Wayne Cole (Reuters)
Sydney, Australia ●
Mon 28 March 2022
Asian stocks and oil prices both slid on Monday as the coronavirus lockdown in Shanghai, China looked set to hit global activity, while the yen extended its stomach-churning descent as the Bank of Japan acted to keep local yields close to zero.
China’s financial hub of 26 million people has told all businesses to suspend manufacturing or have people work remotely under a nine-day, two-step lockdown.
The spread of restrictions in the world’s biggest oil importer saw Brent skid from US$3.26 to $117.39, while US crude fell from $3.37 to $110.53.
The sense of risk was bolstered by hopes for progress in the Russian-Ukrainian peace talks to be held in Turkey this week after President Volodymyr Zelenskiy said Ukraine was ready to discuss adopting a neutral status under an agreement.
Monday’s early action was stifled with MSCI’s broadest index of Asia-Pacific stocks outside of Japan down 0.8%. The index is down 3% for the month but well above recent lows.
Chinese blue chips lost 0.8%. Japan’s Nikkei fell 0.4%, but is still firmer nearly 6% for the month, as the lower yen promises to boost earnings for exporters.
S&P 500 stock futures fell 0.3%, while Nasdaq futures fell 0.4%. EUROSTOXX 50 and FTSE futures have remained flat for now.
Wall Street has so far proved remarkably resilient in the face of a radically more hawkish Federal Reserve. Markets are pricing in eight hikes for the remaining six policy meetings this year, bringing the funds rate to 2.50-2.75%.
Even that perspective isn’t aggressive enough for some. Citi last week forecast 275 basis points of tightening this year, including half-point hikes in May, June, July and September.
“We expect the Fed to continue climbing through 2023, reaching a target policy rate range of 3.5-3.75%,” the Citi analysts wrote. “Risks to the final policy rate remain on the upside given the upside risk to inflation.”
The key data event this week will be US payrolls on Friday, as another solid increase of 475,000 is expected, with the jobless rate hitting a new post-pandemic low of 3.7%. A slew of global manufacturing surveys and US and EU inflation readings are also expected.
“U.S. data will help shape expectations about whether tighter financial conditions are starting to trickle down to the broader economy,” NatWest Markets analysts said.
Yields on 10-year Treasuries jumped 33 basis points last week and rose 67 basis points on the month to 2.49%, sending US mortgage rates sharply higher.
“The next major theme will be rising fears of a recession as the Fed begins to decelerate growth, potentially supporting a peak in yields this summer,” NatWest warned.
In the forex markets, the Japanese yen has been the big loser as policymakers keep yields there near zero and sky-high commodity prices send its import bill skyrocketing.
The Bank of Japan reinforced its super dovish policy on Monday by offering to buy as many bonds as needed to keep 10-year yields below 0.25%.
This saw the dollar hit a new six-year high at 123.03 yen, giving it a 6.9% gain for the month. Similarly, the resource-rich Australian dollar climbed more than 10% to 92.44 yen.
Even the otherwise ailing euro is up 4% on the yen this month at 134.56. The single currency has lost around 2.3% against the dollar over the same period, but at $1.0956 it is above the recent two-year low of $1.0804.
The fall in the yen kept the US dollar index at 99.098, with a gain of 2.5% for the month.
In commodity markets, gold fell to $1,947 an ounce, although it was still up around 2% on the month.