Market Insights Today: Thin markets, China lockdowns in focus – 25 November 2022
APAC Strategy Team
Summary: A quiet overnight session with the Thanksgiving holiday, and most assets remained in consolidation after the FOMC minutes-driven move the day before. China’s zero Covid still in focus as reports suggest that Beijing may go in a lockdown. The US dollar held on to its recent losses, and bets for the December Fed rate hike in favour of a 50bps move. Sweden’s Riksbank hiked 75bps and the pressure on Bank of Japan to tighten policy also remains with Tokyo CPI touching a new 40-year high. Crude oil still below key levels, while Gold and Silver are testing key resistances.
What’s happening in markets?
The Nasdaq 100 (NAS100.I) and S&P 500 (US500.I)
Closed for the Thanksgiving holiday.
US treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
Closed for the Thanksgiving holiday.
Hong Kong’s Hang Seng (HISX2) and China’s CSI300 (03188:xhkg)
Hang Seng Index gained 0.8% on Thursday following China’s State Council’s call on the People’s Bank of China (PBOC) to cut the reserve requirement ratio (RRR). In addition, leading Chinese banks offered more than RMB 270 billion in credit facilities to support private enterprise developers. Chinese developers were top performers in the benchmark index, with Country Garden (02007:xhkg) jumping 20%, Longfor (00960:xhkg) up 12%, and Country Garden Services (06098) up 11%. Hang Seng TECH Index climbed 0.8%. Xiaomi was the laggard among tech peers, falling 3.6% after reporting Q3 results. Market sentiment was tempered by the rise of daily Covid cases to an all-time high of 31,444 in mainland China. CSI 300 edged down by 0.4%, driven by large state-owned enterprise names that consolidated recent strong gains.
FX: Dollar held on to its losses in a thin trading day
The dollar index traded steady below 106 on Thursday amid thin trading markets with US closed for Thanksgiving. The reaction to a dovish read of the FOMC minutes has been a significant slide in USD, which along with higher equities and lower bond yields, suggest financial conditions continue to ease since that softer CPI release. This is sending warning signals on inflation and Fed members may need to be more hawkish to prevent that. Lower US yields, and still-steady expectations of a BOJ pivot, have meant a stronger Japanese yen, with USDJPY now below 139. GBPUSD touched 1.2150, the highest levels since early August.
Crude oil (CLZ2 & LCOF3)
Demand concerns, especially from China’s zero covid, continued to underpin the oil markets. A record high in the number of cases and reports that Beijing may go back in a lockdown show the difficulty of opening up the economy. US gasoline demand is also weakening as the travel season ends, and there are signals of overall demand weakness globally after massive tightening this year. This saw oil prices remain below key levels, with WTI still around $78/barrel and Brent around $85. Meanwhile, the proposed price caps on Russian oil continues to cause concern. EU diplomats are locked in negotiations over how strict the mechanism should be. Poland rejected USD65/bbl, while shipping giant Greece said it doesn’t want it below USD70/bbl.
Gold (XAUUSD) and Silver (XAGUSD) testing key resistances
A dovish FOMC read, along with softer US economic data from the flash PMIs, have returned the focus again on precious metals. Gold tested $1735 support again this week but is now back at over $1750-levels and testing the resistance at $1757. Break above will bring $1765 in focus, but lack of ETF buying still makes it hard to confirm the reversal of the short-term downtrend. Silver is also at key resistance level of $21.50.
What to consider?
Sweden’s Riksbank hiked 75bps, more in the pipeline
The Riksbank’s 75bps rate hike was larger than the 50bps signalled at the September meeting, and brings its policy rate to 2.5%, the highest since the GFC. Worsening inflation outlook, with October’s inflation at 9.3% and suggesting wage pressures as well, more rate hikes potentially remain in the pipeline. Peak rate is closer to 3% for now, but the bank showed an alternate scenario where persistent inflation above 3.5% could prompt the peak rate move higher from 2.84% to 4.65%.
Japan’s Tokyo CPI above expectations again, more pressures to come
Japan’s Tokyo inflation for November rose to its highest level in 40 years, suggesting that price pressures have not peaked yet. Tokyo CPI came in at 3.8% YoY from 3.5% previously, while the ex-food was at 3.6% YoY (prev 3.4%) and ex-food and energy was at 2.5% YoY (prev 2.2%). Meanwhile, Asia LNG prices are rising again, as colder temperatures in Europe heat up the competition to secure LNG cargoes again. This suggests price pressures will likely continue, and Bank of Japan could still likely consider tweaking its yield curve control policy.
Anwar Ibrahim sworn in as Malaysia’s PM, political chaos to stay
Malaysia’s new PM Anwar Ibrahim plans to test lawmakers' support for his leadership with a confidence vote on Dec 19, as he seeks to prove he commands a majority. His party, Pakatan Harapan, got the most but only 82 seats in the 220-seat parliament and lacks a majority. The political divide in the country is getting worse, suggesting policy paralysis that can likely drive foreign investors away.
Local governments across China resorted to lockdowns as Covid cases surged to record highs
As new Covid cases hit new highs day after day, local governments are torn between the urge to avoid full lockdowns and the instruction to adhere to the zero-Covid policy. Over 40 cities across China, including Guangzhou, Zhengzhou, Chongqing, Shanghai, and Beijing have to resort to some sort of movement restrictions or lockdown.
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