China’s lockdown sends oil lower, BoJ hurts the yen

European bourses are heading for a softer start on Monday, unnerved by rising COVID cases in China and a lockdown in Shanghai, which is overshadowing cautious optimism from Ukraine.

• Shanghai part locks down, oil falls 4% on-demand outlook concerns
• BoJ offers to buy unlimited bonds, pulling the Japanese yen lower
• BoE’s Andrew Bailey is due to speak and could highlight BoE- Fed divergence

Ukraine said that it is willing to be neutral and is prepared to compromise over the status of the eastern region of Donbas, ahead of peace talks in Turkey this week. The announcement comes after more than four weeks of war and as Russia looks to scale back its ambitions and focus on the Donbas region after failing to seize any major Ukrainian city. The fighting continues on the ground, and the latest headlines will continue to influence sentiment.

Shanghai locks down 

China’s financial hub and home to 26 million people, has kicked off a two-stage lockdown programme which will last nine days, as the power continues with its zero-COVID policy. Public transport will be suspended, and firms and factories will also suspend manufacturing work.

Chinese stocks trade over 1.5% lower at the start of the week. Meanwhile, the DAX  is pointing to a 0.4% loss on the open and the FTSE a 0.25% decline.

Oil

Oil prices have fallen sharply as the resurgence of COVID has raised concerns over the demand outlook in China, the world’s largest oil importer. WTI oil and Brent trade down around 4% at the time of writing, after booking gains of 8% across last week. Despite today’s steep losses, oil prices are still set for gains across the month after Russia invaded Ukraine, fuelling supply concerns. While OPEC+ is due to meet on Thursday, the group is not expected to deviate from its steady increase of 400,000 barrels a day.  WTI crude oil trades below $110.

USD/JPY

The USD/JPY trades at fresh six-year highs as the USD is boosted by safe-haven trade and the Japanese yen falls following a pledge of unlimited bond purchases by the BoJ in order to defend the yield curve. USD/JPY  rose to 123.25, a level which was last seen in December 2015 after the central bank offered to buy an unlimited amount of JGBs at 0.25%. The dovish stance of the BoJ contrasts sharply with the Fed, sounding increasingly hawkish.

BoE’s Bailey to speak

Looking ahead, the economic calendar is relatively light today. BoE’s Andrew Bailey is due to speak and could shed more light on how cautiously the BoE intends to proceed with interest rate hikes across the year. GBP/USD trades below 1.3150 as risk aversion and higher US treasury yields boost the greenback. Despite three rate hikes from the BoE over the past three central bank meetings, policy divergence supports the USD, as the Fed is set to hike rates more aggressively this year than the BoE.