Hang Seng tanks as China’s COVID cases surge

European stocks are set to trace Asian markets lower after surging COVID cases in China overshadowed strong data.

• 45 million Chinese are back under lockdown in some of China’s important cities
• UK unemployment ticked lower to 3.9% & wages jump, piling pressure on BoE to hike rates
• German ZEW economic sentiment & US PPI inflation data to come

Data overnight showed that the Chinese economy started the year on a solid footing. Industrial output rose by 7.5% in the first two months of 2022, up from 4.3% at the end of last year and almost double the 4% forecast. Consumer spending was also strong as retail sales jumped 6.7%, up from 1.7% in December and over double the 3% increase forecast. It is worth noting that data from the first two months of the year can be stronger than the following months, given the lunar new year.

However, that’s not the issue here. Concerns are growing over the outlook for the Chinese economy amid surging COVID cases, an economy hit hard by a slump in the property market and heightened geopolitical tensions. The PBoC held back from cutting interest rates but did inject 100 billion yuan into the financial system.

China’s COVID cases rise 

COVID cases are at the highest level since the start of the pandemic as an outbreak of Omicron prompts wide-scale lockdowns in China’s ongoing zero-COVID policy. 45 million inhabitants have been locked down, including in some of China’s important cities. One of them is Shenzhen, the tech hub where iPhones are manufactured.

Despite the upbeat data, the Chinese stock market saw panic selling again on Tuesday. The Hang Seng trades 6% lower at the time of writing. The Australian dollar, a proxy for China, dropped 1.5% versus the USD yesterday in its worst daily performance in over a year. The Aussie is extending those losses again today, falling below 0.72.

The negativity from Asia is putting Europe on course for a weaker open after substantial gains yesterday. Optimism surrounding Russia, Ukraine peace talks helped the DAX rally over 2% on Monday, and the index is set to drop 0.7% on the open today. The FTSE rose 0.5% yesterday and is set to tumble 0.8% on the open today.

UK jobs data

The UK index is shrugging off better than expected UK labour market data. Unemployment fell by more than expected to 3.9% in the three months to January, down from 4.1% and ahead of the 4% forecast. Meanwhile, the more recent claimant count data showed a fall of 48.1k in February, after falling 31.9k in January.  Average earnings were also on the rise, up 4.8%, YoY, which will pile pressure on the BoE to hike interest rates later this week. 

While the FTSE is less than impressed by the upbeat data, the pound is finally showing some signs of life, rebounding from the 1.30 low reached yesterday, a level not seen since November 2020.

German ZEW economic sentiment data

Looking ahead Ukraine-Russia headlines will remain in focus today. The release of German ZEW economic sentiment data should quantify the hit to confidence from the war. Expectations are for economic sentiment to decline to 10 from 54.3 in February.

US PPI inflation will also be on traders’ radar ahead of the Fed meeting tomorrow.