down down down

“Sell in May” theory on test as uncertainties rise, more stagflation warnings to come but China still holding its ground on zero covid

Equities 7 minutes to read
Saxo Be Invested
APAC Research

Summary:  60/40 portfolios disappoint again amid a coordinated selloff in bonds and equities. Risk off boosted by a gloomy BOE outlook and China doubling down on its Dynamic Zero covid policy. Australia’s earning season disappoints. On watch today will be the US NFP release which is likely to disappoint, and may see the stagflation rhetoric start gaining more traction.

What’s happening in markets?

That was a quick reversal in asset markets. Deep plunge in equities overnight with tech-heavy Nasdaq down 5% and S&P and Dow in red of 3.6% and 3.1% respectively. US treasuries were also offered as 10-year yields surged 10bps to head over 3% again. FX markets were not spared either as dollar dominance returned. Asian stocks are likely to feel the pinch as well and Singapore’s STI Index (ES3) dropped 1.4% in the morning. Japanese stocks dropped as well at the open but recovered later. Nikkei (NI225.I) was last seen in minor gains as Mitsui (8031) inched higher amid solid results and buyback plans on the back of buoyant iron ore prices. Japanese utilities were also higher amid the nuclear energy push.

Hong Kong and mainland China equity markets reversed and headed lower. Following sharp reversal of the U.S. markets overnight, Hang Seng Index (HSI.I) fell over 3%. Hang Seng TECH Index (HSTECH.I) was more than 4% lower. China’s doubling down on its Dynamic Zero Covid policy yesterday increased investors’ concerns about persistent and pervasive lockdowns.  CSI300 (000300.I) fell 2%. The recent rebound has waned, and the markets are set to test their lows in the coming days. 

Consumer spending is expected to weaken. E-commerce stocks were a big part of disappointing quarterly reports overnight. Etsy, Wayfair, Shopify, followed Amazon with weaker results. Etsy (ETSY) shares fell about 17%, Ebay (EBAY) shares lost about 12% taking e-commerce stocks to 2-yr lows. Ebay dropped its guidance saying consumer confidence has fallen and expects inflation and higher fuel prices to lower disposable income, especially in UK and Germany. As a house, we have a bearish view on stay home economy consumer spending stocks, given rates are rising.

Lessons from Australia today. The ASX200 fell 2.2% on Friday to an 8-week low. The technical indicators look very bearish as earnings seasons has been weaker than expected so far. Scratching beneath the surface, there are a lot of interesting stories at play to be aware of and watch. The Coal price in Australia is chasing back to record highs. Yet the biggest coal stock, Whitehaven (WHC) is having down day too, proving risk off sentiment is also causing profit taking across the board. However, WHC remains one of the best performing stocks this year on the ASX. REA Group (REA) the online real estate website, reported results beating expectations as there's been an increase in people selling homes ahead of rates aggressively rising. Meanwhile, Australia's biggest investment and infrastructure group, Macquarie Group (MGQ) reported profit rose 56% to $4.7 billion (a record). Three of its four divisions reported record performance; profits from investment banking and commodities rose 92% on the prior year, while banking and asset management profits rose 25%. Despite that MGQ shares gapped down.

FX reversal keeps policy divergence theme at play. USD bounced back to fresh 20-year highs as Fed funds rate still remains on course for near-3% levels by year-end. USDJPY was back above 130.50 in Asia while AUDUSD slid back to 0.7100. The euro was also dented after German data showed that industrial orders in March suffered their biggest monthly drop since last October but has bounced back from the 1.0500 support. GBPUSD plunged to near 2-year lows after the Bank of England raised interest rates to their highest since 2009 but warned that the economy was at risk of recession.


What to consider?

China down on the Dynamic Zero-Covid policy. The standing committee of the Chinese Communist Party’s Politburo convened. The meeting, in which President Xi chaired, issued a statement reaffirming strict adherence to the Dynamic Zero Covid policy. The resolution of the meeting commands party cadres, government officials, and community leaders at all levels to unite their thinking and actions around the centre of the Chinese Communist Party and not to loosen efforts in pandemic prevention. The statement pledges to fight against narratives that “distort, doubt, or reject” China’s pandemic prevention policy. The tone throughout the statement is usually stringent and apparently aims at ironing out pushback from some concerns in the society against the Dynamic Zero Covid policy.

BOE’s gloomy outlook. The Bank of England also had some role to play in the reversal of sentiment on Thursday as they sounded the alarm on 10% inflation and said that while UK will avoid a technical recession, output will collapse by close to 1% in Q4. Finally, rather than starting “active QT” now (selling holdings outright rather than merely not replacing maturing bonds) as had been forecast once the BoE rate reached 1.00%, the bank now says it will not start doing so until August. Sterling under pressure with 1.2000 at risk and EURGBP higher above 0.8500.

Tokyo inflation unlikely to nudge BOJ. Japan’s Tokyo inflation surged to its highest levels in 30 years at 1.9% y/y - getting in close distance of the 2% target levels. Gains are still mostly driven by energy (up 25% y/y to constitute 1.1% points of the headline print) and base effects. No Wage inflation pressures mean easy Bank of Japan monetary policy is set to continue, but the weaker yen continues to add a layer of risk.

China’s PBoC announced an increase of relending quota to support clean coal projects. In line with its emphasis of using targeted credit extension, the People’s Bank of China announced a RMB 100 billion increase to its relending programme, bringing it to RMB 300 billion in total, to provide funding at preferential rates to banks which are encouraged to lend to clean coal projects.


Trading ideas to consider

Markets are at a critical point, adjusting for tightening liquidity with money coming out of the financial system for the first time in over a decade. Younger investors are being schooled; that market moves in cycles; markets generally shrink when central banks rise interest rates and stay home economy stocks are losing their shine- guiding for weaking consumer spending (amid inflation and rising rates). With the US central bank to aggressively rise rates (on path for rates to at least rise 3% this year) to tackle inflation - the market is adjusting for weaker medium to long-term growth. The global economy is poised to shrink, inflation is said to peak (petrol, food, wage growth)- and thus as the market is forward looking, it’s favouring companies with strong repeatable/ and rising cashflows and these are mostly in commodities as we highlighted in a note yesterday.

US NFP on watch. US non-farm payrolls for April out later today, consensus stands at 391K, below 431K for Mar. Unemployment rate is expected to fall to 3.5% from 3.6% in March, and average hourly earnings – the measure watched by Fed for their inflation mandate – is expected to stay flat at 0.4% m/m but slow down on an annual basis to 5.5% y/y from 5.6% previously. High-frequency data on the labor market generally indicate weakness in April employment and with the rhetoric starting to shift to activity slowdown from just inflation headwinds, it is probably time to position portfolios to be recession-proof as against just being inflation-proof previously.

Japan travel restrictions to ease. PM Kishida has announced he would loosen Japan’s covid-related border controls in June, boosting travel stocks. Japan Airlines (9201), ANA (9202), Tobu Railway (9001) got a boost. Retail and restaurant stocks may get a push as well once more details are chalked out. While a weaker yen is attractive for tourism pickup, higher fuel prices might as well ruin the party.


Key economic releases this week:

  • Fri, May 6: US non-farm payrolls


For a global look at markets – tune into our Podcast. 


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.