China strengthened investors’ conviction in the global recovery with the latest trade data released on Sunday. The volume of exports gained impressive 60% YoY in January-February period. The reading was way ahead of market projections (40%). The February figure is a huge gain - 150% YoY. Undoubtedly, growth of China exports is also a merit of its trading partners, especially the United States, where economic growth in February could be the highest on record. This can be seen, for example, in the surge of GS Analytic Index to the highest level in many years:

A similar jump is in the NY Fed Nowcast GDP forecast for the 1Q of 2021:

The forecast was revised sharply higher thanks to strong incoming data and now stands at 8.5%. And that's without taking into account forthcoming government spending stimulus!

Congress approved support measures of $1.9 trillion, but Monday moves in the US futures indicate that approval of the bill apparently has been priced in valuations.

Equities remain under pressure as the stressful situation in US long-term rates has not gone anywhere. Moreover, last week's events (Powell speech, NFP release) only fueled the trend. I agree that the topic of erratic moves in the Treasury rates has set the tongue on edge, but the markets, in a sense, are now in unchartered waters – the good old Fed which expressed concerns about every ebb and flow in the market, has apparently gone. Therefore, repeated shocks in rates, such as the recent ones, should not be ruled out. We’ve seen their impact on equities and the risk of repeated volatility keeps buying pressure effectively in check.

JP Morgan has discovered another channel of the impact of the recent Treasury selloff on the stock market – coming portfolio rebalancing of large pension and mutual funds. They will most likely significantly adjust the proportions of assets in the portfolio, due to accumulated overweight in equities as well as favorable conditions - stocks became quite expensive while bonds have fallen a lot.

There are 4 big players to watch out for - balanced Mutual Funds (60:40), US Pension Funds, Norwegian Oil Fund and Japan Pension Fund. They make portfolio rebalancing at different intervals, but since some of them have called off the move, there is a risk of combined sell-off. For example, US mutual funds have a noticeable overweight in equity, which sooner or later will have to be adjusted:

JP Morgan estimates cumulative potential outflow from stocks caused by the sale of these funds at $316 billion. Since the event (rebalancing) is more or less likely (the fund's strategy periodically requires this procedure), other market participants may be inclined to try to get ahead of the whales, which may increase near-term pressure on equities.

Key events to watch this week:

EURUSD – the weekly report of the ECB’s purchases within PEPP (pandemic QE” program) which is due today - will the ECB respond to the rise of EU bond yields? Increased bond purchases by the ECB should have negative impact on the Euro as it will signal that the ECB is concerned. On Thursday - the ECB meeting and again the question, what does the regulator think about the recent moves in bond yields?

USD index - on Wednesday and Thursday - major auctions of 10- and 30-year Treasuries bonds. Week demand on these auctions (low bid-to-cover ratio) will likely add upward pressure on the yields, and vice versa, strong demand will bring welcomed relief to risk assets. Another report to watch is US CPI in February, which is due on Wednesday. Given the latest data on the NFP, a positive surprise is likely and should support upside movement in the USD.

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