Asia gets no Shanghai surprise

Shanghai ends virus restrictions

Asian markets are trading with a negative tone today, with the ending of virus restrictions in Shanghai today having little to no positive impact. Mostly that is due to the flip-flop of the day in US markets, which reopened overnight. New York decided overnight to be nervous about Fed tightening once again, having dismissed it last week. Tomorrow, they may decide it’s not a problem once again, who knows.

Either way, the Fed’s Waller’s hawkish remarks on Monday and the start of quantitative tightening this week by the Fed prompted Wall Street to close slightly lower after US yields rose, after a few sessions of sideways trading. That also saw some modest US dollar strength while gold moved lower in another session of unconvincing price action.

With Wall Street setting a negative tone for Asia, Manufacturing PMIs from across the region did nothing to lift the tone. China’s Caixin Manufacturing PMI rose slightly from April, the May number climbing to 48.1. Partial reopenings in China have seen the official and Caixin PMIs rebound slightly this week, but not enough to push them into expansionary territory once again.

Notably, May Manufacturing PMIs from Australia, Malaysia, Taiwan, Thailand, and the Philippines all fell from April. Although mostly expansionary, one cannot but conclude that China’s slowdown is finally permeating regional economies. The only exception was Vietnam, long a China alternative. Manufacturing PMI rose to 54.7 from 51.9 previously. So a combination of soft PMIs and a negative Wall Street session are dampening Asian sentiment today.

Much has been made of the ending of Shanghai virus restrictions today, with many seeming to think it offers an instant panacea to an Asian slowdown. Unfortunately, I must add a word of caution here. China’s covid zero strategy has not suddenly gone away, the opposite in fact. And as other countries with covid zero strategies have found out, the country needs to get lucky 100% of the time, the virus only needs to get lucky only once. Any returning outbreaks in Beijing or Shanghai or Shenzhen etc, will put China back to square one.

One potential piece of good news for markets comes from OPEC+, who never cease to amaze me with their ability to surprise us sometimes. Late in New York, a story started circulating that OPEC might exempt Russia from the production quota agreement at the OPEC+ meeting tomorrow. That slack being taken up by other producers, although realistically, that means Saudi Arabia and the UAE. The potential for higher output making up for lost Russian oil saw crude prices fall by 5.0% overnight. All eyes will be on the OPEC+ meeting tomorrow for confirmation.

Looking ahead, Asia’s data calendar is now dead with German Unemployment and UK Nationwide House Prices holding the most interest for markets this afternoon. Overnight, French GDP contracted QoQ for Q1, with inflation rising. Italian GDP narrowly avoided a Q1 contraction, but inflation also rose. It highlights the difficult position the ECB finds itself in as stagflation, exacerbated by the Ukraine conflict, makes its presence felt in Europe. There are no good choices for a central bank in this situation, and although the ECB will probably ramp rates up to errrr… zero per cent, the increasingly dark economic picture is likely to limit EUR/USD gains. One piece of good news though would be if the OPEC Russia exemption story is correct.

Tonight, the US releases May ISM Manufacturing PMI and the JOLTs Job Openings for April. Manufacturing PMI should retreat slightly from April’s 55.4 but remains expansionary. And unless the JOLTs data tumbles massively and prints under 11.0 million jobs (11.4 exp), neither number is likely to move markets. The move higher by US yields, should it continue this evening, is going to have far more impact. Otherwise, US markets, and by default, global markets, will still indulge in schizophrenic swings in market sentiment as the FOMO dip-buyers become increasingly frantic in their attempts to pick a cyclical low in equity markets.

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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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