Markets across Asia opened in the red on Monday as the dollar hit two-decade peaks and US stock futures declined on interest rate worries while a further tightening of already stringent lockdowns in Shanghai raised concerns of a possible recession.
Analysts said that China’s trade data for April were not as bad as feared, with exports up 3.9% on the year and imports flat.
But there has been no let-up in China’s zero-Covid policy, with Shanghai tightening the city-wide Covid lockdown for its 25 million residents.
“A series of rate hikes and hawkish communication came against a backdrop of plummeting Chinese and European activity, new plans for Russian energy bans and continued supply-side pressures,” analysts at Barclays warned.
“This creates the gloomy prospect of persistent inflation forcing central banks to hike rates despite sharply slowing growth.”
There was no respite in China’s zero-Covid policy with Shanghai tightening the city-wide Covid lockdown for 25 million residents.
ALSO SEE: Chinese Exports to Russia Sink in April, But Imports Surge
Full-Scale Russia-Ukraine War Looms
Speculation that Russian President Vladimir Putin might declare war on Ukraine in order to call up reserves during his speech at “Victory Day” celebrations also hurt market sentiment.
Putin has so far characterised Russia’s actions in Ukraine as a “special military operation”, not a war.
S&P 500 stock futures led the way with a drop of 1.1%, while Nasdaq futures shed 1.0%. US 10-year bond yields edged up to a fresh top at 3.15%.
EUROSTOXX 50 futures fell 1.5% and FTSE futures 0.7%.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.3%, and Japan’s Nikkei 2.4%. Chinese blue chips eased 0.8%, while the yuan touched another 18-month low to trade at 6.7049 per dollar.
Investors Wary Ahead of US Inflation Data
Investors were also tense ahead of the US consumer price report due on Wednesday where only a slight easing in inflation is forecast, and certainly nothing to prevent the Federal Reserve from hiking by at least 50 basis points in June.
Core inflation is actually seen rising by 0.4% in April, up from 0.3% the previous month, even as the annual pace dips a bit due to base effects.
“In Q1, the annualised monthly change in core CPI was 5.6%,” analysts at ANZ said. “That is too high for the Fed and we think the FOMC won’t be relaxed about inflation until the core number moderates to around 0.2% m/m on a sustained basis.
“The Fed is not the only central bank facing inflation pressures. Increasingly, the guidance from the ECB is becoming a lot more hawkish.”
In-Demand Dollar Gains More Strength
Fed fund futures are priced for rates reaching 1.75-2.0% in July, from the current 0.75-1.0%, and climbing all the way to around 3% by the end of the year.
The diary is full of Fed speakers this week, which will give them plenty of opportunity to keep up the hawkish chorus.
The aggressive rate outlook saw the US dollar scale 20-year highs on a basket of majors last week at 104.070, and it was last trading firm at 104.080.
“Risk appetite is fragile and yield spreads continue to suggest further upside on the Dollar Index,” said Sean Callow, a senior FX strategist at Westpac.
“We look for ongoing demand for DXY on dips, with 104 already being probed and still potential for a run towards 107 multi-week.”
The euro was stuck at $1.0510 and just a whisker above its recent lows of $1.0481, while the dollar was very much in control against the Japanese yen at 130.90.
Oil prices see-sawed after the Group of Seven (G7) nations committed on Sunday to banning or phasing out imports of Russian oil over time.
After an initial dip, Brent was last quoted 46 cents higher at $112.51, while US crude added 4 cents to $109.81.
Gold was idling at $1,872 an ounce, having struggled to gain any traction as a safe haven recently.
- Reuters with additional editing by Jim Pollard
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