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Safe havens jump, stocks tank as China and inflation fears intensify

XM.COM

  • Dollar stretches bull run, yen and bonds rise too as China races to contain Covid outbreak
  • Aussie leads the FX losers, Macron victory limits euro’s losses
  • Stocks and oil plunge, no safe-haven boost for gold

China struggles with zero-Covid policy

A worsening outbreak of Covid-19 in China dragged risk assets lower at the start of the new trading week as stocks extended Friday’s losses while the US dollar scaled a fresh two-year high against a basket of currencies. Restrictions in Shanghai are being tightened again, having been partially eased only last week, after a fresh flare-up in daily cases.

The latest measures are likely the most draconian yet with infected people being transferred to government quarantine facilities, while some neighbourhoods have been fenced off. But perhaps an even bigger warning sign for investors is that Beijing is also now seeing a spike in infections. Authorities have placed parts of Chaoyang district under lockdown and ordered residents to get tested three times this week.

With markets still reeling from the fallout from the war in Ukraine and global supply chains yet to normalize, China’s zero-Covid strategy is threatening to destabilize supply lines even further, fuelling the shortages and adding more pressure on prices.

China’s benchmark CSI 300 index slumped by almost 5% today as the government’s growth target of 5.5% looked increasingly unattainable. Investors have been less than impressed by the economic support measures that have been announced so far by Chinese policymakers as they don’t go far enough to address the concerns about a major slowdown.

Bruising day for stocks

Fears about worsening supply disruptions and sluggish growth in the world’s second largest economy pulled equity markets deep into the red globally too. The S&P 500 sank 2.8% on Friday and its e-mini futures were last pointing to a further drop of 0.9% today. Nasdaq futures were doing slightly better (-0.8%) as investors eyed a slew of tech earnings this week, starting with Microsoft and Alphabet tomorrow.

Shares in Europe were down more sharply. The Euro STOXX 50 index was last quoted down 2.1%, and in Tokyo, the Nikkei 225 index closed 1.9% lower.

Markets have been in this situation several times before during the course of the pandemic but what’s different this time is that central banks are no longer there to ease the panic every time there’s a fresh scare about lockdowns and their impact on growth.

Dollar stands tall, euro see-saws on Macron win

Policymakers in America, Europe and Australasia have pulled the plug on stimulus and borrowing costs are going up as inflation spirals out of control. Last week, Fed Chair Jerome Powell gave his blessing to 50-basis-point rate hikes just before the blackout period ahead of the Fed’s next policy meeting on May 3-4 started.

The ECB’s Christine Lagarde also made a hawkish pivot, signalling on Friday that asset purchases could end in July. However, there seems to be a growing majority within the Governing Council to stop QE even sooner in June, which would pave the way for a rate hike in July rather than in September. Either way, a rate rise in Q3 is looking like a strong possibility in the euro area and that is adding to worries about a recession.

For now, the Eurozone economy is proving resilient, at least according to the flash PMI estimates for April. But a slowdown may already be underway in the US and UK where the services PMIs disappointed, in a sign that higher energy prices are squeezing consumer spending.

The euro was trading down by about 0.5% today, brushing a two-year low of $1.0705 as the mood soured, having started the day with a bullish gap above $1.08 on the back of Emmanuel Macron’s win in the French presidential election on Sunday that maintained the status quo.

But the pound plummeted, hitting 19-month lows versus the dollar amid the bleaker growth outlook in the UK.

The greenback slid against the Japanese yen to just above the 128 level, but the dollar index nevertheless climbed to new two-year highs.

Oil skids, gold gets sidestepped

The commodity-linked currencies were all under pressure on Monday, led by the Australian dollar, which is down about 1%. The Canadian dollar fared slightly better, however, despite oil prices taking a tumble, as a more hawkish Bank of Canada is providing some support.

WTI and Brent crude futures have dropped about 5% today as the lockdowns in China look set to last for some time, weighing significantly on the demand outlook.

Gold was trading lower too, slipping to around $1,915/oz, unable to benefit much from the renewed flight to safety that’s gripped the markets since Friday. Investors appear to be fleeing to the safety of the world’s reserve currency and US Treasuries rather than the traditional safe-haven, gold. Treasury yields were weaker across the curve today, but they remained elevated as the Fed is expected to front load its rate hikes in the coming months.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-safe-havens-jump-stocks-tank-as-china-and-inflation-fears-intensify-159397
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