It’s just another Manic Monday

It’s not often that you associate The Bangles with prescient outlooks on global markets (no disrespect intended Ladies), but as I look across the landscape of the great game in Asia today, the song is humming through my head. The second line of the chorus is even more poignant. “I wish it was Sunday.” I have a feeling there are many investors feeling the same way.

Asia was always going to start the week on the back foot after a grim Friday session for US equities. Stock markets took fright at hawkish comments from Jerome Powell and fears of higher rates saw equities routed, even though US yields did not really move that much. The US dollar index surged through 1.0100 and the higher rate, lower growth trade pushed oil down.

China lockdowns weigh on Asia markets

Today, China fears are adding to the downside momentum for Asian markets. China has tightened parts of the Shanghai lockdown, including erecting fences around apartment buildings with Covid-19 infected individuals. Meanwhile, residents of the Chaoyang district of Beijing will have to submit to three days of testing to get on top of the omicron outbreak there, with parts of it “sealed” or “controlled,” to paraphrase Bloomberg’s story this morning. Although some parts of China have been under restrictions longer than Shanghai, omicron’s arrival in Beijing would be an ominous development.

It is important to remember that although market darlings like Tesla and Foxconn are operating normally in China under a “closed-loop,” and China is vigorously playing whack-a-mole across the country to enforce the Covid-zero policy, omicron only has to get lucky once, while those manning the ramparts have to get lucky 100% of the time. Just ask any other previously Covid-zero country.

The difference here is that China is the world’s second-largest economy and has shown no signs it intends to live with the virus. It would be a brave man that bets on President Xi Jinping backtracking on anything he says he is going to do, or on the government in general. With that in mind, the likely pressure valve is going to be disruption to China’s export machine, and a cratering of consumer confidence.

All of that points to lower growth and it is no surprise that the offshore yuan is getting punished, Asia FX is weaker, and Asian equities are taking fright at a US rate hike, slow China growth pincer move. Probably the only bright spot, ex-China, is that oil prices are also being beaten down as well.

I am not a great fan of blackouts, but I do see the opportunity for some relief rallies in the days ahead by equity markets. That is because the Federal Reserve has headed into its pre-May-FOMC news blackout. That means we do not get any Fed talking heads on the wires with their hawkish talons out on the wires until after the FOMC meeting in early May.

That does not mean markets are out of the woods though. US New Home Sales tomorrow, and GDP prints from Germany, France and the United States on Thursday have downside risks, as does Friday’s US Personal Income and Expenditure and Eurozone Business Sentiment. Upside risks persist in European Flash CPI releases. The United Kingdom released weak data on Friday and the sterling got punished aggressively, it’s that sort of market.

US earnings season accelerates this week and the results for Q1 should have a very binary impact on markets. Weak results equal bad, superior results equal relief rally. Heavyweights such as Citigroup, McDonald’s, and Visa announce this week, but the street will be focused on the FAANG titans. Although I guess they should be called MAANGA these days (Japan is still relevant) We saw what happened to Netflix last week when the exponential growth forever dream ended, and Facebook earlier this year. The MAANGA’s will need to keep the dream alive this week for the US stock market to have any hope of a sustained pre-FOMC rally.

In Asia this week, Singapore releases core-CPI today with upside risk to the 2.40% expected. Taiwan announces March Industrial Production this afternoon as well. Wednesday’s Japan Industrial Production and Retail Sales have obvious downside risks, while Australian CPI could increase the pressure on the RBA to start thinking about seriously considering the remote possibility of at least contemplating hiking interest rates; a doctrine pioneered by the ECB. China releases Caixin PMI on Friday and official PMIs over the weekend. The price action in Asia today suggests downside risk.

The week’s highlight should be the Bank of Japan policy meeting on Thursday before the golden week holidays start on Friday. Given that the BOJ is standing in the 1-year JGB markets today with an unlimited bid to cap yields at 0.25%, the chance of any policy shift on Thursday is infinitesimal. An elegant way to telegraph an impending change would have been to be less aggressive in the bond market these past two weeks, and that hasn’t happened. If any of my readers are thinking that shorting USD/JPY at these levels is attractive, please slap yourself vigorously and say “buy dips” one hundred times.

Finally, something that Asia and the rest of the world should be watching is Indonesia’s decision to ban exports of cooking oil and their raw materials on Friday. Like PLN’s coal supply crisis earlier this year, Indonesia’s oligopolies are struggling to resist the temptation of higher prices overseas, while meeting their contracted domestic supply obligations at lower prices. Cooking oil mysteriously vanished from shop shelves the last time Indonesia capped domestic prices recently, only to magically reappear when that policy was adjusted.

With Eid-al-Fitr starting in the world’s largest Muslim nation next week, it would be a brave government that forced 270 million people to steam the rice instead of rustling up a glorious celebratory nasi goreng. My point is that with inflation sweeping the world, and Russia/Ukrainian food supply disruptions only just starting to be felt, food nationalism is on the rise. I would argue that going hungry in the world’s developing nations will impact societal stability there far faster than USD 150 oil. Kuala Lumpur palm oil futures are already 4.50% higher today.

Russia and Ukraine are key exporters of grain to the world, but it’s fertilisers that are making me nervous. Russia is an important potash exporter and natural gas is the key ingredient in the manufacture of urea. The maths isn’t difficult to do with a little research.  Food inflation and production challenges, and their impact on the poor of the world, (i.e., most of the world) shouldn’t be underestimated. Their problems will quickly become our own and we can see those impacts already in unrest in Sri Lanka and Pakistan. Admittedly exacerbated by the fact both countries are/were run by populist strongman (male) leaders who are economic dotards. This is a story we should all be watching closely in 2022, more so even than a China slowdown, energy inflation, or inflation-chasing central banks.

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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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