Markets Bounce As China Covid Unrest Ends (For Now!)

The China-covid story remains ongoing today with mixed headlines coming through regarding developments there. On the one hand, there is some speculation that the government might be close to announcing an end to its zero-covid policy, a move which would no doubt please protestors and hopefully help de-escalate tensions. On the other hand, fresh business closures and new quarantine rules have been put in place in Shanghai today suggesting the government’s zero-covid policy is not yet over.

Risk assets appear to be rebounding across the European open today, suggesting some sense of optimism on the issue. This might also simply be a response to the better optics as a heavy police presence deterred any further protests taking place last night. While security forces appear to have put an end to the protests for now, China risks further unrest if the government continues with its strict covid measures, keeping risks tilted to the downside for equities and commodities traders.

Key Factors for Today

• USD softens as risk markets bounce back – China protests cease for now – mixed expectations regarding potential end to zero-covid
• Equities bounce back on hopes of calm end to China unrest
• Risk FX rallying today – JPY still holding some residual support – hawkish comments from ECB’s Lagarde
• Oil and metals rally as USD falls

Coming Up

• GBP – BOE’s Bailey speaks
• USD – CB Consumer confidence
• CAD – GDP

Equities Mostly Higher – Nikkei Struggling

Equities prices are seeing mixed action on Tuesday. US, UK and European stocks are pushing higher with the FTSE now testing the September highs around 7502. However, Asian stocks are coming under pressure as contagion around the events in China lean on sentiment. Additionally, the Nikkei is being hindered by fresh strength in JPY this week which has emerged through increased safe-haven demand. 

Risk FX Bounces Back

In FX, better risk appetite on Tuesday is being well reflected with AUD and NZD both seeing decent gains across the European open on Tuesday. Both currencies are higher against USD while NZD remains the stronger of the two on the back of the recent shift in central bank expectations. The RBNZ signalled its intention to press ahead with further hikes while the RBA has recently pivoted, adopting a slower pace and looking to pause when it can.

Hawkish ECB Comments From Lagarde

Comments from ECB’s Lagarde today have been taken as a sign that the central bank is not yet done with its tightening program. The ECB chief noted that she would be surprised if inflation had peaked, warning that risks for now remain skewed to the upside. Looking ahead she advised that the bank still has work to do on inflation which may well take monetary policy into restrictive territory if needed.

Metals & Oil Rebound on USD Weakness

In the metals and commodities space, both gold and silver are turning higher today, taking advantage of a weaker US Dollar. Today’s US CB consumer confidence data will likely be the key driver for USD and consequently metals. Crude oil prices bounced back yesterday and are trading in the green today, after initially breaking down to fresh 2022 lows yesterday on the China covid story. European leaders have yet to agree a price cap on Russian energy. Some leaders have called for the price cap to be as low as $62 to hurt Moscow most while others have called for higher prices to be allowed.