AM Notes: Not talking to you anymore

China "indefinitely" suspended on Thursday all activity under a China-Australia Strategic Economic Dialogue, its state economic planner said, in the latest setback for their strained relations.

Things have been tense for a while, but markets obliged nonetheless, and sent the Aussie 50 pips lower with buyers stepping in around 0.77...

FX markets are largely stuck around key levels and ranges, awaiting a fresh impulse...

EURUSD is stuck right on that magic 1.20 level & GBP is ambling aimlessly around 1.39...

Maybe the BOE today can give some impetus...

Forecasts are set for a slight upgrade (slightly higher GDP, lower unemployment peak) and the pace of purchases will likely be scaled back to ensure the QE program runs until the end of 2021.

The question is whether the taper starts now (to £3/3.5bn per week) or a larger taper is announced at the next meeting in June...

The other big GBP event is the Scottish national elections...

Via ING:

Scottish voters go to the polls this Thursday in what’s likely to mark another step in the push for a second referendum on independence. Here are the key things to consider:

• What’s being voted on? Voters are taking part in a Scottish Parliamentary election, and the key question is whether the Scottish National Party (SNP) manages to gain an outright majority. The party fell slightly short in the 2016 election, and recent polls suggest it’s a close call again. But even if the SNP fails to gain a majority this time, there is talk of some form of coalition or agreement with the Greens, which are also pro-independence. In other words, the result is likely to lead to renewed calls for a second referendum.

• How likely is a second referendum? As things stand, the government in London needs to give its consent to another referendum, and there’s little sign that Prime Minister Boris Johnson will do so. In theory the question of who holds the power to allow a vote could ultimately be tested in the courts. But barring a surprise legal outcome, an imminent referendum is unlikely, though a further refusal by the UK government to allow a vote may potentially spur further pro-independence feeling in Scotland. The issue is likely to play a key role in the next UK-wide general election in 2024, assuming a referendum hasn’t been granted before then.

Unless the SNP gain an outright majority (and perhaps not even then), the political risk looks to be a way down the road...

Initial polls should be released around 22:00, although the final result might not be known until the weekend.  

NFP's tomorrow still seem like the main event that could break markets out of recent ranges...

Norges Bank are expected to stick to the script at their interim meeting today

Turkey's central bank are also widely expected to keep rates on hold, with rate hikes firmly off the table but no real justification to cut either...

In equity indices, tech is struggling and the reflation trade is taking the lead again...

UBS 👇

1. Catalysts for further mega-cap gains appear less obvious. More investor visibility on mega-cap share buyback plans may offer some nearterm support, and companies are likely to use any share pullbacks as an opportunity to repurchase shares. However, we appear to be entering a less compelling quarter for mega-cap tech with limited product refreshes and upgrade cycles until the ramp-up into the year-end holiday season. More demanding year-over-year growth comparisons may also limit the scope for major earning beats into the second half.

2. The tactical outlook favors the reflation trade. Part of tech’s surprising resilience in the first quarter can be attributed to reopening setbacks, while a pause in the rise of US Treasury yields has lent support in recent weeks. But we don't expect either trend to extend further into the second quarter as vaccination progress, fiscal spending, and pentup demand give a fresh boost to cyclical sectors such as financials and energy. In addition, the earnings outlook for cyclical and value sectors appears more reliable on the back of recovering growth compared with  the high bar mega-cap tech firms will face as one-off pandemic drivers fade.

3. Growth and regulatory outlooks support a rotation within tech, too. As the growth outlook for mega-cap tech normalizes toward more incremental gains, we expect markets to seek out the strong longrun growth outlook offered by earlier-stage small- and mid-cap tech companies. A more combative US regulatory outlook may be another driver—a point underscored by the headwinds China mega-cap tech companies have faced from increased scrutiny. While regulatory impacts tend to be transitory, any short-term hit to dominant tech firms could lead to mid- and small-cap tech firms outperforming.

So while mega-cap tech companies have been a core part of the solid performance of portfolios throughout the pandemic, we think investors should be careful to avoid overallocation to this part of the market. In an environment of accelerating growth, we continue to prefer cyclical and value sectors such as financials and energy, while positioning for longterm structural growth in industries which could provide 'The Next Big Thing' (e.g., fintech, healthtech, and greentech).

Energy, Materials & Financials are the standout performers on the month so far 👇