, The Fiscal Outlook Is Meaningfully Less Bad… Relative to this new baseline, an increase in interest rates to, but not above, the projected rate of nominal economic growth increases the debt-to-GDP ratio by an additional ten percentage points (20 points higher versus the CBO’s baseline) in the middle of the forecast period, but it lowers the debt-to-GDP ratio over the longer run by eliminating the effect of outsized interest rates magnifying a persistent primary deficit. Still, the debt-to-GDP ratio is projected to rise to a whopping 207% of GDP by 2051 in this scenario, with a budget deficit in excess of 10% of GDP. The third adjustment shown in Charts II-7 and II-8 underscores the impact on the US fiscal outlook of actions aimed at reducing the primary deficit. Increases in government revenue and the prevention of rising health care costs per person results in the debt-to-GDP ratio that is 64 percentage points lower in 2051 than in our normalized interest rate scenario. The budget deficit in this scenario still increases to approximately 6% of GDP thirty years from today, but in this case most of the deficit is due to the net interest component rather than the primary deficit, meaning that the debt-to-GDP ratio would be increasing at a much slower rate if interest rates were no higher than the rate of economic growth. Chart II-8 highlights that net interest spending in this scenario would rise to 4.5% of GDP, which would be meaningfully higher than the prior high of roughly 3% in the late 1980s and early 1990s. Chart II-8...With Higher Taxes And Medical Cost Control Chart II-9A Meaningful, But Not Unprecedented, Rise In Net Interest Outlays But that is far from unprecedented or necessarily consistent with a fiscal crisis. Chart II-9 also shows that Canada’s public debt charges rose to 6.5% of GDP in the early 1990s without triggering a public debt crisis. It is true that Canada subsequently embarked on a painful fiscal consolidation program in order to reduce its public debt burden, but this, in part, occurred because of a cyclically-adjusted primary deficit of approximately 3% - twice as large as that projected for the US in 2051 in our adjusted scenario shown in Charts II-7 and II-8. Revenue And Health Care Cost Reform Our third adjustment to the CBO’s long-term budget outlook involved changes to revenue and health care cost control to reduce the US’ projected primary deficit. Are these adjustments achievable? In our view, the answer is yes: As noted above, our scenario modeled these changes taking place a decade from today, which allows for policymakers and stakeholders to have a substantial amount of time to act and adjust to these changes. On the revenue front, we noted above that US government revenue has reached 20% of GDP in the past, in the year 2000. Chart II-10 highlights that while raising taxes will likely reduce US competitiveness, the US maintains a sizeable tax advantage relative to other advanced economies, and that this was true prior to the tax cuts that took place under the Trump administration. On the health care cost front, Chart II-11 highlights that US healthcare expenditure is much larger as a share of GDP than other countries, which was not the case prior to the 1980s. Chart II-12 highlights that this cost difference is entirely due to inpatient (i.e., hospital) and outpatient (i.e., drug) costs. While it is not clear what form it will take, it seems likely that future reforms by policymakers to eliminate rising health care costs per person will occur and can be achieved. Chart II-10The US Government Can Afford To Raise Revenue Chart II-11The US Spends Much More On Health Care Than Other Countries   Chart II-12The US Significantly Outspends The World On Hospital And Drug Costs The key point for investors is not whether these changes should or should not occur, but whether there are any feasible scenarios in which spiraling government debt and interest payments are avoided without the Fed purposely maintaining monetary policy at levels persistently below the rate of economic growth – and thus risking major inflationary pressure. Our analysis above highlights that there are; the question is when policymakers will choose to act and in what form. A potential tipping point may be when US government spending on net interest as a % of GDP exceeds its prior high, which occurs in 2026 in the scenario modeled in Chart II-8. In a scenario where reforms fail to materialize or where financial markets force policymakers to act, a fiscal risk premium could certainly emerge in longer-term government bond yields, which could lead the Fed to maintain lower short-term interest rates than it otherwise would. But this scenario is only likely to emerge after interest rates converge towards rates of economic growth, as US government debt will remain highly serviceable for some time if "r" remains meaningfully lower than "g". Investment Conclusions There are three potential investment implications of our research. First, the fact that rising medical costs have such a significant impact on the CBO’s projections of the primary deficit implies that fiscal reform, when it eventually occurs, will be negative for US health care stocks. Chart II-13 highlights that US health care sector earnings have outperformed broad market earnings since the mid-1990s, and that the sector has consistently delivered an above-average return on equity. This historical performance likely reflects the sector’s pricing power, which stand to be curtailed through regulatory efforts in a world where rising health care costs per person collide with fiscal belt-tightening. Interestingly, Chart II-12 highlighted that US per capita spending on medical goods is not significantly higher than in other developed markets, suggesting that the health care equipment & supplies industry may fare better over a very long term time horizon than overall health care. Second, Charts II-7 and II-8 highlighted that even if the US does raise revenue as a share of GDP and limits excessive growth in medical costs, a primary deficit will still exist and net interest outlays will still rise to elevated levels compared to what has historically been the case. We noted that Canada experienced a higher public debt burden in the 1990s and did not suffer from a fiscal crisis, but Chart II-14 highlights that the fiscal situation did weigh on the Canadian dollar, which progressively traded 10-20% below its PPP-implied fair value level over the course of the 1990s. Thus, the implication is that eventual fiscal reform in the US may be structurally negative for the US dollar, from an overvalued starting point (panels 3 and 4 of Chart II-14). Chart II-13Eventual Fiscal Reform Will Likely Be Negative For Health Care Stocks Chart II-14The US Fiscal Outlook, Even With Some Reforms, Is Dollar-Negative   Finally, our scenario analysis highlights that very elevated levels of government debt do not guarantee that interest rates will remain structurally low, especially over the next decade when the US primary deficit is projected to remain relatively stable. For investors focused on forecasting the direction of 10-year Treasury yields from the perspective of valuation, it should be noted that the next decade is the relevant projection period for the Fed funds rate, not what occurs to net interest outlays in the two decades that follow. Over the very long run, it is true that there may ultimately be very strong political pressure on the Fed to keep interest rates below the prevailing rate of economic growth, as policymakers in 2030 will be able to avoid a structural adjustment to the primary deficit of roughly 1.1-1.3% of GDP for every percentage point that average interest rates on government debt are below nominal GDP growth. However, we noted above that this pressure is unlikely to build before the second half of this decade even in a scenario where interest rates rise significantly over the coming few years, and it remains an open questions whether the Fed will acquiesce to this pressure given its strong potential to fuel excess private sector leveraging. Over the coming one to two years, the key conclusion is that the US fiscal outlook is not likely to prevent an increase in interest rates over the coming few years in the hypothetical scenario that we described in last month’s report, i.e., an environment where the narrative of secular stagnation is challenged and investor expectations for the neutral rate rise closer to trend rates of economic growth. This remains a risk to our overweight stance towards risky assets and is not our base case view. But it does highlight the importance of monitoring long-dated rate expectations over the coming year, and argues, on a risk-adjusted basis, for a below-neutral duration stance within a fixed-income portfolio. Jonathan LaBerge, CFA Vice President The Bank Credit Analyst III. Indicators And Reference Charts BCA’s equity indicators highlight that the “easy” money from expectations of an eventual end to the pandemic have already been made. Our technical, valuation, and sentiment indicators are very extended, highlighting that investors should expect positive but more modest returns from stocks over the coming 6-12 months. Our monetary indicator has aggressively retreated from its high last year, reflecting a meaningful recovery in government bond yields. The indicator remains above the boom/bust line, however, highlighting that monetary policy remains supportive for risky asset prices. Forward equity earnings already price in a complete earnings recovery, but for now there is no meaningful sign of waning forward earnings momentum. Net revisions remain positive, and positive earnings surprises have risen to their strongest levels on record. Within a global equity portfolio, EM stocks have dragged down global ex-US performance, likely in response to deteriorating leading indicators for the Chinese economy. This implies that they are not likely to lead global ex-US equity performance higher over the course of the year barring an imminent shift in Chinese policy. We continue to expect that euro area stocks will have to do the heavy lifting, driven either by the underperformance of global technology stocks or the outperformance of euro area financials – which are extremely cheap relative to US banks and have much further scope for earnings to normalize as the pandemic draws to a close. The US 10-Year Treasury yield has edged lower over the past month, after having risen to levels that were extremely technically stretched. Despite this pause, our valuation index highlights that bonds are still expensive, and that yields could move higher over the cyclical investment horizon. We expect the rise to be more modest than our valuation index would imply, but we would still recommend a modestly short duration stance within a fixed-income portfolio. Commodity prices, particularly copper, lumber, and agricultural commodities, are screaming higher. This reflects bullish cyclical conditions, but also pandemic-induced supply shortages that are likely to wane later this year. Commodity prices are technically extended and sentiment is extremely bullish for most commodities, suggesting that a breather in commodity prices is likely at some point over the coming several months. US and global LEIs remain in a solid uptrend, and global manufacturing PMIs are strong. Our global LEI diffusion index has declined significantly, but this likely reflects the outsized impact of a few emerging market countries (whose vaccination progress is lagging). Strong leading and coincident indicators underscore that the global demand for goods is robust, and that output is below pre-pandemic levels in most economies because of very weak services spending. The latter will recover significantly later this year, as social distancing and other pandemic control measures disappear. EQUITIES: Chart III-1US Equity Indicators Chart III-2Willingness To Pay For Risk Chart III-3US Equity Sentiment Indicators   Chart III-4Revealed Preference Indicator Chart III-5US Stock Market Valuation Chart III-6US Earnings Chart III-7Global Stock Market And Earnings: Relative Performance Chart III-8Global Stock Market And Earnings: Relative Performance   FIXED INCOME:   Chart III-9US Treasurys And Valuations Chart III-10Yield Curve Slopes Chart III-11Selected US Bond Yields Chart III-1210-Year Treasury Yield ComponentsChart III-13US Corporate Bonds And Health Monitor Chart III-14Global Bonds: Developed Markets Chart III-15Global Bonds: Emerging Markets   CURRENCIES: Chart III-16US Dollar And PPP Chart III-17US Dollar And Indicator Chart III-18US Dollar Fundamentals Chart III-19Japanese Yen Technicals Chart III-20Euro Technicals Chart III-21Euro/Yen Technicals Chart III-22Euro/Pound Technicals   COMMODITIES: Chart III-23Broad Commodity Indicators Chart III-24Commodity Prices Chart III-25Commodity Prices Chart III-26Commodity Sentiment Chart III-27Speculative Positioning   ECONOMY: Chart III-28US And Global Macro Backdrop Chart III-29US Macro Snapshot Chart III-30US Growth Outlook Chart III-31US Cyclical Spending Chart III-32US Labor Market Chart III-33US Consumption Chart III-34US Housing Chart III-35US Debt And Deleveraging   Chart III-36US Financial Conditions Chart III-37Global Economic Snapshot: Europe Chart III-38Global Economic Snapshot: China   Jonathan LaBerge, CFA Vice President The Bank Credit Analyst Footnotes 1 Please see Global Investment Strategy "Taxing Woke Capital," dated April 16, 2021, available at gis.bcaresearch.com 2 Please see The Bank Credit Analyst Special Report "R-star, And The Structural Risk To Stocks," dated March 31, 2021, available at bca.bcaresearch.com 3 Please see The Bank Credit Analyst Special Report "R-star, And The Structural Risk To Stocks," dated March 31, 2021, available at bca.bcaresearch.com 4 Presented in this fashion, a budget deficit (surplus) is recorded with a positive (negative) sign. 5 For more information, please see US Political Strategy report “Biden’s Pittsburgh Speech And Legislative Agenda,” dated April 1, 2021, available at usp.bcaresearch.com 6 Please see “Term premia: models and some stylised facts”, by Cohen, Hördahl, and Xia, BIS Quarterly Review, September 2008.

ハイライト COVID-19感染者数の急増がインドの株式および通貨市場を動揺させている。 懸念すべきは、複数の潜在的なスーパースプレッダー・イベントが進行中であるため、インドの新規感染者数がしばらく例外的に高水準で推移する可能性があることだ。 それでも、中期および長期の見通しは依然として明るい。 ボラティリティ許容度が低い資産配分担当者は、EMエクイティ・ポートフォリオでインドを戦術的にニュートラルに格下げすることを検討してよい。長期投資家はインド株を引き続きオーバーウエイトすべきである。 特集 インドの新型COVID-19新規感染者数は過去数週間で急増し、以前のピークを大幅に上回っている。同国は現在、世界の1日当たり新規感染者の40%を占めている（図表1および図表2）。これにより新たなロックダウンの可能性が高まり、その結果インド株と通貨は売りが先行し始めている。 Chart 1 インドの日次COVID-19新規感染者数は最近急増している … インドは戦術的な格下げに値する インドは戦術的な格下げに値する Chart 2 … 世界の新規感染者の40%および死者の20%を占めている … インドは戦術的な格下げを正当化する インドは戦術的な格下げを正当化する 当社はインドの景気循環的および構造的見通しが良好であることから、EMエクイティ・ポートフォリオでインドをオーバーウエイトしてきた。見解自体は変わらないが、COVID-19新規感染者数の放物線的な急増はインドの株式および通貨市場に短期的なボラティリティをもたらす可能性が高いと考えている。 したがって、ボラティリティ許容度が低い資産配分担当者には、今後数か月間、インド株を戦術的にニュートラルに格下げすることを推奨する。以下に、この短期的な格下げの理由と中期から長期にかけてのより楽観的な理由を詳述する。 新規感染者数は高水準が続く可能性 Chart 3 … 再び厳格なロックダウンの恐れを生じさせている インドは戦術的な格下げを正当化する インドは戦術的な格下げを正当化する 人口密度が高く生活環境が理想的とは言えない同国では、感染拡大を社会的距離政策で抑える試みは極めて困難だ。それでも当局は昨年春に世界で最も厳格なロックダウン措置を課すことでまさにそれを試みた（図表3）。その結果、経済活動は完全に崩壊し、鉱工業生産は前年同期比で半減し、2020年第2四半期のGDPは前年同期比で22%縮小した。 現在、前例のない新規感染者数の急増に直面しており、市場は一部のロックダウンでも景気回復の芽を摘むのではないかと懸念している。 懸念されるのは、インドの新規感染者数がしばらくの間例外的に高水準を維持する可能性があることだ。理由は、いくつかの潜在的なスーパースプレッダー・イベントが進行中だからである。同国では、数万人規模の集会の前で候補者が遊説する５州での州選挙が行われている。現在、最大で300万人が集まっている宗教的集会も行われている。 Chart 4 罹患率および死亡率が上昇すれば、厳格なロックダウンが避けられなくなる可能性がある インドは戦術的な格下げを正当化する インドは戦術的な格下げを正当化する 罹患率および死亡率はまだ上昇していない（図表4）。これは重要な指標であり、当局のロックダウン措置の厳しさを決定するだろう。首相は厳格なロックダウンは最後の手段だと述べているが、入院率や死亡率が上昇し始めればその可能性は排除できない。投資家の懸念を高めている点は次のとおりだ： 株式のバリュエーションが昨年春よりもはるかに高いことが、市場をさらに急落しやすくしている（図表5）。 インド株は過去12か月で記録的な外国ポートフォリオ投資の流入（合計で$34 billion）に恩恵を受けてきた。したがって、再度のロックダウンの脅威が現実になれば、これらの資金の一部が短期的に逆流するリスクが高く、それは株式市場とルピーの両方にとって逆風となる（図表6）。 最後に、米ドル高と今後数か月にわたるEMエクイティの総じてのアンダーパフォーマンスは、インドからの資金流出を促すだろう。 Chart 5 高まったバリュエーションがインド株の脆弱性を高めている インドは戦術的なダウングレードを正当化する インドは戦術的なダウングレードを正当化する Chart 6 海外ポートフォリオ投資の逆流は株式とルピーの両方を下落させるだろう インドは戦術的な格下げに値する インドは戦術的な格下げに値する 景気循環の見通しは引き続き良好 短期的な懸念を超えて、インドの景気循環的な見通しは引き続き良好だ。回復は以下の指標が示すように堅調である： E-wayビルの発行数（事業活動のバロメーター）が財・サービス税（GST）徴収機構の一部として着実に増加している。GSTの徴収自体も堅調であり、同じメッセージを裏付けている（図表7）。 製造業およびサービス業のPMIは3月に55を超え、活動が力強く拡大していることを示している。 RBIおよびダン・アンド・ブラッドストリートの調査が示すように、企業の受注残は強い。これらの指標は今後の鉱工業生産の改善を予告している（図表8）。 Chart 7 インドの基調的な景気回復はこれまで堅調である … インドは戦術的なダウングレードに値する インドは戦術的なダウングレードに値する Chart 8 … 強い受注残によって支えられている … インドは戦術的なダウングレードに値する インドは戦術的なダウングレードに値する 要するに、上記のすべては、厳格なロックダウンがない限り、今後数か月で企業の売上高（トップライン）が改善することを示唆している。 一方で、企業の利益率も著しく回復している。RBIの2600社超の調査によれば、粗利益率および純利益率はいずれも2020年12月時点でパンデミック前の水準を上回っていた（図表9）。 利益率が広がっているため、売上高の回復は今後の数四半期で利益の加速につながるだろう。 利益の再加速が近い兆候として、企業は新たな工場や機械への投資を始めている。資本支出は既に2020年第4四半期に2019年同期比でプラスに転じていた。資本財の輸入も増加し始めており、企業の新たな設備投資計画を裏付けている（図表10）。 Chart 9 … 健全な利益率 … インドは戦術的なダウングレードを正当化する インドは戦術的なダウングレードを正当化する Chart 10 … それが企業の設備投資再開を促した インドは戦術的な格下げに値する インドは戦術的な格下げに値する 新たな設備投資は需要の強まりに自信がある場合にのみ行われる。さらに、設備投資は通常、利益の増加に続いて行われる。したがって、資本財の輸入増と資本支出の増加は、企業が今後の売上と利益の両方について楽観的であることを示している。 中央銀行は多数のオープンマーケットオペレーションを実施することで銀行システムの流動性を十分に保っている。銀行貸出の伸び率は6.3%と依然低いが、底打ちしているように見える。近年、大企業が銀行借入を自国通貨建て債務の発行で代替していることを除けば、貸出成長率は9%に達する（図表11）。 COVID-19の感染拡大による短期的な懸念を超えれば、経済活動の回復に伴って貸出は加速する可能性が高い。それは銀行株にとって追い風となる。ちなみに、銀行はインドの株価指数における最大の構成比を占めている。 最後に、インドの小型株は大型株に対して引き続きアウトパフォームしている（図表12）。インドの小企業は成長の鈍化や信用環境の引き締まりに対して脆弱だ。彼らがアウトパフォームを続けているという事実は、投資家が今回のパンデミック再拡大が経済に重大かつ長期的な影響を与えるとは見ていないことを示唆している。 Chart 11 拡張が続けば銀行貸出は増加するだろう インドは戦術的な格下げに値する インドは戦術的な格下げに値する Chart 12 小型株のアウトパフォームは投資家が成長と信用環境に楽観的であることを示唆している インドは戦術的な格下げに値する インドは戦術的な格下げに値する 景気循環的な回復を超えて、我々はインドの長期的見通しにも強気である。その理由は、インドが意味のある構造改革を実施している数少ない新興国の一つであるからだ。人口構成も非常に好都合である。これらおよび他の構造的課題については、今後のレポートでより詳述する予定だ。 投資結論 インド株および通貨は、COVID-19感染者数の急増が利食い・売りを誘発したため、変動の時期に入っている。ボラティリティ許容度の低いEMエクイティ・ポートフォリオは、したがってこの株式市場を数か月間戦術的にニュートラルに格下げすることを検討すべきである。絶対リターン投資家（米ドル建て）も、短期的なインド株価のボラティリティに備えるべきだ。 しかし中期から長期では、インド株はEMの同業他国を上回るパフォーマンスを示し、絶対値でも上昇する可能性が高い（図表13）。 インドの銀行株も現在のボラティリティで影響を受けている。しかし、インドの民間銀行は効率性が高くバランスシートも優れていることから、長期投資家は当社推奨のインド銀行株ロング／EM銀行株ショートのトレードを引き続き維持すべきである（図表14）。 Chart 13 短期的なボラティリティを超えれば、インド株はEMの同業他国を上回る … インドは戦術的格下げに値する インドは戦術的格下げに値する Chart 14 … 同様にインドの銀行株もEMの銀行を上回るだろう インドは戦術的なダウングレードに値する インドは戦術的なダウングレードに値する フィクスト・インカム投資家は引き続きインドで10年物スワップ金利を受けるポジションを維持すべきだ。降水量が豊富なため食料価格は下落する見込みで、これがインフレを抑制するだろう。COVID-19の感染拡大と潜在的なロックダウンはディスインフレ的であり、スワップ金利を押し下げるだろう。   Rajeeb Pramanik シニアEMストラテジスト rajeeb.pramanik@bcaresearch.com

ハイライト 継続中かつ予想される財政・金融刺激策とCOVID-19対策の進展を受けた世界成長の強まりは、主要データ提供者による今年の石油需要前提を押し上げています。 当社は本月の需給バランスで2021年の世界需要見積りを64万b/d引き上げて98.25mm b/dとし、OPEC 2.0が脆弱な回復を乱さないようにブレント価格を$60/bbl付近に保つための必要な調整を行うと想定しています。 当社の2022年および2023年のブレント予測はそれぞれ$65/bbl、$75/bblで維持します。 コモディティ市場は、米国、ロシア、中国およびそれらの関係国・同盟国を巻き込む武力衝突の高まる確率を無視しています。ロシアはウクライナ国境に軍を集結させ、米国に干渉するなと警告しました。中国はフィリピン沖に戦艦を集結させ、台湾の防空識別圏への侵入を続けており、米軍を緊張させています。意図的あるいは偶発的な交戦が発生すれば石油価格は急騰します。 価格は上下双方にリスクがあふれています。武力衝突のリスクに加え、ワクチン配布の加速は回復を前倒しし、当社予測を超える価格上昇をもたらす可能性があります。一方で、ブラジル、インド、欧州での死亡者数および入院者数の上昇が示すように、COVID-19によるロックダウン再発の下振れリスクは依然として存在します（今週のチャート）。 特集 石油需要推計—当社の推計も含め—は、主要経済におけるCOVID-19の抑制に向けた測定可能な進展と、特に米国発の潤沢な財政・金融刺激策を受けて回復しています。1 IMFのGDP上方修正を受け、本月の需給バランスで当社は2021年の世界需要見積りを64万b/d引き上げて98.25mm b/dとしました。当社のモデリングでは、脆弱な回復を損なわないようにブレント価格を$60/bbl付近に保つために、サウジアラビア王国（KSA）とロシアが主導する生産者連合であるOPEC 2.0が必要な調整を行うと想定しています。 通常とは異なり、石油需要回復の初期段階は先進国市場（DM）がけん引すると見ています。先進国の代理としてOECDの石油消費を用いています（チャート2）。その後、来年以降は新興市場（EM）経済が再び成長を主導し、2023年にかけて続きます。 今週のチャート COVID-19の死者数・入院者数が世界的回復を脅かす 原油価格の上振れリスクが高まっている 原油価格の上振れリスクが高まっている チャート2 先進国（DM）の需要が今年急増 DMの需要が今年急増 DMの需要が今年急増 OPEC 2.0の余剰生産能力の吸収 当社はサウジアラビア王国（KSA）とロシアが主導する生産者連合であるOPEC 2.0を市場で支配的な生産者としてモデリングし続けています。今年予想する成長はOPEC 2.0の余剰生産能力のかなりの部分を吸収する見込みであり、その大半—約8mm b/dのうち約6mm b/d—がKSAにあります（チャート3）。 主要生産国の余剰生産能力は、米国のシェール生産者がリグと人員を動員して新規生産を集積ラインや主要パイプラインに導入するよりも速く、回復する需要に対応することを可能にします。 当社は米国のシェール生産者を市場価格を受け入れるコホート（価格受容群）としてモデル化しており、市場が許す限り生産すると想定しています。2020年に9.22mm b/dまで落ち込んだ米国生産は、今年9.56mm b/d、2022年に10.65mm b/d、2023年に11.18mm b/dまで回復すると見ています（チャート4）。米国内コンチネンタル産（Lower 48）の生産成長はシェールが主導し、各年とも米国総生産の約80%を占める見込みです。 チャート3 コアOPEC 2.0の余剰生産能力がまず需要増に反応する OPEC 2.0のコア予備生産能力は需要の増加に最初に反応する OPEC 2.0のコア予備生産能力は需要の増加に最初に反応する チャート4 シェールは価格受容群における限界供給源 シェールは価格受容群における限界バレルである シェールは価格受容群における限界バレルである 供給面でのOPEC 2.0の支配的地位は、余剰生産能力が枯渇するまでは非連合生産者に経済的地代を奪われることを許さず、非連合生産者にとっては抑制要因となります。その後、価格受容群は資本を呼び込む能力が限られているため、内部留保から多くの探査・生産（E+P）活動を賄う可能性が高いと考えられます。株主は配当の維持・成長、あるいは株式買戻しによる資本還元を要求し続けるでしょう。これが収益性のある企業に生産成長を限定する要因になります。 当社はOPEC 2.0連合の生産規律が供給を需要のわずか下にとどめ、在庫が減少し続けるようにするだろうと見ています。これはCOVID-19パンデミックで需要が破壊されたにもかかわらず実際に起きたことです（チャート5）。これらのモデリング前提から、当社は供給と需要が2023年にかけて均衡へ向かって動き続けると予想しています（表1）。 チャート5 2021年の需給バランス 2021年の需給バランス 2021年の需給バランス 表1 BCA 世界原油 需給バランス（MMb/d、ベースケース） 原油価格の上方リスクが高まっている 原油価格の上方リスクが高まっている 当社はこの需給均衡化が恒常的な物理的不足を誘発し、在庫は2023年にかけて減少し続けると予想しています（チャート6）。在庫が取り崩されるにつれて、OPEC 2.0の支配的な生産者地位はブレントおよびWTIのフォワードカーブをバックワーデーションに保つことを可能にします（チャート7）。2 当社は2022年および2023年のブレント予測をそれぞれ$65/bbl、$75/bblで維持しています（チャート8）。 チャート6 OPEC 2.0の政策は供給を需要の下に置き続ける... OPEC 2.0政策は供給を需要より下回る水準に保ち続けている… OPEC 2.0政策は供給を需要より下回る水準に保ち続けている… チャート7 OECD在庫は2023年までに減少 OECD Inventories Fall to 2023 OECD Inventories Fall to 2023 チャート8 世界経済回復に伴いブレント予測は上昇 世界経済の回復に伴い、ブレントは上昇が予想される 世界経済の回復に伴い、ブレントは上昇が予想される 価格の両方向リスクが充満 当社見解には上振れおよび下振れのリスクが数多くあります。 上振れの例として、英国と米国のワクチン配布の立ち上げ方が示唆に富みます。 両国とも当初はつまづきました。特に米国は1月時点でも戦略が整っていないように見えました。米国が調達と配布を本格化させると接種率は急上昇し、現在では米国内で「通常の」独立記念日（Fourth of July）を迎える見通しにあるようです。英国は今週再開を開始しました。両国は2021年第3四半期に集団免疫を達成すると予想されています。3 調達と配布を誤ったEUは、英国と米国の教訓から利益を得て2021年第4四半期に集団免疫を達成するとマッキンゼーの調査は示しています。このスケジュールの前倒しは、より強い成長と当社予測を上回る石油価格につながるでしょう。 次の大きな課題は、パンデミックが加速し変異株の発生・拡散に理想的な環境を提供している新興経済地域（特にそのような地域）にワクチンを供給することです。ブラジル、インド、欧州での死亡者数・入院者数の上昇が示すように、大規模なCOVID-19によるロックダウンの再発リスクは依然として残ります。 戦の狼煙（Cry Havoc） 当社が見るもう一つの大きな上振れリスクは、米国、ロシア、中国およびそれらの関係国・同盟国を巻き込む武力衝突です。 現時点でコモディティ市場はこれらのリスクを無視しています。戦争のレベルには達していないにせよ、機動的な交戦―航空機が撃墜されたり南シナ海で艦船が交戦するような事態―の確率は日々高まっています。 これは驚くべきことではなく、当社の同僚であるBCAリサーチの地政学ストラテジー（Geopolitical Strategy）が最近指摘した通りです。4 実際、マット・ガートケン（Matt Gertken）が率いる当該サービスは、バイデン政権が就任直後からロシアと中国によってこの種の試練にさらされるだろうと警告していました。 ロシアはウクライナ国境に軍を集結させ、米国に干渉するなと警告しています。中国はフィリピン沿岸に軍艦を集結させ、台湾の防空識別圏への侵入を続けており、米軍を緊張させています。米露、米中間の政治対話はますます激しくなっており、近い将来に和らぐ兆しは見えません。意図的であれ偶発的であれ交戦が発生すれば戦争の遁走を許し、石油価格は一時的に急騰する可能性があります。 最後に、当社が想定するようにイランが核合意（すなわち共同包括的行動計画：JCPOA）を西側諸国と再締結できれば、イランは「正式な」石油輸出国としての復帰を余儀なくされ、OPEC 2.0はこれを受け入れざるを得なくなります。JCPOAは2018年に当時のトランプ大統領によって破棄されました。 これは困難を伴う可能性があります。当社は2014–16年の石油価格崩壊が、サウジが市場シェア戦争を仕掛けて価格を暴落させ、2010年末から2014年半ばにかけて続いた1バレル当たり$100超の価格をイランに許さないための行動だったと考えています。OPEC 2.0、特にKSAは米国–イラン交渉に公には関与していません。しかし2014年に開始された壊滅的な市場シェア戦争の後、KSAおよびOPEC 2.0はJCPOA後にイランの市場復帰を受け入れたことを想起する価値があります。   ロバート・P・ライアン チーフ コモディティ＆エネルギー・ストラテジスト rryan@bcaresearch.com アシュウィン・シャイアム リサーチアソシエイト コモディティ＆エネルギー戦略 ashwin.shyam@bcaresearch.com   コモディティ概況 エネルギー： 強気 ブレントとWTI価格は、EIAの週間石油在庫報告が2021年4月9週終わりで米国の原油・製品在庫が910万バレル減少したことを示した後に急騰しました。これは商業用原油と蒸留油在庫の大幅な取り崩し（それぞれ590万バレル、210万バレル）が主導しました。これらの取り崩しは過去一週間に主要データ機関（EIA、IEA、OPEC）による世界需要の概ね強気な上方修正を背景としています。これらの評価は、精製製品需要、すなわち「product supplied」が4月9週終わりで日量110万b/d跳ね上がったというEIAデータに裏付けられています。ジョンソン＆ジョンソンの接種問題という挫折があったにもかかわらずワクチン配布が勢いを増しており、在庫の取り崩しと需要改善が上昇の触媒となったようです。米ドルの弱含みや米国の実質金利低下も追い風になりました。 ベースメタル： 強気 今週初めニッケル価格は下落しました。中国の国営新華社通信が中国の李克強首相が上昇するコモディティ価格の中で原材料市場の規制強化の必要性を強調したと報じ、企業の業績に圧力がかかっているとのことでした（チャート9）。この発言は中国のトップ経済顧問である劉鶴が先週コモディティ価格の追跡を当局に求めた後に出たものです。ニッケル価格はこの報を受けて今週初めにトン当たり約$500下落し、ロンドン金属取引所の取引で火曜日終値時点で$16,114.5/MTで取引されていました。他のベースメタルはこのニュースの影響を受けませんでした。 貴金属： 強気 今週初めに発表された3月の米国インフレデータを受けて米ドルと10年物米国債利回りは低下しました。米国の消費者物価は約9年ぶりの大幅上昇を記録しました。インフレヘッジ需要と米ドル・債利回りの低下が金の購入における機会費用を下げたことが金価格を押し上げました（チャート10）。この不確実性と米国の財政刺激策によるインフレ圧力の高まりが金需要を増加させます。スポットのCOMEX金は火曜日終値で$1,746.20/ozで取引されていました。 穀物・ソフトコモディティ： 中立 USDAの報告によると、米国のトウモロコシ期末在庫は13.5億ブッシェルで、市場予想の13.9億ブッシェルや先月の省の1.50億ブッシェル推定を下回っています（agriculture.comの集計）。世界のトウモロコシ在庫は2.839億トンで、市場予想の2.845億トンおよび省の推定2.876億トンを下回りました。 チャート9 ベースメタルは強気に動く ベースメタルは強気になっている ベースメタルは強気になっている チャート10 金価格の上昇 金価格が上昇へ 金価格が上昇へ   脚注 1     当社が2021年4月8日に発表したUS-Russia Pipeline Standoff Could Push LNG Prices Higherをご覧ください。簡単に言えば、IMFは今年および来年の成長率見通しをそれぞれ6%と4.4%に引き上げ、2021年1月の更新時点と比べてほぼ1ポイントの上方修正を行いました。 2     バックワーデーションのフォワードカーブ—先物の期近価格が期先価格を上回る状態—は需給タイトさを示す市場のシグナルです。精製業者が将来よりも今の原油の入手を高く評価していることを意味します。これはちょうど投資家が明日引き渡される1ドル札に対して1ドルを支払うことを好み、1年後に引き渡される同じ1ドル札には今日98セントしか払わないかもしれないのと同じダイナミクスです。 3    マッキンゼー・アンド・カンパニーが2021年3月26日に発表したWhen will the COVID-19 pandemic end?をご参照ください。 4    BCAの地政学ストラテジーが2021年4月2日に発表した先見的な分析The Arsenal Of Democracyをご覧ください。同レポートは、バイデン政権は中国/台湾、ロシア、イラン、さらには北朝鮮に関する初期のストレス・テストに直面していると指摘しています。ゲーム理論は金融市場が台湾海峡での危機の60%の確率を無視できない理由を説明するのに役立ちます。全面戦争の確率は依然低いものの、台湾は世界で最も重要な地政学的リスクであり続けます。   投資見解とテーマ 推奨事項 戦略的推奨 タクティカルトレード コモディティ価格とプレイ参考表 2021年にクローズしたトレード クローズしたトレードの概要 より高いインフレが到来 より高いインフレが到来

Highlights The latest major economic releases have been solidly positive, … : The manufacturing ISM hit a 37-year high and the services ISM made a new all-time high in its 24-year history, while the March employment report was quite strong. … but they have fallen within the wide distribution of Goldilocks economic and market outcomes, … : The pace of vaccinations is limiting the potential of a negative pandemic surprise and the Fed continues to stick to its easier-for-longer messaging. … though we are watching the potential to drift into the too-hot right tail: Although the labor market is awash in excess capacity, both ISM surveys are telling a pro-inflation story replete with bottlenecks, shortages and suppliers willing to exploit their advantages. Earnings season will shed some light on how long the good times can be sustained: First quarter earnings releases begin this week with the SIFI banks. We will look to management commentary for insight into how corporate earnings are likely to stack up against expectations and how long we might be able to stick with our risk-friendly positioning. Feature When the COVID-19 pandemic reached the US last spring, our view turned on the outcome of the battle between policy makers and the virus. We were optimistic that the economy could escape long-term damage and that risk assets would be able to come back from their vicious February-March declines because we expected that policy makers would do what it took to build a bridge across the pandemic crater. Once the Democrats captured the White House and a majority in both houses of Congress, the policymakers-versus-the-virus outcome was settled, as the Biden-Pelosi-Schumer triumvirate ensured that fiscal policy would join monetary policy in erring to the side of providing too much support to the economy. The investment narrative now has shifted to whether or not policy makers have overdone it. It is possible to have too much of a good thing and excessive stimulus could cause the economy to overheat, hastening the end of the just-right Goldilocks combination of strong growth and easy monetary policy. It is also possible that the pandemic could still spring a nasty surprise on the United States, bringing about a growth disappointment despite indulgent policy, but the probability of a bad public-health outcome appears to shrink every week that the rapid vaccination clip is maintained. Our new framework is Goldilocks and the two tails (Figure 1), in which the probability of a just-right outcome that keeps the strong-growth, easy-policy beat going is considerably larger than unanticipated slowing (the too-cold left tail) or overheating (the too-hot right tail). This week, we review vaccine progress, consumer loan delinquencies and key economic releases to assess where in our stylized distribution the economy is likely to fall. Figure 1Goldilocks And The Two Tails The Left Tail We have viewed widespread vaccinations as the best way to inoculate the economy against a left-tail outcome. The more quickly herd immunity can be achieved via vaccinations, the less likely that growth will fall short of market expectations. We are impressed with the ground the US has made up after stumbling out of the gate; vaccine production has ramped up well beyond expectations and a mix of public and private injection sites are getting doses delivered. Assuming that new virus-resistant variants do not emerge, it looks as if the US is sure to meet the goal of inoculating a critical mass of the adult population well before September 30th (Chart 1). Chart 1Off And Running A self-reinforcing wave of defaults and bankruptcies would have been at the center of any worst-case economic and market scenarios. The Fed was keenly aware of the threat and preventing avoidable bankruptcies was an explicit monetary policy aim. Zero interest rates, massive asset purchases and new emergency measures like the Primary and Secondary Corporate Credit Facilities paved the way for record corporate bond issuance, eradicating the threat of bankruptcy for many viable businesses that were severely strained by the pandemic. Generous fiscal policy more directly buoyed household borrowers, but Powell and company had an eye out for them as well, highlighting the goal of : “just … keeping people solvent, keeping them in their homes, keeping them paying their bills just for maybe a few more months.”1 Personal loan performance has therefore been an important indicator for tracking the course of the recovery and policy makers’ success in promoting it. We have been monitoring 60-day delinquency rates across the four main consumer loan categories (90-day rates for credit cards) ever since TransUnion began publishing them on a monthly basis last spring. They have been a good barometer (with a lag) of the flow of transfer payments from the federal government to households. The $1,200 economic impact payments for adults with annual earnings below $75,000 were distributed in March and April, while the $600 weekly federal unemployment insurance (UI) benefit supplement was available from late March until the end of July, and delinquency rates steadily declined from March through August in every category but autos (Chart 2, top panel). Chart 260-Day Delinquency Rates Had Stopped Falling … Chart 3… But The Leading 30-Day Delinquencies Are Headed Lower After the UI supplements stopped flowing in the second half of the year, 60-day delinquencies began creeping up in every category but mortgages (Chart 2, third panel). A new round of $600 checks that were distributed in January, along with the resumption of federal UI benefit supplement payments at a rate of $300 per week, helped the February numbers and March’s $1,400 checks will extend the positive turn. The 30-day delinquency rates show the same pattern, but with bigger declines in February (Chart 3). 30-day delinquency rates lead 60- and 90-day rates and their positive trend will surely be enhanced by the latest round of direct payments and the gathering hiring momentum on display in the March employment report. Along with the success of the vaccination rollout, consumer loan performance suggests that the probability of left-hand tail outcomes is narrowing. Robust ISM Surveys And The Specter Of Cost-Push Inflation The ISM manufacturing and services PMI surveys stand out amid the welter of economic data that researchers and investors have to navigate. They are issued monthly with virtually no lag and provide a reliable read on the economy’s direction. Given that stocks tend to perform well when the economy performs well, they also provide information about the future direction of the stock market (Chart 4) and offer a first-cut guide to asset allocation. Chart 4A Strong Economy Is Good For Equity Returns The March composite releases were quite strong, with the manufacturing survey hitting a 37-year high and the services survey reaching the highest level in its 24-year history. The manufacturing survey was strong across the board, with new orders and order backlogs at or near extended highs (Chart 5, fourth panel) and the production and employment indexes (Chart 5, second and third panels) pointing to broad pickups. Unfortunately, the prices paid and supplier performance indexes (Chart 5, bottom panel) hinted that upward price pressures and supply bottlenecks have taken hold across broad swaths of the economy. Those components, and the accompanying comments from survey respondents, suggest that upward inflation pressures are building. The ISM services PMI survey closely resembled its manufacturing counterpart. New orders (Chart 6, fourth panel) and business activity (Chart 6, second panel) were very strong, though not as large a share of services employers are looking to hire (Chart 6, third panel). The share of respondents facing higher prices has broken out (Chart 6, fifth panel) and lengthening supplier delivery times are prevalent. The services sector has more slack than the manufacturing sector, but it is not immune from inflation pressure. Chart 5The Manufacturing PMI Looks A Lot Like ... Chart 6... Its Services Counterpart It is important to remember that the PMI surveys are diffusion indexes that capture share rather than magnitude. The record and near-record readings don’t mean that respondents’ businesses are growing at their most rapid rate in decades; they mean that the share of respondents who report quickening growth is at record/near-record levels. The same goes for the near-record prices paid readings; they don’t reflect that prices are rising at close-to-record rates, they reflect that an unusually large proportion of companies report increasing prices. The diffusion of upward price pressures as reported in the surveys has had a solid record of leading year-on-year core CPI increases and testifies to the economy’s potential to overheat (Chart 7). Cost-push inflation pressures could derail the strong-growth/easy-policy backdrop. Chart 7Inflation Pressures Have Begun To Stir Bottom Line: The ISM PMI surveys reinforce the idea that the probability of a left-hand tail outcome is modest and shrinking, but they suggest that right-tail overheating is a valid concern. Labor Market Firmly In Goldilocks Territory Chart 8The Labor Market Still Has A Lot Of Slack Net payroll gains in the March employment report comfortably surpassed expectations, while January’s and February’s estimates were also revised higher. The employment figures added to the run of positive surprises in key economic data series that suggest that growth in 2021 and 2022 will run well above its long-term potential. Despite the gains, however, employment remains far below its pre-pandemic peak (Chart 8, top panel) and the spaces that were hardest hit by the pandemic, like restaurants and hospitality, are not operating at anything close to full capacity. With labor force participation sharply reduced from its pre-pandemic level (Chart 8, bottom panel), the labor market is a long way from being tight. With all the excess capacity in the labor market, wage growth has been well behaved. Neither of the main wage series is growing at a rate that would give rise to inflation concerns. Average hourly earnings are up a lot year-over-year (Chart 9, top panel) because of a 5% month-over-month surge last April, but they have been running in place for the last three months and face much tougher comparisons beginning next month. The employment cost index has been rising at a rate well below its 2019 peak (Chart 9, bottom panel) that accompanied half-century lows in the unemployment rate. Chart 9Wage Growth Is Not Yet A Reason For Concern With considerable ground to make up to get back to its pre-pandemic state, the labor market appears to have plenty of room to run before it pulls the overall economy into overheating territory. The combination of ample slack and a strong backlog of labor demand (Chart 10) hints at a best-of-both-worlds/Goldilocks scenario. As long as it remains in place, the labor market is likely to be a positive economic catalyst, promoting robust hiring activity without setting off a self-reinforcing wage-price dynamic that would prod the Fed to cut off monetary accommodation in an abrupt way that would disrupt financial markets. Chart 10There's Still A Lot Of Demand For Workers Investment Implications We stand by our base case that the Goldilocks backdrop of solid growth and ample monetary accommodation will remain in place at least into early 2022. That backdrop precludes the possibility of a recession and therefore argues for risk-friendly investment strategy. Stocks rarely experience significant reversals outside of recessions and spread product reliably generates positive excess returns over Treasuries and cash. Multi-asset investors should remain at least equal weight equity and credit while holding fixed income duration below benchmark levels. We have a high degree of conviction that the economy will avoid a downside surprise in the next twelve months, thanks to the success of the vaccination effort and measures undertaken to limit defaults by households and businesses. We are less sure that the economy will be able to avoid overheating. A rapid rise in consumer prices to levels that would unsettle markets and force the Fed into tightening monetary policy sooner than expected is not our base case but it cannot be ruled out. We will be perusing the data for any advance indications that inflation could be gaining a foothold while also carefully observing what we see in our day-to-day experience. We will also be listening eagerly to what corporate management teams have to say over the next three to four weeks when they report their first-quarter earnings and offer their impressions of the second quarter and the full year.   Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com Footnotes 1 Interview conducted May 13, 2020 and broadcast May 17. Full Transcript: Fed Chair Jerome Powell's 60 Minutes interview on economic recovery from the coronavirus pandemic - CBS New.

Feature The selloff in Chinese stocks since mid-February reflects a rollover in earnings growth and multiples. Lofty valuations in Chinese equities driven by last year’s massive stimulus means that stock prices are vulnerable to any pullback in policy supports (Chart 1A and 1B). Chart 1AGrowth In Chinese Investable Earnings And Multiple Expansions Has Rolled Over Chart 1BEarnings Outlook Still Looks Promising In The Onshore Market, But May Soon Peak After diverging in the past seven to eight months, Chinese stocks have started to gravitate towards deteriorating monetary conditions index. The market may be beginning to price in a peak in economic as well as corporate profit growth (Chart 2). Defensive stocks in China’s onshore and offshore equity markets have also outperformed cyclicals since February, which confirms that investors expect earnings growth will slow in the coming months (Chart 3). A tighter monetary policy stance, coupled with increased regulations targeting the real estate, banking, and tech sectors have further dampened investors’ appetite for Chinese stocks. Chart 2A-Share Prices Start To Gravitate Towards Tightening Monetary Conditions Chart 3Defensives Have Prevailed Over Cyclicals In Both Onshore And Offshore Markets The official PMIs bounced back smartly in March following three consecutive months of decline. However, the strong PMI readings do not change our view that the speed of China’s economic recovery is near its zenith. PMIs in the first two months of the year are typically lower due to the Lunar New Year (LNY), and the improvement in March’s PMI did not exceed seasonal rebounds experienced in previous years. Weakening fixed-asset investments also indicate that economic activity is moderating. We remain cautious on the 6 to 12-month outlook for Chinese stocks, in both absolute and relative terms. Qingyun Xu, CFA Associate Editor qingyunx@bcaresearch.com Jing Sima China Strategist jings@bcaresearch.com     China’s NBS manufacturing and non-manufacturing PMIs in March beat market expectations with sharp rebounds after moderating in the previous three months. The improvement in the PMIs will likely provide authorities with confidence to stay the course on policy normalization. The methodology calculating PMI indexes reflects the net reported improvement in business activities relative to the previous month and there was a notable decline in PMIs in February, due to the LNY holiday and travel restrictions related to the spread of COVID-19.  Additionally, the average reading of China’s official composite PMI in Q1 this year was 2.2 percentage points lower than in Q4 last year and weaker than the Q1 PMI figures in most of the pre-pandemic years. Moreover, Chinese Caixin manufacturing PMI, which focuses on smaller and private corporates, declined further in March as it continued its downward trend started in December 2020. Chart 4Q1 PMIs Slowed By More Than Seasonal Factors Chart 5Caixin PMI Shows Further Deterioration Among Private-Sector Manufacturers Growth in credit expansions in February was better than expected, supported by a substantial increase in corporates’ demand for medium- and long-term loans. Travel restrictions during this year’s LNY led to a shorter holiday, a faster resumption in manufacturing activity after the break and stronger credit demand in February. China’s Monetary Policy Committee meeting last week reiterated the authorities’ hawkish policy tone and removed dovish language prevalent in last month’s National People’s Congress, such as “maintaining the consistency, stability, and sustainability in monetary policy” and “not making a sudden turn in policymaking.” Given the strong headline economic and credit data in January and February, the authorities will be unlikely to slow normalizing monetary policy. Therefore, the risk of a policy-tightening overshoot remains high. The PBoC has continued to drain net liquidity in the interbank system since early this year, evidenced by falling excess reserves at the central bank. Excess reserves normally lead the credit impulse by about six months, signaling that the latter will continue to decelerate in the months ahead. In turn, the credit impulse normally leads the business cycle by six to nine months, meaning that China’s cyclical economic recovery will likely peak in the first half of 2021. Chart 6Corporates Demand For Longer-Term Bank Loans Resumed Their Upward Trend Early This Year Chart 7Falling Excess Reserves Leads To A Deceleration In Credit And Economic Growth Robust industrial activities and improving profitability helped to boost profit growth in January and February. The bounce in producer prices also drove up returns in industrial output, particularly in upstream industries loaded with commodity producers. Nevertheless, weak final demand is limiting the ability of Chinese producers to pass on higher prices to domestic consumers, highlighted in the divergence between Chinese PPI and CPI. In addition, China’s domestic demand for commodities and industrial metals may reach its cyclical peak in mid-2021, following ongoing credit tightening and reduced economic activity. Commodity inventories have surged to historical highs due to soaring imports (which far exceeded consumption) during 2H20. Inventory destocking pressures will weigh on commodity prices with China’s domestic demand reaching its cyclical peak. Disinflation/deflation pressures may re-emerge in 2H21, which will pose downside risks to China’s industrial profits. Chart 8Industrials Posted A Strong Rebound In The First Two Months of 2021 Chart 9Surging Commodity Prices Helped To Boost Upstream Industry Profits Chart 10Domestic Final Demand Remains Sluggish Chart 11Decelerating Chinese Credit Growth Poses Downside Risks To Global Commodity Prices Chart 12Chinas Raw Material Inventory Restocking Cycle May Be Near A Cyclical Peak Chart 13Real Estate And Infrastructure Investment Losing Steam In 2021 Investments in infrastructure and real estate drove China’s economic recovery in the second half of 2020. However, growth momentum in both sectors has slowed because of retreating government spending in infrastructure and tightening regulations in the property sector. Both home sales and housing prices, especially in tier-one cities, rose significantly in January-February this year, deepening authorities’ concerns over bubble risks in the property market. The share of mortgages, deposits and advanced payments as a source of funds for property developers reached an all-time high in February. Following the LNY, the authorities introduced a slew of new restrictions on the housing market to curb excessive demand. These were in addition to placing limits on bank lending to both property developers and household mortgages. All of these measures will weigh on housing supply and demand, and the impact is already evident in falling land purchases and housing starts. At the same time, property developers are rushing to complete existing projects. The tighter regulations on real estate financing will likely weaken growth in real estate investment and construction activities in the second half of this year. Chart 14Housing Prices In Top-Tier Cities Have Been On A Tear … Chart 15… But Bank Lending To Developers And Mortgage Loans Continue Downward Trend Chart 16Property Developers Are Rushing To Sell And Complete Existing Projects Chart 17Forward-Looking Indicators Suggest A Slowdown In Housing And Construction Activities   Table 1China Macro Data Summary Table 2China Financial Market Performance Summary Footnotes Cyclical Investment Stance Equity Sector Recommendations

Dear client, In addition to this abbreviated weekly report, we are also sending you an in-depth report on the euro, written by my colleague Mathieu Savary. Mathieu argues that the euro could continue to face some downside in the near-term, creating perfect conditions for a buying opportunity below 1.15. We agree with Mathieu’s assessment and are shorting EUR/JPY this week as a tactical trade. Finally, last week, we held a webcast during which I discussed the key themes that will shape the dollar landscape in the coming months. In case you missed it, you can listen to the replay here. Kind regards, Chester Highlights Being long the dollar is now a consensus trade. A new US infrastructure bill will be positive for US growth. However, the new package also increases the probability that inflation will be higher in the US, which will depress relative real rates. Go short EUR/JPY as a tactical trade. Feature Chart I-1Dollar Sentiment Has Been Reset The DXY index is fast approaching our 94-95 target and it is an open question whether the rally will stall at these levels, or punch through for new highs this year. Historically, the dollar has tended to move in long cycles, with the latest bull and bear markets lasting about a decade or so. If, as we believe, a dollar bear market did indeed commence in 2020, then the historical evidence is that any bounce will be capped around 4-6%. This was the experience of the 2000s. The defining landscape during the latter stages of the dollar bull market in 2018 and 2019 was deteriorating global growth, with financial conditions which remained relatively too tight. The situation today is extremely easy financial conditions and improving global growth. As such, our bias remains that the landscape is more characteristic of a dollar bear market.  Speculators are now long the dollar and our capitulation index is approaching overbought levels (Chart I-1). So while there is scope for the dollar to continue to rise in the near term, the big gains are behind us. US Infrastructure Spending And Bond Yields President Joe Biden’s American Jobs Plan did little to lift US long bond yields. This suggests that most of the improvement to aggregate demand may have already been priced in. The big driver of the US dollar this year has been the improvement in yields, particularly at the long end of the curve. Short yields have remained anchored near zero (Chart I-2). If this improvement in long rates is torpedoed by lack of bi-partisan support for a larger fiscal package, then this will provide less scope for the US dollar to rise. Economically, a large infrastructure package makes sense. The neutral rate of interest in the US is well above the Fed funds target rate. A widening gap suggests underlying financing conditions (short rates) are low relative to the potential growth rate of the economy (long rates). Not surprisingly, this also tends to track the yield curve pretty closely (Chart I-3). This incentivizes banks to lend, and fund these projects. Chart I-2The Move In Rates Has Been On The Long End Chart I-3A Steeping Curve Usually Encourages Lending The feedback loop with the dollar could however be negative. First, while the boost to aggregate demand supports US growth in the short term, there will be spillovers to other countries. The net beneficiaries might also be the countries that have the raw materials needed to realize this infrastructure plan. The proposal has a largely “buy American” tilt, but this will also create sharp domestic shortages as the US is not a manufacturing-based economy. An increase in imports will widen the US trade deficit. Second, the returns on infrastructure investments tend to be large in lower-productivity countries. Meanwhile, the increase in US taxes to fund these deficits will lower the return on capital for US assets. This might limit foreign inflows into US capital markets. Third, the US output gap is slated to close faster than in other economies, meaning the increase in aggregate demand will soon become inflationary. This could further depress real rates in the US. There is a longstanding correlation between US relative real rates and the dollar (Chart I-4). Chart I-4The Dollar Moves With Relative Real Rates Chart I-5The Dollar Is Overvalued Finally, it is important to remember that the starting point for the US dollar is as an expensive currency. According to our PPP models, the dollar is overvalued by over 10% (Chart I-5). This is already manifesting itself in a deteriorating trade balance. It also suggests that should the dollar continue to rise significantly, it will negatively impact US growth. Trading Strategy Amidst Market Uncertainty The near term outlook for the dollar remains bullish. Vaccinations are progressing at the fastest pace in the US and in the UK while the euro area, Canada and Japan are seeing a third wave of infections underway (Chart I-6). New lockdown measures have been implemented in these latter countries, which will further dent their Q2 outlook. While our bias is that these economies eventually benefit as their vaccination program progresses, the dollar remains in a sweet spot for now. Chart I-6AA Third Wave Is Underway Chart I-6BA Third Wave Is Underway Chart I-6CA Third Wave Is Underway One hedge to this scenario is to go short the EUR/JPY cross. First, our Chief European Investment Strategist Mathieu Savary argues that the euro could undershoot to 1.12 in the near term. This suggests that EUR/JPY which faces critical resistance a nudge above 130, will stage a countertrend reversal (Chart I-7). Both EUR/USD and EUR/JPY tend to be positively correlated. Second, European bourses are underperforming those in Japan in common-currency terms. The relative performance of the equity markets have usually moved in lockstep with the currency, but a divergence has opened up (Chart I-8). In fact, given very similar sector compositions across both bourses, this divergence might be down to competitiveness, given the rally in EUR/JPY. Should profits in Europe suffer relative to those in Japan, this will cap EUR/JPY gains (Chart I-9) Chart I-7EUR/JPY Faces Strong Resistance At 130 Chart I-8EUR/JPY Moves With Relative Share Prices   Chart I-9EUR/JPY And Relative Profits Finally, monetary policy is more accommodative in Europe than in Japan. Interest rates are lower, and the ECB’s balance sheet is rising more aggressively. This has historically been accompanied by a lower EUR/JPY exchange rate (Chart I-10). Chart I-10EUR/JPY And Relative Monetary Policy We eventually expect EUR/JPY to break higher, but for now, we are opening a short position in this cross as a portfolio hedge. In line with this view, we are tightening stops on all of our trades this week. The dollar could be set for violent moves in the coming weeks. Stay tuned.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights The Biden Administration's $2.25 trillion infrastructure plan rolled out yesterday will, at the margin, boost global demand for energy and base metals more than expected later this year and next.  Global GDP growth estimates – and the boost supplied by US stimulus – once again will have to be adjusted higher (Chart of the Week). Energy and metals fundamentals continue to tighten. OPEC 2.0's so-far-successful production management strategy will keep the level of supply just below demand, which will keep Brent crude oil on either side of $60/bbl. Base-metals output will struggle to meet higher demand from the ongoing buildout of renewables infrastructure and growing electric-vehicle sales. Of late, concerns that speculative positioning suggests prices will head lower – or, at other times, higher – are entirely misplaced: Spec positioning conveys no information on price levels or direction.  Energy and metals prices, on the other hand, do convey useful information on spec positioning, demonstrating specs do not lead the news or prices, they follow them. Short-term headwinds caused by halting recoveries and renewed lockdowns – particularly in the EU – will fade in 2H21 as vaccines roll out, if the experience of the UK and US are any guide.  Continued USD strength, however, would remain a headwind. Feature If the Biden administration is successful in getting its $2.25 trillion infrastructure-spending bill through Congress, the US will join the rest of the world in the race to re-build – in some cases, build anew – its long-neglected bridges, roads, schools, communications and high-speed transportation networks, and, critically, its electric-power grid.  There's a lot of game left to play on this, but our Geopolitical Strategy group is giving this bill an 80% of passage later this year, after all the wrangling and log-rolling in Congress is done. In and of itself, the infrastructure-directed spending coming out of Biden's plan will be a catalyst for higher US industrial commodity demand – energy, metals and bulks.  In addition, it will support the lift in the demand boost coming out of higher GDP growth globally, which will be pushed higher by US fiscal spending, as the Chart of the Week shows.  Of note is the extremely robust growth expected in India, China and the US, which are among the largest consumers of industrial commodities globally.  Overall growth in the G20 and globally will be expansive in 2022 as well. Chart of the WeekBiden's $2.25 Trillion Infrastructure Bill Will Boost Global Commodity Demand Higher GDP growth translates directly into higher demand for commodities, all else equal, as can be seen in the relationship between EM and DM GDP, supply and inventories and Brent crude oil prices in Chart 2.  While we have reduced our Brent forecast for this year to $60/bbl on the back of renewed demand-side weakness in the EU due to problems in acquiring and distributing COVID-19 vaccines, we expect this to be reversed next year and into 2025, with prices trading between $60-$80/bbl (Chart 3).  OPEC 2.0, the oil-producer coalition led by the Kingdom of Saudi Arabia (KSA) and Russia, has done an excellent job of keeping the level of oil supply below demand over the course of the pandemic, which we expect to continue to the end of 2025.1 Chart 2Higher GDP Growth Presages Higher Commodity Demand Chart 3Brent Crude Oil Prices Will Average - / bbl to 2025 As the Biden plan makes its way through Congress, markets will get a better idea of how much diesel fuel, copper, steel, iron ore, etc., will be required in the US alone.  What is important to note here that the US is just moving to the starting line, whereas other economies like China and the EU already have begun their investment cycles in renewables and EVs.  At present, key markets already are tight, particularly copper (Chart 4) and aluminum (Chart 5).  In both markets, we expect physical deficits this year and next, which inclines us to believe the metals leg of this renewables buildout is just beginning – higher prices will be required to incentivize the development of new supply.2  Chart 4Copper Will Post Physical Deficit... Chart 5...As Will Aluminum This is particularly important in copper, where growth in mining output of ore has been flat for the past two years.  Copper is the one metal that spans all renewables technologies, and is a bellwether commodity for global growth.  We expect copper to trade to $4.50/lb (up ~ $0.50/lb vs spot) on the COMEX in 4Q21 on the back of increasing demand and tight supplies – i.e., falling mining supply and refined copper output growth (Chart 6). Worth noting also is steel rebar and hot-rolled coil prices traded at record highs this week on Chinese futures markets.  Stronger steel markets continue to support iron ore prices, although the latter is trading off its recent highs and likely will move lower toward the end of the year as Brazilian supply returns to the market.3  We use steel prices as a leading indicator for copper prices – steel leads copper prices by ~ 9 months.  This makes sense when one considers steel is consumed early in infrastructure and construction projects, while copper consumption occurs later as airports and houses are fitted with copper for electric, plumbing and communications applications. Chart 6Copper Ore Output Flat   Does Speculative Positioning Matter? Of late, media pundits and analysts have cited an unwinding of speculative positions in oil and metals markets following sharp run-ups in net long positions as a harbinger of weaker prices in the near future (Chart 7).4  At other times, speculation has been invoked as a reason for price surges – e.g., when oil rocketed  toward $150/bbl in mid-2008, which was followed by a price collapse at the start of the Global Financial Crisis (GFC).5 Brunetti et al note, "The role of speculators in financial markets has been the source of considerable interest and controversy in recent years. Concern about speculative trading also finds support in theory where noise traders, speculative bubbles, and herding can drive prices away from fundamental values and destabilize markets." (p. 1545) Chart 7Speculative Positioning Lower In Brent Than WTI We recently re-tested earlier findings in our research, which found that knowledge of how specs are positioned – either on the long or the short side of the market – conveys no information on the level of prices or the change that should be expected given that knowledge.  However, knowledge of the price level does convey useful information on how speculators are positioned in futures markets.6 In cointegrating regressions of speculative positions in crude oil, natural gas and copper futures on price levels for these commodities, we find the level of prices to be a statistically significant determinant of spec positions. We find no such relationship using spec positions as an explanatory variable for prices.7 On the other hand, Chart 2 above is an example of statistically significant relationships for Brent and WTI price as a function of supply-demand fundamentals displaying coefficients of determination (r-squares) of close to 90% in the post-GFC period (2010 to now).  This supports our earlier findings regarding spec behavior: They follow prices, they don't lead them.8 We are not dismissive of speculation.  It plays a critical role in markets, by providing the liquidity that enables commodity producers and consumers to hedge their price exposures, and to investors seeking to diversify their portfolios with commodity exposures that are uncorrelated to their equity and bond holdings.  Short-Term Headwinds Likely Dissipate COVID-19 remains the largest risk to markets generally, commodities in particular.  The mishandling of vaccine rollouts in the EU has pushed back our assumption for demand recovery deeper into 2H21, but it has not derailed it.  We expect COVID-related deaths and hospitalizations to fall in the EU as they have in the UK and the US following the widespread distribution of vaccines, which should occur in the near future as Brussels organizes its pandemic response (Chart 8).  Making vaccines available for other states in dire straits will follow, which will allow the global re-opening to progress as lockdowns are lifted (Chart 9). Chart 8EU Vaccination Rollouts Will Boost Global Economic Recovery Chart 9Global Re-Opening Has Slowed, But Will Resume In 2H21 The other big risk we see to commodities is persistent USD strength (Chart 10).  The dollar has rallied for the better part of 2021, largely on the back of improving US economic prospects relative to other states, and success in its vaccination efforts.  The resumption of the USD's bear market may have to wait until the rest of the world catches up with America's public-health response to the pandemic, and the global economy ex-US and -China enters a stronger expansionary mode. Bottom Line: We remain bullish industrial commodities expecting demand to improve as the EU rolls out vaccines and begins to make progress in arresting the pandemic and removing lockdowns.  Global fiscal and monetary policy, which likely will be bolstered by a massive round of US infrastructure spending beginning in 4Q21 will catalyze demand growth for oil and base metals.  This will prompt another round of GDP revisions to the upside.  The dollar remains a headwind for now, but we expect it to return to a bear market in 2H21. Chart 10The USD's Evolution Remains Important   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish Going into the April 1 meeting of OPEC 2.0 today, we are not expecting any increase in production.  OPEC earlier this week noted demand had softened, mostly due to the slow recovery from the COVID-19 pandemic in the EU, which, based on their previous policy decisions, suggests the producer coalition will not be increasing production.  The coalition led by KSA and Russia will have to address Iran's return as a major exporter to China this year, which appears to have been importing ~ 1mm b/d of Iranian crude this month (Chart 11).  This puts Iran in direct competition with KSA as a major exporter to China, in defiance of the US re-imposition of sanctions against Iranian exports.  China and Iran over the weekend signed a 25-year trade pact that also could include military provisions, which could, over time, alter the balance of power in the Persian Gulf if Chinese military assets – naval and land warfare – deploy to Iran under their agreement.  Details of the deal are sparse, as The Guardian noted in its recent coverage.  Among other things, government officials in Tehran have come under withering criticism for entering the deal, which they contend was signed with a "politically bankrupt regime."  The Guardian also noted US President Joe Biden " is prepared to make a new offer to Iran this week whereby he will lift some sanctions in return for Iran taking specific limited steps to come back into compliance with the nuclear agreement, including reducing the level to which it enriches uranium," in the wake of the signing of this deal. Base Metals: Bullish Copper fell this week, initially on an inventory build, and has now settled right under the $4/lb mark, as investors await details on the US infrastructure bill unveiled in Pittsburgh, PA, on Wednesday.  According to mining.com, a major chunk of the proposed bill will be devoted to investments in infrastructure, which will be metals-intensive.  Precious Metals: Bullish Gold fell further this week, as US treasury yields rose, buoyed by the increased US vaccine efforts and President Biden’s proposed spending plans (Chart 12). USD strength also worked against the yellow metal, which has been steadily declining since the beginning of this year.  COMEX gold fell below the $1,700/oz mark for the third time this month and settled at $1,683.90/oz on Tuesday. Chart 11 Chart 12     Footnotes 1     Please see Five-Year Brent Forecast Update: Expect Price Range of $60 - $80/bbl, which we published 25 March 2021.  It is available at ces.bcaresearch.com. 2     Please see Industrial Commodities Super-Cycle Or Bull Market?, which we published 4 March 2021 for additional discussion, particularly regarding the need for additional capex in energy and metals markets. 3    Please see UPDATE 1-Strong industrial activity, profit lift China steel futures, published by reuters.com 29 March 2021. 4    See, e.g., Column: Frothy oil market deflates as virus fears return published 23 March 2021. 5    Brunetti, Celso, Bahattin Büyüksahin, and Jeffrey H. Harris (2016), " Speculators, Prices, and Market Volatility," Journal of Financial and Quantitative Analysis, 51:5, pp. 1545-74, for further discussion. 6    Please see Specs Back Up The Truck For Oil, which we published 26 April 2018, and Feedback Loop: Spec Positioning & Oil Price Volatility published 10 May 2018.  Both are available at ces.bcaresearch.com. 7     We group money managers (registered commodity trading advisors, commodity pool operators and unregistered funds) and swap dealers (banks and trading companies providing liquidity to hedgers and speculators) together to test these relationships. 8    In our earlier research, we also noted our results generally were supported in the academic literature.  See, e.g., Fattouh, Bassam, Lutz Kilian and Lavan Mahadeva (2012), "The Role of Speculation in Oil Markets: What Have We Learned So Far?" published by The Oxford Institute For Energy Studies.   Investment Views and Themes Strategic Recommendations Commodity Prices and Plays Reference Table Summary of Closed Trades