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Stocks eke out gains on China boost as Fed worries linger


  • China reopens its borders, lifting jittery stocks in quiet holiday week
  • Improved sentiment hurts dollar and yen; latter also weighed by Kuroda
  • Oil extends gains on China news and US winter storm disruption

China scraps quarantine rules, helps spread some festive joy

Risk appetite was on the rise on Tuesday following China’s announcement yesterday that inbound travellers will no longer have to quarantine as of next month. The decision comes even as daily infections continue to surge across many parts of China and is another indication that Beijing plans to press ahead with unwinding its controversial zero-Covid policy.

Reports of hospitals in major cities like Beijing and Shanghai being overwhelmed had raised concerns among investors that authorities would reverse some of the recent relaxation of Covid curbs. But this latest measure suggests China is finally joining the global community in learning to live with the virus – something that is music to the markets’ ears.

Amid the very real possibility of recession in Europe and America and fears about overtightening by the Fed, the return of strict lockdowns in China in recent weeks had added to the doom and gloom around the outlook. And even though it’s likely that it will take a few weeks for Chinese consumers to start spending again and for the supply disruptions to abate due to the current high infection rate, this latest development has lifted the uncertainty about zero-Covid making a possible comeback, buoying risk assets.

Stocks rebound but still headed for big yearly losses

The headlines about China have injected some much needed positive momentum into equity markets as many traders return from the long Christmas weekend. The major indices in Asia and Europe that are trading today are all edging higher and US futures are up too, adding to Friday’s modest gains when the S&P 500 managed to nearly wipe out the week’s losses.

December has been a dreadful month for Wall Street, as investors have struggled to make sense of the data. Friday’s PCE inflation numbers offered more relief that price pressures are easing in the United States, while consumption growth almost ground to a halt. But with jobless claims still pointing to a very tight labour market, investors are finally heeding the message that the Fed won’t alter course until inflation is a lot closer to its 2% target.

Even the encouraging drop in consumer inflation expectations as highlighted in the University of Michigan’s preliminary survey readings on Friday failed to set the markets alight, although it did contribute to Wall Street’s bounce back.

With volumes expected to remain thin for much of the week and not a lot on the agenda, a further recovery is possible in the remaining trading days of the year on the back of today’s optimism. But any rebound is unlikely to be sufficient in preventing stock markets from finishing the year with the worst losses since 2008.

Dollar and yen on the backfoot

The brighter mood weighed on the safe-haven US dollar and Japanese yen, while the risk-sensitive Australian dollar led the gainers. The aussie is trading near two-week highs as the Australian economy is set to enjoy a substantial boost from China reopening its borders, both in the form of more tourists and higher exports.

The Japanese economy also stands to benefit from Chinese tourists, but Bank of Japan Governor Haruhiko Kuroda put a dampener on yen bulls yesterday by pushing back against the view that the widening of the yield band amounted to the first step towards an exit from ultra-easy policy.

The dollar was last trading about 0.2% firmer against the yen but was weaker by about 0.3% against a basket of currencies.

Oil rallies on demand and supply shifts

In commodities, gold took full advantage of the softer greenback to jump back above $1,800/oz and oil prices rose too. Oil futures ended last week on a high note after Russia signalled that it may slash output by 500,000-700,000 barrels per day (bpd) in 2023 if other countries comply with the West’s price cap.

Adding to oil’s upside on Tuesday is the improved demand outlook for China, while the arctic weather in the US, which has hit oil and gas output as well as forced the closure of refineries, is further helping extend the rebound from the early December lows.

WTI futures are back above $80 a barrel today, the highest in three weeks.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-stocks-eke-out-gains-on-china-boost-as-fed-worries-linger-171969
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