Market volatility continues
Volatility continued unabated overnight, with oil trading in a USD 9.0 a barrel range, almost pedestrian by recent standards. Equities and currencies were also buffeted. The meeting between Ukrainian and Russian ministers in Turkey went nowhere, as expected, and China-listed ADRs were pummelled in New York on regulatory and delisting fears.
Today, China’s Covid-19 cases on the mainland have hit 1,000, not normally a worry unless you are running a covid-zero policy. Fears of renewed lockdowns will permeate mainland markets today, already facing slowing growth and a PPI shock from soaring energy and commodity prices.
Overnight the ECB surprised markets by accelerating the pace of tapering, setting markets up for a rate hike in Q4. Club Med government bond yields rose sharply in response as the prospective loss of the monetary cookie jar looms. In the US, inflation hit 40-year highs of 7.90%, and although base effects should start bringing that number down from next month, the Ukraine-derived wave of price rises sweeping the world may undo much of the base effects.
The rhetoric from the Federal Reserve suggests they will stay on track to start hiking next month, the first of what should be a series of constant hikes over the rest of the year. Similarly, the ECB is clearly more concerned about inflation now than the spillover effects from the war. A Bank of Japan official has said today that economic and price conditions don’t allow for a withdrawal of stimulus, and China’s Premier Li said high growth will be hard to maintain for a large economy. Additionally, Asia economies have shown a higher predilection than most to tolerate stagflationary conditions throughout the pandemic and will likely continue to prioritise growth. When taken in totality, it’s not a big reach to say the US dollar and euro to a lesser extent will outperform Asian currencies. And the environment won’t be special for most equities either anywhere.
It is no surprise that Asian markets are looking soggy today, or that the US dollar is bouncing hard. The bad news pouring in isn’t just from the front lines of Kyiv. With that in mind, we appear to be seeing similar price action to last Friday. That is, nobody wants to go into the weekend when markets are closed, overly long risk exposure. This will probably be a day the US dollar and US Treasuries and gold and oil rise, and short everything else until Monday.
Data wise, there is not much for financial markets to sink their teeth into today. German inflation will be overshadowed by yesterday’s ECB meeting, and UK GDP will impact only the sterling. The US releases Michigan Consumer Sentiment which could cause some equity wobbles if it is very weak. Elsewhere, China releases New Yuan Loans of the next 24 hours which should ease following January’s peak, and the National People’s Congress wraps up. That leaves us at the mercy of the headline RSS feed and the ebbs and flows of the tail-chasing fast money algo-gnomes. Stay battened down and stay safe, sentiment remains fragile out there. Happy Friday.
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