EMEA Morning Briefing: Stocks Seen Dented as China Covid Worries Linger
- EU Investment
- December 29, 2022
- No Comment
Monetary developments in the euro area; France housing starts; UK capital issuance statistics; no major corporate trading updates expected
European shares look poised to decline at Thursday’s open, as traders digest the lifting of China’s Covid restrictions and look ahead to various headwinds likely in 2023. In Asia, stock benchmarks fell; Treasury yields largely declined; and the dollar, oil and gold weakened.
Shares may open lower in Europe on Thursday, as investors continue to digest the implications of China’s easing of Covid-19 restrictions on the global growth outlook as cases there rise rapidly.
Investors are contending with the effects of China’s reopening and rising global interest rates. The scarpping of China’s quarantine measures is likely to ripple through global economies and markets at a time of slowing growth and sticky inflation.
“The way [China has opened up] has been quite surprising…I think that’s why markets are going backward and forward,” said Altaf Kassam, head of investment strategy and research for Europe, the Middle East and Africa at State Street Global Advisors.
He added that investors are also still assessing the effects of tightening monetary policy around the world, which continues to weigh on sentiment. “The effects of that are now starting to be felt,” Kassam said.
“If the Chinese reopening story is positive for oil and commodity prices — and for the massively battered Chinese stocks, it’s bad news for global inflation,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“The surge in Chinese demand will certainly boost inflation through higher energy and commodity prices,” Ozkardeskaya added. “And in response to higher inflation, the central banks will continue hiking rates.”
Indeed, there are few fresh catalysts this week to distract investors from the underlying theme that has driven markets for much of the year: multi-decade high inflation and how the central banks’ attempts to quash it will hurt the global economy and crimp company earnings.
“Many factors historically have driven the traditional environment supportive of year-end stock rallies, such as the investing of holiday bonuses, a seasonal optimism among consumers and investors, and tax considerations,” said Greg Bassuk, CEO of AXS Investments.
“However, with 2022’s dismal stock and bond performance expected to carry into 2023, along with ongoing inflationary concerns, uncertain Fed policy, and lingering geopolitical tensions, investors won’t be receiving any holiday gifts this year for their portfolios,” he added.
The dollared weakened in Asia as the yen strengthened against other G-10 and Asian currencies, amid concerns over China’s Covid-19 outbreak spurring safe-haven demand for the Japanese currency.
Many countries are adopting an additional layer of testing for travelers arriving from China, which reflects the hobbled resumption of travel amid China’s outbreak, said Mizuho Bank.
This could also fuel fears of new strains of Covid-19 that might once again disrupt the global recovery, Mizuho added.
Treasury yields mostly fell early Thursday, after long-dated yields nudged higher overnight. The 10-year note finished at a seven-week high in choppy, holiday-season trade amid a dearth of major market catalysts, as investors assessed the outlook for Fed policy and the economy in 2023.
On Thursday, weekly initial jobless claims will be released and Friday sees the Chicago PMI report. Together, the reports are not expected to meaningfully shift investors’ forecasts of the Fed’s monetary policy trajectory in 2023.
Oil fell in Asia amid an uncertain outlook. While China’s reopening plans have spurred optimism over oil demand, there are also concerns that the country’s loosening of Covid-19 restrictions on international travel could lead to a surge in Covid-19 cases worldwide.
Gold edged lower early Thursday, and are set to end the year flat, a surprising performance given persistently high inflation. Looking ahead, some investors think prices of the precious metal will climb due to a potentially less hawkish Fed in 2023.
However, Craig Erlam, senior market analyst at Oanda, said investors may see a correction early in the new year in the absence of a dovish shift in Fed commentary or some favorable economic data.
Copper prices rose slightly, extending a recent muted trading pattern. Yongan Futures said the metal is likely to fluctuate around current levels amid mixed signals.
Traders have been slowing purchases and adopting a wait-and-see approach for now, given weaker downstream demand and lower factory activity amid China’s ongoing surge in infection. Rising interest rates could further dampen sentiment.
But Yongan likes copper’s longer-term demand outlook once China’s economy normalizes, and advises buying on dips.
Iron ore prices advanced, extending a broad rally amid China reopening optimism.
The steel-making raw material may face profit-taking pressure, especially after the seasonal winter-restocking demand wanes, Yongan Futures said, advising investors to monitor the pace and strength of China’s real-estate recovery next year, as concerns are emerging over how soon policy support measures will take effect and stimulate property sales on the ground.
TODAY’S TOP HEADLINES
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Ukraine Sets Sights on Retaking Key Eastern City
KYIV, Ukraine-Ukrainian authorities said their army was closing in on the Russian-occupied city of Kreminna, control of which could allow Kyiv to significantly expand its efforts to retake Russian-held areas in Ukraine’s east.
Kreminna, a city in the eastern Luhansk region with a prewar population of 18,000, is being abandoned by Russia’s military command as Ukrainian troops advance through the mined and heavily fortified area surrounding it, said Serhiy Haidai, the governor of Luhansk.
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Exxon Sues EU Over Windfall Profit Levy
BRUSSELS-Exxon Mobil Corp. said Wednesday that it has filed a lawsuit against European Union authorities over the bloc’s decision to impose a windfall levy on energy companies’ high profits triggered by Russia’s invasion of Ukraine.
The EU approved a plan this past fall to redistribute some energy company profits and revenue in a bid to shield consumers from high energy prices. The plan sought to cap producers’ revenue from electricity generated by fuels other than natural gas and demanded that oil-and-gas companies hand over one third or more of money the EU considers to be excess profit.
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Expected Major Events for Thursday
07:45/FRA: Nov Housing starts
08:00/SPN: Nov Retail Sales
08:00/SVK: Dec Business tendency survey
08:00/SVK: Dec Economic sentiment indicator
09:00/EU: Nov Monetary developments in the euro area (M3)
09:30/UK: Nov Capital issuance statistics
10:00/CYP: Oct Industrial Production Index
10:00/CRO: Nov Industrial Production Volume Index
13:00/POL: 3Q Quarterly Balance of Payments
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December 29, 2022 00:17 ET (05:17 GMT)
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