Covid fears weighing on Asian markets
Equity markets are front and centre in Asia this morning, as increasing nerves about the delta-variant Covid-19 are sapping recovery hopes across the Asia-Pacific. Of course, you can choose your poison on that front globally, with the US, Europe, and the UK also experiencing rises in cases with populations pushing back on restrictions that seem to increase by the day in APAC.
China has muddied the water more by erecting barriers for China tech IPOs in the US, which appears to be an ongoing process. It’s Hong Kong or bust for your IPO from now on, it seems. Even Treasury Secretary Janet Yellen’s comments in a WSJ article that the US-China trade deal hadn’t been beneficial to American consumers has failed to lift the malaise.
US equities finished on a weak note on Friday despite blockbuster US Retail Sales showing Americans were out shopping. Like the earnings season thus far, last week seemed to be a buy the rumour, sell the fact sort of market. Underlying the weakness, though, are the nagging Covid-19 doubts. For context, given how inclined markets are in this day and age to schizophrenically change direction and sentiment on a 24-hour rolling basis, US equities remain near all-time highs, so let’s all just calm down a bit. Even a ten per cent pullback would change the underlying trend, and the Fed has your back.
In other news, OPEC+ seems to have reached an agreement to increase oil production by 400,000 barrels a day per month until the end of the year. Higher production baselines were given to heavyweights, the UAE, Saudi Arabia, Russia, Kuwait and Iraq, and the entire OPEC+ agreement was extended until the end of 2022. On the one hand, increased production is bearish in the short-term for oil prices, as Covid-19 demand concerns coincide with a speculative market that has filled its boots limit-long. On the other, it is a longer-term positive, as OPEC+ cohesion remains intact, without worries of a member’s production free-for-all. OPEC+ has once again demonstrated the ability to resolves its differences and stay on target.
The week’s data calendar is relatively light, notably in the US, with only weekly Initial Jobless Claims to pique interest. Most attention will be on Covid/inflation/growth concerns so that we can expect plenty of day-trader’s paradise type markets in Wall Street this week. The ECB announces its latest policy decision on Thursday, and for once, I will be watching the outcome. We should gain some more clarity as to whether the ECB’s new strategy entrenches a 2.0% inflation target, which, given they haven’t been there for well over a decade, should be a dovish outcome. Rising virus cases are clouding the demand picture there once again, and I would say that a dovish ECB will be reflected by a weak euro versus everything.
The United Kingdom fully reopens today as well, with all restrictions dropped. Unless you have been pinged by the NHS tracer app and told to isolate. The Prime Minister has asked everyone to show some social discipline, but having lived in London for years, that’s as likely to happen as inflation in Japan. The reopening is occurring as delta-variant cases explode in the UK, and I expect nerves over whether this is the dumbest post-pandemic policy decision ever to cap gains in sterling this week.
The week’s calendar sees China’s latest one and three-year Loan Prime Rate decisions tomorrow in Asia. Despite the recent RRR cut and MLF rollovers, I see no change to the LPR’s although I am now wavering on whether they will be hiked in Q4. Indonesia announces its latest policy decision on Thursday. Bank Indonesia has a slight problem this time around with the country of virus lockdowns and a never-ending delta wave, of which Mrs Halley and I have been recipients. There is room for a rate cut with inflation on the floor, but with ASEAN currencies, including the rupiah, fighting a Covid-19 retreat, I expect BI to remain unchanged to support the currency.
Australian PMIs on Wednesday should remain strong, but with sweeping lockdowns in NSW and Melbourne, any signs of viral infection will not be kind to the AUD or local equities. Some forecasters are now downgrading the growth outlook for the lucky country, and it almost certainly justifies the RBA’s ultra-dovish position. The lucky country will remain lucky, just not as fortunate for now, meaning that the Australian dollar, which is a risk-barometer for Asia anyway, will remain unloved this week.
Holidays will play a part in Asia this week. Much of South-East Asia is closed tomorrow for Eid Al Adha/Hari Raya Haji, including Singapore. Japan markets are closed on Thursday and Friday.
We do have some other data from around the region but in all honesty, the calendar this week is relatively light globally ex the ECB. Day-to-day sentiment will be dominated by news flow across asset classes. In the case of this week, that is dominated by Covid-19, especially in Asia, and its potential impact on the global recovery and inflation. Stand by for some wild swings in intra-day volatility across the world this week.
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