- China’s reopening optimism turns to fears about spread of new Covid variants
- Stocks slump as Wall Street can’t shake off the gloom, Nasdaq approaches new lows
- But major currencies continue to trade sideways, dollar little changed
Stocks stuck in downbeat mood
There doesn’t seem to be any end in sight for the global stock rout that’s gripped equity markets since the December round of central bank gatherings. After policymakers from the Fed, ECB and others warned that there are plenty more rate hikes to come in 2023, the bond market selloff resumed, pushing yields back up to painful territory again for risk assets.
Moreover, the impact from the Fed’s aggressive tightening campaign is starting to be felt beyond the housing market in the US and investors are worried that at the current pace, there can be no turning back and a deep recession is inevitable. A bigger-than-expected drop in pending home sales in November added to concerns about a housing crash yesterday, while today, the latest weekly jobless claims figures might jolt markets amid thinning volumes in the run up to the New Year weekend.
China’s reopening plans go awry
China’s decision to abandon quarantine requirements for travellers had boosted sentiment earlier this week as the country finally ditched its zero-Covid approach. But the optimism faded fast and there is a sense that authorities may have acted too hastily in removing all restrictions.
Not only are investors now questioning how quickly the economy can fully recover when infections are seemingly soaring in many districts, but they are also worried that the reopening of borders will increase the risk of new variants spreading to other parts of the world. Even if the Chinese economy were to bounce back quickly, that would then bring its own problems such as the risk that it would magnify price pressures globally as demand for commodities and other goods increases.
Several countries including the United States, Japan and Italy have imposed mandatory Covid tests for Chinese visitors, adding to the alarm in the markets after Italian authorities said almost half of all passengers travelling to Milan from Beijing and Shanghai since Monday have tested positive.
Wall Street headed for double-digit losses for 2022
So on top of the uncertainty around the growth outlook on the back of concerns about a recession and overtightening by central banks, traders now also have to grapple with the threat of new Covid variants, as well as the mystery surrounding the true scale of the latest outbreak in China amid the lack of information from the country.
And in the absence of any positive drivers, Wall Street struggled to hold onto early-session gains on Wednesday to end the day lower, and it looks set to end the month and the year with substantial losses.
The S&P 500 is headed for yearly losses of just over 20%, while the Nasdaq is on track to end 2022 down almost 35%. In comparison, the Dow Jones’s losses of 9.5% are relatively modest, as traditional stocks are less sensitive to interest rates than overvalued tech stocks.
The resurgence in bond yields in December has been a major drag on the Nasdaq, which closed at its lowest since July 2020 yesterday, although it has yet to surpass the intra-day low from October 13.
Dollar adrift heading into 2023
The US dollar was unable to garner much support from the negative mood in equity markets but the other safe havens – the Japanese yen and Swiss franc – were both firmer on Thursday.
With investors losing hope that the Fed will be able to pivot on time to avert a major economic downturn, the greenback has stopped mirroring Treasury yields in recent weeks, moving sideways, while yields have crept higher. Although the issuance of new debt this week may have contributed to the upsurge in yields, expectations of more tightening remain the primary factor behind the rise.
But with yields climbing everywhere, yield differentials haven’t changed much and this is another reason why the dollar is lacking direction right now.
The yen on the other hand is attempting to pare back some of its recent losses, rising across the board despite the Bank of Japan conducting more unscheduled bond-buying operations today to maintain its cap of 0.50% on the 10-year JGB yield.