EMEA Morning Briefing: Stocks Seen Dented as China Covid Worries Linger

EU Investment
December 29, 2022
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MARKET WRAPS

Watch For:

Monetary developments in the euro area; France housing starts; UK capital issuance statistics; no major corporate trading updates expected

Opening Call:

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.

Equities:

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.

Forex:

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.

Bonds:

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.

Energy:

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.

Metals:

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.

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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.

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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

Even a Housing Crash Can’t Bring Back a Shale Boom This Time

Ask a U.S. producer why they didn’t pump out more oil this year, and one common answer you will get is that it has become too difficult and expensive to hire new employees. There are some early signs that labor markets could ease next year, but that may not be nearly enough to unleash production.

In a report published in December, Goldman Sachs noted that the main source of labor supply in the shale industry is typically from the housing market. This makes a lot of sense for parts of the oil-and-gas industry. After all, a portion of the work on the oil field looks a lot like construction, such as creating a road, moving sand, water or chemicals, and pouring concrete, notes Jesse Thompson, an economist at the Federal Reserve Bank of Dallas. Workers from that same pool also tend to be tapped as candidates for training on the more skilled and technical roles.

Flying From China to U.S. Will Require Negative Covid Test

The U.S. will require travelers from China to submit a negative Covid-19 test beginning Jan. 5, federal officials said.

The U.S. is concerned about the rapid spread of the virus that causes Covid-19 in China, which increases the potential for new variants, health officials said Wednesday. The officials said that China has provided limited surveillance data regarding the surge and that officials have declined U.S. offers to provide additional vaccines. Countries including Japan and Malaysia have also recently imposed restrictions on travelers from China.

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.

Turkey, Syria Defense Ministers Meet in Moscow

ISTANBUL-Turkey’s defense minister and intelligence chief held talks with their Syrian counterparts in Moscow on Wednesday, the first formal, high-level meeting between the two Middle East governments since the eruption of a civil war in Syria in 2011.

The meeting, attended by senior Russian officials, came as Ankara is beginning to open a dialogue with Damascus after more than a decade of hostility. Turkish President Recep Tayyip Erdogan was the chief foreign supporter of an armed rebellion that sought to topple Syrian President Bashar al-Assad amid the uprisings of the Arab Spring.

Some Twitter Users Experienced Technical Problems With Platform

Some Twitter Inc. users experienced technical problems accessing the service through web browsers late Wednesday, in what appeared to be the first widespread outage since the company was taken over by Elon Musk two months ago.

Users who tried to login through their computer browsers on Wednesday were met with an error message. The Twitter Spaces tab, which allows users to join real-time conversations with others, on the mobile app version of the platform also wasn’t functioning. Other aspects of the Twitter app seemed to be working fine for users, including the ability to tweet.

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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