Pack it up, Pack it in...
March 17, 2025
North American equity futures are on the defensive. Elsewhere, Euro area fixed income is outperforming led by lower yields in Greece (thanks in large part to an upgrade from Moody’s).
Meanwhile, gold “continues to shine” as levels flirt with the $3000 mark.
The trade-weighted USD is now probing below technical support. There are several reasons why the USD is under pressure at the moment, but the most proximate is the shift towards expansionary fiscal policy outside of North America (especially in the Eurozone) which is triggering an unwind in prior positioning.
Oh…and Happy St. Patrick’s Day to those celebrating.
1.) Canada Notes:
a.) Amazingly, the Liberals now have a slight edge in seats over the Conservatives according to the latest update from 338Canada.
Seat projections (average of the range of expected outcomes)…
- Liberals at 150 seats (from 143 last week)
- Conservatives at 149 seats (from 156 last week)
- BQ at 27 seats (from 28 last week)
- NDP at 15 seats (from 14 last week)
In terms of odds of outcome…
- Liberal plurality is now at 41%
- Tory plurality is now at 31%
- Liberal majority is now at 14%
- Tory majority is now at 13%
b.) Some things to note from point a) above…
First, the Liberals are gaining a ton of momentum and it appears to be coming from those that had switched over to the Tories towards the end of Trudeau’s tenure.
Second, remember that 172 seats are needed for a majority and we still don’t have a clear path to that outcome yet for any of the major parties.
Third, as things stand today, the BQ is set to play an important role as part of any coalition. For instance, the only two-party combinations that get parliament over the 172 mark is either the Liberals + BQ or the Conservatives + BQ.
Given the need for a clear mandate after the coming election, this could be bad news for markets. Nevertheless, we’re still a few months away (at least) from a possible election. There’s plenty of time left for the polls to shift.
c.) There is still no indication as to whether PM Carney will trigger a snap election ahead of the March 24th date when parliament reconvenes. You can find the complete list of his cabinet members here.
In other notes, Carney is visiting France and the UK as part of his first foreign trip as PM early this week. Closer economic and security ties are likely to be discussed when he meets with French President Macron and UK PM Starmer.
Also, Carney is looking to set up a call with Trump “as soon as possible.”
d.) Key data points on the calendar this week include February CPI (out on Tuesday), January Retail sales (Friday) as well as a speech from BoC Governor Macklem on Thursday.
2.) Eurozone News + Notes:
a.) In Germany: Just in case you missed the big news from Friday, incoming German chancellor Friedrich Merz (of the CDU/CSU party) has secured the backing of the SPD and the Green party to push through plans to massively increase state borrowing.
The plan calls for EUR500bln for new infrastructure spending over the next 12 years while also agreeing to exempt spending on defense from any caps so long as it is greater than 1% of GDP. A vote in the lower and upper chambers of German parliament is expected to take place this week.
Our take: This is HUGE news and there are several important takeaways here…
- Germany is the largest economy in the Eurozone. With the “debt brake” now circumvented, Germany’s economy will no longer be constrained via the fiscal straitjacket. That is a massive boost for the European growth outlook going forward.
- For a long time now, the ECB has had to run overly loose monetary policy precisely because Germany (as the EU’s largest economy) insisted on running overly tight fiscal policy. At the margin, this shift means that there’s now a lower risk of negative interest rate policy being implemented in the Eurozone again.
- This is very constructive for the EUR over the long-term. Keep in mind that on a “net-net” basis, EUR/USD flows account for over 22% of daily FX turnover – which is a meaningful footprint. That should translate into general USD weakness across the spectrum of developed market currencies over time.
- European markets should continue to outperform the US. The equilibrium for the “rate of return” has now shifted higher in Europe relative to the US. At the very least, that should mean a greater proportion of European savings are recycled into Euro-area markets as opposed to the US. In fact, it wouldn’t surprise me if we continue to see flows repatriate back to the EU at the same clip we’ve seen over the past few weeks.
b.) However, we want our readers to understand the implications of the numbers mentioned above.
For instance, Germany spending EUR500bln on infrastructure is a big deal primarily because of the multiplier effect. Typically, infrastructure has a high multiplier (usually between 1.5-2.5x) because it leads to job gains, demand for materials and boosts long-term productivity. But that effect can be higher if current resources are under-utilized in an economy.
If we assume a multiplier of 2x for Germany’s infrastructure spending, then a rough estimate is that the current plan will increase GDP by EUR1trln over the next 12 years. The size of the German economy is currently at EUR4.3trln – so we’re talking about the country’s economy expanding by 23% over 12 years (or roughly 2% per year). And remember, we’re not even accounting for the uptick in defense spending yet.
So yeah – we’re bullish Germany and the Eurozone.
c.) How do we play this out using our funds?
Our preference would be for unhedged exposure to Germany – given that we see EUR/CAD extending higher over time.
As such, we like the following (in order) – ZDI, ZWP, ZEA and ZIQ.
3.) US News + Notes:
a.) The latest NBC News poll shows that Trump’s job approval rating is the highest its been during his political career – though most Americans still disapprove of his performance.
b.) US Treasury Secretary Bessent again says that a correction in the S&P 500 and Nasdaq are “healthy” for markets that had been “euphoric” beforehand.
Our take: There’s a kernal of truth here, but to say this at a time when administrative policy on trade/tariffs/regulations change by the day won’t do much to assuage market concerns.
Politics shouldn’t matter for markets most of the time. But there’s something to be said about institutional stability that makes investing decisions easier. Markets should continue to price the ‘chaos premium’ in the months to come – which is why we’re still advocating for a defensive posture for portfolios.
And for what its worth, I suspect the tone from Trump’s team changes if the S&P 500 is down by over 20% from the peak.
c.) FOMC: On Wednesday, the Federal Reserve will finish deliberating and will almost certainly keep policy rates unchanged. Also, there is a non-zero chance that an official announcement on the end of quantitative tightening could also come this week.
We’ll have more to say on the Fed in a short/brief preview to be released Wednesday morning.
d.) Trump is scheduled to speak with Russian President Putin on Tuesday on a possible ceasefire agreement for the conflict in Ukraine.
4.) Asia-Pacific Notes:
a.) In Japan, the BoJ is expected to keep policy unchanged later this week.
Recent speaking engagements from BoJ members have repeatedly emphasized the need to tighten policy gradually and that message would be upended with a second straight hike to the policy rate. Additionally, there’s now greater concern that Trump will target the Japanese agricultural industry with tariffs in the coming weeks. At the margin, that will further complicate the decision path for the BoJ in the near-term.
b.) In China – the February dataset were mixed. Indeed, retail sales picked up on a “year-to-date, y/y” basis to 4.0% (above expectations of 3.8%), while industrial production expanded by 5.9%, and fixed asset investment by 4.1% (3.2%) under that same gauge.
Those are solid signals that Q1 growth is holding up reasonably well amidst tariff/trade threats – though there are offset by ongoing concerns in the property market to a degree as new/used home prices fell on the month. Meanwhile, the unemployment rate rose to 5.4% on the month.
c.) Staying with China, policymakers unveiled an action plan aimed at propping up consumption in China. The measures within the plan focused on raising incomes, stabilizing stock and real estate markets while offering incentives to raise the country’s birth rate.
The plan (again) sends a signal to the markets that the authorities in China remain focused on propping up domestic consumption. That’s part of the long term strategy to reorient the economy away from an external trade driven model. For markets, the details matter more, and thus far any major announcement has been short on them.
Onshore markets took the news in stride as the CSX was slightly lower from Friday’s close. Meanwhile, USD/CNY and USD/CNH are both steady and remain in recent ranges.
5.) Portfolio Strategy:
This is a tough week to call.
On one hand, markets have come to grips with the fact that tariffs on some goods will remain in place for the time being (steel/aluminum + non-USMCA compliant). On the other, we’re still in the “eye of the storm” when it comes to additional tariffs with the April 2nd date looming large (reciprocal + balance of 25% comprehensive on Canada/Mexico goods).
Additionally, we have lots of event risk this week with central banks deliberating in several countries (most notably – the Fed). Markets have sold off aggressively over the past few weeks and we’re due for some consolidation here.
Having said that, there are some tailwinds to take note of:
- We are bullish on European markets given the sheer size of German fiscal stimulus (see point 2a).
- We are also constructive on base metals going forward. Indeed, we’re hearing more about potential supply disruptions as firms outside of the US try to procure as much supply as they can of copper, aluminum, etc. As supply chains continue to reorient, we suspect that near-term demand-pull effects will dominate.
The two funds that are best placed to capitalize on the above themes are ZDI and ZMT. The former because we like the exposure to European markets while emphasizing income, and the latter due to its exposure to base metals.
6.) Data/Events to watch this week:
Mon March 17th
- Canada: Housing starts (Feb), Existing home sales (Feb), Int’l securities transactions (Jan)
- US: Retail sales (Feb)
Tues March 18th
- Canada: CPI (Feb)
- US: Housing starts (Feb) + Building permits (Feb), Import price index (Feb), Industrial production (Feb)
- Germany: ZEW survey (Mar)
Wed March 19th
- US: FOMC decision + SEP + Chair Powell press conference, Net TICS flows (Jan)
- Eurozone: CPI (final – Feb)
- Japan: BoJ decision
- Brazil: BCB decision
- Indonesia: BI decision
Thurs March 20th
- US: Initial + continuing jobless claims, Existing home sales (Feb), Current account (Q4)
- Canada: CFIB business barometer (Mar), BoC’s Macklem speaks in Calgary
- China: PBoC decision on loan prime rates
- UK: BoE decision, Jobless claims (Feb) + Unemployment rate (Jan) + Avg weekly earnings (Jan)
- Switzerland: SNB decision
- Sweden: Riksbank decision
- South Africa: SARB decision
- Eurozone: ECB President Lagarde speaks before European parliament
- Japan: CPI (Feb)
Fri March 21st
- Canada: Retail sales (Jan)
- Eurozone: Consumer confidence (Mar)
- Russia: CBR decision