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Asian equities fell and oil prices fell on Monday as economic activity was harmed by a coronavirus lockdown in Shanghai, while the yen continued its stomach-churning decline as the Bank of Japan obstructed higher rates.
In a nine-day two-stage lockdown, China’s financial metropolis of 26 million people ordered all enterprises to cease production or have employees work remotely.
Brent crude sank $3.39 to $117.26 as a result of the expansion of curbs in the world’s largest oil importer, while US crude fell $3.41 to $110.49. [O/R]
Risk sentiment was bolstered by optimism for progress in the Russian-Ukrainian peace negotiations scheduled for this week in Turkey, after President Volodymyr Zelenskiy’s statement that Ukraine was willing to consider adopting a neutral status as part of a compromise.
The equities market remained relatively flat, with MSCI’s broadest index of Asia-Pacific shares outside Japan remaining unchanged. The index is down 2.1 percent for the month but still much higher than previous lows.
Chinese blue chips fell 0.8%. Japan’s Nikkei 225 index fell 0.4%, but is still over 6% higher for the month as a weakening yen expected to increase exporter profits.
Stock futures for the S&P 500 fell 0.3 percent, while Nasdaq futures fell 0.4 percent. EUROSTOXX 50 futures gained 0.3 percent, while FTSE futures gained 0.2 percent.
Wall Street has so far shown remarkable resilience in the face of a Federal Reserve that is much more hawkish. Markets are factoring in eight rate rises over the next six policy sessions, bringing the funds rate to 2.50-2.75 percent.
Even that viewpoint is seen insufficiently hostile by others. Citi estimated this week that tightening would total 275 basis points this year, with half-point increases in May, June, July, and September.
“We anticipate the Fed to continue raising rates through 2023, eventually reaching a policy rate target range of 3.5-3.75 percent,” Citi analysts said. “Given the upside risk to inflation, risks to the terminal policy rate remain to the upside.”
The week’s important data point will be Friday’s US payrolls, when another robust gain of 475,000 is forecast, with the unemployment rate falling to a record post-pandemic low of 3.7 percent. Additionally, a slew of surveys on global manufacturing and inflation figures for the United States and the European Union are coming.
“The data from the United States will help define expectations about whether the tightening of financial conditions is beginning to leak over into the wider economy,” analysts at NatWest Markets said.
Ten-year Treasury yields increased 33 basis points last week and are now up a stunning 71 basis points for the month at 2.53 percent, substantially raising mortgage rates in the United States.
“The next key trend will be growing recession worries as the Fed increases into decelerating GDP, perhaps supporting a yield high through this summer,” NatWest advised.
The Japanese yen has been the top loser in currency markets, as officials maintain rates around zero and the country’s import bill balloons due to sky-high commodities costs.
The Bank of Japan reaffirmed its ultra-loose monetary policy on Monday by pledging to purchase as many bonds as necessary to maintain 10-year rates below 0.25 percent.
This resulted in the dollar reaching a new six-year high of 123.16 yen, a gain of 6.9 percent for the month. Similarly, the resource-rich Australian dollar has increased by more than 10% to 92.44 yen.
Even the struggling euro is up 4% against the yen this month, trading at 134.56. The euro has lost roughly 2.3 percent against the dollar during the same time, but is still far above its recent two-year low of $1.0804.
The yen’s decline has maintained the US dollar index steady at 99.098, a gain of 2.5 percent for the month.
Gold fell to $1,947 an ounce on commodities markets, while it was still up approximately 2% for the month.
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