China gloom hangs over Asia

Although we have seen some interesting political developments across the world over the weekend, it is China that is weighing on Asian markets this morning. China inflation came in slightly above expectations YoY for March rising by 1.50%, while PPI eased back to 8.30% YoY, likely thanks to Covid restrictions crimping economic activity.

China’s Covid spike threatens economy

It is China’s Covid situation that is making Asia nervous. The weekend press was full of stories of locked down Shanghai residents unable to secure food supplies, with cases rising to 27,000 yesterday. Ominously, the city of Guangzhou closed its schools until April 17th and began mass testing. With China’s government doggedly sticking to its Covid-zero policy, fears are increasing that an extended lockdown in China, which may spread to other major industrial cities will darken an already cloudy outlook for China’s growth.

Asian equity markets are lower in response, although one silver lining is that a slowdown in China is taking some heat out of the commodities market. Oil prices have moved 2.0% lower in Asia this morning.

The less than stellar news continues from China, where the property developer sector debt woes, knocked off the headlines for the past two months, but certainly not gone away, have made an appearance today. Developer Zhenro has officially defaulted on some US dollar bonds after a grace period expired. It also said it would struggle to pay some upcoming coupons. The slow-moving debt trainwreck that is the China private developer sector, continues, with no sign of relief from the central government, although municipalities are busy removing buying restrictions to keep the property market supported. The property market gloom is another headwind blowing across Asia today.

China releases New Yuan Loans on Tuesday, and markets will be looking for a strong increase to back up assertions from the central government that it is standing behind the economy. Additionally, the 1-year MTF rate should be announced sometime this week and a cut in the financing rate would go some way to reassuring investors that China is not going to sacrifice growth over deleveraging. Whichever way you cut it though, China equities are in for a challenging start to the week and escalating bad news on the omicron front is likely to offset any tinkering central government does on the sidelines.

We have a lot of inflation data out this week, including the US on Wednesday, and New Zealand Food Price Index on Wednesday. US Inflation data has upside risks, expect the race to pencil in 0.50% hikes by market experts to go into overdrive and look for more US dollar strength. The latter is important, as ii precedes the RBNZ policy meeting by a day. The United Kingdom has an avalanche of data starting with GDP today, Employment tomorrow and CPIs on Wednesday. All of it has upside risks and could increase the noise around faster Bank of England tightenings.

We have a packed week of central bank policy decisions as well. In Asia, the MAS will announce its semi-annual policy decision Wednesday. A tightening by raising the bands of the S$NEER and the pace of appreciation is 100% locked in, more interesting will be its policy outlook which has hawkish risks. The Bank of Korea announces on Friday, with markets expecting a 0.25% hike to 1.50%, Again, its policy outlook will be a key bellwether as to whether Asia will finally look to hike rates with the Federal Reserve.

In the South Pacific, one of the developed world’s worst-performing central banks, the Reserve Bank of New Zealand also announces its latest policy decision. Markets are locked and loaded for a 0.50% increase as the RBNZ plays a major game of catchup to spiralling inflation. Markets will be expecting the RBNZ statement to be competing with the FOMC for the number of 0.50% increases to come. Anything less will see the New Zealand dollar get slammed. New Zealand remains at the top of my which developed country will have a hard landing first, chart.

Moving into the heavyweight category, the Bank of Canada should join the 0.50% rate hike club on Wednesday. With the government enacting foreign property buyer bans last week, the mood in the Ottawa halls of power is clearly sombre. Once again, like the RBNZ, markets will be looking for hawkish forward guidance.

Finally, the European Central Bank announces its ECB Deposit Rate and Refinancing Rate on Thursday. I expect them to remain unchanged at -0.50% and 0.00% respectively, thanks to the Ukraine war. Europe is on the frontline of the economic war now, and hiking into a wartime economy is usually not a good thing. What will be more interesting will be the internal battle between the doves and the hawks and the ensuing policy outlook. I believe Ukraine has left the ECB’s hands tied and it will have to accept stagflation for some time to come. There won’t be many reasons to be excited about the euro this week and long-term multi-year support at 1.0800 will almost certainly be tested.

But wait, I’ve not finished. Pakistan’s Prime Minister was deposed in a no-confidence vote over the weekend. The dropped catch by the PM means a caretaker PM will take over the bowling. Unfortunately, a mass resignation by Mr Khan’s MPs could yet see fresh elections and another change in the coaching staff. That is just the selection instability its giant neighbour India does not need this week as Prime Minister Modi is meeting US President Biden for talks. Just how much discounted Russian oil India intends to buy will be a delicate balancing act for Mr Modi, as will a potential swing by Pakistan back into the US sphere of influence thanks to an impending IMF bailout that can probably now be signed. Geopolitical currents may weigh on India’s equities and the Rupee this week, with a hawkish RBI last week seeing no strength occurring in the INR.

France’s presidential runoff on the 24th of April will be between the incumbent Emmanuel Macron, and the far-right’s Marine Le Pen. Macron holds a slim lead, but as we have seen in elections over the last few years, angry people get out and vote. Ask the Americans and the British and the Brazilians. That lesson may finally have sunk in, and French election uncertainty will be another reason for the ECB to stay its hand this week. It is already holding back any euro gains. A Le Marine victory will make Brexit look like scones, marmalade, and clotted cream.

Australia’s Prime Minister, Scott Morrison, also announced Australia’s next election date on May 21st. The Liberal Party is trailing the Labour Party quite badly and has about 5 weeks to turn this around. Having come from behind before, you can’t rule out ScoMo doing it again. The AUD is wilting today, although that is probably more China-related. Mr Morrison will gain brownie points for standing up to China and winning but will lose plenty on overseas trips during Covid and the cost of living. Although Mr Morrison is a pragmatic junkyard dog campaigner, I understand there is no truth that he will campaign on Christmas Island for swing votes, or among the diaspora in Auckland New Zealand, wearing 501 jeans.

Over in the Ukraine, NATO and Western dilly-dallying over the resupply of the Ukraine of arms and other supplies threatens to swing the war decisively in Russia’s favour. Ukraine’s armed forces have had success in the North because the Russians left, but have shown no capability to conduct large scale manoeuvres in the East and South, where the Russians have shown no signs of going anywhere. The East is open flat tank country and little drones and MPATs will be of limited use there. Additionally, the bombing by Russia of key fuel depots in Ukraine is threatening the fuel supplies of farmers just as the sowing season is about to begin. Think world food prices, think Ukrainian grain season failing, think much higher food prices across the world.

If you can make sense of all of that, you’re a better person than me. My overriding impression, as the week starts, is that risks on multiple fronts are increasing, led by China’s Covid-zero and potential slowdown, followed by inflation. Don’t get wedded to lower oil prices or a sustained “the worst is over” FOMO bounce in equity markets. Staying more heavily weighted in cash, or perhaps some precious metals, buying a Kevlar helmet, and settling in to watch the whole mess develop from the sidelines, maybe no bad thing. Or you could buy volatility.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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