Sat, May 28, 2022 @ 23:30 GMT

China Continues to Ease

Market movers today

There are no tier-1 market movers today and it will be a pretty quiet week on the data front where the main highlights will be German ZEW and US regional surveys from Philadelphia and Empire.

On the central bank front China has already cut policy rates this morning (see below) and Turkey may also cut rates later this week. Bank of Japan meets on Tuesday where no change is expected but we will listen closely to policy signals given Friday’s Reuters story that BoJ may hike policy rates prior to hitting 2% inflation. ECB releases minutes on Thursday which is also the day of the interim Norges Bank meeting where we do not expect any new policy signals. The Fed blackout period has started so we will have no more Fed speeches before the meeting next week (22 January).

The Russia/Ukraine conflict will remain in focus as well.

US stock and bond markets will be out today due to the Martin Luther King holiday.

The 60 second overview

Markets. It has been fairly quiet overnight with limited market moves across asset classes.

Chinese data and rate cut. Overnight the People’s Bank of China cut its key policy rates by 10bp and added more liquidity to the banking system. This was the first change in policy rates in almost two years but follows several credit and regulatory easing measures over the last month as a response to the softening growth outlook. This morning’s rate cut was announced shortly before national account figures revealed that the Chinese economy grew 1.6% Q/Q in Q4 2021. While this was slightly stronger than expected by consensus the figures still highlighted a weakening momentum and a hit to demand from the zero COVID-19 policy and the property sector. Looking forward we expect 2022 to be a year in which the Chinese economy continues to recover moderately but also where the impact of the recent easing is not felt on the global cycle until summer.

COVID-19 update. Despite new cases are rising sharply in many countries due to omicron, it seems like we have reached or are close to reaching “peak restrictions” in the sense that severe disease still seems under control for now. Risk is, of course, that the waves get so big that they dominate the fact that omicron is milder than delta. We continue to believe this is the last winter with restrictions in the advanced economies, as COVID-19 becomes endemic like the seasonal flu. We have good vaccines (especially when updated to the prevailing variant), more natural immunity, better treatments and more know-how. So from a societal, economic and financial market perspective, we should be able to deal with COVID-19 outbreaks going forward.

Equities: Global equities moved lower Friday despite some late hour rally in US. Defensives, large cap value outperforming last week where bond yields and central bank repricing dominated the action in equities. The earnings season kick-off in the US did not change the narrative with some mixed bank reporting. Asia is very mixed this morning with Japan and most other markets higher while South Korea is sharply lower. Futures in Europe are playing some Friday catch up to the US session while tech stocks lead US futures lower.

Fixed income: Last week was fairly volatile for the US Treasury market where US inflation hit 7% amid increased speculation of four hikes rather three hikes in 2022 from the Federal Reserve. 10Y US government bond yields rose almost 10bp on Friday and the US curve continues the flattening trend from the start of the year.

FX: Growth and inflation sensitive currencies ended last week on a weak-footing. SEK, AUD, NZD and NOK lead losses with EUR/SEK and EUR/NOK moving towards 10.30 and 10.00, respectively. On the other hand, the USD ended a long string of losing sessions with EUR/USD moving back close to 1.14.

Credit: This Friday the risk off sentiment in credit continued. iTraxx main widened 1.2bp to 52.1bp and Xover widened 4.9bp to 257.5bp. The poor sentiment continues to be driven by fears of rising rates, coupled with rising worries about geopolitical risk relating to Russia and inflation. In cash space, liquidity remains muted.

Danske Bank
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