Worries in the world’s two largest economies sapped risk appetite. China reported its first Covid death in six months while new cases neared April’s peak. Although the Shanghai Composite Index started Monday 1.3% weaker, it quickly stabilized and limited the session’s loss to 0.4%. Similarly, CNY depreciated to 7.17 per USD from last Friday’s close of 7.12 but swiftly found support around 7.1650. The stock index and exchange rate were near their levels on 11 November, when the State Council announced a 20-point plan to refine the country’s Covid Zero Policy.
In the US, Fed officials reminded markets the Fed still had some ways to go with rate hikes to control inflation, even as it paved the way for a smaller hike in December. The US Treasury 2Y yield firmed for the fourth session by 1.9 bps to 4.55%. However, the 10Y yield was barely changed around 3.83% from weaker US equities. Dow, S&P 500 and Nasdaq Composite fell 0.1%, 0.4% and 1.1% respectively. Brent crude oil prices plunged 5% for two hours during the US session but recovered just as quickly to Monday’s starting levels. DXY appreciated the third session by 0.8% to 107.81, its highest close since 10 November.
Overall, investor sentiment is mixed from the conflicting policy signals. On the one hand, the global economic slowdown next year is a significant consideration for the Fed to dial down its aggressive hikes and for China to reopen its economy gradually. On the other hand, the Fed does not want to be seen letting down its guard because US inflation is still too high above its 2% target. Similarly, China has yet to move away from strict lockdowns and mass testing to curb infections. Meanwhile, consensus has pencilled in recessions for the Eurozone and UK economies next year, but the forecasts are not negative enough for a hard landing or for their central banks to stop hiking. To balance overtightening and under-tightening, central banks in Canada and Australia will keep hiking but have shifted to smaller rate increases. Let’s see if New Zealand does the same tomorrow.
In the end, Thanksgiving is two days away and US markets will likely thin without conviction. Currencies are already mildly positive this morning after yesterday’s sell-off. On an unrelated issue, the American Gaming Association reported that about 20.5 million Americans plan to bet USD1.8bn at the FIFA World Cup. That’s up from the 10 million allowed at the last World Cup four years ago before US Supreme Court ended the federal ban on sports betting in many states in 2018.
Quote of the day
“Being powerful is like being a lady. If you have to tell people you are, you aren’t.”
Margaret Thatcher
22 November in history
Margaret Thatcher resigned as British Prime Minister in 1990.
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