China reacts to financial stress

Market movers today

We have a number of US data releases today. Consumer confidence from Conference Board, durable goods orders, new home sales and house prices will add more information on the state of the economy. Most interesting will probably be new home sales following the sharp rise in mortgage rates, although the biggest impact will probably not be felt until we get the April and May data. US 30-year mortage rates have increased from 3.25% to 5.25% since the beginning of the year pushing up the cost for new home buyers.

China's covid development and how much the virus spreads in Beijing is also worth watching.

The 60 second overview

Volatile markets: global growth concerns have increasingly become a market theme. Over the last week concerns have been amplified by China's zero Covid-policy and continued aggressive tightening signals from central banks such as the Fed and the ECB. Assets that tend to trade closely in tandem with the cyclical outlook have performed poorly, market volatility has increased and the broad USD is one of the few assets that has performed recently.

Markets will continue to follow Chinese developments closely amid China expanding coronavirus testing to most of Beijing which could precede a shut-down of the city similar to Shanghai. A possible shutdown risks putting further upside pressure on global supply chain issues and removes demand from the physical commodity market as evident from the recent setback to commodity prices.

Chinese authorities react: Overnight, the People's Bank of China has reacted to the financial stress in Chinese markets by pledging its support to the real economy. In a statement, the central bank announced new liquidity measures and stated that it "will step up the prudent monetary policy's support to the real economy, especially for industries and small businesses hit hard by the pandemic". Markets have reacted positively to the statement this morning: we see some stabilisation in the heavily battered Chinese equity market, broader equity futures are trading in green and yields are rebounding somewhat after a sharp setback in yesterday's session

CNY and global inflation: Following the sharpest weekly decline in the CNY since 2015 the Chinese authorities yesterday announced a decline in the FX reserve requirement ratio (RRR). The change means that Chinese banks need not hold as much foreign exchange incentivising domestic CNY buying. We do not believe that China minds a weaker CNY but the pace of the latest decline has likely been a worry. Given the importance of the Chinese economy for global growth and not least global goods production changes to the currency is important for global inflationary pressures. All else equal a weaker CNY acts as a dis-inflationary force and is likely welcome by central banks around the world fighting high imported inflationary pressures.

Equities: In our opinion there were no news out yesterday justifying the elevated volatility in equity markets. In our book this comes down to massive uncertainty among investors with the overshadowing question being whether central banks can orchestra a soft landing. Sector and style performance were very different on the two sides of the Atlantic with Min Vol outperforming. Min Vol is getting a lot of support from the combination of elevated uncertainty and stagflation.

FI: Sour risk sentiment on growth concerns from China due to Covid outbreak has sent European rates massively lower this week - bar this morning's stabilization. Being the most growth/policy segment of the curve, the 5y point in Germany ended 16bp lower yesterday, but also the shorter (2y lower by 13bp) and longer end (30y lower by 8bp) of the curve moved lower. Despite a pro-EU outcome of the French election, we did not see a noteworthy outperformance of French bonds. BTPs-Bund spreads widened 4bp to 174bp, which is the widest since Q2 2020. From a near-term macro aspect, we expect the high volatility to continue, with no particular circuit breaker in sight this week, hence we keep an eye out for next week's Fed meeting where a 50bp hike and QT announcement is widely expected.

FX: For once JPY was top performing G10 currency in part on the back of the drop in oil prices with Scandies losing out. EUR/USD drifted lower and close to the 1.07 mark.

Credit: The credit markets remain choppy. Yesterday iTraxx main widened 2.3bp to 84.3bp while Xover widened 10.6bp to 398.6bp. The subdued sentiment is also taking its toll on the primary markets where we see limited new issue printing.