China markets rally on hope for faster reopening

Market movers today

The Chinese National Health Commission will host a briefing at 3pm Beijing time (08:00 am CET). However, they regularly hold briefings and they do not include senior political officials, which would be expected if a bigger change was to be announced. The question is if we will see any hints of future changes, though, or calls for stronger vaccination efforts that could signal a move towards an earlier reopening.

Germany and Spain release inflation numbers for November today ahead of the Euro area release tomorrow, which will likely be key for whether the ECB hikes 75bp or 50bp at their 15 December meeting. We see some upside risk to the headline inflation but expect core inflation to be unchanged.

In the US focus turns to house prices for September. Consensus is a decline of 1.2% adding to declines in the previous two months. US Consumer confidence from Conference Board is also due, where the most focus should be on the labour market component 'jobs plentiful' vs 'jobs hard to get' as it tends to be a good leading indicator for unemployment and has deteriorated in recent months, albeit from a high level.

The 60 second overview

Chinese markets rally: Chinese offshore stocks are up close to 5% this morning as there were no new protests in China yesterday, and markets set their eyes on the Chinese press briefing this morning hoping for signs of China moving closer to a full re-opening. Chinese authorities yesterday stressed that barriers in front of apartment buildings should be removed in a small sign that they may be listening to protesters' call for a softening of Covid rules. Oil prices also rebounded following the decline yesterday.

We doubt China will move completely away from zero-Covid policy going into the winter but any sign that more spread of the virus will be tolerated would be a hint that China is moving towards a full reopening within the next 6-9 months. However, if China doubles down on the zero-Covid policy to reign in the outbreaks, it would likely throw cold water on the market rally.

Fed's Bullard says market underestimates peak rate: One of the hawkish Fed officials, James Bullard, said yesterday he believed "markets are underpricing a little bit the risk that the FOMC will have to be more aggressive rather than less aggressive". The money market currently prices a peak around 5%, corresponding to around 115bp further hikes from here. New York Fed President John Williams struck a tone a bit softer and mentioned rates could come down in 2024 as inflation falls. But he also said he saw the rate path a bit higher than in September (the time of Fed's latest rate projections). It is still a close call if the Fed will move 50bp or 75bp at their next meeting and will likely depend on Friday's payrolls and the next CPI print on 13 December, one day before the FOMC meeting.

Equities: US equities sold off yesterday with tech seeing the biggest hit. Hawkish Fed comments and uncertainty about developments in China probably led to some profit taking after a decent rally over the past 1½ months. Stocks rallied in most of Asia on hopes of a faster Chinese reopening.

FI: An immediate drop in the European rates from the morning on risk-off was quickly replaced by hawkish comments from Knot which sent yields 8bp higher from the lows. The afternoon trading session was mainly a sideways move in the afternoon amid Lagarde's EP hearing underway. Lagarde did not provide significant policy signals for the December meeting where a significant hike is expected (50b or 75bp) and a play laying out the QT principles are expected.

FX: Hawkish Fed comments from familiar hawks such as Bullard and Williams dented hopes for a soon-to-come Fed pivot which alongside negative equities throughout the European and US sessions pushed the USD higher vs peers while SEK and NOK continued to post losses against the EUR. With the better risk sentiment (China Covid policy-related) seen overnight, yesterday's trends may take a pause.

Credit: After a relatively strong performance last week the credit market started out on a slightly negative note this week with iTraxx main widening 2.6bp to 91.9bp and Xover widening 10bp to 463bp. Overall, we saw limited primary activity with Metso Outotec a notable exception in the Nordic market. Metso Outotec issued a EUR300m 5Y bond with a MS+220bp spread which represented a new issue premium of some 20-30bp versus the company's already outstanding bonds. 

Nordic macro

Sweden: NIER November confidence survey will be out and we expect to see a continuation of weakening new orders and the sentiment in general. We also keep an extra eye on hiring plans and perceived unemployment risk. Final Q3 GDP numbers are also due and judging from the preliminary GDP indicator, Q3 GDP is likely to print +0.7 % q/q sa/2.6 % y/y.