Beijing blues hold Asia in thrall

Asian markets are showing tentative signs of life today after the sell-everything move lower yesterday. It looks more dead cat bounce than brave new world though as Beijing’s Covid-19 situation has knocked the Ukraine/Russia war, the Federal Reserve, threats of nuclear war from Russia, and even Elon Musk and Twitter off the headlines. I can’t imagine Elon is happy about that. Nothing that a 6,000 km wide (3,728.25 miles for Americans), hashtag etched on the surface of Mars won’t cure.

Covid casts pall over China’s growth

It seems that threats to China’s growth outlook thanks to its Covid-zero policy but begun by its regulatory clampdown and the property developer leverage trainwreck, trumps all as far as financial markets are concerned. That is an entirely reasonable assumption. For over two decades, China’s growth has been as solid an investment as an AAA-rated bond. China stopped the rot in the Asian financial crisis (the 1990’s kids), by not devaluing the yuan. It became the consumer of last resort through and post the GFC. If this party is about to end as leverage, a virus and stubbornness catch up with China, it is indeed a schism, and not just for China.

Part of the problem is that the rest of the world has become addicted to China hitting a stimulate button bigger than anything you could buy in Amsterdam at the first sign of trouble. This time around, China appears to be sticking to its guns and simultaneously trying to deleverage certain sectors (property), while applying targeted stimulus to specific sectors such as SMEs, energy, agricultural production, etc, as it locks down swaths of the country and keeps borders closed to play whack-a-mole with Covid-19.

Little surprise then that news of mass testing and limited lockdowns in areas of Beijing was the straw that broke the camel’s back. Unfortunately, China is finding out what other previously Covid-zero countries have. You have to be right 100% of the time, the virus only has to get lucky once. The incipient relief rally across currencies, equities, energy, and metals that we saw in New York and early Asia is likely to run into a China growth brick wall, as news emerges that China will expand mass testing to the whole of Beijing between the 26^th and 30^th of April. Asian currencies, including the offshore Yuan, and equities, are showing almost no reaction to the PBOC’s overnight foreign reserve cut for China banks, or further PBOC-speak around adequate liquidity and targeted support measures.

The China growth concerns have subsumed any data releases from Asia today. South Korean Advanced Q1 GDP eased to 3.10%, slightly better than expected. Similarly, Japan’s Unemployment for March fell to 2.60%. The Japanese finance minister has been on the wires denying the US and Japan were planning joint USD/JPY intervention, while also trotting out the usual watching currency markets closely rhetoric. USD/JPY hasn’t moved.

Singapore Industrial Production later today has downside risks, and a soft print may increase pressure on the Singapore Dollar once again, suffering like the Malaysian ringgit, from its high beta to China growth. The Indonesian rupiah weakened notably yesterday, breaking out of its carefully managed multi-month range after President Jokowi announced a palm oil export ban. The government has softened Pak Jokowi’s ban today to processed oils but contained a non-too-subtle warning to the country’s food oligarchs, that if cooking oil disappeared off the shelves again, the ban would be expanded. As I mentioned yesterday, food nationalism is an existential threat to social order and inflation in 2022. The rupiah’s fall won’t be enough to bring forward Bank Indonesia’s tightening schedule, for now.

Europe’s data calendar is quiet, but the US releases a swath of data. That includes Durable Goods, S&P Case-Shiller House Prices, the House Price Index, Richmond Fed Manufacturing and Service, as well New Home Sales. Soft data will ease the Fed tightening noise, possibly supporting equities. While firm data is likely to have the opposite effect. Likely we will get a mixed bag with New Home Sales, in particular, having downside risks as mortgage interest rates soar.

With Fed speakers in pre-FOMC media lockdown, the only data that could break the markets out of its hawkish FOMC/China growth funk will be tech heavyweight earnings this week. Today we have Microsoft and Alphabet. Both should have had impressive quarters, but the real meat in the sandwich will be their 2022 outlooks going forward. Softer guidance will have stock markets back to square one once again.

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