American Rescue Plan – $1.9trn approved.
Over the weekend, the US Senate passed President Biden’s $1.9trn or 9% of GDP Covid relief bill with 50-49 votes. Much of the spending will be frontloaded, as $1.4trn is expected to flow into the economy this year. Direct payments of up to $1400 per individual are expected to flow to households from next week on. Overall, state and local governments will receive $350bn in support, $160bn are dedicated to vaccine and testing programs, child tax credits are expanded by $1000 and unemployment payments are kept at $300. The bill must now be confirmed again by the House, before Biden signs it into effect a few days later. We think that compared to previous stimulus plans which were centered around tax cuts, the fiscal multiplier of this bill will be much higher. However, we still need to see details around future spending on infrastructure that will ultimately stimulate long term growth.

Powell – Striking the Fed put lower.
In a WSJ interview last week, Powell commented that the recent moves in rates were ‘notable’ and ‘caught his attention’ but fell short of hinting any Fed actions against it for now. With market expectation high into his speech, these comments turned out to be a disappointment which led to sell off in equities, bonds and a rise in USD. Powell re-iterated that the Fed is still far away from their goals and that they are not focused on bond yields per se, but rather on financial conditions more broadly, essentially lowering the ‘Fed put’. In short, Powell remains dovish, but not dovish enough to prevent further increases in yields in the short term. We continue to see further gradual widening over the next months, with the potential of 10-year treasuries reaching 2%. Unless financial conditions tighten, market conditions become disorderly or market expectations of hikes becomes too frontloaded, the Fed is unlikely to step in.

Commodities – Adding to reflationary pressures.
OPEC surprised markets by leaving production volumes unchanged, supporting the bull case for oil and commodities. Markets were expecting at least a small increase in volumes, but, together with the voluntary curb by Saudi Arabia, supply is restricted at the same time as the demand deficit is closing. Crude and Brent rallied ca. 5% through $65 and $68 respectively and have further upside as inventories fall and the imbalance between supply and demand rises. With the economy reopening over the next quarters, higher commodity prices add to reflationary pressures. We believe energy stocks offer upside opportunities, and are positioned through index upside and convertible debt in single names like Total and BP.

Positioning – Adding to downside hedges.
As 10Y UST’s breached 1.5%, we believe that risk assets have more downside. The moves down are led by US assets, where IG credit has twice the duration of the European benchmark and sold off ca. 6% YtD. To us, the market looks similar to 2018, where investors were long cash bonds, but lost money because hedges in derivatives didn’t work. The difference now, however, is that strong growth ahead offers opportunities in value equities and commodities, led by the reopening of the economy. In addition to our existing hedges and high cash levels, we reduce our credit allocation further by selling longer-duration bonds and add more protection in US cash credit ETFs, which match the actual bond selloff, and in gold, which suffers from higher real rates.

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